There are hunters around hunting for your creations, and you shouldn’t let them take your ownership from you. But how can you protect your creation from people with unsavory intentions? Today, Michael Lechter, the Author of Rich Dad’s Advisors: OPM: How to Attract Other People’s Money for Your Investments–The Ultimate Leverage, talks about how you can build and protect your intellectual property. He also identifies some mistakes entrepreneurs make when it comes to intellectual property. He also touches on how entrepreneurs can protect themselves from working with the wrong attorney and getting cheated on. Step into this insightful conversation with Michael and armor your patent with his valuable ideas.
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How To Build And Protect Intellectual Property With Michael Lechter On Exit Rich
I am delighted to have my co-author, Sharon Lechter’s husband. They always say, there’s a better woman behind every man, but there’s also a better man behind every woman sometimes. Michael Lechter is that man. He is our guest in this episode, and I’m very excited because one of the biggest things I and Sharon Lechter talk about in Exit Rich together is IP or Intellectual Property. How to build it and how to protect it.
We have the king of IP on the show. Make sure you get your questions and comments in. I will be giving away three chapters of Exit Rich to anyone who posts questions and comments, and I read them. Let’s go ahead and dive in. A little bit about Michael A. Lechter. He’s an attorney, certified licensing professional, electrical engineer, and entrepreneur. He is a bestselling author. Michael is also an internationally known expert in the field of intellectual property, which is why I’m so excited to have him here.
His clients have included everything from major software, semiconductor, medical devices, and alternative energy companies to breweries. That’s quite a vast industry there, Michael. You are all over the place. From software to medical to restaurants and casinos, city professionals, sports teams, from authors to publishing companies. Also, from startups to venture capitalists to Fortune 100 companies. Michael is also a venture capitalist, right?
I’m an angel investor. I have represented venture capitalists.
Michael, welcome to the show.
Thank you. It’s a pleasure to be here.
Thank you. We have met before and I have got so many questions to ask you. For everybody reading, pack your lunch and fasten your seatbelt. It is going to be a crazy ride. You are going to drink from a fire hose. I got to start with, Michael, what were you like as a little boy? I know about Sharon’s background. I want to hear a little bit about you.
I started as a child. I started in engineering and went into law. I have been practicing law since the early 1970s.
Have you practiced different aspects of law or have you always been driven to IP?
I have always been concentrating on technology-type stuff and primarily intellectual property, but intellectual property covers a wide range of things.
It does, but you didn’t answer my question. What was Michael like as a little boy?
I was a mean little kid. I had trouble staying out of trouble.
How does that serve you now?
It served me well when I was doing a bunch of litigation but now, I’m much calmer. My wild days are done.
What does it take to be a great litigator?
It’s to have a great team. You need to have a lot of good people working with you that can handle all of the details. You need to pay attention to the details, but you need to be able to speak from the cuff and be very accurate when you speak, which are opposed skills.A great litigator has a great team. You should have a lot of good people working with you who can handle all the details. Click To Tweet
Were you argumentative when you were young?
Yeah, I was but not so much anymore.
My husband’s always telling me, “Michelle, you would have been a great attorney,” because I can be argumentative. There are so many different aspects of law. What inspired you to go into intellectual property?
I was in the engineering academia. I was going for a doctorate at the University of Maryland and it had some issues with some of the things that were going on there at the school. I took a job doing an investigation for a law firm and enrolled in law school.
You never know where life’s going to lead.
You never do. Now, I’m a cowboy.
That’s right. You and Sharon have that huge ranch that we spoke about in Los Angeles together when we spoke about Exit Rich. I said, “Sharon, we got to go out to that ranch.” She says, “Anytime you and your daughter want to.” My daughter loves horses. We need to plan a trip. Sharon and I wrote Exit Rich together. You contributed content as well, especially related to proprietary. Proprietary is my fourth P. I have the 6Ps. The fourth P to me is the highest value driver. Having the right IP and making sure it’s protected can take you from a 3 to 5 to an 8 to 10, or an even higher multiple. Would you agree?
Yes. Let me give you some statistics. Many years ago, about 80% of the value of the Fortune 500 companies was intangible assets, bricks and mortar. Now, more than 95% of the value of the Fortune 500 is in intellectual property.
What did it use to be? What percentage?
