It is an obvious fact that the ability to raise capital is vital to many small (especially “high-tech”) businesses. In doing so, small business founders and other entrepreneurs spend a significant amount of time drafting a business plan and toiling with presentation slides. Those plans invariably define a market, describe the new service or product offering and detail the biographies of the management team. However, rarely do entrepreneurs think of stating their business case to potential investors in terms of the intellectual property (IP) rights (i.e., the patents, copyrights, trademarks and/or trade secrets) their new company controls or potentially can control.

Why should a small company care about IP?  Well, in the last thirty years, there has been a shift from a labor economy to a knowledge economy. That is, less than 10% of Americans now work in manufacturing. Consequently, intangible assets (i.e., long-lived assets used in the production of goods and services, including IP rights, know-how, software, databases, and certain contractual rights such as broadcast licenses, governmental permits, customer and supplier agreements, etc.) have emerged as the most powerful asset class, overtaking more traditional capital assets such as real property, plant and equipment. Studies have shown that as much as 75% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 30 years ago when less than 20 percent of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is IP.

So again, “What does IP have to do with me the small company entrepreneur raising capital!?”  Well, the lifeblood of any small, high-technology enterprise is the IP that it controls or potentially controls. In other words, the short-term salability, the long-term profitability, and the eventual ability to undertake an initial public offering of the small company all depend upon its ability to develop, acquire, protect and apply innovative ideas and concepts. The foregoing is supported by data showing that small businesses generate 13-14 times more patents per employee than large firms (and would empirically suggest that this tangible asset versus intangible asset inversion described above applies, if not more so, to smaller (and private) companies as well).

Thus, when an entrepreneur is spending a significant amount of time drafting a business plan and toiling with presentation slides in the hopes of raising capital, it would be prudent to ask: “What is my IP position and have I conveyed that in my materials such that a professional investor will understand?”  In other words, as an entrepreneur, you would not have started a company if you didn’t have a great idea about making some new product, offering a new service, or making some existing product or service faster, slower, cheaper, bigger, smaller or whatever adjective applies for describing the next “cool thing” in your technology space. Well, how do you keep competitors (think bigger, more-established companies) from just copying that idea!? The answer is IP rights!

Therefore, your business plan and pitch book should address the following:  What patent applications will we file?  What will we keep secret?  What will be open sourced?  What trademark applications will we file?  Have we obtained domain name registrations corresponding to the trademark applications we filed?  Does our business model depend on using someone else’s materials that are protected by copyright or some other form of IP?  Your plan and pitch books should address these because without any plan for establishing (or any established) IP rights, your venture essentially becomes a commodity provider attempting to compete on price – which is difficult given that you most likely won’t be able to take advantage of any economies of scale, unlike your more mature and larger competitors.

It is not uncommon for museums (or other artistic, non-profit and philanthropic organizations) to organize art exhibits which include works of art (e.g., paintings, sculptures, etc.) that are not owned by the museum itself.  In such cases, the museum curator must borrow the desired works from their owners (i.e., the artist themselves, other museums, corporations or private collectors).  In drafting a Loan Agreement between the exhibiting museums and owners to accomplish the foregoing, here are some general considerations:

1. The agreement should clearly specify the work(s) being borrowed by the museum, the loan period and the exact dates, times and places (i.e., one or more participating venues) the artwork may be exhibited.
2. The museum should reserve the right to include or not include specific works in one or more special exhibits. That is, the curator may want to maintain artistic control as to including or withdrawing one or more of the borrowed works from the exhibit at any time and in their sole discretion.
3. The agreement should specify in whose possession the borrowed works will remain during the duration of the loan period (i.e., the museum or one or more participating venues for a touring exhibit) and specify the logistics for the drop-off and pick-up of the borrowed works (including responsibility for the costs of such transportation and storage if pick-up times are missed).
4. The agreement should specify any indoor/outdoor exhibit conditions and requirements for the preservation of the borrowed works (e.g., limits or ranges of temperature, sunlight exposure, moisture, etc.).
5. The lending party should warrant that they have has full legal title and copyrights to the works being borrowed by the museum, and agree to indemnify the museum (and any participating venues) against any liability arising out of claims by persons claiming title or copyright to any of the works.
6. The agreement should specify who is responsible party (and in what amounts) for insuring the works against risks of physical loss or damage during the loan period.
7. The agreement should include a limited license for the museum and any participating venues to photograph and reproduce, display and transmit images of the works in connection with publicity of the exhibition and the right to use any contributing artist’s name, biographical information, likeness and credit line information in connection with such publicity.
8. The agreement should specify any monetary (or other) consideration being paid to the works’ owners for making the loan.  And, if the exhibition contemplates accepting offers for the sale of the borrowed works, the agreement should also specify sale prices and any commission arrangements.
9. The agreement should specify that the museum and any participating venues may apply conservation measures without the owner’s permission if immediate action is required to protect the works and how the costs of such conservation measures shall be shared and/or insured.

