The Inventor's Mentor

June 2012

Profits, Pitfalls and Perils of Partnerships

Why form a partnership? 
        A primary reason for forming a partnership is finding yourself in a situation where you have a wonderful project and limited resources. No matter how good your idea might be, if you don’t have the means to bring it to fruition, you are likely to fail. In this situation, a reasonable option is to associate yourself with a partner, someone different from yourself who can complement your talents and capabilities. For example if you excel in science and engineering, pick someone adept at hobnobbing with people, who can be pivotal in bringing your idea to market. Your partner will also share the burden and responsibility of your business and will provide you with a good sounding board to test your ideas.

What are the steps involved?           
        Persons planning to go into a partnership should be willing to sit down and plan this arrangement carefully.  One significant reason for caution is that, like proprietorships, the law does not distinguish between a partnership business and its owners.  One may be placing personal assets at risk while taking on the potential liability for the other partner’s actions.  Therefore, partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

If your partner is not a co-inventor of your invention, consider assigning some equity of your invention to him. Having ownership in the invention may give him the incentive to contribute to the business to the best of his abilities.

Filing an Invention Assignment with the USPTO        
        When an agreement is in place, describing how the invention is to be divided, file it with the US Patent Office. This step will formalize the assignment of the invention.

Other Options     
        Instead of a partnership consider forming a corporation to which you would assign your invention. You and your associate would then receive a certain number of shares and own the invention according to the allocated shares. Forming the corporation and assigning the invention to it requires the drafting of a business contract which should be performed by an attorney.

When to Set up Agreement?            
        It is best to set up all business agreements at the onset of an ongoing relationship. Too often co-inventors attempt unsuccessfully to draft an agreement between themselves after most of the development and marketing work has been completed. Egos and greed can get in the way of cooperation and the result can be a feud with usually disastrous results.

What are the risks involved if there is no agreement?              
        In the absence of an agreement between the inventors, the US Patent Office and the Courts consider each inventor to own 100% of the invention. In other words each inventor has the full right to license or sell the invention.

If the inventors are feuding, then there is a significant likelihood that they will attempt to undermine and compete with each other in the marketing and selling of their license rights. The sad result: they both lose. “Conflicts waste time and money, erode focus and strategic direction, cause emotional and financial pain and destroy businesses and reputations” writes George Gage the author of The Partnership Charter: How to Start Out Right with Your New Business Partnership (or fix The One You’re In). The best advice is to try to reach an agreement: a piece of something is better than 100% of nothing.

How to Select an Associate?            
        If you are contemplating forming a partnership or a corporation, be careful with whom you associate. Gage lists seven cautions that would-be and existing partners should consider:

     1)     If you think you are not “partner material,” don’t take the partner path. 
     2)     Use extreme caution when selecting a partner.
     3)     If you don’t really need a partner, don’t get one.
     4)     If it doesn’t feel good before you start, follow your gut and don’t do it.
     5)     Don’t be fooled into thinking that legal agreements and documents will keep you out of trouble with one another.
     6)     If you currently have a partner, and it does not feel like a positive working relationship, don’t just ignore it. Try to fix things.
     7)     If there are unanswered questions or vague boundaries and responsibilities with current partners, address these issues while you are still getting along.

For archived newsletters and a lot of information for the small inventor go to: www.patentsandventures.com.

If you have any question you can contact me at (858)259-2226 or email me at glevy@patentsandventures.com.

        This newsletter should not be construed as legal advice.                                    ©2012 by George Levy