Patent defence - The $1m Fallacy

My colleague, Marios, wrote an excellent piece dispelling the myths around software patenting last week. This week, I’m dispelling another myth – that you need a balance sheet to defend a patent – and expanding on the financial reasons to patent.

A common fallacy behind dismissing patenting is the refrain: “I don’t have $1m to defend it, so the patent would be worthless”. This fallacy is easily disproven, however, with two simple facts. First, you can take out IP insurance starting from a few hundred pounds a month; and second, you can secure litigation finance at the time against any awards from a court action. In both cases, you can operate knowing you will have top-notch counsel fully funded should you need it.

If you choose not to patent by believing the $1m fallacy, you’re making a decision you can’t undo later.

If you do patent, however, you’re building an asset with real value both strategically (see Marios’ article from last week) and in its own right. Patent value tends to grow as the underlying technology is derisked; the business case is proven; ancillary patents naturally follow on; global territories are added and so on.

Investors recognise this evolution and place a value on it. They know a patent can be sold and transferred as any physical asset could. They also know it can be retained but licensed out for an incremental 20 years of cash flow, possibly many times over.

If not licensed out, investors value patents on a “relief from royalty” basis – based on the fact that since you own the patent you don’t pay 15% of your revenues as a royalty to a third party, meaning the value is each one of those royalty payments in today’s money.

A patent you choose to pursue today may also be a source of financing down the line.

There are a number of alternatives here including a patent-backed loan, or a royalty securitisation allowing you to receive a part of the royalties you’ll earn over 20 years upfront.

Needless to say, this all relies on a good patent that really underpins your business. Silly patents for window dressing will not fool anyone but the most naïve and will almost certainly be a waste of your scarce resources. But if you have an opportunity to patent a material aspect of your technology, don’t pass up on it because of the $1m fallacy.