IP Commercialisation Case Studies

D-Load Holdings

Toby Buzzok has developed a new kind of anti-virus software for downloading random music from the internet that also avoids bringing a virus onto the receiving machine. Toby writes a business plan and shows a copy to Sarah Smooze. Sarah is prepared to leave her job as the editor of a prominent music journal and help Toby with the launch and marketing of his product. Sarah names the software 'D-Load'. Both know that they need additional money to launch the software - so they decide to approach Ventek, a venture capital company. Larry Bigbux is the Managing Director of Ventek. After discussions, Ventek agrees to invest $800,000 in the commercialisation of the software.

Toby has undertaken extensive beta testing of the software but admits 'the internet is the ultimate quality assurance'. He has been honest in the business plan in admitting that there are legal uncertainties of the copyright position in downloading music from the internet. Larry sees the need to balance this risk within the corporate structure.

Two companies are established:

• D- Load Holdings Pty Ltd ('Holdings') - into which the IP - the current and future copyright and trade mark - has been transferred; and
• D- Load Trading Pty Ltd ('Trading') through which the IP is licensed by the Holdings.

Sarah has two daughters with her partner, so Sarah establishes a Family Trust to hold her shares in both companies. Toby is single and decides, after speaking with his accountant, to hold his share in his name.

Ventek identify an academic from a local university who accepts Ventek's invitation to be their nominee on D-Load Holding's Board of Directors. Larry declines to be a director of the trading company.

Even though Toby and Sarah had only just met, they established a Shareholder Agreement before they issued an invitation to Ventek. The Heads of Agreement for the Shareholders Agreement, proposing Ventek's involvement, is included at the end of this case study. Toby's Solicitors, Crabshaw's of Geebung, Brisbane proposed the two-company structure. Sarah proposed, and Toby accepted, the appointment of the firm of accountants Quartermass. This firm checks to see that the IP transfers from Sarah and Toby, in return for the allotment of shares in the companies, do not have adverse tax consequences.

Because Toby's business plan promises Ventek that there is no current competition on the internet and licence D-Load will have 'first user advantage' Toby and Sarah are able to negotiate the following share allocations:

• Toby - 40%
• Sarah - 40%
• Ventek - 20%.

Company Structure Diagram: D-Load

Click to enlarge

A diagram of the overall transactions is set out above, and is adopted in the Joint Venture Heads of Agreement. The agenda for the first meeting between Sarah, Toby and Larry is also annexed along with the agenda for the final meeting at which the actual documents are signed and the investment monies are actually provided by Ventek to the respective companies.

How does this two-company structure protect Larry's investment and the IP?

• As soon as there are signs that the business conducted in the trading entity may fail commercially and that company becomes insolvent, the IP licence from the holding company to the trading company can be terminated by the holding company in accordance with provisions to that effect in the licence agreement; and
• Because the title to all the IP rights in the project - the most valuable component of the business - remain in the holding company and the trading company holds no valuable assets, the trading company's creditors or insolvency administrator would not be able to have access to these IP rights.

For the two-company structure to be an effective strategy to protect your IP - and to minimise tax issues as the value of the IP increases - timing of its adoption can determine whether or not it is regarded as 'commercial'. This will also determine whether a liquidator, receiver or administrator of the trading company can act against the company.

• If this two-company structure is established very early in the entrepreneurial process (preferably, before any trading has occurred), then a liquidator in control of the trading entity's remaining assets is unlikely to be able to have access to the IP.
• However, if this structure is created after there are already creditors in the original trading company and especially where the trading company may be trying to avoid its creditors, it is quite probable that this structure will be overturned as 'uncommercial' under the provisions of corporations law. If the transfer of the IP is held to be a share transaction to avoid creditors, then the liquidator of the trading company may well be given access to the IP in the separate holding company as well as to personal recovery actions against the actual directors of both the holding and trading companies who are personally responsible for the assignments.

Toby and Sarah will need preliminary assignment contracts to ensure the appropriate holding company owns the unencumbered rights to the software.

• However, unless ownership is formally assigned to the appropriate entity, the IP rights will remain legally with their 'author', who is both a shareholder and director (ie. Toby). The trading company, which is employing the research and development, would also be an owner of the IP developed by the employed researchers.

There is no central database for registration of ownership of copyrights. Allocation of rights to confidentiality and goodwill can only be confirmed by actual contracts. Contracts assigning IP rights to the appropriate vehicle, which are signed by individual capital shareholders, directors and third party contractors, must be sighted by a venture capitalist prior to making the investment. Contracts are especially significant in respect of copyright, confidentiality and unregistered trade marks because these three forms of IP rights do not have a public ownership register, as exists for designs, patents and trade marks.

IP ownership is not automatically cross-referenced with the law concerning corporations, partnerships or trusts. In other words, shareholding, unit holding or directorships are not, of themselves, sufficient to automatically assign IP rights to the actual and appropriate company or trust. Only contracts, actually signed by the authors/owners of IP can achieve this assignment.

Click here to view the sample Shareholders Agreement in PDF format