Founder’s Guide, Part 1: Boost Your Valuation with IP and Trademarks

Both Utah’s tech and venture capital scene have been exploding recently. More and more Utah companies are being acquired and funded through venture capital financing rounds.

One thing that I have noticed is that startup business owners often leave a significant amount of money on the table in acquisition or venture deals because of a lack of careful and thoughtful upfront legal work.

There are two areas where startup owners may lose money in these transactions: (1) in the valuation of the company, and (2) in the negotiation of indemnification reserves.

Valuations of startups are typically based on a combination of the company’s EBITDA and a multiplier. The negotiation of the multiplier is often where business owners make or lose millions, or, in the case of those majestic unicorns, billions of dollars. Given there are market conditions and business aspects that influence the multiplier, but the ability to negotiate an above-market multiplier or being forced to take a below-market multiplier is generally a function of buyer or investor comfort with the cleanliness of the deal and lack of risk being assumed.

Indemnification reserves, on the other hand, are significant chunks of the purchase price in an acquisition that is not paid immediately to the seller but held in escrow for years to be used to pay the buyer if assumed risks turn into actual liabilities. Here is another place where startup owners gain or lose money.

One of the critical areas where startup business owners gain and lose money in these valuable negotiation points is in intellectual property ownership. There are three fundamental intellectual property rights:

Trademarks
Copyrights
Patents

Trademarks

Most, if not all, businesses need a trademark or two (or ten). At the very least, they need to take into account the availability of trademarks in determining its business name and brand.

Step 1: Name and brand your business in a way that can be protected by a good strong trademark and register that trademark.

Nothing is worse than to start a business under a certain name and build a brand to learn that you have to change your brand because you are infringing on another business’s trademark. So the first moment in time that trademarks should influence your business is from before you form it and give it a name.

Step 2: Protect and enforce your trademark rights.

So now you have a business and a brand, what does a trademark do for your business? Trademarks protect against other companies using the brand you have created to advertise and sell competing goods and services under the same or confusingly similar brands or logos. This not only limits exact copycats from branding in your name or like you, but if their name is confusingly similar or their logo’s look is confusingly similar, you can protect your rights and block them from trying to take advantage of your hard work in establishing your brand.

If you notice that another company is using your trademark or a mark that is confusingly similar in your same space, to keep your trademark enforceable, you need to send them a cease and desist letter immediately and take whatever steps necessary to protect your trademark from being used and having its value diluted

Step 3: Keep your trademark current and don’t let its registration lapse.

Like diamonds, trademarks can be forever, but trademarks once registered, need to be renewed every five years and need to be used during that time to be extended.

Having strong and defensible trademarks can increase the value of your business significantly, especially when it comes to selling your business or raising money through venture capital or other channels. When potential buyers or investors come along, they are going to want to see that you have a strong and defensible ownership in your brand, and the best way to do this is to have registered trademarks. When a potential buyer or investor comes along and realizes that you don’t have a trademark or haven’t been protecting that, your valuation will immediately go down.

Copyrights

The next most commonly used intellectual property right in startups and businesses are copyrights. Copyrights are not just for visual art, literature, or music anymore, but now are commonly used to protect rights in source code and professional writing materials.

Copyrights are different from trademarks in that they are used to protect the unauthorized duplication, sale, or use of the copyrighted materials. This becomes most useful to tech startups that invest a significant amount of money in writing proprietary source code for their business that they want to protect from another company from using. So if you have done this and own valuable, proprietary code that is not open source, you should definitely get it copyrighted.

Also, unlike trademarks, and diamonds for that matter, copyrights are not forever. Copyrights only last 70 years. Like trademarks, potential buyers and investors who see that your source code is protected from imitators and other infringers will see a lower level of risk, and the strength of your owned rights will no doubt boost the value of your company.

Patents

Last but not least, Patents. Patents are generally the least used of these intellectual property rights. That is because they can be really expensive to register, and not every business lends itself to patents.

Patents are very common in the science and high tech companies who are making non-obvious and novel inventions. You can also use patents to protect non-obvious and novel business processes but to do so successfully. Those processes need to utilize some form of novel technology or science.

Like copyrights, patents are only valid for 70 years, and then after that, the technology can be used openly by anyone.

While patents are the least common form of intellectual property rights, patents are also usually the most valuable of the intellectual property assets of a company, especially at the time of acquisition or investment.

The Long and Short of It

While this is a very general explanation of the basics of intellectual property rights and how they can increase the value of your business, there is much, much more to say on these topics. The take-home lesson about intellectual property rights for the business owner is the stronger your portfolio of registered trademarks, copyrights, and patents, the better position you are going to be in to negotiate the highest purchase price or valuation of your company and also decrease indemnification reserves.

