Jaisen Mathai, a Yahoo engineer, asks a good question: What can we do with failed startup intellectual property that might help the community?
The large majority of most startups fail, and a lot of them have software, patents and other intellectual property that may be of value to the community. This IP could help those startups avoid wasting time reinventing the wheel, find creative ways to solve problems, etc. In a perfect world, the best of this property would be made available via a clearing house, or turned open source. Many founders would love to see their work live on in other projects and would be open to this.
But there’s a problem: all this intellectual property is still “property” and isowned by someone, even after a startup goes bankrupt. If the company has raised any venture capital, or has any creditors, they own the property after the bankruptcy. In a very few instances that IP is sold off to return some money to creditors. This is exactly what happened with Edgeio, for example, a company that I co-founded and which failed late last year. Most of the IP assets were sold to third parties, and the proceeds went to pay off those who were entitled to the assets.
But in most cases the founders are exhausted and just walk away, and the creditors really have no idea is the IP is worth anything or not. They also don’t have the time or inclination to try. And it is even rarer to find a case where people took the time to open source the assets. The fact that the IP usually has a limited shelf life before others simply re-create it is another reason why it usually ends up forgotten.
But I can see how this could change. Creditors and investors could agree up front, via a standard clause added to agreements, that any IP that isn’t obviously valuable on its face would be turned over to a third party for a quick analysis and determination of its value (financial and otherwise). That third party could decide to sell anything of value, keeping a percentage of the sale (and giving them an incentive to find value when it’s there), and simply release the code for anything that may be interesting but has little immediate commercial value.
That third party would need to be funded, though, and the income from asset sales probably wouldn’t cover the operating expenses. Perhaps this would be a good project for a university, or group of universities, to support. Student developers and faculty may find academic reasons to pursue it. And they would certainly be giving back to the community as well.
This may seem far fetched, but the idea of Creative Commons was just as crazy back in the day. At the very least, it would be an interesting experiment.
By the way, you can get your own Fail stamp for $20. Just click on the image above.
The problem is that so many are doing essentially similar things.
If a competitor gets acquired by a company with deep pockets - it usually means that the smaller Startups will not be able to compete and develop competitively for much longer.
In an ideal situation, it would be great to sell all of the software patents to one large company dedicated to acting as a clearinghouse for other companies who could consider purchasing that software for their future projects or for mashups
A waste for somebody can be useful for other. This is a good idea, many of the startups fail because of lack of attention, resources and desired results. The IP as you have tolled can be helpful for other developers in the same niche.
ebay it?
Or just email it to me!
Even though a waste of somebody can be useful for someone else, still no one has a right to use the intellectual property of another person.
Interesting post.
Most people tend not to think about this situation at all despite the fact that chances of this happening are quite high (going by the stats ).
Michael
I’m curious, why did you feel that you had to sell the IP assets outright?
You say:
“The fact that the IP usually has a limited shelf life before others simply re-create it is another reason why it usually ends up forgotten.”
By licensing the IP to anyone who wanted to use it for a fee you’d still have some on-going revenue to pay off investors/creditors but more importantly, still have some sense of “control” - maybe even the beginning’s of another business?
Every business has “hidden” assets that can be turned into revenue, most of the time almost straight away - I do this for offline businesses all the time - online ones are no different.
What kind of an idiot would spell their domain name wrong?
Apparently, I would! D’OH!
An option not mentioned is open sourcing code from the get-go. A number of startups are following this path (SocialText for instance).
This can also be an interesting barrier to entry, as potential competition might not want to expend the effort to build duplicative features, but cannot do a better job than you (the originator) at building a business on top of the open source project.
Even if the company maintains some secret sauce not open sourced, the bulk of their IP would still be available to all.
This neatly avoids the post-failure problem described above.
If it’s releasedd to the community, then there will be more competition and thus a better market. Innovation will happen quicker.
A case of who moved my cheese?
Also an opportunity for a ‘gap merchant’ - an ip broker. Connecting ip with new developers.
I had this experience. The company I co-founded was about to fold and I was owed a lot of money. I agreed with other shareholders to take the IP in consideration, and a bill of sale was drawn up. Once it was clear that the winding up wasn’t going to be challenged by any other creditors, I reinvested the IP into a new company in exchange for shares.
As long as you’re discussing pre-nuptual agreements between geek founders and capitalists, I have another suggestion. Define in advance who is going to bear the cost of liquidation. I suggest taking out insurance or setting aside the cash. Without this, the capitalists quickly resign their directorships at first sign of trouble (so that they don’t get pestered by creditors) and then refuse to bear any costs for liquidation, saying that it’s “good money after bad”. Result is that founding geeks get left with the cost and effort of liquidation, and this makes it hard for them to move on.
What’s more, usually they don’t have the experience to come up with creative ’settlements’ like the one I mentioned, or even proper ‘disposal’ like your suggestion of placing IP in the commons.
