“Is this spend on patent applications going to pay off for my company?” Founders ask me this before they hire me, and I understand why: every other line in a seed-stage budget has to align with demonstrable business and revenue goals.
Nonetheless, whether a patent will pay for itself is the wrong question. A patent portfolio does not throw off a return and was never meant to, so judged on ROI it will always look like a bad buy.
So how should a CEO frame the decision? Stop comparing a patent to the budget lines meant to return cash, and start comparing it to the things you buy because you might need them. A patent’s value does not build steadily while you pay for it. It sits at zero until a specific event occurs, and then it is worth whatever that event makes it worth. Finance has a name for an asset that behaves this way. Put simply, a patent strategy is an option, priced against the future it covers.
A “patent option” is a hedge against competition you cannot yet see. You pay a premium today for the right, but not the obligation, to litigate if somebody else decides to sell a version of your product precisely because it has become wildly successful. Or you are buying an option an acquirer will exercise later, against one of their own competitors.
Candidly, that second scenario is the likelier one for my clients. Litigation is a strategy for companies with pockets deep enough to spend oodles on lawyers, and a seed-stage company does not have them.
So when is the option worthless? It is worthless if your product succeeds and nobody bothers to copy it, or if nobody wanted the product to begin with, or if the coverage is solid but nobody could credibly bring a case. Note that most patent options are never exercised in a courtroom at all. They get exercised at a negotiating table, in a licensing conversation, or in a diligence room, and every one of those is priced off what would happen if a case actually were brought.
In any of these scenarios, your patent option expires unused, which is, quite frankly, “just business.” Nobody calls the fire insurance on their building a bad investment because their building did not burn down, and nobody who has watched a building burn thinks the premium was the expensive part of that year.
So the useful question is which future states you want to hedge against. Maybe it is the one where a well-capitalized competitor decides your customers look worth taking. Maybe it is the one where an acquirer’s diligence team asks what stops them from building it themselves once the deal closes, finds that nothing does, and your valuation tanks. You cannot know today which arrives, and you may never exercise. But if you need it, you will be darn glad you have it.
Why, then, does the premium feel to so many founders like a black hole? Because almost nobody in my profession sells it as a prepayment on future optionality. Your patent attorney’s job is to get you a patent. Full stop. Deciding whether that patent is worth buying–to hedge against competition, or to bolster your valuation for investment or exit–is your job as CEO.
The fix is to price the option before you hire anyone to build it. Before a word of an application is drafted, name the future state you are hedging against, look hard at what already sits in the competitive landscape to see what can actually be owned, and form a view on what that scope would mean for your business strategy. Do that first and you will know whether the option has any chance of paying for itself.
This is not to say that every early-stage company should buy the patent option. Plenty should not, and one of the more useful things I do for clients is tell them not to get one. I like to say that not getting a patent is a patent strategy. However, it is only a strategy when somebody actually made the decision.
In short, stop asking whether your patents will pay for themselves and write that future state down in one sentence a non-lawyer could read. If you cannot write the sentence, you are not ready to hire anybody, and whatever you buy will not be what you needed. If you can, you have the beginning of a patent strategy that tracks your business strategy.
Then hire someone to execute it, and manage them, because you do not want to wake up and find that your patent covers an option that is worthless when you need it. Unlike an option you could buy on an exchange, a patent does not arrive with its terms printed on it–you find out what you actually bought years later, which is exactly why the thinking has to happen before the drafting does. I have a budgeting model that shows what the patent option will cost and what optionality it buys. Feel free to reach out if that would be helpful.