SMEs (small and medium-sized enterprises) invest most of their resources in R&D to produce new technologies. They take higher risks than larger companies, who in contrast focus their R&D efforts on incremental innovations. Yet, SMEs mostly fail to protect the value they create with patents. When they do, these patents have in general very poor quality and do not adequately protect their core markets. Lastly, SMEs are underserved in terms of legal representation and understandably so: outside law firms tend to find it difficult to work with SMEs, let alone getting paid for their services. There is a mismatch between the patent value creation potential of SMEs on one hand, and what they actually produce.

1. SMEs and
Patents: How
to Get it Right?
Ivan Chaperot, IP Law
Summit, March 28, 2017
Content first presented at the IP Law Summit (a Marcus Evans conference) on March 28, 2017, Red Rock Resort & Spa, Las Vegas, NV

2. Disclaimer
The views and opinions in this presentation are those of the author and do not
necessarily reflect the official position of any entity other than the author, whether
current or former employer or other agency, organization or company.
Since the author is a critically-thinking human being, these views and opinions are
subject to change, revisions, rethinking at any time. By the way, please do interrupt,
challenge and otherwise participate in a discussion with the author to challenge his
thinking.

3. The SME patent paradox
SMEs invest most of their resources in R&D to produce new technologies. They take
higher risks than larger companies, who in contrast focus their R&D efforts on
incremental innovations.
Yet, SMEs mostly fail to protect the value they create with patents. When they do,
these patents have in general very poor quality and do not adequately protect their
core markets. Lastly, SMEs are underserved in terms of legal representation and
understandably so: outside law firms tend to find it difficult to work with SMEs, let
alone getting paid for their services.
There is a mismatch between the patent value creation potential of SMEs on one
hand, and what they actually produce.

4. Patent Obtention Costs
Typical costs for a 40-page application with 15 claims and 5 pages of drawings, first
filed in the US, and then extended overseas with a PCT application for 3
countries/regions (US, CA, EP) to 6 countries/regions (US, CA, EP, JP, KR, CN)
Activities Costs
Drafting and filing a US patent application $15k - $20k
Early extension costs (filing and examination fees) $15k - $30k
Late extension costs (prosecution, grant, maintenance) $40k - $90k
Total $70k - $140k
Source: Based on “Estimating the cost for filing, obtaining and maintaining patents across the
globe” by Anthony de Andrade & Venkatesh Viswanath (August 28, 2016), IPWatchdog

5. Patent Utilization Costs
Typical patent enforcement/defense activities include a filing an IPR to defend
against an assertion, the acquisition by the SME of a patent as leverage in
counter-claim/negotiations and a ITC or District Court litigation (up to trial)
Activities Costs
Preparing, filing an Inter Partes Review $250k - $500k
Acquiring a “claim charted” US patent $500k - $2M
ITC or District Court action $2M - $6M
Total $2.7M - $8.5M

6. Why should SMEs spend
money on obtaining patents
they cannot afford to use?

7. Why are patents important to SMEs?
“Reasons for Patenting Your Inventions”
1. Exclusive rights allow your SME to use and exploit the invention for 20 years
2. Strong market position prevent others from commercially using your patented
invention, thereby reducing competition
3. Higher returns on investments under the umbrella of these exclusive rights
4. Opportunity to license or sell the invention if you chose not to exploit the patent
yourself
5. Increase in negotiating power in the process of acquiring the rights to use the
patents of another enterprise
6. Positive image for your enterprise for raising funds, finding business partners and
raising your company's market value.
Source: Extracts from http://www.wipo.int/sme/en/ip_business/importance/reasons.htm

8. Why are patents really important to SMEs?
Reality-checked motivations for seeking patent protection for SMEs:
1. Clearly establishes who owns what (employees, contractors, partners)
2. Enables flexibility to disclose publicly (demos, fund raising)
3. Protects the value of stock and stock options (investors & employees)
4. Creates a valuation premium for strategic buyers (value of control)
And to a lesser extent, as it most likely won’t benefit the SME’s current team or
shareholders unless something goes terribly wrong and the SME magically survives:
5. Fortifies the SME’s balance sheet (assets pledged as loan collateral)
6. Protects the SME’s margins (licensing, enforcement)

9. #1: Establishes Ownership

10. Parting ways with a co-founder
Ousted co-founder, Reggie Brown (on
the left in the photo) filed a lawsuit
against Snapchat claiming he came up
with the idea for disappearing photos
but was pushed out and not given
equity. Snapchat settled in September
2014.
Disgruntled co-founders or early
technology partners may make claims
if a company proves to be successful.
It is important to get ahead of it.
The founders of Snapchat celebrate its launch: Reggie Brown,
Bobby Murphy and Evan Spiegel. LA County Superior Court

11. Key employees/contractors leaving
Early stage companies create most of
their value is the form of technologies.
They are vulnerable if departing
employees use it for their new
employer or to form a new company.
Trade secret violation claims against
departing employees are hard to
prove unless there is an overwhelming
evidence, such as former employee
downloading 14,000 proprietary
design files weeks before resigning.
“Waymo sues Uber and Otto for theft of trade secrets” by
Darrell Etherington, TechCrunch (Feb 23, 2017 )

12. How far can trade secrets & copyrights go?
Zenimax sued Oculus (Facebook) for
stealing their VR technology.
Carmack (Oculus CTO) stated: "No
work I have ever done has been
patented. Zenimax owns the code
that I wrote, but they don't own VR."
While deciding Oculus wasn't guilty of
stealing trade secrets, the jury also
decided to award Zenimax $500
million for violations of NDAs.“Facebook just lost a $500 million lawsuit — here's what's
going on” by Ben Gilbert, Business Insider (Feb 7, 2017 )

13. Challenges in establishing ownership
Hard to establish clear boundaries
Employees
● Not possible to brainwash
departing employees.
● Non-compete hard to enforce
Technology partners collaborate well
until some other partner comes along
(infidelities) or break-up
Benefits of filing patent applications:
Employees document (invention
disclosure) what they are working on
during their employment, whether or
not a patent is ultimately filed.
Filing a patent application forces a
discussion about IP ownership while
relationships are (still) good with a
technology partner. Filing a patent
application before initiating a
technology partnership is even better.

