10 Tips for Licensing Intellectual Property
Congratulations: you have an innovative product or service. So you naturally want as many people to be using it as possible. When a company turns to licensing its intellectual property, it opens up a whole new world of customers, giving it money to fuel future inventions. But how can you make sure you're getting your innovations into new places while still getting a good deal for all your hard work? We've talked with the experts in the field, asking for their best tips you should consider before you start.
1. Keep good records.
"Get in the habit of establishing and maintaining complete centralized agreement files. You get at least two significant advantages by doing this. First, if a license dispute erupts, the party with better agreement files has a significant early advantage. Secondly, if you ever want to sell your business, accurate and complete agreement files makes it easier for a potential buyer to conduct its due diligence while also enhancing how the potential buyer views your business. Quite simply, accurate and complete agreement files make your business more valuable."
-David Kagan, adjunct professor of intellectual property Licensing at William Mitchell School of Law
2. Be diligent about enforcement from the start.
"A lot of inventors are under the misperception that they get a patent and the money rolls in. They don't realize there's a lot of work that goes into enforcing a patent. Once you get the patent, you have to pay attention to who may actually be using your invention. Parties who infringe your patents don't have to do it on purpose to be infringing. There's no intent requirement for patent infringement. It's unusual for a party to just come to you and say, 'We're using your patent and we want to get a license.' Look for the presence of your invention in other people's products or services. Managing that portfolio in an effective way becomes a bit of a logistical challenge. One has to be aware of inventions perhaps in many different fields and stay abreast of where they're being used."
-Manny Schecter, chief patent counsel for IBM
3. Keep long-term relationships in mind.
"You need to start to understand what are the negotiable points and what are the 'don't even try because it's our policy (points)'. You can waste a whole lot of time and a whole lot of good will. License agreements aren't like selling a used car. You don't get the best deal you possibly can and run. You're going to be living together for a long time. Circumstances change, you need modifications, you don't know what your company's going to look like in five years. You've got to leave good will and understanding on both sides because you're going to be living with each other. You're really to some extent partners: (the company) wants stuff to get developed, (the licensee) wants you to be successful but at the same time they want a fair deal. It's a different style of negotiation."
-Lita Nelsen, director of the Technology Licensing Office at the Massachusetts Institute of Technology
4. Test quality before licensing, and maintain it after.
"In addition to doing test chips, we also ships tens of millions of chips in production. It gives you the confidence that you can work in volume. You want a proven product. If you're buying a software package, if you can you want to make sure it's already been in production. If it's possible, you want to talk to people who have used it. It's kind of like building a house and talking to a contractor. It can be hard though, because sometimes the references are your competitors. Ongoing support is really important too. If it's somebody who just produces something and walks away, if you don't have ongoing support, that's a bad sign."
-Ron Richter, director of intellectual property licensing, Silicon Image Inc.
5. Assume the license is negotiable.
"'We don't make changes to our form agreement' is a phrase that companies like to use, but they rarely mean it. If you see something in the contract that is unreasonable, seems ambiguous, or is flat-out wrong, say something about it. Better yet, suggest something that works better. In my experience companies will nearly always work with you to either change their language or explain their reasons for keeping it as-is. I have never seen a deal implode because someone suggested changes in good faith. Most companies expect some negotiation as part of the process, regardless of what they might say to the contrary. "
-Chad King, intellectual property partner, K&L Gates
6. Navigate exclusivity carefully.
"One of the things that happens, especially with startups and companies that are developing something new, is that companies will want to incorporate their product line and will ask for exclusivity. It's a fair thing to ask for. As a start-up or as a relatively young company, you may not have the realization of the full potential of what's possible with your technology. You might be so excited to get the deal done you might give away the farm. You can get around it by building milestones or performance-based metrics to see whether or not we're actually achieving the kind of goals we set forth going into this. Exclusivity has come up as the No. 1 point of contention in negotiations. I don't think its fair to say avoid it completely. You just can't unless you are going to be able to wield enough power in the marketplace to say everybody's going to have this thing."
- Pritesh Gandhi, CEO of Ambient Devices
7. Define and prioritize deal boundaries.
"We begin by understanding the business implications on both sides and by defining the deal parameters, which may include assigning patents, licensing patents for a field of use, technology transfer, copyrights, royalties, buying a product line, etc. Once these are understood, we assign values to each. However, it is vitally important to understand what value the licensor puts on these different parameters. For example, they may only need a narrow field of use license for your intellectual property and therefore would not pay a premium price. Putting a simple price tag on some intellectual property without regard for how it enables the licensor to execute a strategy is a trap many fall into and a recipe for minimizing value or worse, deal failure."
-Clint Balanger, CEO of Evident Technologies
8. Be flexible on price.
Be prepared to negotiate on price, and be flexible on the type and timing of payments. Many payment types are used, such as up-front lump-sum payments, milestone payments for achieving product development or commercialization goals, or a running royalty after commercialization. More than one may be included in a deal. As for pricing, be aware of industry standards and remember that a licensor will propose payments that contemplate an expansive market and optimistic profit potential, while a licensee will view pricing through a prism of costs and risks including substantial costs to develop and commercialize a product, risks of lawsuit, and the uncertainty of changing markets.
-Dan Schulte, managing partner at intellectual property firm Kagan Binder
9. Recognize different agendas.
"My joke is: The tech transfer offices are perceived as greedy and obstructionist; companies or the industry is perceived as being stingy and obstructionist. So the common ground is not necessarily a good common ground. You've got competing agendas: Larger tech transfer offices are being perceived and being tasked with being revenue-generating. You also have attitudes at some institutions that want lots of money up front: lots of licensing, fees, costs covered. Part of the dilemma is making sure you understand the culture of the organizations that you're dealing with. If you walk in knowing that a particular institution is going to want a huge amount of money and all their sum costs covered, you may not be able to get access to that technology. You may have to walk away."
-Anthony P. Green, vice president of Technology Commercialization: Life Sciences for Ben Franklin Technology Partners of Southeastern Pennsylvania
10. Beware of what could happen to the license.
"If you enter into a paid-up license (when the licensee paid a one-time lump sum payment in lieu of future royalties) beware of assignment right: in the event a smaller licensee is acquired in the future by a larger company, if the license is assignable, the larger company may get a license without having to pay a dime to the patent owner. Make sure that in the event of licensee's insolvency or filing for bankruptcy, the license terminates automatically. If it doesn't, the license may be sold with other assets to a new buyer who will get the license without having to pay the IP owner."
- Alex Poltorak, founder, chairman and CEO of General Patent Corporation, co-author, The Essentials of Intellectual Property
TIM DONNELLY | Columnist | Inc.com Contributor
Tim Donnelly is a freelance writer and managing editor of Brokelyn.com. His work has appeared in Billboard, The Atlantic, Thought Catalog, and The New York Post.