Sweat Equity in Exchange for Patent Services
Exchanging Equity for Patent Services
Should patent professionals accept equity (i.e., ownership, shares, or stock) in exchange for patent services? Should startup companies offer patent professionals equity in lieu of cash payment for those services? These sorts of “sweat equity” deals are somewhat common in many parts of the business world. But, the legal community has been luke warm to the idea.
Sweat equity is a party’s contribution to a project in the form of effort — as opposed to financial equity, which is a contribution in the form of capital. More recently sweat equity has been used to describe a party’s contribution to a project in the form of effort — as opposed to financial equity, which is a contribution in the form of capital.
In my opinion, patent professionals often walk into unique opportunities for getting in on the ground floor of newly developing technology companies. However, investing in startup companies is often incredibly risky, so anyone entering such an agreement should be comfortable with the risk.
Patent professionals often find themselves in a unique situation when forming relationships with startup companies. On the one hand, a startup company should file patent applications describing and claiming their technology before speaking to investors. On the other hand, patent work is often very expensive, especially before the startup company gets funding. It’s a catch 22: you need the money to do the patent work; but you can’t go chasing the money without first completing the patent work.
Waiting until after funding to file patent applications puts the entire enterprise at risk. For a startup company, the patents are often the companies most valuable asset. Speaking with investors before protecting that asset is very risky. For example, the “investor” could steal or leak the technology to competitors with better resources.
One way to solve the above problem is to exchange owner’s equity for the needed patent services. A few people have explored this area. I’ve tried to summarize my findings below.
Equity for Legal Services
This idea of paying for legal services with equity is not new. In particular, Christina Farr wrote about startups exchanging equity for legal services. In her article, she points to Equity LLP, which exchanges legal services for equity. In their words, “Cost. It’s free. All the legal work to launch your company in 3 months, plus a year of maintenance and advice. We are even working on securing a modest investment for every participant. We ask for a modest equity stake, typically 2% of founder equity.”
Gil Silberman, Founding Partner of Equity LLP commented that exchanging equity for patent services happens “[n]ot too often in my observation of Silicon Valley work, but it’s not unheard of either. It might make some sense for a blue chip seed funded startup where there is a real possibility of the equity being worth something in a few years whether or not the patent itself ever issues or is strong. It’s much less frequent with independent solo inventors, where the majority of inventions have no commercial value, the majority of patents are not economically viable, and there are several more steps to take before their idea could be commercialized.”
Patent Services on a Contingency Basis
Here is another discussion about why attorneys should think twice before agreeing to accept a share in the project in lieu of traditional cash fees. This article takes the perspective of the patent professional and outlines many of the risks involved. In short, taking equity in a startup company is a high-risk venture. The patent professional should consider it akin to spending cash to acquire shares of a high-risk company.
Exchanging Equity for Services is Common in the Tech Accelerator Space.
Recently there have been an increasing number of technology accelerators. For example, Y Combinator and TechStars are considered to be among the best accelerators. Most accelerators provide a stipend or small seed investment, mentoring, and workspace and professional services in exchange for an equity stake in the company. Typically the equity investment is around $25,000 and the equity stake is roughly 6 percent, according to Hochberg’s research.
Quirky offers a similar deal–exchanging a wide array of acceleration services for all of the patent rights. If things work out, the inventor can hope to receive some royalties in return.