It used to be around 80% tangible property and intangible property. It’s intellectual property.
When did that shift?
It started shifting many years ago slowly but we had the reversal probably a few years ago where it was steadily higher.
Do you think the internet, Google, social media, and all of that also have a lot to do with that shift?
For sure. Data is a form of intellectual property. That’s the bulk of the value of a lot of the big companies out there.
In Exit Rich, I talked about the eight pillars of IP because everybody’s like, “Proprietary is patents. All proprietary content. All proprietary is Federal trademarks.” I say there are eight different components and maybe even more that I haven’t identified that are part of IP. You know that better than I do. What would you say is the biggest component of IP that every company should adopt?
Let me just run through them. It’s information, expertise, and data. That can be protected in a number of different ways, but that’s the underlying intellectual property assets.
There’s also reputation and trademarks. Also, goodwill. That’s another huge component of value. There’s also invention and design or the way things look. Also, here are literary works and copyrights. There are a number of different legal mechanisms that you can use to protect these. One is contracts. You create obligations with respect to how people who are given access to your intellectual property can use it.
That goes hand in glove with trade secrets and confidentiality. If you can keep something confidential, then the bad guys can’t acquire it from you. They have to build it, do it, or make it themselves. You protect the investment that you made in developing the information. Invention can be kept as a trade secret or it can be patented.
Do you specialize in patents?
I do. It’s a separate patent bar that you have to use to practice patent law before the patent office. The main thing is to look at your business and figure out exactly what you have got and drill down to figure out what the essence of what you have is. The thing that gives you the real competitive advantage and you protect it. You use this box of legal tools to protect it as best you can.
We want to get into protection. Gina is asking a question. She says, “Are trade secrets confidentially the same as a non-disclosure agreement contract?”
The non-disclosure agreement contract is one way to maintain confidentiality. For something to be confidential, you have to keep it secret or you create a legal fiction of secrecy using a contract. That’s what the non-disclosure agreement does. Now, if anybody has access to information and they are not obligated to keep it secret, they are not out to keep it confidential, then you don’t have enforceable rights. Generally, to have enforceable rights, you have to restrict access to the information and have confidentiality agreements. Now, those confidentiality agreements can be in a number of different forms. They can be a non-disclosure agreement or they can be a provision in some other agreements.The non-disclosure agreement contract is one way to maintain confidentiality. For something to be confidential, you should keep it secret or create a legal fiction of secrecy using a contract. Click To Tweet
When you say you have to keep it confidential, when you go to apply for a patent, you have to give out that information, right?
That’s right. It’s an either/or. You can either keep it secret or get a patent because a patent is a deal between the inventor and the government. The inventor is going to teach the public how to use their invention in return for an exclusive right to keep other people from using their invention for some time. It’s twenty years after you filed the application in the US.
I want to come back to patents. I like your definition of IP and your different pillars, which are different than mine. Some of them are the same or close to being the same, but some of them are different. The first thing I always tell my clients is trademarks. You can’t just have a local trademark in your state. You need to hire an attorney. Don’t just go on the website. Check to make sure that name’s available and make sure that you file for a Federal trademark.
It’s because I have seen time and time again, that my clients receive a cease-and-desist letter from an attorney that says, “Wait a minute. You have to stop using that company name.” Let’s say you have been in business for 4, 5, or 10 years. Branding is one of the number one things in proprietary because the more well-branded you are, the more I can sell your business to you. If you look at Apple, it’s worth over a trillion dollars just for its branding as Michael was saying and 95% of its value is those intangibles.
You hit it right on the head. Trademarks tie your reputation to your goods, services, products, or what it is you are delivering to the public. They represent your goodwill. Trademarks were the original consumer protection law going back to feudal times when the brand’s high technology was metal and leatherwork. The artisans would put a brand on there so that the consumer knew what level of competency to expect. Over the years, the ownership of that right became the intellectual property of the artisan as opposed to the public.
Not protecting your trademarks or getting those Federal trademarks can kill your brand and put you out of business overnight.
It’s what you were talking about. The trademarks, at least in the US, have two components. There’s a common law component and then there’s the Federal component. You get common law rights to a trademark just from using it. If you are the first entity to use the mark with particular goods or services in a particular geographical area. This is the local thing that you were talking about. You can get the exclusive rights to use that mark for those goods in that area but if there’s somebody else out there in a different area that doesn’t know about you and they start using it, they get the rights in that area.
