How to sell code and dead startups
In 2017, we had a death in the portfolio. Once all the employees left, the only remaining assets were some patents, servers, domains, and a lot of code. Eventually we managed to sell that intellectual property (“IP”). Here is what we learned.
Set expectations. The value of IP is a small fraction of what the company was once valued at; it’s maybe 1 to 5 cents on the dollar. Any acquirer of the IP is unlikely to do an all cash deal, so don’t be surprised if the final consideration is a blend of cash, stock, royalty, earn out, or some other creative structure that reduces the acquirer’s up front risk. Selling IP is going to take a year or more with legal taking 6 to 9 months alone (we recommend specialized counsel that has M&A experience and experience in bankruptcy/winding down entities). It’s also going to take some cash along the way as you foot the bill for legal, preparing the code, and other unforeseen expenses that have to be paid well ahead of close. With those expectations in mind, you need to seriously consider whether it is worth the work to sell the IP, what you will really recover, and what the probability of success really is.
Reach out to everyone. If you’ve decided it’s worth it to try and recover something for the IP, reach out to absolutely everyone you know. That includes old customers, prospects, former customers, anyone who has ever solicited you for acquisition, your cousin, your aunt, etc. The point is don’t eliminate anyone as a potential acquirer as you don’t know what’s on someone’s product roadmap and be shameless about reaching out to your entire network. The acquirer of the IP in our dead company was a prospect who never actually became a customer. We also had interest from very random firms that weren’t remotely adjacent to our space.
You need the CTO. In order to transfer code to an acquirer, you’re going to need the CTO or whoever built a majority of the code to assist. No acquirer is going to take the code as-is, unless you want them to massively discount the price to hedge their risk. They’re going to want it cleaned up and packaged specific to their needs. In our case, it took a founding developer 3 months of hard work to get the code packaged just right for our acquirer, and of course, we paid him handsomely for successful delivery.
You need great counsel. The code was once part of a company, and that company has liabilities, creditors, equity owners, former employees, and various other obligations. All of those parties are probably pretty upset with you that things didn’t work out. Before you embark on a path to sell the IP, consult with an attorney that can tell you who has a right to any proceeds collected, what the waterfall of recipients looks like, who can potentially block a deal, who you need to get approval from, whether patents are in good standing, etc. You’ll need to pay the attorney up front for his work and as you progress through the deal, so it takes money to make money from selling IP.
Github. Put the code on Github. Have potential acquirers sign a very tight and punitive NDA before allowing them to see the code. It also may be advisable to only give acquirers access to portions of the code. Github is the best $7 a month you’ll ever spend when it comes to selling IP.
Get all the assets. Make sure you have access to all the assets. This includes all code, training modules, patents, domains, actual servers and hardware, trademarks, logos, etc. An acquirer is going to want absolutely everything even if there are some things he can’t necessarily use.
Make sure the acquirer is fair. The acquirer has to be someone that is negotiating fairly and in good faith with you. We got very lucky that our acquirer had an upstanding and reputable CEO. If you don’t trust the acquirer or if they’re being shifty, move on. In our case, had the acquirer been a bad guy, there were many times when he could have screwed us such as changing the terms of the deal before close, among other things. Given the limited recourse you often have in situations like this, ‘bad boy’ acquirers do it all the time. We got lucky finding an acquirer who was honest, forthright, and kept his word. You’ll need to do the same.
Be patient. Since the purchase price will likely be heavily earn-out or royalty based (the chances of getting an all cash deal up front are slim), you’ll need to be patient as the acquirer’s dev team absorbs the code, the sales team gets up to speed on new capabilities, and the acquirer evangelizes your product to the world. I expect if everything goes smoothly, we will be fully paid 18 to 24 months after the day the acquirer bought the code.
Selling IP is incredibly challenging. In our case the recovery was very small relative to capital invested, the process took nearly 1 year, and there were a lot of people involved to make it happen. We also spent tens of thousands of dollars in legal fees, data scientist consulting, patent reinstatement and recovery, shipping of servers, etc. A lot of that expenditure was done along the way so we had to put more money at risk for the possibility of maybe recovering cash in the sale of IP. It wasn’t easy, but it got done. Hopefully we never have to do it again and neither do you.
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