There are companies that run IP asset auctions (Ocean Tomo, for example). I would think that a failed start-up looks carefully at maximizing the future utility of its work, whether by trying to sell it or by making it public domain. It seems like it’s a matter of self-interest.
But perhaps eveyone gives up in disgust at that point. Like sub-prime.
As an entrepreneur who wants to get rich, as well as an idealist who hates broken systems, I still feel like the open source model is the right approach.
I can build a business that succeeds on top of an open source project I’ve created. In a liquidation scenario, use of the IP as a negotiating tool is then off the table.
No matter how nasty people get, or how stupid their decisions are (as they often are in these cases) that beautiful baby you helped create will live on unencumbered.
I feel like this is part of the overall problem with startups / founders and investors unwilling to think about downside risk before it happens. A well designed startup should be capitalized and positioned to succeed, but prepared for its probable failure in such a fashion that IP and founders don’t get destroyed.
One aspect of this is most of the really valuable IP is tied up in the brains of the founding team. And often times they move on to other industries but the knowledge that they gained is never captured. How often do see new start-ups repeating the same mistakes over and over that a five minute chat could have saved them from?
I worked for two start-ups in the on-line betting space from 2000-03 (one sold, one still ticking along, both in the UK so legit) and over the past 5 years I would say I have seen about new 40 start-ups enter the space and make the same mistakes we made. I hate seeing that happen.
I think LinkedIn, Crunchbase and a bit of due diligence are part of the solution. Also a lot of entrepreneurs are now blogging what went wrong after the lights out event. What would be really great would be a way of tying all that together, Crunchbase 2.0 - Start-ups from cradle to grave?
Michael, have you been wondering what Omnidrive is going to with their IP?
IBM had a venture back in the boom era called, ‘Fireworks Partners’; an IP and seed fund. They threw more IP from non-performing ventures into the file cabinet than I could evaluate under their retainer.
I wrote an article about it: http://www.scribd.com/doc/2867656/blackflag
You could always do what someone I know has suggested doing; close the company down, start a fresh one, and just copy the code over. It’s a dishonest way of doing business, and one of the reasons why I quit my last job.
I think the best way to handle with failed startup IP is to open source IP by following some popular open source license such as GPL, Creative Common, etc. simply because the return on the investment to sell the IP may not be justified. However, many creditors and investors of the failer startup may not be open enough to opening the source of their investment although it has failed. So in reality most failed startup IPs are locked then wasted so no one can reuse it.
On the other hand, my observation tells me that it’s the people behind the IP are most valuable. In other words, if the founders of the failed startup left to do other things, the IP they created may be not so useful or even become rublish. From time to time I can see new developers rewrite everything left by old developers just because they do not like the old stuff.
Not only commerical IPs have this issue, but open source IPs also have the issue. Please look at http://ndoc.sourceforge.net/. Admittedly nDoc was a successful open source project that can generate nice API reference for .NET library writing in C#. However, in earlier 2005, the founding member of this project quit due to lack of financial incentive. Then after that three years have gone this then successful open source project hung up there at that time and that point, no serious progress yet.
You’re right - what to do with the IP is important.
This should be part of the partnership agreement of the company when its founded. There are several ways:
- put it on eBay and hope for the best
- open source everything
- give it to the creditors
- give it back to the founders
These considerations should become a standard when founding a company, I think.
Hell if I know
While http://Free.TV did not ‘FAIL’, I have stopped developing the products. I have been trying to find someone that would love to use the #1 dotTv domain.
Any takers? Oh,yea - its FREE!
Why wait? I say scrap it before it fail.
@Nick the Geek,
The problem with licensing IP is that very little tech IP has actual economic value to a third party, and without the team behind it, IP has practically no value. Very few startups have IP that is truly unique, most of it can be recreated and it’s very difficult to take someone else’s software and make it work for you without the people who built it available to maintain it.
Licensing also assumes there is some entity that can maintain the agreements.
Let’s also not lose sight of the fact that most startups that fail do so because their technology didn’t work as promised and/or the opportunity they targeted saw little value in it. No exactly ideal conditions upon which to license something.
Having launched http//www.parisenvies.com/ I am now seeking investors (the business plan is pretty solid anyway).
What I’m thinking, is that if I don’t find investors, I might very well open source the core system (a social network for local bars and restaurants with upfront support for multiple domains (cities) all the places data is essentially a wiki with reviews).
I can’t wait until I’m middle aged enough to troll the net for Techtique (tech + antique) bargains on a lazy Sunday morning. Even just browsing would be fun.
Ooo! Code for a transactional e-commerce system for pet products! Wow! An automated ITIL database manager! Hey! Is a RISC processor?
jeff @22 is bang on
abe @8, very few companies start by open-sourcing their code if what they are doing is unique. A common reason to later open source is that they are relying on something with a GPL license and they then have no choice.
I own some IP….founder spent about $700k developing it about 10 years ago. Think I could get anything for it or has technology moved too far beyond? It is client management software for the finance industry.
