Introduction
Inventors usually dream of making it big. They hope to sell a patent for a billion dollars, bring in huge venture funding for a company built around the patent, or deliver the next blockbuster product. Most inventors (most people) never stop to ask how much they need to live the life they want to live. This article hits a seemingly simple (but in reality complex) question: Should they be willing to sell for less (sometimes far less) than they believe the patent is worth instead of gambling on litigation to deliver the actual value?
The Problem: Letting “Uber-Rich Dreams” be the Enemy of Wealth
Too often, inventors (or creators of any intellectual property, like screenplays, books, or artwork) get so focused on what their creation is worth and how to maximize the value that they never ask a key, baseline question:
“I’m human. How much do I need to live a happy life and retire in comfort?”
If the answer to that question is less than what you believe the value of your patent to be, that should be the number you’re willing to sell for. To be clear, for some people, “a happy life” means running a big corporation. For others, it means providing a high quality of life for their family. For others, it means being able to give huge financial support to non-profit efforts to help others. There is no universal answer to the question, but it is always worth asking.
In the context of a patent deal, that number might be orders of magnitude less than the possible verdict in a suit for infringement. Let’s consider a theoretical invention: Patenton, a new drug that boosts your creativity without side effects.
Now imagine you tried to sell the drug to InfringCo, but they refused, saying that the patent was probably invalid. The next thing you know, InfringCo is making Patenton (since this is theoretical, we’ll overlook the FDA approval issues). InfringCo reports net revenue for Petenton in the first year of sales to be $10 billion, and Q1 results show increasing adoption and sales. Wow. You’ve invented a $100 billion patent, and it’s being infringed. If you sue InfringCo, you might collect as much as $100 billion. In fact, since they wilfully infringed, it could be increased to $300 billion. Cool, you’ll be able to buy and sell cities and small countries!
Except you might not. What if the patent is found to be invalid (maybe you lied to the USPTO during prosecution, maybe it was an obvious drug, maybe it was an off-patent drug that you’re using for a different purpose)? You get zero.
That’s right. Patent litigation is bimodal. Either the patent is valid and infringed, or it isn’t. If it isn’t, you get nothing (and probably have to pay the other side’s costs, excluding lawyer fees).
Let’s assume that the top ten pharmacologists each tell you that you have a 10% chance of winning, and a 90% chance of having the patent invalidated, and the top 10 patent litigators each tell you that if you win, you’ll get $300 billion. Statistically, the patent is now worth $30 billion: $300 billion multiplied by the 10% chance of winning it.
Here’s where the rubber meets the road: InfringCo offers you $1 billion to purchase the patent. If you agree, they’re getting an amazing deal — a $30 billion patent for $1 billion.
What should you do? Unless your answer to the “how much is enough” question is over $500 million ($1 billion after tax), you should take the $1 billion. Maybe you want to look for a patent enforcement company or competitor willing to pay you more than that for the patent before accepting, but you should absolutely be prepared to accept $1 billion.
It is better to have a guaranteed awesome life than it is to have a 10% chance of having the same lifestyle, but with a bunch of extra money just sitting there.
This applies across IP. If you write the treatment for the next huge TV franchise, it might be worth $100 million, or it might be worth nothing if the pilot fizzles out. If your “enough” number is $10 million, sell it for whatever it takes to net $10 million after taxes. This guarantees you get the lifestyle you want. Would it be fun to have a bunch of extra money? Maybe. But it would be tragic if you turned down your “enough” number only to get nothing.
The bottom line is that IP advisors — especially those with a “piece of the action” — will usually want you to push for the maximum return possible. But why? Consider a roulette analogy. Imagine that you walk into a casino and they have a special roulette wheel. There are 18 red slots, 18 black slots, and 2 green slots. It pays 100:1 if your ball lands in a red or black slot, but you lose if it lands in a green slot. The only caveat? You have to bet all of the money you have in the world. So you have a 17 in 18 chance of turning your life’s savings into a fortune, but a 1 in 18 chance of leaving utterly penniless. It’s a tough decision, but most people are too risk-averse to take a random 6% chance at bankruptcy. Now somebody approaches you with a “deal”: They will pay you $10 for every $1 you bet, but they get to keep the profits if you win (i.e., the $100:$1) if the bet wins. They are far more wealthy than you, so for them, a 6% chance of losing their investment combined with a 94% chance of making 10x their investment is a fantastic deal and an easy choice. Which deal would you rather take? Risking it all for 100 to 1 return, or a guaranteed 10 to 1 return? If the 10 to 1 return is enough for you to retire in the lifestyle you want, wouldn’t it make sense to sell your turn at the 100:1 roulette wheel for far less than its true value?
Look, you’re an inventor. You dream big. Your imagination knows no limits, your horizon goes on forever. But the fantastical thinking that drives innovation can also drive you to bankruptcy. Take the guaranteed win. Once you’re set for life, you can gamble with your next patent.
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