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IP Licensing for Technology Entrepreneurs
 

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.

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 IP Licensing for Technology Entrepreneurs Presentation Transcript

    • 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: martin.suter@iplicensing.net
      Twitter: @martin_suter, @IPLicensing
      LinkedIn: http://www.linkedin.com/in/martinsuter
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • Show of Hands…
      Who aspires to start/own or lead their own company?
      © 2010 Martin Suter, IPLicensing.net
    • Show of Hands…
      Who aspires to start/own or lead their own company?
      • Who here has ever filed or plans to file their own patent(s)?
      © 2010 Martin Suter, IPLicensing.net
    • Show of Hands…
      Who aspires to start/own or lead their own company?
      • Who here has ever filed or plans to file their own patent(s)?
      Licensing can be that mechanism to help all of us entrepreneurial, non-inventors start companies and create wealth.
      © 2010 Martin Suter, IPLicensing.net
    • Takeaways
      Understand the implications of a licensing strategy
      Develop guiding principles outside of the deal
      Assess every deal through a strategic filter
      © 2010 Martin Suter, IPLicensing.net
    • 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.
      © 2010 Martin Suter, IPLicensing.net
    • What is “licensing”?
      An agreement between parties in which a licensor (seller) grants certain rights to a licensee (buyer) in exchange for consideration (dollars)
      © 2010 Martin Suter, IPLicensing.net
    • 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!
      © 2010 Martin Suter, IPLicensing.net
    • Licensing: A Virtuous Lifecycle
      Companies often start as technology licensees via tech transferdeals
      Defense/Government labs, Universities, Fortune 500
      Companies often then become licensors to commercialize
      © 2010 Martin Suter, IPLicensing.net
    • Some Personal Examples
      Knowledge House
      Went IPO
      MeshNetworks
      Acquired by MOT
      Cohda WirelessLicense deal with MOT
      SynChemFailed in Animal Models
      © 2010 Martin Suter, IPLicensing.net
    • ITT Industries-MeshNetworks-Motorola
      2. Milcom
      • Identified “disruptive” potential in non-defense markets
      • Negotiated exclusive license for commercial markets
      1. ITT
      3. MeshNetworks
      • DARPA funded R&D
      • Next gen battlefield radios
      • No commercial market capabilities
      • Raised ~$55m in venture funding
      • Developed substantial additional IP
      • Created thought/market leadership
      4. Motorola
      • Strategic investor
      • Limited use license
      • M&A
      © 2010 Martin Suter, IPLicensing.net
    • Elements of a Licensing Agreement
      © 2010 Martin Suter, IPLicensing.net
    • Scope
      © 2010 Martin Suter, IPLicensing.net
    • Field of Use
      Territory
      A sample definition:
      “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.
      Markets
      Exclusions
      © 2010 Martin Suter, IPLicensing.net
    • New IP (aka Derivative Works)
      One of the most contentious areas in negotiation is ownership of derivative IP
      First Principles:
      For a more detailed explanation
      http://www.martinsuter.net/blog/2008/02/the-battle-over-purple-play-doh.html
      © 2010 Martin Suter, IPLicensing.net
    • How Might This Appear?
      Blue Play-Doh
      Red Play-Doh
      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.
      PurplePlay-Doh
      © 2010 Martin Suter, IPLicensing.net
    • Consideration (i.e. $)
      © 2010 Martin Suter, IPLicensing.net
    • 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
    • Issues to Consider
      Licensing As a GTM Strategy
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • Potential Implications
      © 2010 Martin Suter, IPLicensing.net
    • Licensing: Conflicting Goals
      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”
      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.
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • Overview of Valuation: Income Method
      Examples:
      Total Target Market
      All vehicles
      Total Addressable Market
      All new vehicles
      Total Captured Market
      Market share (i.e., all Fords)
      Units Sold
      Total units sold x $ royalty per
      NPV
      Cash flows discounted by cost of capital
      Risk-AdjustedNPV
      Cash flows discounted by assessment of risks
      © 2010 Martin Suter, IPLicensing.net
    • Commercial Licensing Agreement*
      Case Study: Wireless Start-up & Fortune 500 Company
      * Specific Terms & Conditions are confidential and covered by NDA. The information contained herein is for illustrative purposes only
      © 2010 Martin Suter, IPLicensing.net
    • 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!
      © 2010 Martin Suter, IPLicensing.net
    • Timeline
      t = 0
      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 + ~200 days
      t + ~300 days
      t + ~420 days
      t + ~570 days
      t + ~750 days
      © 2010 Martin Suter, IPLicensing.net
    • What Gave Us Heartburn?
      Market Exclusivity
      Derivative Rights
      Royalty Rates on existing products
      i.e. Established, high-margin, high market share product lines
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • 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
      © 2010 Martin Suter, IPLicensing.net
    • Takeaways
      Understand the implications of a licensing strategy
      Develop guiding principles outside of the deal
      Assess every deal through a strategic filter
      © 2010 Martin Suter, IPLicensing.net
    • Thank-you!
      Blog: www.iplicensing.net
      martin.suter@iplicensing.net
      © 2010 Martin Suter, IPLicensing.net