Wall Street Journal Discovers Long-Time Business Practice, Thinks It’s New

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The July 24, 2020 Wall Street Journal carried a front-page article with this screaming headline:

WSJ headline

WSJ headline

“Amazon bad! Big Amazon stealing from little fish! Jeff Bezos horrible!”

One slight problem with this narrative. Big companies have been doing this ever since intellectual property was legally protected. In the U.S., patents, copyrights, and trademarks are protected by the Constitution. Article I, Section 8, clause 8:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;

Patents and copyrights only protect the specific expression of a text, invention, or process. For example, computer software is usually protected by copyright law. But nothing prevents another programmer for writing different code that accepts identical inputs and produces identical output. Similarly, someone who patents a superior mousetrap can expect others to work with the idea and produce a competitive invention. All this is perfectly legal. It’s impossible to copyright an idea.

It’s impossible to copyright an idea.

So those hoping to sell their startup business to any large company have to walk a delicate line. Unless they follow standard industry practice, described shortly. The line separates giving the prospective buyer enough information to pique their interest without revealing so much that the big guy can produce similar technology. Ultimately, IP protection is trade secrets, not the legal avenues. Patent and copyright disputes are usually undertaken by those who can afford them.

Luckily, there is a simple, inexpensive workaround for those wishing to be acquired. Ask the acquiring company to pay for a third party to evaluate the object of the acquisition. This consultant must be acceptable to both parties. Characteristics of these consultants include:

  • Technical knowledge relevant to the acquisition target.
  • Integrity and honesty.
  • A reputation for keeping secrets.

The process is straightforward. The consultant signs a contract with both the would-be acquirer and the target company. The buyer pays time and expenses. The target company agrees to be completely candid with the consultant.

The consultant spends several days talking to key employees at the startup. The objectives of this extended conversation is to evaluate the claims made by the startup, including details of what it does and how it works. The consultant prepares a report that basically tells the big company “Yes, this is real” or “No, this is a fraud.” After that negotiations can focus on timing, the price of the acquisition, the role current employees will continue to play, and other details.

I know all this because I’ve been the consultant on a few occasions. In one case, the invention was a true breakthrough. All this was during the 1980s and 1990s. I can guarantee that this has been a business practice for at least 40 years. It’s part of due diligence.

 

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.