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Negotiating Deals


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Negotiating Deals

  1. 1. Phyl Speser, J.D., Ph.D. Foresight Science & Technology Incorporated 401.273.4844 ~
  2. 2. Foresight Science & Technology 2 2
  3. 3. Property Slice and Dice Foresight Science & Technology 3
  4. 4. There is a Market His/Her Company Sells (or Want to Sell) to this Customer Segment Atractive Market Size Pull-Through Likely with Customer Segment Your Technology can Capture (or Help Capture) a Hefty Market Share “PEPPY” Value Proposition: Performance, Ease-of- Use, Price, (PEP) and UMPF Foresight Science & Technology 4
  5. 5. Ease of Use Target Foresight Science & Technology 5
  6. 6. Revenues from Sales $ Saving from Operations Time (Life or death needs such as health, environment, or military requirements and aesthetics/taste for consumer items are the exception. ) Foresight Science & Technology 6
  7. 7. Foresight Science & Technology 7
  8. 8. Poor Richard: “The The deal has to made second vice is lying, sound business the first is running in debt. …It is hard for sense or it is a an empty bag to nightmare to enforce stand upright” Good Deals are: Win/Win: Net Positive Cash Flow for All Parties Foresight Science & Technology 8
  9. 9. Poor Richard: “Fair Value is defined by the commerce is where equal product of: values are exchanged for The number of units sold equal, the expense of The profit per unit transport included.” We usually use Net Revenues or Gross Profit Adjusted by the other costs for the buyer and seller to do the transaction Adjusted by the risk of realizing the value (discounting) Foresight Science & Technology 9
  10. 10. Poor Richard: “Always Your Share is Your taking out of the pot and Contribution to the End Value never putting in one soon Cash Flow is the Lifeblood of comes to the bottom” Business The more risk a party bears, the more upside cash flow potential it deserves Cash today is worth less than cash tomorrow The likelihood of cash tomorrow decreases as total risk increases Allocate risk to the party able to control it or bear it. Use side payment(s) to make the deal “fair.” Foresight Science & Technology 10
  11. 11. Poor Richard: “A good Legal Terms Count example is the best Get sermon.” Move Technology to Market Upfront Fees Minimums Loss of Rights Cash Clear and Transparent Metrics for Payments The right amount Audit Rights Not sued Indemnification Infringement prosecuted Right to Sue Foresight Science & Technology 11
  12. 12. Make a list Must Haves No Ways Nice to Have Be Fair and Reasonable Be Realistic About the Value Use Your Nice to Haves to Negotiate for the Others When you have: Your Must Haves None of Your No Ways Sign Foresight Science & Technology 12
  13. 13. NPV (million $) NPV = PV of Total Revenues – Costs NPV as a function of P Linear Equation for the NPV (“Business Model”): spreadsheet value NPV = q (P)-C P (forecasted price of the portfolio, P = Σ 1…nIP xx p) • The quality of IP (q) affects the NPV line slope. • q measures the value of: −C technology value at current TRL/ forecasted fair market value of current substitutes Foresight Science & Technology 13
  14. 14. Technology is a Tool for Doing Something 5 W’s Who is doing it? What is being done? Where are they doing it Why is it being done? When are they doing it? Foresight Science & Technology 14
  15. 15. Product Innovation Stage Bundle of Features Standard User Interface Process Innovation Stage Eliminate Steps Improve Reliability Improve Efficiency of Resource Use Foresight Science & Technology 15
  16. 16. Improves Outcomes Has Utility Bohn Knowledge Useful Level Measured in Bundles Skills/Know-how of Groceries Extension UMPF Extension Enabling Core Strategic Extension Competing Enabling Time Foresight Science & Technology 16
  17. 17. Offensive Emerging Lead all Competitors Pacing Be in Top 5% of all Competitors Spare Impact Lead all Direct Competitors from Use of Defensive Product, Be in Top Half of all Competitors Service, or Hedging Technology Crucial for Future Growth Imitative Crucial for Take-off Spare Offensive Defensive Function 17 Foresight Science & Technology
  18. 18. COMPARING YOUR TECHNOLOGY WITH OTHERS YOURS Functionality of Tchnology Features and Relat ive Weig h t in g 3 Strong 2 Medium 1 Weak Customer Requirements Performance Ease-of-Use Price Other Total Weight 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Foresight Science & Technology 18