In the entertainment field, it is not uncommon for a producer to seek capital (i.e., financing) in order to produce one or a series of films, concerts, comedy shows, stage plays, musicals or other theatrical productions.  Such financing can come from one or more individuals, financial institutions, (for- and non-profit) organizations and/or the like.  As varied as these sources of financing are, so too can be their respective motivations.  An individual or non-profit group may seek to finance a play, for example, for purely altruistic reasons and not expect any return on their investment.  A financial institution or for-profit organization, however, may expect to front the producer a certain sum of money with the expectation that a multiple of such sum be returned from the profits of the production.  Regardless of the financing source and their motivation, some common considerations should be taken into account when drafting a Production Finance Agreement.  (And, yes, you need a written agreement!)  These include:

1. The Work.  Be sure to clearly define the work (or series of works) being financed.  The more detail as to format, title, medium, schedule, language(s), production schedule, talent line-up/casting, etc., the less chance of a dispute later on with respect to each party’s expectations and obligations.
2. The Money.  What is the amount being financed?  What is the payment schedule?  Will there be an escrow account?  What are the payment arrangements?
3. Exclusivity. Is this an exclusive or non-exclusive deal?  That is, will the producer be allowed to raise funds from multiple financiers or is there a sole source of capital?  If there are multiple sources of capital, what it the total amount being raised and how does each financier get their return on investment?  Any preferences to such return?
4. Artistic Independence.  In exchange for receiving the capital, does the producer cede any artistic control to the financier?  For example, what comments and suggestions can the financier provide to the producer during production of the work and does the producer have to listen?  The artistic independence that the producer retains should be clearly spelled out to avoid the obvious fights that can occur.
5. Distribution.  The agreement should clearly spell out how, where and when the finished work will be distributed, exhibited, performed, etc. This will allow the “royalty base” to be clearly defined when calculating the financier’s return on investment (if any).
6. Publicity.   Does the financier want to be publicly acknowledged in the credits, advertising and other marketing collateral associated with the work?  Do they want to make a speech during opening night or appear on the red carpet during the premier?  Or, are they shy and want to be a silent investor?
7. Comps.  In addition to a return on their investment as a condition to providing capital, does the financier want certain “comps” (e.g., free tickets, premier reception passes, etc.)?
8. Contingency Plans.  What happens if there is a change (i.e., delay) to the production schedule?  Or, costs overruns?  Who is responsible?  Who is penalized?  Who decides how to mitigate and/or fix such schedule slips or cost overruns?  The agreement should address these potential pitfalls that are part of the business.  After all, no production goes 100% according to plan!
9. Intellectual Property.  The agreement should specify who owns or will own the copyright and other proprietary rights to the work and any derivative works.  Also, the producer should warrant to the financier that all IP clearances (e.g., music synch rights, etc.) have or will be obtained in producing the work.
10. General Provisions.  Like all other agreements, a Production Finance Agreement should contain the following standard general provisions: representations/warranties (e.g., the right to enter into the agreement, producer will abide by all union work rules, etc.); indemnifications (for breaches of the representations); insurance (i.e., producer will carry all necessary and customary insurance coverage for all aspects of the production); disclaimers of liability; and severability, choice of law, dispute resolution, assignment, independent contractor, counterparts and integration clauses.