Patent defence - The $1m Fallacy

Last week, my colleague Marios penned an outstanding article in which he debunked the misconceptions surrounding software patenting. This week, I am addressing another misconception – the belief that possessing a balance sheet is essential for patent defense, while also elaborating on the financial incentives for patenting.

One common error that leads to the dismissal of patenting is the oft-repeated notion that, "I lack the $1 million required to protect it, rendering the patent worthless." This misconception, however, can be easily refuted with two straightforward points. Firstly, you can obtain intellectual property (IP) insurance for as little as a few hundred pounds per month. Secondly, you can secure litigation financing to cover any potential court-related expenses. In both instances, you can proceed with confidence, knowing that you will have well-qualified legal representation fully funded if the need arises.

If you choose not to patent by believing the $1m fallacy you’re making a decision you can’t undo later. If you do patent, however, you’re building an asset with real value both strategically (see Marios’ article from last week) and in its own right. Patent value tends to grow as the underlying technology is derisked; the business case is proven; ancillary patents naturally follow on; global territories are added and so on.

Investors recognise this evolution and place a value on it. They know a patent can be sold and transferred as any physical asset could. They also know it can be retained but licensed out for an incremental 20 years of cash flow, possibly many times over.  If not licensed out, investors value patents on a “relief from royalty” basis – based on the fact that since you own the patent you don’t pay 15% of your revenues as a royalty to a third party, meaning the value is each one of those royalty payments in today’s money.

A patent you choose to pursue today may also be a source of financing down the line. There are a number of alternatives here including a patent-backed loan, or a royalty securitisation allowing you to receive a part of the royalties you’ll earn over 20 years upfront.

Needless to say, this all relies on a good patent that really underpins your business. Silly patents for window dressing will not fool anyone but the most naïve and will almost certainly be a waste of your scarce resources.  But if you have an opportunity to patent a material aspect of your technology, don’t pass up on it because of the $1m fallacy.