Make sure your IP is secure before you unleash your tech unicorn

South Africa has produced many exceptional tech entrepreneurs like Elon Musk, Mark Shuttleworth and Vinny Lingham, and the entrepreneurial spirit in SA’s tech space remains strong. But if you’re developing an app or tech business that might become the next ‘unicorn’, you must make sure that you structure your intellectual property (IP) correctly from the outset to avoid unnecessary issues in any future sale or transfer.

That’s the warning from Sovereign Trust consultant Ralph Wichtmann, who says there are strict exchange control regulations in place governing the sale or assignment of IP to non-residents. Transferring and licensing South African IP to a non-resident, is subject to SA Reserve Bank approval, which can be a time-consuming and costly process.

“IP is the most valuable asset of the information age. The largest companies in the world are built on IP, and organisations of all sizes are recognising the value of digital and intellectual property. It is thus critical that start-ups take the time to develop a proper IP strategy up front, as this will play a major role in the way they raise money or sell their business in the future,” says Wichtmann.

If IP has already been created, it is important to determine where the IP was created and what exactly it consists of, because the process of transferring the IP to a non-resident can be simplified if the IP was originally created outside South Africa. In such cases, the IP laws of the relevant jurisdictions will then govern the transfer of the IP to non-residents.

One way of easing the IP transfer process is to establish an overseas (offshore) structure that will be efficient in terms of international business expansion, tax and estate planning, as well as avoiding exchange control regulations that could hinder the transfer when a potential buyer comes knocking. That is why it’s important to get expert structuring advice before creating the IP, and if possible, determine upfront the target market or buyer of the IP.

“A further benefit is that if you hold the IP through an offshore structure in a jurisdiction that has a business-friendly environment and a tax neutral system, this will make venture capital or similar investing all the more attractive, especially if your IP is in a competitive market segment,” says Wichtmann.

When choosing an offshore jurisdiction, you should also consider whether the company will be licensing the IP to other users, who will have to pay royalties. The country from which the royalty fee is paid might impose a withholding tax on such payments, so it is important to confirm that the jurisdiction where your company is registered, has signed double taxation agreements with those countries. This can significantly reduce the withholding taxes imposed – in some circumstances, even reduce it to 0%.

Once the IP is owned by an offshore company, it should then be registered to prevent any copying, abuse by potential competitors or disgruntled employees.

Even if your ‘wannabe’ unicorn IP is intended solely for the local market, proper structuring is still required to hold the IP, and to ensure it does not form part of your estate’s assets. This will be especially important when the IP grows in value, says Wichtmann.

For further information or to set up an appointment to discuss your particular situation, please contact Ralph Wichtmann.