IP Licensing for Technology Entrepreneurs

IP Licensing for Technology Entrepreneurs

This presentation is provided under a Creative Commons license

http://creativecommons.org/licenses/by-nc-sa/3.0/

Martin SuterEmail: [email protected]: @martin_suter, @IPLicensingLinkedIn: http://www.linkedin.com/in/martinsuter

© 2010 Martin Suter, IPLicensing.net



mailto:[email protected]



Martin Suter: Personal background

• BBA & MBA from Canada

• ~20 years diverse work experience• Tech & pharma• Enterprise sales, trade finance,

strategic alliances & biz dev• Mix of BigCo and SmallCo• Sat at both sides of the table• Done a few deals


http://www.linkedin.com/in/martinsuter



Show of Hands…

• Who aspires to start/own or lead their own company?

Licensing can be that mechanism to help all of us entrepreneurial, non-

inventors start companies and create wealth.

• Who here has ever filed or plans to file their own patent(s)?


Takeaways

Understand the implications of a licensing strategy

Develop guiding principles outside of the deal

Assess every deal through a strategic filter


IP Defined: More than just patents

“Intellectual Property” means works of authorship, discoveries, ideas, inventions, technology, improvements, innovations, and proprietary data or information as reflected in any form (including computer programs), and any patent applications, patents, copyrights, trade secrets, mask works, trademarks, know-how and other common law and/or statutory proprietary rights under the law of any jurisdiction.


What is “licensing”?

• An agreement between parties in which a licensor (seller) grants certain rights to a licensee (buyer) in exchange for consideration (dollars)


What are some examples?

• Software on your PC• Don’t “buy”

software, you “license” it• How many people

read the EULAs?

• Do you really think Microsoft builds spell checkers?• Check out the

“Help>About” box on MS Office apps and you’ll be amazed• Licensing to MSFT

is not as lucrative as one might think!


Licensing: A Virtuous Lifecycle

• Companies often start as technology licensees via tech transfer deals• Defense/Government labs,

Universities, Fortune 500

• Companies often then become licensors to commercialize


Some Personal Examples

Knowledge HouseWent IPO

MeshNetworksAcquired by MOT

Cohda WirelessLicense deal with MOT

SynChemFailed in Animal

Models


3. MeshNetworks1. ITT

ITT Industries-MeshNetworks-Motorola

DARPA funded R&D Next gen battlefield

radios No commercial

market capabilities

Identified “disruptive” potential in non-defense markets

Negotiated exclusive license for commercial markets

Raised ~$55m in venture funding

Developed substantial additional IP

Created thought/market leadership4. Motorola

Strategic investor Limited use license M&A

2. Milcom


Elements of a Licensing Agreement


Scope


Field of Use

A sample definition:

“Field of Use” means markets worldwide including national, federal, state & local civil and municipal government, utilities, transportation (but exclusive of Telematics), rail, petro-chemical, manufacturing, airports & seaports, and/or other markets as may be agreed in writing by the Parties, but, in all cases, specifically excluding Defense Customers. Markets

Territory

Exclusions


New IP (aka Derivative Works)

One of the most contentious areas in negotiation is ownership of derivative IP


For a more detailed explanationhttp://www.martinsuter.net/blog/2008/02/the-battle-over-purple-play-doh.html

First Principles:

http://www.martinsuter.net/blog/2008/02/the-battle-over-purple-play-doh.html



How Might This Appear?

As between the Parties, BigCo will have and retain exclusive ownership of all of BigCo's Background Property and SmallCo will have and retain exclusive ownership of all of SmallCo's Background Property. By virtue of this Agreement, neither Party has any right, title, or interest to or in the other Party's Background Property except for the licenses expressly granted in this Section X.

Blue Play-Doh

Red Play-Doh

PurplePlay-Doh


Consideration (i.e. $)


Tech Transfer: Something for Nothing?

• Wrong!• You’re giving them something

substantial – your focus• The commitment to commercialise

their IP in a way they can’t/haven’t• Give them skin in the game

• Equity ties them to your success• Commit to performance

milestones• “NewCo will raise $X by Y date to

fund R&D”• “NewCo will have working

prototype/customer, etc. by Z date”© 2010 Martin Suter, IPLicensing.net

LICENSING AS A GTM STRATEGY

Issues to Consider


GTM: To License or Not to License?

• Attractive option for many reasons• Focuses scarce resources in core

technology development• Time-to-market• Exploits existing channels

• Risk:Reward


Potential Implications


Licensing: Conflicting Goals

Licensor• “I can’t give market

exclusivity to one company”

• “What if my own IP is used against me?”

• “I want to maximize my valuation”

In the heat of a deal negotiation, the issues are complex, and the positions often adversarial. A key is to build consensus internally by

developing guiding deal principles before beginning negotiations.