However, if they applied for a Federal trademark, then they could put you out of business.
They could conceivably wipe you out everywhere but the little area where you are working or where you have a market at the time they filed. They would foreclose you from the rest of the country.
I always tell my clients to make sure they put that TM behind their names. Number one, check to see if it’s available. Put that TM and then go ahead and file for the Federal trademark. It’s not that much money to protect your company name and your company brand.
These days, I would recommend that you file even before you start using it. It’s like you say. It’s not that expensive. In the old days, you had to use the mark before you could register it. That law changed. You can get rights to a trademark by filing a Federal registration based on your intent to use that mark in the future. Once you start using the mark, you get your rights relating to the time when you filed the mark.
Again, it’s the priority of use. Whoever uses it first gets the rights. You file that registration and ultimately, start using it as if you started using the mark when you filed the registration statewide or United States-wide rights. The geo trademark rights are geographic. You would have to go to other countries to get rights there.
However, you could get a Federal trademark for the United States and if you are planning to expand globally, then you have got to get those trademarks per country or there’s another word for it that I forgot where you can get a global trademark.
There are treaties that let you file in other countries and then there are certain groups of countries like Europe where you can get a European trademark.
We have a client that’s operating all over or globally. There’s something where you can apply for and you can pretty much get the trademark in every country. It’s very expensive and very time-consuming.
There’s something called the Madrid Protocol.
That’s it. Thank you.
You can go through the US Patent Office and apply for rights in a bunch of other countries or all the other protocol countries.
We are talking about branding, which is IP. The more well-branded you are, the more your company will sell for. We talked about Federal trademarks. Let’s go ahead and go back to patents because anybody who’s ever walked Shark Tank, what do they ask? “Do you have a patent on that? Do you have a patent pending? Do you have a utility patent?”
Let’s talk about patents because so many investors and buyers will buy a business. We sold a business for $30 million that was losing money, but they had eighteen patents. Patents are extremely valuable and a lot of clients are like, “Michelle, what do I have that I can patent? What type of patent do I get? Can you get a patent for a service business?” Can we dive into patents a little bit?
Yes. Patents are a demonstrative asset. If you have got a patent, then you can show people, that you wave that patent around and they know that you have rights to the invention.
That doesn’t mean you are not going to get sued or somebody is going to go after you and you have to sue them to protect your patent.
That’s part of the beauty of the system. It’s designed so that there’s an incentive to make improvements. Just because you have a patent on something doesn’t mean that you can necessarily use it. However, in any event, the patents are worth their weight in gold.
There are a lot of companies, even my own, and maybe somebody has a conversation with you and that’s the first step, but how does somebody look around their company and say, “What can I patent here? What can I create for a patent?” It’s because we know patents add huge value and get a much higher multiple on the sale of your business. You can go out of business and sell patents. How do entrepreneurs, look at their business and say, “I think I can patent it.”
Many times, the basic mission of the business is to serve a particular need or solve a problem. The solution to the problem or the way that you are meeting that need is something that you would want to look at right off the top to see whether or not it’s patentable. If it’s not patentable, there’s some other way to protect it. The coming in after the fact, you want to take a look at your business and dissect it.
It gives you that competitive advantage. Keep drilling down because many times, you will encounter a problem in your business or you will come up with a more efficient way of doing something in your business. It may have applications in businesses unrelated to yours. If you can take the blinders off and get to the essence of it and you patent it and you patent it broadly enough, then you can license that into the other industries without affecting your core business. You still have your production and you have got an additional stream of income coming in from the license.If you take the blinders off, get to the essence of it, and patent it broadly enough, then you can license that into other industries without affecting your core business. Click To Tweet
Sometimes, it’s hard to see the forest through the trees. Many times I think an entrepreneur needs an outsider’s perspective, a professional like Michael Lechter to look at your business and say, “Did you think about this? If you made a few tweaks here, you could patent this.”
You go to your customers, see what it is about your products or your services that they like, and then you figure out what is it that makes them do that. What feature does it provide the thing that they like and what makes that work? You keep drilling down and try to get protection at the most basic level.
Can you talk about the different types of patents?
