Question
It is not every day that my partners and I get a chance to work with an inventor of a much-needed product. He has yet to patent it, and we are currently in business formation mode. One year of talks has us arrive at the following: -
1. He will join us as a founding member of a new company, and we will file the patent on his behalf and behalf of the company.
2. He will continue his research and enhance the product by making the production process and the final product more efficient and cost-effective.
3. We will finance, seek finance, file, certify claims, manage day-to-day operations and market the product.
But, we still have the following questions we are seeking answers to:
a. Given the abovementioned - how much stake should the founding team share amongst themselves? There are 5 of us in total.
b. How much stake should we offer outside initial investors?
c. How can we structure the business and patent to protect the founder's share?
d. How should the patent ownership be structured? What is a reasonable share for the patent inventor to expect given that we will finance, file, certify claims, manage day-to-day operations and market the product?
e. One anticipated approach from the inventor is to own 100% and license the patent exclusively to the organisation for a period of 25 years. We are still pushing for co-ownership as we believe the patent is more lucrative even without the business.
f. One of the most important thing we want to ensure is that the investor cannot sell his portion of the patent to someone else without our collective say-so. Could this be a provision in a licensing agreement - if we did follow that path?
h. In these cases, what is the best long-term equity distribution strategy as we go through the different funding rounds?
i. How can we structure the company and patent so that today and our families tomorrow continue to receive dividends 100 years into the future?
The most important thing is to ensure that the patent and company are structured today in such a way as to attract investors.
Answer
There are a multitude of options at play with your scenario. If the founder is not going to be active in the day-to-day operations, a royalty/licensing agreement makes a lot of sense (i.e. x dollars/unit, or an annual fee) The operating partners need to have an exclusivity arrangement so that all of their hard work doesn't go for naught if the patent license gets made available to other competitors. I would recommend two separate companies, The founder's company (he holds the patent) and the operators company (they get an exclusive license to market the product). The operators can hire the founder as a consultant as well. This way everyone gets to hold on to what they put in.