  19. 19. Is There a Competitive Opening? Foresight Science & Technology 19
  20. 20. Conditional GO GO GO NO GO Conditional GO Conditional GO NO GO NO GO Inside the Triangles, the Technology has a Competitive Advantage Foresight Science & Technology 20
  21. 21. Foresight Science & Technology 21
  22. 22. STAKEHOLDER ANALYSIS Level of Commitment People or Group Supply Chain, Opinion Industry Regulators Customers Funders NGOs incl. Targets Leaders Assoc. Enthusiastic Helpful Compliant Hesitant Indifferent Uncooperative Opposed Hostile Key: O - Level Necessary for Success X - Current Level Foresight Science & Technology 22
  23. 23. Focus on the Significant Risks 23 Foresight Science & Technology 23
  24. 24. Cost vs. Delays for all Risks along Value Chain Technical and firm specific risk 30% are the basis for the discount 25% Resulting Cost Increases rate. 20% 15% 10% Market risk is a probability distribution for outcomes. 5% 0% 0% 5% 10% 15% 20% Resulting Delays Foresight Science & Technology 24 24
  25. 25. Risk Level Approximate DR(%) Description Risk Free 10-18 Existing product, high demand, building more of the same Very Low Risk 15-20 New well understood technology for an existing product Low Risk 20-30 New features, well understood technology into an existing market Moderate Risk 25-35 New product, well understood technology into market with competition High Risk 30-40 New product, not well understood technology into an existing market. Very High Risk 35-45 New product, new technology, new market Extremely High Risk 50-70 New company, unproven technology, new market Source: Richard Razgaitis, Early Stage Technology q: the measure of potential utility is the inverse of the discount rate Foresight Science & Technology 25
  26. 26. Any numbers in green found in the following fields can be changed and will be reflected in the tables below Factor Rate Weight Impact Industry Norm 0.0% 0.0 0% Significance (Breakthrough add 5-10%, Major add 0-5%%, Minor subtract 0-3% 0.0% 3.0 0% Refinement/Maturity of Technology (High add, Low subtract) 0.0% 2.0 0% Breadth and Strength of IP Protection (Yes add, No subtract) 0.0% 2.0 0% Portfolio, Not Single Patent Being Licensed (Yes add, No subtract) 0.0% 2.0 0% Exclusive Market Position in Field of Use Gained (Yes add, No subtract) 0.0% 3.0 0% Immediate Utility in Market (Yes add, No subtract) 0.0% 2.0 0% Commercially Successful (Already Successful in Market add, Not Yet Proven in Market subtract) 0.0% 3.0 0% Competition Exists which Will Inhibit Ability to Exploit (Yes subtract, No add) 0.0% 1.0 0% Foreign Rights (Yes add, No subtract) 0.0% 3.0 0% Sales Conveyed or Highly Likely (Yes add, No subtract) 0.0% 2.0 0% Duration (Over Ten Years add, Under Three Years subtract) 0.0% 1.0 0% Upfront Payment Required (Yes subtract, No or Conditional add, Standard neutral) 0.0% 2.0 0% Minimum Royalties (Yes subtract, no add, Standard neutral) 0.0% 2.0 0% Know-How Included in Deal (Yes add, No subtract, Standard neutral) 0.0% 3.0 0% Support/Training Provided After Initial Transfer (Yes add, No subtract, Standard neutral) 0.0% 2.0 0% Maintenance and Enforcement Burden (Licensee subtract, Licensor add, Standard neutral) 0.0% 2.0 0% Exposure to Liability (Yes subtract, No add, Standard neutral) 0.0% 2.0 0% Total 0% Add to Industry Norm 0.00% RATE 0.000% Foresight Science & Technology 26
  27. 27. Transitioning Deal Design & Production Transaction Costs Engineering Test and Evaluation Regulatory Approvals Negotiations Legal Equipment and Set-up Vendor Qualification On-Going Costs Collection/Payment of Customer Support and Revenues Maintenance Systems Patent Fees Development Infringement Monitoring Product Launch and Prosecution Foresight Science & Technology 27
  28. 28. Target Target Advice Testing Idea – Design – Proof – Brass – Prototype – Product – Production – Sales – Distribution – Customer of of Board Engineering Marketing Support Concept Feasibility End User Testing End User Advice Foresight Science & Technology 28
  29. 29. Foresight Science & Technology 29
  30. 30. Market Familiarity STRATEGY Control: Internal Development Divest or Acquisitions Monitor In-License Partner: Market Joint Ventures Development Alliances Internal Ventures Out-License Partner Divest: Assignments Sales Control Monitor: Technology Venture Capital Development Educational Acquisitions CORE Adapted from Roberts and Berry, SMR 1988. Technology Familiarity Foresight Science & Technology 30