Generally, when people talk about a patent, they are talking about a utility patent. That covers the way things work, the physical things, and physical processes. The Supreme Court said anything under the sun made by man is patentable as long as it’s new, it’s novel, and it’s not obvious in view of what the public already knew.
Are there any other types of patents?
There’s also a design patent that covers the way things look like the ornamental features or anything that’s not functional. A given product can have functional aspects that would be covered by a utility patent and non-functional aspects that are covered by a design patent.
What is very difficult to patent, if not impossible? Is a process very difficult?
Physical processes, not so much. They are patentable just like everything else but as soon as you start getting into the realm of mental processes, things that don’t create any tangible results, then you start running into difficulties. As a practical matter, you can’t keep people from thinking through a process. If it’s just a business process that happens in somebody’s head or a mental or mathematical algorithm, then it’s not considered patentable.
If it’s applied in the context of a physical process, then it is patentable if it’s new and not obvious. There have been some companies that will file patent applications, at least, in the old days on anything new and they left the question of obviousness to the patent office. Now, the expenses are a little bit higher and there are fewer and fewer companies that do that.
We have talked about design and utility. Are there any other patents?
Plant patent that relates to certain types of plants. It’s not something that I have done a whole lot in and I keep forgetting whether it’s the type of plants that grow from cuttings or whether they are seeds. There’s another type of protection for whichever type of plant that is not covered by the plant patent.
You can patent your seeds if you are growing. Is there anything else?
There’s a lot of work on genetically altered animals. There is a patent on a genetically changed mouse that it’s more susceptible to certain types of cancers.
The most common in businesses are your utility patent, your design patent, and the process patent, right?
Yes. The process patent is under the umbrella of the utility patent.
Gina has a question. She says, “In 2012, the government changed a law of intellectual property via patents. There is a grandfather clause for certain intellectual property rights before the law changed.” Can you explain this clause?
I’m going to give it a short shrift because it could take 1.5 hours to go through it. The basic thing was they changed the term of the patent. Patents used to start when they were issued by the patent office. A patent application is a proposed patent. If everything’s good with the patent office, it’s published. The patent is word-for-word in the application. You file the application and you negotiate with the patent office over the scope of the patent.
There are two basic parts. There’s a written description. This is what the inventor is giving to the public. It has to have a certain level of detail. It has to be in enough detail so the typical people who are in that industry can make and use the invention. Also, there are the claims. The claims define the scope of the invention. They are like a one-sentence definition of the invention. That sentence can have some really weird punctuation and indentation. It can be a page and a half long but it’s one sentence.
You infringe the patent if you have the equivalent of every element that’s in the claim. If you are missing any element, you don’t infringe. If you have additional elements, you still infringe. If I have a claim that says a gizmo comprising A, B, C, and D. If somebody has A, B, and C but not D, they don’t infringe. If somebody has A, B, C, D, E, F, G, they still infringe even though G may be a patent of itself. That’s where the improvements come in.
With that background, before 2012, the term that the patent went on was seventeen years from the issue date of the patent. When the patent office said, “It’s patentable. We are going to grant your rights.” You had seventeen years of exclusivity. The applications that were filed after the effective date of that act then had a term that was twenty years from when you filed the application as opposed to when the patent was issued.
The reason that they did that was there were some people who were taking advantage of the patent law and they were filing a series of patents that related to the earlier filing date. If they were issued twenty years after they filed the application. Their patentability was judged based on when they filed it. Also, they were filing claims that were more or less supported by the description but the new claims were designed to cover new developments anyway. Also, because people were doing that, they changed the law. There are other changes. There are things that are prior art. What is prior art, it is no more and there are things that weren’t prior art and are now.
It’s very interesting and I have talked to many different attorneys. My clients have talked to many different attorneys, and you get a lot of different answers. If somebody out there’s looking for patents, I suggest you call Michael because he has been doing it since the 1970s. You need an expert to go down this path with you but I will tell you, it can exponentially increase your value.
We have a few other questions here. We have Kaylee who says, “What are some common mistakes I can avoid making when it comes to intellectual property?” That was a question I was going to ask you too. What are the biggest mistakes, case studies, and nightmare stories that you can share with us when it comes to intellectual property?
