Large Patent Holders Eye Startup Equity in Return for Patent Sale

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By Malathi Nayak

A handful of large patent holders, including telecom giant AT&T Inc., have agreed to pool patents for sale to startups in exchange for equity when the up-and-coming companies raise venture capital funds.

Patent advisory and transaction firm Aqua Licensing said Aug. 2 in a statement that it will launch a program to match startups looking to purchase intellectual property to defend against potential litigation with patent holders interested in selling patents that aren’t essential to their core businesses.

AT&T, PC maker Lenovo Group Ltd., semiconductor technology licensors Entegris Inc. and Rambus Inc., and two other undisclosed companies have agreed to pool more than 60,000 patents for sale in the “IP Investor Pool” program, Mark McMillan, Aqua Licensing’s founder and managing director, said in an interview with Bloomberg BNA. The pool includes patents in areas such as automotive, computer hardware, semiconductors, and social networking, he said.

By building a new marketplace connecting startups and large patent holders, the program addresses issues on both sides. Startups are often vulnerable to litigation threats as they lack defensive patent portfolios that would help them fight infringement lawsuits by countersuing or making cross-licensing offers. Meanwhile, corporations with extensive patent portfolios are looking to shed redundant, noncore assets.

Making Matches

This week Aqua Licensing will begin soliciting business plans from startups to identify which patent holders’ assets are a good fit. The program is designed so a patent owner sets a patent’s value and then makes a sales agreement on the condition that the startup raises venture-backed funding within 90 days. The agreement specifies that the startup will reinvest funds raised in equity to be held by the patent owner, McMillan said.

To match up patents with potential buyers, Aqua Licensing will use an automated language analysis of a startup’s product descriptions and competitors’ patent claims, examinations by its analysts of potential threats, and suggestions from patent holders selling assets, McMillan said.

Young startups will likely be drawn by the opportunity to buy mature patents owned by corporations as they build their patent portfolios. Normally they don’t have the resources to buy those patents, which are some times snatched up by patent holding companies that earn revenue strictly from licensing patents or asserting them in lawsuits.

“A lot of the patents entering the secondary patent market being sold off by these large tech firms would be of most value to startups,” McMillan said. “The challenge is they don’t have cash to buy the assets.”

Startup Value Boost

The program would enhance a startup’s value in the eyes of venture capitalists because of the promise that they will acquire ownership of defensive patents from established companies once they have the money, McMillan said.

Most patent holders want to restrict their participation to five to 10 percent of the funding round value, McMillan said. Instead of taking a larger share, they understand that pitching in with their patents would increase the value of not only the startup but also of their limited equity stakes, he said.

Another program launched in April by Alphabet Inc.'s Google and Silicon Valley-based software company Intertrust Technologies Corporation lets startups access some patents to use as shields against litigation in exchange for equity. But that program, unlike the IP Investor Pool, doesn’t result in any transfer of patent ownership.

“We’re looking to intersect these startups as they prepare for their next venture round,” McMillan said, “and become an early participant in the next round through the placement of strategic intellectual property.”

To contact the reporter on this story: Malathi Nayak in Washington at mnayak@bna.com

To contact the editor responsible for this story: Mike Wilczek at mwilczek@bna.com

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