If the stuff is patented, the patent office has a public database of patents, and patents can be dedicated to the public.
http://www.uspto.gov/web/offic.....m#sect1490
“…In like manner any patentee or applicant may disclaim or dedicate to the public the entire term, or any terminal part of the term, of the patent granted or to be granted.”
It isn’t easy to sell other people’s ideas. People have taste in which intellectual property they are interested in and usually ideas of their own they would prefer to pursue. Generally other people’s ideas have to have overwhelming and obvious commercial value to interest other people, and IP from failed ventures already has an onus of “loser.”
Maybe the Salvation Army could open a site for discarded software.
Selling IP through a third party is often done these days - my company is this kind of company. Therefore, this isn’t a new concept at all. The concept of agreeing to some clause, up front, that this will be the path you take would probably not work. It’s extremely hard to predict the circumstances upon which you’ll want/need to sell IP or the path the company ultimately takes (e.g. if you take a later round of investment, the investor may require differing terms or if you take on debt, IP may need to be secured). A shifting foundation would potentially require many trips back to those who agree to the clause in the first place to amend it. Also, there will always be disagreements regarding what IP has “obvious value” on its face. At the end of the day, it’s important to assess your assets and maximize value in the event of liquidation. The best way to create a positive situation at that time is to make sure you’ve taken appropriate steps along the way to generate value in the IP, not just the technology or company.
interesting topic mike.
how about this:
1) transfer the old IP into a NewCo structure
2) create an “open source” version of the IP usable by others
3a) make the open source GL free to use for non-commercial activities, and
3b) available on commercial basis via some paid component, perhaps a per-txn model, or default rev-share, or (more complex) minority equity stake.
if you can make 3b simple enough, you can use 2) & 3a) to crowdsource some new opportunities for the IP, and 3b) to monetize it, providing value back to the IP acquirer / owner.
devil is in the details of course, but some possibilities here perhaps…
How about creating a non-profit exclusively for this purpose and donating the IP to it. Investors get a tax-write off and the non-profit maybe able to monetize it eventually.
Maybe someone could startup a website to keep track of, and sell, failed startup IP, with the entrepreneur behind the magic keeping a slice of the profits?
One suggestion for automatic release of IP could be implemented as follows. A non profit offers a source code escrow service. Functioning companies renew their escrow agreements every six months. A company that gets sold/merged terminates its agreement and removes code from escrow. The “release of source code” clause provides for the following:
A company that fails to renew its agreement, and does not respond to reasonable notice - will have its source code released under a open source friendly license, a determination that the company is defunct having been made.
This is sort of a living will or trust for the IP of the company. The beneficiary is the company when alive, and the non-profit when dead.
p.s
Most startups will fancy the thought that there is some buyer out there for their IP, and the investors will want to recoup some costs, however marginal.
Most experienced source code buyers understand that any code that comes without developers and one that has not been maintained for a while is usually unusable. (Enterprise buyers who insist on source code escrow only serve to enrich the coffers of Iron Mountain)
Meanwhile, hope springs eternal for the seller.. but by the time it is clear that there is no buyer for the asset - there is no engineering talent left to go with the code, and often no one left to negotiate with.
On the notion that the donors can get a tax deduction .. the US IRS wont even let you take a deduction for a used car to a charity unless the charity can show the exact value it got by disposing of the car. What is the value of donated IP ? A can of worms
I worked for dotcoms for several years. The last startup company I worked for had a team of excellent engineers all from ivy league universities. The ideas they had were innovative but eventually they ran out of money and got screwed over by lousy workmanship overseas. They tried to sell everything at the end. We found some really good information in Complete Guide to Selling a Business by attorney Fred Steingold including the transferring of intellectual property and noncompete agreements. We all learned a lot during those last months.
I have a feeling Arrington is secretly referring to Omnidrive. From what I hear the app was great when it worked. So if the technology is sound it would probably still be worth a lot to acquirers.
When our dotcom failed, we had one member buyout the other member and try to make something work from it (which it didn’t, but some people have to try, you know). We tried to find a bunch of different things to make that happen– we even looked at the selling a business book that PiNi was talking about. It’s a good book, but we found one that’s all about buyouts called i think Business Buyout Agreements put out by Nolo. It had all the forms that we needed, and at least one of us got out of the dotcom business with our hands clean!
File a patent or sell the idea if to some giant.
http://vidsonly.blogspot.com/
How about contributing the IP to a patent pool that offers cheap licenses to future startups. The license would allow any holder to use any of the IP in the patent pool with out fear of infringement. I envision the patent pool being more of an IP insurance policy ensuring you don’t end up getting sued for infringement.
Michael,
Not a bad idea. In fact, I’m the founder of a company specifically focussed on solving this problem.
http://brokensymmetry.typepad......ed-rd.html
Michael
If your company has patents, there is now a growing liquid market in which you can sell them. In some cases the patents can be sold with a license back to
the rights which can enable you to sell the rest of the assets of the company or continue operating.
Our firm specializes in finding buyers for patents. Please check out our
web site and get in touch.
Good day! medrol