During development, LLC startups sometimes run into inventors that have developed intellectual property (IP) – like a trade secret, a prototype, or a piece of software – that they desperately want. But they can’t meet the asking price the inventor has put on their IP. This happens a lot – startups are usually long on ambition but short on cash. So what can the start-up do to acquire this IP, save putting out a third mortgage on their house or selling their baseball cards?
It might not be a matter of coming up with money to buy the IP. The answer can be as simple as trading part of what the owners of the LLC already have: a stake in their company. So instead of cash, a company can offer a percentage of their company in exchange for the IP.
HOW DO YOU EXCHANGE OW
NERSHIP FOR IP?
Draft your Operating Agreement to Allow This Action
The first, and most simple method, is to draft the LLC operating agreement (commonly known as the OA) to permit this type of exchange. If the LLC was already formed, then approval must be subject to the terms of the operating agreement. (Most OAs are built to allow amendments). Once the exchange is approved, the IP rights owner must assign the IP over to the LLC.*
*If you don’t have an OA, get one! If you don’t, you could face some messy days in court ahead. Especially if you are planning to undertake an action such as this one.
Then, have the Developer of the IP Assign the Rights to the Company
Assigning rights to an LLC is a simple process, but one that must be done carefully. The IP owner must sign a properly drafted document called a Rights Assignment document, one tailored to the type of IP being transferred. Although the document itself may be short, several pitfalls are common.
WHAT ARE THE PITFALLS COMON TO THIS TRANSFER?
Patent, trademark, and copyright assignments should not only be transferred through contract, but these transfers must also be reported to their respective Patent, Trademark, or Copyright offices within a specified period of time. Failure to do so can result in termination of protection under the law. So check with your local offices and see what has to happen.
Additionally, a trademark assignment must include the mark (trademark) itself AND the goodwill associated with it. Failing to include the goodwill can leave you with a “naked” mark, which means the trademark can be duplicated generically. For example, a special dish developed for a restaurant would include the dish itself, but not the recipe (leaving the trademark ‘naked’). This means the recipe could be duplicated elsewhere, without infringement. The recipe, in this case, is the goodwill. SO remember to include plans, schematics and any other kind of base materials in your trademark.
With a bit of foresight and strategic planning, the founder of an LLC can use the exchange if IP rights for LLC membership to recruit important members on board without using capital, lock down exclusive IP rights, and retain exclusive control over the IP. Win win win!
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