Licensee• “I need exclusivity for

competitive advantage”

• “I need an agreement in perpetuity”

• “I need ownership of derivative works”

• I want to tie payments to cash flow”


Lots of Moving Parts

• Market exclusivity vs. non-exclusivity• Licensee = competitive advantage• Licensor = one roll of the dice

• As a rule, non-exclusives are preferred• Imagine how different MSFT would be if IBM had an

exclusive to DOS?• BUT under the right conditions…

• Non-exclusive to someone precludes future exclusivity

• Field of Use & Territory• Licensee typically wants it all

• Are they really going to sell product in Japan? Latin America? Middle East?

• Licensor typically wants it contained• At a minimum, ensure Field is fully and properly defined

• What it is, and equally importantly, what it isn’t• Granting rights in a field and/or territory may

unintentionally preclude future deals


More Moving Parts

Derivative Works Licensee = ownership of their IP Licensor = Risk of “picket fence” as a result of

knowledge x’fer Can’t make someone dumb after you’ve made them

smart! Purple Play-Doh = Red Play-Doh + Blue Play-Doh

Indemnification Licensee wants to be protected

What if Company B sues for patent infringement in Korea?

Licensor can’t bet the company on a deal The licensee may have a bigger target on their back

and/or be in more markets Higher risk of litigation


Even More Moving Parts

• Consideration (i.e. How much $?)• Licensee typically wants to tie payments to cash flows• Licensor typically wants some assurances that there will be

revenues• Up-front payments, minimum royalty commitments, etc.

minimize risk and provide predictability of revenue stream• Huge difference in deal valuation!

• (Time value of money & Risk Adjusted NPV)

Term (i.e. How long?) Licensee typically want rights in perpetuity

Investing to build products and a market and can’t risk losing license rights

Licensor typically wants it limited Shorter term is an opportunity to re-negotiate or terminate

A reasonable compromise is to tie Term to performance Non-performance (e.g. de minimus royalty payments)

May still elect not to terminate, but may be a stick to negotiate higher royalty rates or other more favourable terms


Still More Moving Parts

What is being licensed? Technology? Intellectual Property?

Not just patents, but designs, know-how, trademarks, copyrights, etc.

Future versions and enhancements? What can they do with it?

Make or have made, sell, develop derivative works, etc.

Public Relations Licensee may not want PR for competitive reasons Licensor often wants PR for competitive reasons

Generally, PR requires mutual consent


High-level Overview of Valuation Method

• Many different approaches to valuation• Worthy of its own seminar!

• Income method is one way of determining present value• Top-down approach to calculating

cash flows• Discounted for

• Cost of capital• Risks


Overview of Valuation: Income Method

Total Target Market

Total Addressable Market

Total Captured Market

Units Sold

NPV

Risk-AdjustedNPV

All vehicles

All new vehicles

Market share (i.e., all Fords)

Total units sold x $ royalty per

Cash flows discounted by cost of capital

Cash flows discounted by assessment of risks

Examples:


CASE STUDY: WIRELESS START-UP & FORTUNE 500 COMPANY

Commercial Licensing Agreement*

* Specific Terms & Conditions are confidential and covered by NDA.

The information contained herein is for illustrative purposes only


Background

• BigCo wanted to be the leader in mesh networking in multi $B core franchise

• Viewed some capabilities as table stakes and willing to support industry standardization• i.e. willing to “share”/sub-license

• Viewed other capabilities as key differentiators with potential competitive advantage• i.e. Unwilling to “share”

SmallCo in-house general counsel, outside counsel & business development vs. BigCo Legal Team!


Timeline

• 01/2003• Technical evaluation begins

• 08/2003• Licensing interest expressed, posturing

begins around terms

• 11/2003• non-binding MOU signed

• Broad brush approach to deal structure

• 04/2004• Agreement signed

• 09/2004• Agreement announced

• 12/2004• SmallCo Acquired by BigCo

t = 0

t + ~200 days

t + ~300 days

t + ~420 days

t + ~570 days

t + ~750 days


What Gave Us Heartburn?

• Market Exclusivity

• Derivative Rights

• Royalty Rates on existing products• i.e. Established, high-margin, high

market share product lines


Market Exclusivity:How did we deal with it?

• Negotiated at length (or ad nauseam!), the definition of “Primary Field of Use” that was limited in scope• $$ solved this dilemma• Risk was that granting exclusivity

would make company less attractive as an M&A target

• Also included “Secondary Field of Use” on a non-exclusive basis• Again, clearly and narrowly defined


Derivative Rights:How did we deal with it?

• SmallCo owned the blue Play-Doh

• BigCo owned the red Play-Doh

• BigCo had the right to make purple Play-Doh, but did not own it• By definition, purple contains blue

• Protection against “picket fence” through non-assertion clauses


Royalty Rates:How did we deal with it?

• Different % royalties by product• Existing product lines

• Lowest rate• Established gross margins, higher

price (COGS) sensitivity• Competitive product lines

• Industry standard rate• Market dictated pricing

• “New” product categories • Highest royalty rate

• More flexibility in setting price in market to maintain margins


Takeaways

Understand the implications of a licensing strategy

Develop guiding principles outside of the deal

Assess every deal through a strategic filter


Thank-you!

[email protected]

Blog: www.iplicensing.net


http://www.iplicensing.net/

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