These go hand in glove. The biggest mistake you can make is not laying the foundation, not taking the time, and going to the expense. Even when you are a startup and with limited resources, you have got to lay the foundation. You have to have the right type of intellectual property protection in place. You have to have the right type of agreement in place. You necessarily own what you pay for if you have non-W-2 employees.
The biggest glitch that comes to mind goes back to a software program that, in my view created the age of the personal computer. It was a spreadsheet program. It was the first program that let you operate on data in a spreadsheet format. Before that time, only us geeks were using computers. There wasn’t a reason for most business people to use them or personal computers.
Once the spreadsheet came out there, suddenly, computers became relevant to the business people that are out there. It became widely relevant. You all are familiar with Excel, I’m sure. I’m not talking about Excel. If you remember Lotus 1-2-3. I’m not talking about Lotus 1-2-3. My mind just went blank. It was the name of the company. There were two inventors. There were guys out of Boston, and they decided it was too expensive to file a patent application.
One of the guys’ names was Dan Bricklin. That much I do remember. They didn’t file the application. Years later, after the industry was able to legitimately appropriate all their basic work and they made the market, other people came in and were able to take it from them. The Lotus and the Excels because they didn’t have a patent.
Bricklin was being interviewed and I had forgotten what the context was, but the moderator asked him, “Do you think it made a difference that you didn’t file a patent?” He leaned back in his chair looked at the ceiling and said, “It’s only several hundreds of millions of dollars.” That was the fact, that had they gotten the patent on their product. Back then, they could have. It would be in the position of Microsoft now. That’s the horror story.
There are lots and lots of horror stories. I see it every day when people are not protecting their brands by getting those Federal trademark contracts. You talked earlier about contracts. Contracts are proprietary, especially if you have employment contracts. Most importantly, client contracts. However, the biggest mistake the business owners make around contracts is not having that transferable language. Michael and I could talk all day. We can bring Sharon in too and talk about the biggest mistakes that business owners make with their surroundings.
The terms of the agreements make a difference.
Yes. Let’s say you have got thousands of clients and it’s an asset, which 99% of all sales are asset sales in my experience of over 23 years. If you don’t have that transferrable language, then your deal can stop in its tracks because those contracts are not transferrable to the new owner. In many years of doing this, I have seen where two owners got this right.
What happens is you have to go out to your clients and get them to sign a transfer agreement. Now, they know your business is for sale. We are talking about all these assets, Federal trademarks, transferrable contracts, protecting your brand, getting those patents, and protecting your intellectual property because as Michael said, it’s either competition, which is hard to do, I also want to get a patent for that.
I have seen vendors hold the company up and would not agree to assign their agreement to a potential purchaser and it blew the deal.
You are right. You just said something different. You said, vendors. I said, clients. There are vendors too that you need to have those transferrable contracts. We would have sold a business for 165% more than what the business valued because it was in the energy space. It was a very similar company with similar products and services, but different. My client had a bunch of patents and they outbid everybody else because they wanted that BP contract but it was not transferable.
They took a huge risk. They went ahead and purchased the company in hopes that they would get that contract because they have been in business for decades and have been trying to get their foot in the door with BP and never could. This company could do it for them. We couldn’t get the consent to transfer, even though the seller went over there begging the lady. He even got on one knee and proposed to her.
He bought her flowers, chocolates, and a ring. He still couldn’t get her to agree to do a transferable contract. This IP is so important and there are several different pillars of IP as Michael and I are discussing. Lawson wants to know, “Can you provide examples of industries where intellectual property is crucial for success?”
Generally, anytime you have a startup, you can’t compete with the big guys unless you have some competitive advantage and unless you have intellectual property protection of that competitive advantage. The big guys can come in there and appropriate it just like they did with that spreadsheet program I was talking about. When you are small and you don’t have that market power, that’s where having the intellectual property is the great equalizer.
Lawson also asks in a follow-up question, “I just started my startup, which means I have limited resources and money. How do you approach the challenge of protecting intellectual property for someone like me and getting those patents? Also, getting those trademarks.” How does a startup have the funds to do that? It should be built in the working capital.
There are attorneys out there who will provide services for equity. There are some ethical issues that can be waived because there’s a potential conflict I should say, between the attorney as a shareholder and the attorney that’s providing services. You can do that. Sometimes the attorneys would be willing to operate on a profit sharing up to a certain point. There are a lot of things that can be done or you can team up with somebody that does have the resources to get the legal counsel that they need.
