Some Educational Issues in Youth Entrepreneurship: Intellectual Property and Ownership Splits

Here's a new challenge: Try explaining intellectual property to young people who have been downloading pirated movies and music since they first encountered computers.
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Here's a new challenge: Try explaining intellectual property to young people who have been downloading pirated movies and music since they first encountered computers. For that matter, try explaining intellectual property to kids in other countries where IP rights enforcement is spotty, to say the least.

At the Network for Teaching Entrepreneurship (NFTE), we are constantly uncovering new issues like these as we expand our existing paradigm as leaders in our field of youth-entrepreneurship education, and our programs into countries all over the world. Currently, we are tackling improving how we teach concepts like intellectual property and the issue of equity ownership.

There are essentially two IP issues in youth entrepreneurship:

How does a young person learn to protect his or her idea in order to be able to monetize it?
How can intellectual property protection be simplified so that it is affordable for the young entrepreneur?

What are the most effective lesson plans available to teach the four aspects of intellectual property -- copyright, trademark, patents and trade secrets? Are there ways that this difficult field of owning the expression of ideas, inventions, and brands, can be made simple to teach? Can we make young people understand that in order to protect and monetize their own ideas, they must learn to respect the intellectual property rights of others? Complicating these lessons is the fact that in their schools students tend to use music and other materials in film, electronic music classes, etc., without thinking about it. Generally fair use and the TEACH Act allow this type of educational use, but schools tend not to compensate by giving kids instruction in intellectual property rights at the same time, so they just become used to downloading whatever they need for their projects without any thought given to ownership issues.

As far as the second question, can we streamline the process for our students so their rights can be protected with minimal help from a lawyer, for example? Perhaps we could get pro bono IP lawyers to work with our low-income youth to help them protect and be able to monetize their ideas. A national effort to help young entrepreneurs gain access to lawyers who specialize in IP issues is emerging as an important strategy for the improvement of youth entrepreneurship education. These lawyers have been instrumental in both advising students on their current businesses, and creating instructional case studies to help students internalize the advice for the future as well.

How do you teach ownership issues in group businesses?

Another problem confronting our field involves the group businesses that young people often start within youth-entrepreneurship education programs. Many businesses in youth entrepreneurship are based on a group model. The benefits are enormous -- kids learn to work in groups and team work skills improve. But creating a business within a team raises sticky legal issues like: Who owns a group business? How does ownership transfer?

These issues become compounded when considering them alongside the general attitudes and behaviors of adolescents. Jason Delgatto, a Program Manager with the NFTE Chicago Program Office finds that, "Some students create businesses with their best friends, regardless of whether or not these other students may be the most reliable or trustworthy of business partners. For the groups that may eventually have a falling out, it can be the ultimate learning experience -- which of course is better than learning the same lesson later in life when they are more established. However, what many of these students do not realize is the implications of IP ownership in such a split, especially when the majority of these students lack the legal expertise and foresight to negotiate ownership agreements before starting work on the business. We have seen some potentially viable businesses and groups deteriorate, simply because some students felt they deserved more because of the disproportionate work they put in, and the terms of ownership were not explicitly discussed in advance."

To solve this issue, I recommend that we begin using what I've named the Equal Ownership Group Business model. Essentially, each team business would start out with equal ownership granted to each founder. This model is based on the way Fairchild Semiconductor was set up by legendary venture capitalist Arthur Rock in 1957, in San Francisco's southern Bay Area. Fairchild Semiconductors was one of the first great venture capital deals. Each of the eight scientists who were founders received equal percentages of the business, with the venture capitalists receiving the balance.

The new company produced transistors, selling their first 100 to IBM at $150 apiece. Two years later, Fairchild researchers invented the integrated microchip. The company grew from twelve to twelve thousand employees, and was soon raking in some $130 million a year. Many of the Fairchild founders formed other companies, helping to create Silicon Valley.

If we apply the Fairchild model to youth entrepreneurship, a team business with five members would split the business five ways. Each team member would receive a 20 percent equity stake in the business.

In some ways, this model would also be similar to the Employee Stock Ownership Plan pioneered by Louis Kelso in 1956. In an ESOP, each employee owns part of the company and when they retire or leave the business, they receive a certain amount of money for their shares. Perhaps, we could set up youth enterprises so that once a team member reaches eighteen, the team member could sell his or her shares to the other team members. If a child leaves the business before 18, the other team members could split and share that child's portion of the business equity at a predetermined price, something like a co-operative ownership model does now. After each young entrepreneur in the business reached the age of 18 they could negotiate amongst themselves for valuation.

Not only would this approach set fair and concrete guidelines for group ownership for the students to follow, but it would provide a tremendous amount of real-life learning opportunities as well. I'd like to see our Equal Ownership Group Businesses set up boards, with each team member receiving one vote per share. What a great educational experience for our young entrepreneurs from low-income communities to learn how company boards work understand bylaws and how meetings are run.

Once an ownership model is agreed upon, then our team of young entrepreneurs could seek help from some pro bono IP lawyers to protect various intellectual properties that the group business generates, such as its logo, tag line or inventions. This would add enormous value to the business model and make the valuation of the business much easier to not only teach, but also to calculate.

The team could then use their protected intellectual property, plus a detailed business plan with financial projections to raise money from investors for their business.

These are very advanced issues in youth entrepreneurship and no one has ever solved them on a global basis before, but hopefully, NFTE will be the first to do so. The world will be a better place for it, as solving these issues will enable the growing field of youth entrepreneurship to 2013-01-30-delgatto.jpglead the way for teaching at-risk youth around the world the very principles of ownership and intellectual property they can use to discover their own pathways out of poverty.

Jason Delgatto is the a graduate of the Curriculum Studies graduate program at DePaul University in Chicago, Illinois. He is the Director of Teacher Support and Development for the NFTE Chicago Program Office that specializes in teaching youth entrepreneurship.

Special thanks to Patricia Nelson, NFTE's intellectual property lawyer for this insight

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