Intellectual Property Rights Buyout – Price?

[david.source]

Hi everybody, I wondered if anybody had any opinions on the following issue that I have.

We have been developing a internet based business application for a client, basically a online booking system with CRM and mobile communications functionality. When we originally signed the contract to do the work we used our usual agreement that gave our client a sole license to use the system but no access to the back end code.

They have now come back to us and asked to buy the whole system from us, code, graphics, database, everything. We are not against selling but we want to get the true value of the system.

When we originally quoted we based our price on the length of time we thought it would take to develop the system, which has been broadly accurate. We did however keep the original quoted price low because we knew that our client would be tied to us and would have to come back to us for updates/maintenance etc. From what they have now said they will probably not be signing any form of future maintenance agreement with us.

The system uses a lot of code that we have developed as a business in previous projects, obviously we give our client all the code for the application they will have access to all of this.

Anyway my question is this, how much do you look to increase your prices when the client wishes to buy all the intellectual property rights to the project - our initial thoughts were to double the original quote. What do others think? Is there an accepted formula?

Thanks in advance for any help.

David

[Derek Sheppard]

Are they trying to buy all the rights or just the source code for private use? Those are two different animals. You can

1. Sell the source code (= $$)
2. Sell non-exclusive rights or some combination of license to cover what the client wants to do but not what you don't want him to do (= $$$)
3. Sell all the rights (= lots of $$$$)

I don't believe there is any formula for this, it's truly a matter of what the market will bear. I see source code selling for from 2 to 10 times the price of an application, with additional rights going for more...

[david.source]

Are they trying to buy all the rights or just the source code for private use?

They are trying to buy all the rights.

Basically they want everything - the system forms part of a new venture and is a key application which the venture could not survive without. We suspect that they will sell the company to other investers before to long and 75% + of the companies value is within the system we have developed.

Thank you for your advice.

David

[shadowbox]

I would suggest talking to an IP lawyer over this, because by handing over all rights to the client, you may also be giving up the rights to re-use certain elements of your own code routines (e.g. classes, functions etc), so I would suspect careful wording is required.

Also, if you consider that the software may be re-badged and sold on in multiple units as a commercial web solution, this certainly puts a different perspective on the value of the application to this company and to yours. After all, currently there is nothing stopping you selling this as a commercial application yourself and making very good money from it. I

'd certainly consider charging quite a hefty fee if you hand everything over - but I wouldn't base it on a multiple of original development costs, I'd look beyond that and as Derek suggests, consider how far the market will allow you to go, how much you think these guys are willing to pay, and how much you stand to lose if you keep the rights and exploit it yourself as a licensed commercial product.

[Derek Sheppard]

Basically they want everything - the system forms part of a new venture and is a key application which the venture could not survive without. We suspect that they will sell the company to other investers before to long and 75% + of the companies value is within the system we have developed.

Then Shadow's right - use the Force (lawyer). You are in the driver's seat and many things are possible, from lots of cash to equity. You may look into using a legal firm that also does business negotiation.

[david.source]

This is excellent stuff - thank you.

We are hearing from a number of people that we hold most of the cards and we should negotiate with this in mind.

I have an appointment with an IP lawyer at 9:30am tomorrow.

David