Sharon likes to talk about the association. I talk in terms of teams. Business is a team sport and every business needs certain resources to accomplish its business goals. Some resources are cash. There are other ways to get to the resources besides raising the cash and buying the resources. Sometimes you can go directly to the source of the resource and work some sort of a deal, whether it’s for equity or for services, your imagination, or whatever you can negotiate. Most of the time, you end up in a better position than you would if you just raised the money and went out and bought this.
We are talking about crossing the dotting the I’s and crossing the Ts and planning out your foundation. This is what Michael’s talking about because so many business owners start on a string shoe budget and they are funding their business for very little to no money. They never go back and put these proprietary assets in place.
As Sharon Lechter says, assets are sexy. We have to make sure we go back and protect this IP but I wanted to transition into your book, Other People’s Money. It’s always better when you use other people’s money as long as it’s not high interest or you are giving up a huge percentage of your company. Tell us a little bit about your book and how that’s helped a lot of clients.
It relates to building a business and using alternative mechanisms rather than just going out there and raising capital. We go into the science of raising capital and making sure that you don’t raise too much too early when you are talking about equity.
That’s a huge mistake that a lot of entrepreneurs make and they give up their company.
That’s right. Also, they do that because it’s easy. You should have a business plan and that business plan should tell you when there’s going to be big upticks in the valuation of your company. Certain events will happen that will make your company much higher value. You get that first working model. You get something on the marketplace. You get your patent. There are many different events that will cause that uptick in valuation. You want to raise just enough money to get to that point. You want to give yourself some slop because, in my experience, you are always wrong as to how much it’s going to cost. It’s always going to be more.You should have a business plan that would tell you when there will be big upsticks in the valuation of your company. Click To Tweet
Do you mean the contractor says it’s going to cost us much to build your house or do a build-out on your business, on your real estate and then it always seems double or triple the price they quoted you?
That’s pretty much it. Only this time, you are contracting with yourself and you think what it’s going to cost to get to this certain point. Generally, as a rule of thumb, I will add a third to that. You raise that much money. The lower the value of your company, the more equity you are going to have to trade per dollar.
You could make a safe note.
Taking a loan is a different animal.
I was saying a safe note because I did this with someone. A safe note is when you sign a note. Let’s say I want to invest $150,000 into a company. I signed that note. No equity exchanges hands. When and usually there’s a good rate to get in where it’s very low. When there’s an event like raising more capital or selling a company, then the investor gets paid. I’m not an attorney so I don’t know all the ins and outs, but it’s called a safe note. That’s what a lot of people are using.
That’s a different term than what I have used.
You probably have the right term or name.
It’s convertible notes where you make a loan and you have the choice or someone has the choice depending on the way that typically the investor converts that money into stock or equity units at a certain price at the due date, whenever that is. There are one zillion different ways that you can set those up. However, most of the time you have people going out and they are raising money by selling pieces of the company. They are selling equity in the company and that’s where the founders run into trouble. It’s because they end up selling the company and their percentage of the company is very small after they have done a couple of successive rounds of funding.When you have people raising money by selling pieces of the company, they're selling equity in the company. That's where the founders run into trouble because they end up selling the company with a small percentage after they've had a couple of… Click To Tweet
I have seen that time and time again as well. Your book Other People’s Money, does it covers lots of different strategies in there about how to raise capital without giving away the firm.
There are different business models that you can use. Instead of going into a manufacturing type business where you do everything, you may go into a licensing business where you are developing the intellectual property and then you are licensing other people that already have the infrastructure or the machinery.
It’s a lot less headache and it can be very lucrative because they talk about licensing deals all the time on Shark Tank.
Particularly, if you have something that spans a lot of different industries, the intellectual property and you can pick and choose and license somebody just to use your intellectual property in a particular market channel, a particular industry, or a particular product line. You can go to somebody else who has a better presence in a different channel or industry and license them. There’s lots of flexibility and you can create many different streams of income.
You can do that with franchising too. You can use other people’s money by franchising and indexing your brand.
That’s right. Franchising is a combination of trademark licenses and trade secret licenses for the patent business.
