Posted: April 2nd, 2011
By Tiffany R. Johnson *
On Friday, March 25th, the Journal of Business and Intellectual Property Law’s symposium tackled the hard-and-fast growing issues associated with “creative capital,” and topped off its energetic morning panel with Bob Young – the founder of two incredibly successful creative capital ventures, Red Hat and Lulu.com. Young’s address to a full crowd was not only inspiring because of his unique journey to success (often noting that his “ADD” prevented him from focusing on any one project for too long), but also because of his candor. He opened to a crowd full of law students with the sentiment that he had some bad news for aspiring lawyers – the world does not revolve around us; and, especially for the IP start-up, it operates in spite of us. Young qualified this statement by noting that some of the most successful start-ups in the field, like Bill Gates’ Microsoft, can attribute their success to the dual practice of ignoring the advice of lawyers and meeting the needs of customers. With this in mind, Young noted that an IP start-up must often consider what the consequences of breaking the law will be, whether the law is being enforced, and if the potential fine (or even jail time) is worth the benefit to its customers. While Young conceded that very few IP issues arise with Lulu.com, because the law is relatively settled in the arena of publishing, other ventures may face laws that, if followed strictly, stifle the progression of the industry.
Other fine points covered by Young included:
- Net neutrality: Young noted that the potential for certain bandwidths to be prioritized over others in the interest of profitability could hamper innovation of internet-based start-ups like Ebay and Netflix.
- Free market wealth: Referring specifically to the example of Sam Walton’s Wal-Mart, Young hypothesized that making the world a better place with solutions – like closing the gap between rural and urban America – will be rewarded with economic success. The potential for this sort of “karma reward” incentivizes faster and better creative thought that, Young believes, cannot be matched by government controls.
- Venture Capital is not the only option: Young admitted to starting Red Hat in a closet and credited contributions like his aunt’s “love money” as an equally reliable source of capital. Perhaps more important than the initial source of capital is the trust of the customer. Young estimated that successful branding could, and probably should, take at least five years to establish.
Young’s keynote speech was followed by a more business oriented panel focused on financing an IP start-up. Overall, the consensus of the panel was that the IP start-up, not unlike other start-ups, faces incredible legal, ethical, and strategic challenges. Sharon Presnell, Senior Vice President of Tengion, and Martin Sinozich, President of Venn Capital agreed that, strategically, IP can be very complicated to predict in the market. For example, Tengion must often decide whether the protections a patent may afford are worth the expense, time, and exposure. Tengion’s biotechnology is, in some circumstances, better suited to capture a niche in the market quickly while keeping the technology unpatented. Reiterating this strategic choice, Sinozich explained that patent applications usually cost at least $20,000 to even file, and international patents are exponentially more expensive. Additionally, in addressing a question about the Patent Reform Act (which would dramatically change patenting in the U.S. from “first to invent” to “first to file”), Presnell noted that rushing an invention to the patent office, even under the current system, not only runs the risk of patenting an invention that is not viable in the market but of also creating prior art.
One of the more legally relevant issues that arises with financing the IP start-up is the ethical dilemma of how to pay for legal counsel. Therese Maynard, a professor at Loyola Law School, examined this increasingly common scenario:
An entrepreneur shows up in a lawyer’s office and asks for help setting up his new business. The lawyer agrees to help the entrepreneur, at which point the entrepreneur reveals he has no money. He offers the lawyer a percentage of the fledgling company in stock, in what is known as an equitable billing arrangement. What is the lawyer to do?
The ensuing conversation between Maynard and Merrill Mason, Partner at Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP, revealed the potential conflicts an attorney might face when attempting to provide counsel to the wide-eyed IP entrepreneur. Mason noted that entrepreneurs are “freakishly passionate…about really weird things,” and the role of the attorney is to determine the potential value of the company—which sometimes involves breaking the news to the entrepreneurs that their company is not worth even half the grant money they have already sunken into their venture or, alternatively, facilitating meetings with potential investors. However, Maynard argued that sometimes, in determining the value of the company, the lawyer’s partial ownership of the company could skew that lawyer’s actions. Taking stock as payment could confuse the interests of the lawyer to pay his bills with the best interests of the company. Mason countered, noting that lawyers often have to displace their own personal interests, and good lawyers should be able to draw the line. Perhaps more important than the principles behind equitable billing arrangements, Maynard pointed out that courts often judge the reasonableness of a fee agreement after-the-fact, or more specifically, after there has been a large windfall for an attorney. Thus, valuation of a company can be both key to the success of the company, but also to the potential for suit should an excessively large fee result from the stock agreement.
Overall, JBIPL’s symposium was a successful collaboration of legal and business minds and exhibited the Journal’s new goal of emphasis on the practical implications of that interaction. Kudos to all that contributed!
*Tiffany Johnson is a second-year law student at Wake Forest University School of Law, and works as a Legal Writing and Research teaching assistant. She holds a Bachelor of the Arts in Politics from Princeton University. Upon graduation in May 2012, Ms. Johnson intends to litigate in the private sector.