IP Licensing for Technology Entrepreneurs


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Originally delivered to MBA students at Crummer, this presentation attempts to simplify some of the issues around a very complex topic: IP licensing.

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IP Licensing for Technology Entrepreneurs

  1. 1. IP Licensing for Technology Entrepreneurs<br />This presentation is provided under a Creative Commons license<br />http://creativecommons.org/licenses/by-nc-sa/3.0/<br />Martin SuterEmail: martin.suter@iplicensing.net<br />Twitter: @martin_suter, @IPLicensing<br />LinkedIn: http://www.linkedin.com/in/martinsuter<br />© 2010 Martin Suter, IPLicensing.net<br />
  2. 2. Martin Suter: Personal background<br />BBA & MBA from Canada<br />~20 years diverse work experience<br />Tech & pharma<br />Enterprise sales, trade finance, strategic alliances & biz dev<br />Mix of BigCo and SmallCo<br />Sat at both sides of the table<br />Done a few deals<br />http://www.linkedin.com/in/martinsuter<br />© 2010 Martin Suter, IPLicensing.net<br />
  3. 3. Show of Hands…<br />Who aspires to start/own or lead their own company?<br />© 2010 Martin Suter, IPLicensing.net<br />
  4. 4. Show of Hands…<br />Who aspires to start/own or lead their own company?<br /><ul><li>Who here has ever filed or plans to file their own patent(s)?</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  5. 5. Show of Hands…<br />Who aspires to start/own or lead their own company?<br /><ul><li>Who here has ever filed or plans to file their own patent(s)?</li></ul>Licensing can be that mechanism to help all of us entrepreneurial, non-inventors start companies and create wealth.<br />© 2010 Martin Suter, IPLicensing.net<br />
  6. 6. Takeaways<br />Understand the implications of a licensing strategy<br />Develop guiding principles outside of the deal<br />Assess every deal through a strategic filter<br />© 2010 Martin Suter, IPLicensing.net<br />
  7. 7. IP Defined: More than just patents<br />“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.<br />© 2010 Martin Suter, IPLicensing.net<br />
  8. 8. What is “licensing”?<br />An agreement between parties in which a licensor (seller) grants certain rights to a licensee (buyer) in exchange for consideration (dollars)<br />© 2010 Martin Suter, IPLicensing.net<br />
  9. 9. What are some examples?<br /><ul><li>Software on your PC
  10. 10. Don’t “buy” software, you “license” it
  11. 11. How many people read the EULAs?
  12. 12. Do you really think Microsoft builds spell checkers?
  13. 13. Check out the “Help>About” box on MS Office apps and you’ll be amazed
  14. 14. Licensing to MSFT is not as lucrative as one might think!</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  15. 15. Licensing: A Virtuous Lifecycle<br />Companies often start as technology licensees via tech transferdeals<br />Defense/Government labs, Universities, Fortune 500 <br />Companies often then become licensors to commercialize<br />© 2010 Martin Suter, IPLicensing.net<br />
  16. 16. Some Personal Examples<br />Knowledge House<br />Went IPO<br />MeshNetworks<br />Acquired by MOT<br />Cohda WirelessLicense deal with MOT<br />SynChemFailed in Animal Models<br />© 2010 Martin Suter, IPLicensing.net<br />
  17. 17. ITT Industries-MeshNetworks-Motorola<br />2. Milcom<br /><ul><li>Identified “disruptive” potential in non-defense markets
  18. 18. Negotiated exclusive license for commercial markets</li></ul>1. ITT<br />3. MeshNetworks<br /><ul><li>DARPA funded R&D
  19. 19. Next gen battlefield radios
  20. 20. No commercial market capabilities
  21. 21. Raised ~$55m in venture funding
  22. 22. Developed substantial additional IP
  23. 23. Created thought/market leadership</li></ul>4. Motorola<br /><ul><li>Strategic investor
  24. 24. Limited use license
  25. 25. M&A</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  26. 26. Elements of a Licensing Agreement<br />© 2010 Martin Suter, IPLicensing.net<br />
  27. 27. Scope<br />© 2010 Martin Suter, IPLicensing.net<br />
  28. 28. Field of Use<br />Territory<br />A sample definition:<br />“Field of Use” means marketsworldwide 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. <br />Markets<br />Exclusions<br />© 2010 Martin Suter, IPLicensing.net<br />
  29. 29. New IP (aka Derivative Works)<br />One of the most contentious areas in negotiation is ownership of derivative IP<br />First Principles:<br />For a more detailed explanation<br />http://www.martinsuter.net/blog/2008/02/the-battle-over-purple-play-doh.html<br />© 2010 Martin Suter, IPLicensing.net<br />