Gina says, “I worked with investors on my invention and obtained a patent in the process. I signed 1 or 2 contracts. I signed the first. It stated that if I go to the shelf, I owe 10% royalties to them. Is this reversible?”
The question is what the contract says? Whether it’s reversible or not. This is what I refer to as a profit interest. You have got investors that are contributing money to the company and in return for that, they get a royalty on each item that’s sold. I think that’s what she means by going to the shelf. That’s one way of financing a product or a business.
Now, whether or not that can be reversed depends on what’s in the contract. Generally, there’s a limit as to how much money they collect. They are going to get this 10% until they reach a certain amount of money or for a certain period. There’s no rule that says that there has to be that type of provision in the agreement. If it’s not in there, then as long as you are selling products that are covered by the patent claims, you are going to end up paying that royalty to your investors.
She says, “Even if I were to invent without those investors, I still owe 10% royalties.” Even if she invented without those investors, she still owes 10% because of the contract.
I guess I’d have to look at that contract.
Gina, send him the contract. Engage Michael. You have to look at the agreement, see if there are any loopholes, and if there’s anything that you can do to help her.
It may be they put the money in and they are going to get 10% of whatever the gross, net, or whatever the agreement says. I have seen that type of agreement before.
Gina, did they invest any money? It’s because she says even if I were to invent without these investors, I still owe 10%. That makes it sound like the contract.
I’d have to see exactly what the situation was there.
One thing I want you to mention is, that attorneys, doctors, bankers, M&A advisors, every different industry experts have different opinions and different contracts. How does everybody protect themselves? How do entrepreneurs protect themselves? How do entrepreneurs make sure that they have the right attorney?
How do they make sure they do their due diligence before they get caught in a trap like Gina has now? What do you recommend to prevent that because I have been burned by different attorneys? There are CPAs out there. How can someone protect themselves to make sure they don’t get stuck in a situation like she did?
Get as many recommendations as you can. You speak to other clients. Sometimes clients don’t know whether the attorney’s done a good job or not because unless there’s a contest or a dispute, nobody even looks at agreements.
Entrepreneurs get so excited to patent something and to do something unique in their company that they find an attorney, they don’t do their due diligence. They don’t call references, “He knows what he is doing. Let me sign on the dotted line,” and then I will get a second or third opinion. It’s like if a doctor told you, “You are about to die in a week.” You are going to go get other opinions, I would assume. It’s the same thing.
You want to get lots of references. Talk to clients if the clients let the attorney give you their name. If you can’t get any references, if you don’t have any other data to judge on, I would go to the biggest firm in town that has an intellectual property section and the business law section, corporate finance for a small company. Also, if you have a litigation section.
I used to get local counsel for litigation I was handling all around the country. There were many instances where I didn’t have a recommendation. I didn’t know anybody in that particular area. That’s what I would do. I’d go to the biggest firm. That doesn’t mean they are necessarily the best, but if you don’t have anything else to go on, there’s typically a reason why they are big
What if you don’t have the money to go to some of those biggest firms that are charging $700 to $800 bucks an hour?
That’s a consideration. They are going to be more expensive. If you can get a bright young attorney, you may have to pay for more time than it would somebody that has more expertise but you may get as good a work product.
Also, at a much lower rate.
The balance is out because somebody who has more expertise may well be able to do it quickly but there are a lot of things that expertise isn’t going to play in how long it takes. Having a firm that’s got a bunch of different attorneys at different levels where you can assign the right level attorney to do different types of work is a whole lot more economical.
You said something important. Find a firm that has an IP department, has a patent department, and has this and that because so many times entrepreneurs will just go to their general attorney or I have seen them go to a personal injury attorney or they will go to different attorneys. I was using an M&A firm to do all of our trademarks and they charged me a fortune even though I sent them a lot of business and they did it all wrong.
You have to make sure you are going to somebody that specializes in that industry. If not, you are wasting money, time, and energy because they are probably not going to do it right. You have to make sure you hire a firm that specializes in that particular industry. I have a firm right next door to me that specializes in IP but they also do M&A. It’s like you are not going to go to a chiropractor if you need heart surgery. Michael, you have been a great guest. Those were great golden nuggets, as we talked about in Exit Rich. What tips can you leave with our readers on IP or Intellectual Property? Why you should have it and how you should protect it? Any thoughts here?
