Never Sell Your Intellectual Property

I recently visited the website of a graphic designer who was clearly very talented and had a portfolio of different logos, trademarks, and other artistic intellectual property that he had created on behalf of small and medium-sized businesses as well as for sports team and individuals in the entertainment world.

While his artistic talents were within the realm of what you would expect to see from a professional, what really impressed me is the pricing mechanism for his renderings. He charged a flat fee in cash, or an alternative arrangement available that was one-third cash and one-third stock. For instance, if he designed a Christmas decoration for Coca-Cola, then Coca-Cola could either pay him $3,000 or $1,000 in cash plus $1,000 in Coke stock.

It is a brilliant way for a graphic designer to behave in a way that reflects the limited bargaining power of artistic types in the business world. If he went around demanding $3,000 in stock from every business, none would hire him–they’d find some other freelancer because businessmen aren’t in the habit of giving up ownership stakes in the businesses that they run. However, businessmen do love a good deal, and the thought of a 33% discount is one possible way of getting to yes.

Even if the equity payment method is not successful, it can avoid a gut-wrenching regret.

Every now and then, I think about Carolyn Johnson, who was paid $2 per hour by Nike executives to draw up a potential logo to CEO Phil Knight’s satisfaction, and after 17.5 hours of work, her drawing of the Nike swoosh was chosen and marketed to become such a global icon that you can look at the swoosh itself and associate it with Nike. And yet, all Carolyn Johnson received for her globally successful efforts was a $35 check.

In real life, the story is a little bit better as Nike management resolved to give Johnson 500 shares of Nike stock in 1983 as a recognition of her dramatic underpayment (and, to Johnson’s credit, she owns that stock to this day, which have since expanded to 16,000 shares through stock splits that are worth over $1.1 million and sending her approximately $5,000+ quarterly dividend checks every 91.3 days).

But of course, you cannot rely upon the decades-delayed generosity of corporate largesse when drafting a strategy. Nike would have been fully within its rights to merely pay Johnson the $35 and never look back.

Now, you might think: Most intellectual property created in the world is not globally significant and does not result in millions of dollars in foregone wealth.

That is true, but also reinforces the point in why you should hold onto the intellectual property that you create in life. Because the future cash flows from intellectual property contain some degree of speculation, typical intellectual property assets only sell for 2-3x current earnings and almost never sell for a rate above 5x annual earnings. This is not the chocolate factory making $250,000 that sells for $4 million. This is the royalty stream earning $4,500 per year that sells for $10,000. Just by holding onto your intellectual property for eighteen months can often mean that you end up with the total value that you would have received if you did sell your intellectual property, and in this scenario, you still maintain the ownership rights for all future cash flows.

An old American pearl of wisdom, most recently repopularized by Oprah Winfrey, states that “luck is what happens when preparation meets opportunity.” The opportunity side is the creation of the intellectual property, logo, trademark, or artistic rendering that is somehow connected to serve a particular end user. The preparation part is reaching for a slice of equity if you don’t have it, and holding onto it with dear life if you do.  

Originally posted 2018-11-14 01:20:46.

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