  30. 30. How Might This Appear?<br />Blue Play-Doh<br />Red Play-Doh<br />As between the Parties, BigCo will have and retain exclusive ownership of all of BigCo'sBackground Property and SmallCo will have and retain exclusive ownership of all of SmallCo'sBackground 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.<br />PurplePlay-Doh<br />© 2010 Martin Suter, IPLicensing.net<br />
  31. 31. Consideration (i.e. $)<br />© 2010 Martin Suter, IPLicensing.net<br />
  32. 32. Tech Transfer: Something for Nothing?<br />Wrong!<br />You’re giving them something substantial – your focus<br />The commitment to commercialise their IP in a way they can’t/haven’t<br />Give them skin in the game<br />Equity ties them to your success<br />Commit to performance milestones<br />“NewCo will raise $X by Y date to fund R&D”<br />“NewCo will have working prototype/customer, etc. by Z date”<br />© 2010 Martin Suter, IPLicensing.net<br />
  33. 33. Issues to Consider<br />Licensing As a GTM Strategy<br />© 2010 Martin Suter, IPLicensing.net<br />
  34. 34. GTM: To License or Not to License?<br />Attractive option for many reasons<br />Focuses scarce resources in core technology development<br />Time-to-market<br />Exploits existing channels<br />Risk:Reward<br />© 2010 Martin Suter, IPLicensing.net<br />
  35. 35. Potential Implications<br />© 2010 Martin Suter, IPLicensing.net<br />
  36. 36. Licensing: Conflicting Goals<br />Licensee<br /><ul><li>“I need exclusivity for competitive advantage”
  37. 37. “I need an agreement in perpetuity”
  38. 38. “I need ownership of derivative works”
  39. 39. I want to tie payments to cash flow”</li></ul>Licensor<br />“I can’t give market exclusivity to one company”<br />“What if my own IP is used against me?”<br />“I want to maximize my valuation”<br />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.<br />© 2010 Martin Suter, IPLicensing.net<br />
  40. 40. Lots of Moving Parts<br />Market exclusivity vs. non-exclusivity<br />Licensee = competitive advantage<br />Licensor = one roll of the dice<br />As a rule, non-exclusives are preferred<br />Imagine how different MSFT would be if IBM had an exclusive to DOS?<br />BUT under the right conditions…<br />Non-exclusive to someone precludes future exclusivity<br /><ul><li>Field of Use & Territory
  41. 41. Licensee typically wants it all
  42. 42. Are they really going to sell product in Japan? Latin America? Middle East?
  43. 43. Licensor typically wants it contained
  44. 44. At a minimum, ensure Field is fully and properly defined
  45. 45. What it is, and equally importantly, what it isn’t
  46. 46. Granting rights in a field and/or territory may unintentionally preclude future deals</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  47. 47. More Moving Parts<br /><ul><li>Derivative Works
  48. 48. Licensee = ownership of their IP
  49. 49. Licensor = Risk of “picket fence” as a result of knowledge x’fer
  50. 50. Can’t make someone dumb after you’ve made them smart!
  51. 51. Purple Play-Doh = Red Play-Doh + Blue Play-Doh
  52. 52. Indemnification
  53. 53. Licensee wants to be protected
  54. 54. What if Company B sues for patent infringement in Korea?
  55. 55. Licensor can’t bet the company on a deal
  56. 56. The licensee may have a bigger target on their back and/or be in more markets
  57. 57. Higher risk of litigation</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  58. 58. Even More Moving Parts<br />Consideration (i.e. How much $?)<br />Licensee typically wants to tie payments to cash flows<br />Licensor typically wants some assurances that there will be revenues<br />Up-front payments, minimum royalty commitments, etc. minimize risk and provide predictability of revenue stream<br />Huge difference in deal valuation!<br />(Time value of money & Risk Adjusted NPV)<br /><ul><li>Term (i.e. How long?)
  59. 59. Licensee typically want rights in perpetuity
  60. 60. Investing to build products and a market and can’t risk losing license rights
  61. 61. Licensor typically wants it limited
  62. 62. Shorter term is an opportunity to re-negotiate or terminate
  63. 63. A reasonable compromise is to tie Term to performance
  64. 64. Non-performance (e.g. de minimus royalty payments)
  65. 65. May still elect not to terminate, but may be a stick to negotiate higher royalty rates or other more favourable terms</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  66. 66. Still More Moving Parts<br /><ul><li>What is being licensed?
  67. 67. Technology?