14. #2: Enables Disclosures

15. Investor Pitch Demo Product Launch
Startup disclosures
Build MVP Optimize product

16. R&D activities
Investor Pitch Demo Product Launch
Build MVP Optimize product

17. Typical VC-funding
Seed Round A Round B Round C
$250k $2M $10M
Build MVP
Optimize
Product
Scale Up,
M&As
Business
Development
$50M

18. Startup patent filing strategies
BAD
● Rely only on trade secrets by
signing NDAs (no patent)
● Open source everything to foster
technology adoption (no patent)
● D.I.Y. provisional filing or patent
drafting services (no attorney)
● Capped patent drafting fees
result in thin applications
GOOD
● Deferred attorney fees, bridge
financing (e.g. convertible loan)
● Preserve rights with patent filings
and PCT extensions
● Document all inventions and
make judicious filing decisions
● Develop rich first application that
can be (later) a source of CIPs
“Cheap things are not good, good things are not cheap” - Chinese Proverb.

19. #3: Protects Stock Value

20. Stock of value of a company
Concept of Intellectual Capital by Adam and Oleksak
Stock Value
Financial Capital Intellectual Capital
Relationship
Capital
Structural
Capital
Human
Capital
● IP assets (patents, code...)
● Processes
● Network
● Customers
● Management
● Employees

21. Seed Round
$250k$500k $750k
Pre-Money Valuation Post-Money ValuationThe Money
VC=33%Team=66%

22. Round A
$2M$3M $5M
Pre-Money Valuation Post-Money ValuationThe Money
VC=60%Team=40%

23. New hires
Seed stage value creation
$500k$3M
Mostly
IP assets
creation
$2.5M
New relationships
Value created in Seed stage by
the team using the money

24. IP assets contribute to stock value increase
Patents
Copyrights
Trade Secrets
Industrial Design
Trademarks
● Computer programs
● 3d objects
● Panoramic images
● Technologies (e.g. VR)
● Brand names
● Structure
Enforceable trade secrets:
● Generally secret
● Economic value
● Reasonable protection to
maintain secret (NDAs)

25. Exemplary Net Payoffs for VCs
IP asset value attributable to patents
Real-Option Value
An early-stage technology startup
is a growth option.
The payoffs are derived from the
expected the value of exploiting
the patented technology.
The patents provide legal
exclusive rights (ownership) to this
“real option”.
More information on real-option value: “Real Options: Fact and Fantasy”, Aswath Damodaran, NYU Stern School of Business (2013)
Fail
Round A
Seed
Round B
Fail
Round C
Exit
Fail
Exit
-$250k
-$2.25M
-$12.2M
$6.75M
$26M
$94M
-$250k
-$2M
-$10M
-$50M

26. “doubling of a start-up’s patent application stock is associated
with a 45% increase in valuation”
“Small Firms, Big Patents? Estimating Patent Value Using. Data on Israeli Start-Up Firms’ Financing Rounds”, Gili Greenberg (2010)

27. #4: Valuation Premium

28. Who cares about patent quality?
Most high tech VCs don’t value patents because
they don’t know anything about it. If they do, they
don’t care about patent quality because they are
out before it matters. Patents are at best a “check
the box and move on” consideration.
Why should patent quality matter for VCs?
Because buyers care.
Corporate buyers generally pay more than
financial buyers and care about patents (which
their IP team assess).
Patent

29. Strategic motivations for acquiring SMEs
Brand
Talent
Technology
Products
Cost
Synergies
Geographic
Expansion
For Corporate Buyers, intellectual
property and R&D is deal driver,
which is protected by the SMEs
patents.

30. What is the “value of control”?
● In acquisitions, acquirers often
pay a premium for control that
can be substantial.
● The value of controlling a firm
derives from the fact that you
believe that you or someone else
would operate the firm
differently (and better) from the
way it is operated currently.
Patents present incremental strategic
value for corporate buyers, which they
can evaluate. They will operate the
SME patent portfolio differently.
Important considerations:
1. Claim coverage
2. Geographic scope
3. Encumbrances (lack thereof)
Source: “The Value of Control”, by Aswath Damodaran (Stern School of Business)

31. Accountability for patent quality?
1. Some VC investors have experience
with patents. Choose a VC investor
who can bring this experience to the
board (e.g., Corporate VCs).
2. The CEO or a C-level executive (CFO,
CTO) should be responsible for
establishing a patent strategy.
3. The company should establish
processes so that the outside counsel
can work efficiently.
Board / Investor
1
2
3

32. Conclusion

33. Conclusion
Communicate the value of patents in business terms tailored to the key
stakeholders:
● Management team cares about doing the right thing (#1, #2)
● Investors care about their share value (#3, #4)
For outside counsels: choose clients who get it. It can be very frustrating otherwise.
For SMEs: be a good client. Help your outside counsel (processes, attention,
availability).

34. Connect with me
https://www.linkedin.com/in/ivanchaperot/