Schedule an Intellectual Property Review and Audit

Does your company need to review its intellectual property ownership and opportunities? Not knowing where you are at in regards to your intellectual property can cause problems in the future when negotiating additional funding or selling your business.

At Freeman Lovell, we have a team of attorneys that can help you analyze the strengths and weaknesses of your intellectual property. By clicking on the button below, you can set up an intellectual property review and audit with one of our attorneys. Then we can help you create a plan to secure your intellectual property interests for the future.

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Beneficial Ownership Rules

December 28, 2023

Starting January 1, 2024, a new rule took effect requiring all registered legal entities, including limited liability companies and corporations, to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). We wanted to give you a heads up about the rule and give you as much information about what it means to you. What is the rule? The rule, which is called the Beneficial Ownership Information Reporting Requirements (BOI Rule) , comes from the Corporate Transparency Act, which was passed by Congress in 2021. This law created the BOI Rule with FinCEN as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other deceitful ownership structures. Under this new law, FinCEN will permit Federal, State, and local officials to obtain ownership information for authorized activities related to national security, law enforcement, and intelligence. When does the rule take effect? And when do I have to submit a report? The BOI Rule took effect on January 1, 2024 . If your company existed before January 1, 2024, you must file its initial beneficial ownership information report by January 1, 2025 . If your company is formed or registered after January 1, 2024, you must file its initial beneficial ownership information report within 90 days after receiving actual or public notice that its creation or registration is effective. If any beneficial ownership information changes, you will have 90 days from the day of the change to file an updated or corrected report with FinCEN. What if I don’t file a Report? According to FinCEN: “The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in a civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.” What do I need to include in the report? The BOI Rule requires that all entities report information about the company, each individual with substantial control over the entity, and each beneficial owner. What information is required to report about the entity? Full legal name of your company and any DBAs names; Complete current street address for your company's principal place of business (P.O. boxes will not be accepted); The jurisdiction of formation or registration; and Tax identification: IRS tax identification number (TIN) and employer identification number (EIN). What information is required to report about the controlling individuals and beneficial owners? The individual's legal name; Individual's date of birth; Individual's residential address; and A unique identifying number from an acceptable identification document (such as an unexpired driver's license, passport, identification document issued by a State or local government or Indian tribe) and the name of the issuing state or jurisdiction. Who is considered to have substantial control of the entity? Examples of an individual that exercises substantial control over the entity are: An individual is a senior officer (President, CEO, CFO, COO, Manager, or other office who performs a similar function); An individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company; An individual is an important decision-maker for the company; or An individual has any other form of substantial control over the company. Who is considered a beneficial owner? A beneficial owner is an individual that owns or controls at least 25% of the entity’s ownership interests. This includes individuals that indirectly own or control 25% of the ownership interest. For example, if Joe is a 50% owner of Parent LLC, which in turn owns 50% of Subsidiary Corp, then Joe beneficially owns 25% of Subsidiary Corp (50% of 50% = 25%). What type of entities will be required to file a report with FinCEN? All domestically formed entities and foreign registered entities in the USA are required to file a report. Types of entities include corporations, limited liability companies, limited partnerships, general partnerships, and any other entity registered with a state Secretary of State or Division of Corporations or other similar office. There are some types of companies that are exempt from the reporting rule, and in general they are companies that already have to report beneficial ownership to another federal agency. The 23 exemptions listed by FinCEN are: Securities reporting issuer, Governmental authority, Bank, Credit union, Depository institution holding company, Money services business, Broker or dealer in securities, Securities exchange or clearing agency, Securities exchange or clearing agency, Other Exchange Act registered entity, Investment company or investment adviser, Venture capital fund adviser, Insurance company, State-licensed insurance producer, Commodity Exchange Act registered entity, Accounting firm, Public utility, Financial market utility, Pooled investment vehicle, Tax-exempt entity, Entity assisting a tax-exempt entity, Large operating company, Subsidiary of certain exempt entities, and Inactive entity. Can you help me with my company’s report? Yes! We are happy to help prepare and file your company’s BOI Rule report with FinCEN before the December 31, 2024 deadline. We offer a flat-fee service that is discounted based on how early you pay and submit your information. Sign up for our BOI Rule report service HERE. We also know that some situations can be complicated, so please feel free to ask us any questions regarding compliance with the beneficial ownership interest reporting requirements for your company by emailing teamjosh@freemanlovell.com .