  68. 68. Intellectual Property?
  69. 69. Not just patents, but designs, know-how, trademarks, copyrights, etc.
  70. 70. Future versions and enhancements?
  71. 71. What can they do with it?
  72. 72. Make or have made, sell, develop derivative works, etc.
  73. 73. Public Relations
  74. 74. Licensee may not want PR for competitive reasons
  75. 75. Licensor often wants PR for competitive reasons
  76. 76. Generally, PR requires mutual consent</li></ul>© 2010 Martin Suter, IPLicensing.net<br />
  77. 77. High-level Overview of Valuation Method<br />Many different approaches to valuation<br />Worthy of its own seminar!<br />Income method is one way of determining present value<br />Top-down approach to calculating cash flows<br />Discounted for<br />Cost of capital<br />Risks<br />© 2010 Martin Suter, IPLicensing.net<br />
  78. 78. Overview of Valuation: Income Method<br />Examples:<br />Total Target Market<br />All vehicles<br />Total Addressable Market<br />All new vehicles<br />Total Captured Market<br />Market share (i.e., all Fords)<br />Units Sold<br />Total units sold x $ royalty per<br />NPV<br />Cash flows discounted by cost of capital<br />Risk-AdjustedNPV<br />Cash flows discounted by assessment of risks<br />© 2010 Martin Suter, IPLicensing.net<br />
  79. 79. Commercial Licensing Agreement*<br />Case Study: Wireless Start-up & Fortune 500 Company<br />* Specific Terms & Conditions are confidential and covered by NDA. The information contained herein is for illustrative purposes only<br />© 2010 Martin Suter, IPLicensing.net<br />
  80. 80. Background<br />BigCo wanted to be the leader in mesh networking in multi $B core franchise<br />Viewed some capabilities as table stakes and willing to support industry standardization<br />i.e. willing to “share”/sub-license<br />Viewed other capabilities as key differentiators with potential competitive advantage<br />i.e. Unwilling to “share”<br />SmallCo in-house general counsel, outside counsel & business development vs. BigCo Legal Team!<br />© 2010 Martin Suter, IPLicensing.net<br />
  81. 81. Timeline<br />t = 0<br />01/2003<br />Technical evaluation begins<br />08/2003<br />Licensing interest expressed, posturing begins around terms<br />11/2003<br />non-binding MOU signed<br />Broad brush approach to deal structure<br />04/2004<br />Agreement signed<br />09/2004<br />Agreement announced<br />12/2004<br />SmallCo Acquired by BigCo<br />t + ~200 days<br />t + ~300 days<br />t + ~420 days<br />t + ~570 days<br />t + ~750 days<br />© 2010 Martin Suter, IPLicensing.net<br />
  82. 82. What Gave Us Heartburn?<br />Market Exclusivity<br />Derivative Rights<br />Royalty Rates on existing products<br />i.e. Established, high-margin, high market share product lines<br />© 2010 Martin Suter, IPLicensing.net<br />
  83. 83. Market Exclusivity:How did we deal with it?<br />Negotiated at length (or ad nauseam!), the definition of “Primary Field of Use” that was limited in scope<br />$$ solved this dilemma<br />Risk was that granting exclusivity would make company less attractive as an M&A target<br />Also included “Secondary Field of Use” on a non-exclusive basis<br />Again, clearly and narrowly defined<br />© 2010 Martin Suter, IPLicensing.net<br />
  84. 84. Derivative Rights:How did we deal with it?<br />SmallCo owned the blue Play-Doh<br />BigCo owned the red Play-Doh<br />BigCo had the right to make purple Play-Doh, but did not own it<br />By definition, purple contains blue<br />Protection against “picket fence” through non-assertion clauses<br />© 2010 Martin Suter, IPLicensing.net<br />
  85. 85. Royalty Rates:How did we deal with it?<br />Different % royalties by product<br />Existing product lines<br />Lowest rate<br />Established gross margins, higher price (COGS) sensitivity<br />Competitive product lines<br />Industry standard rate<br />Market dictated pricing<br />“New” product categories<br />Highest royalty rate<br />More flexibility in setting price in market to maintain margins<br />© 2010 Martin Suter, IPLicensing.net<br />
  86. 86. Takeaways<br />Understand the implications of a licensing strategy<br />Develop guiding principles outside of the deal<br />Assess every deal through a strategic filter<br />© 2010 Martin Suter, IPLicensing.net<br />
  87. 87. Thank-you!<br />Blog: www.iplicensing.net<br />martin.suter@iplicensing.net<br />© 2010 Martin Suter, IPLicensing.net<br />