Let me restate and summarize. You want to make sure that you get that foundation in place. Start with a plan. Plan to protect your intellectual property. Look for opportunities to create intellectual property assets. Look for problems that you solve. If you solve a problem and that solution is significant, it’s going to have value. It will give you a competitive advantage. Your competitors will want to use it so you want to protect it. You apply the intellectual property law mechanisms to protect it. You need the trade secret protection, the contracts, you register your trademarks and copyrights.Make sure you get that foundation in place, start with a plan to protect your intellectual property, and look for opportunities to create intellectual property assets. Click To Tweet
You have to make sure too that if 1099s and contractors you get them to sign those agreements you own the content.
Let me tell you another horror story. Do you remember the “Where’s the beef commercial for Wendy’s?”
Yes. My daughter, when she was five years old, she was regurgitating that commercial.
Wendy’s was very proud of that commercial. My firm represented Wendy’s. They were bragging about how much money they were making by virtue of that commercial right up to the day they were sued for copyright infringement. It turns out that the gentleman that they hired to produce and direct that, a guy named Sedelmaier had done an essentially identical commercial for another outfit called Suburbia years earlier and it was strikingly similar. It was the same except instead of having three little old ladies go up to the counter and say, “Where’s the meat?” Three little old guys went up to the counter and said, “Where’s the meat?” The camera angles were all the same. The backgrounds were all the same. It was striking.
It’s the guy that they hired that created that very similar commercial.
That’s right. He had been hired by another outfit before and he gave them that same commercial.
Who got sued? Wendy’s got sued or did the guy they hired get sued?
They sued Wendy’s for copyright infringement. We were able to get it thrown out on summary judgment because the agreement that Suburbia had with Sedelmaier just said he was going to provide them a commercial for their stuff by such and such a date and they were going to pay him so many dollars. It did not specifically have any language in the agreement that said that he was assigning the intellectual property rights, and the copyrights to Suburbia.
We were talking earlier a little bit about how you don’t necessarily own everything you pay for. Just because you pay for something, it doesn’t mean you own it. Copyrights are one of those things. Unless there is a written agreement, if you hire somebody and it’s other than a W-2-type employee to provide you copyrightable material. That would be content, photographs, websites, or anything like that. Unless your agreement specifically says that they are assigning you all of the copyrights, they own it. The contractor owns it, not you. That was the case with Suburbia.
That could be the case with Fiverr, Elance, oDesk, or any of those companies that are producing logos, graphics, and work.
You hire a graphics person to give you a graphic and you at best, unless you have the language of assignment in your agreement with them, retain the rights. You will get a limited license to use it. You can use it for one particular thing but nothing else.
It doesn’t blow up until it’s a big company like Wendy’s. Do you see why you need a good attorney? It’s because there are so many little hiccups that can happen along the way and mistakes that can be made. People don’t think about this stuff. It’s not your business. That’s why I always say to focus on your strengths and hire out your weaknesses. Michael, with that being said, how can everyone get in touch with you and get your book, Other People’s Money, and your other books?
My books are available on Amazon or through Sharon’s site, SharonLechter.com.
Just in case you all don’t know who Sharon Lechter is, and I don’t think that’s the case. Sharon Lechter was big in Robert Kiyosaki’s Rich Dad Poor Dad series. That’s Sharon Lechter. She is a wonderful person.
She co-authored Exit Rich.
She’s the co-author of Exit Rich. Michael also has some content under the proprietary section, which is our fourth P, and some great content. Go get Exit Rich, too. Michael, they get in touch with you, get your books through Amazon, and then I can go to SharonLechter.com. Michael, you were a wonderful guest. I was so excited to have you. You dropped a bunch of good bombs there that people don’t think about. People don’t know because again, it’s not your core competency. It’s not your area of expertise. That’s why you have to hire the experts.
I encourage everybody to reach out to Michael Lechter. Thank you so much, Michael. Thank you to all my readers for reading to learn all these golden nuggets that we bring to you every week. If you haven’t subscribed, please do so. Please show this episode with all of your fellow entrepreneurs or anyone in your network, because I know that they can get great and real information from an expert in this industry, Michael Lechter. This can help save your business. Go back and read this again and again. I will see all of you in the next episode. Thank you all so much.
Thank you so much.
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