  31. 31. Foresight Science & Technology High Past Present Future Long-Term Sustainable Competitive Advantage Staff Capacities of to Realize Plan Strength of Short and Mid-Term Intellectual Asset Competitive Advantage Portfolio Revenue From Entry Market Application Low © Foresight Science and Technology 31
  32. 32. Social Networking – SBIR Phase I or Earlier Monitoring and Collaboration. Option Agreement for Right of First Refusal Foresight Science & Technology 32
  33. 33. Six Sigma – Mission Agency Phase II or Phase III Strike License or Equity Investment. Joint Venture Farm Teaming – SBIR Phase II Possible. May have Cooperative R&D Contracts . Option to Option for License Acquire or Equity Investment Foresight Science & Technology 33
  34. 34. There is always a reason for NO Understand it Respond to it Foresight Science & Technology 34
  35. 35. Mailers Demonstrations Non-Proprietary Working, Tested Prototype Fact Sheet, Quad Chart, Presentation Slides Specifications Sheet, Brochure Follow-Along Manual White Paper and/or Check List Patents/ Published Patent Term Sheet (Be Careful Applications with These) Proprietary Test Protocols and Results Legal Documents Unpublished Patent Standard Contract or Applications License One-Way and/or Two-Way Non-Disclosure Agreements Materials Transfer Agreement where Relevant Foresight Science & Technology 35
  36. 36. “Plough deep while “Always taking out of the sluggards sleep, and pot and never putting in you shall have corn to one soon comes to the sell and keep” bottom” Define the agenda – For issues you can give on, Provide the initial offer “horse trades” or side offering payments “It is easier to suppress – Ask for the data to the first desire than to understand their concerns satisfy all that follow” Know when to say no Know how to say no. If no is not really no, explain how it can become yes. ForesightScience & 36 Technology
  37. 37. Partnr Partner Partner Wants Deal Walks SME SME Wants $10m, $0.0m, Deal $0.5m -$0.05m SME Walks $0.1m, -$0m, -$0.05m -$0m Foresight Science & Technology 37
  38. 38. Foresight Science & Technology 38
  39. 39. Do you correctly understand why the technology is attractive? What is the decision process and who else is involved in what roles or functions? Sponsor Lawyer How long does the decision process take? What criteria will be important and why? What information will they want? Decision Technica Technical Gatekeeper Project Leader What kind of deals have they signed in Maker l Expert the past and what do they prefer? Expert Do they have standard agreements they prefer to use? Champion Champion End User Who is (are) the decision maker(s)? Is there other insights they want to pass along to make the process smoother and quicker Foresight Science & Technology 39
  40. 40. Poor Richard: “Pride is as Everyone always Three loud a beggar as need Options: and a good deal more Buy saucy” Wait/Stall Walk Away Ask for the Deal IF THEY DO NOT BUY … ASK WHY! Do not be a “true believer” Do not assume they are stupid Understand their needs, requirements, and constraints Foresight Science & Technology 40
  41. 41. Open the Black Box if Possible Come back with data driven answers or questions SEC, Yahoo Finance, Hoovers, trade publications Foresight Science & Technology 41
  42. 42. Foresight Science & Technology 42
  43. 43. Cash Flow is the Lifeblood of Business The more risk a party bears, the more upside cash flow potential it deserves Cash today is worth less than cash tomorrow The likelihood of cash tomorrow decreases as total risk increases Allocate risk to the party able to control it or bear it. Use side payment(s) to make the deal “fair.” Foresight Science & Technology 43
  44. 44. Allocate tasking to the most competent and cost- efficient party Allocate liability to the party best able to mitigate it Structure hand-offs for success Clear Deliverables Milestones Progress Payments Penalties Use transfer payments to make fair Foresight Science & Technology 44
  45. 45. Govt. or Foundation Subsidy BUYER SELLER Don’t get greedy Foresight Science & Technology 45
  46. 46. Partnr Partner Partner Partner Moves Steps Abandons SME Forward SME Moves >$5m, $0.1m, $0, Forward >$0.25m $1m, +-$0.03m SME Steps $1m, +-≥$3m, $0, $0.3m ≤$0.5m +-$0.1m SME +-$0.03, +-$0.01m $0, Abandons $0 $0 $0 Foresight Science & Technology 46
  47. 47. If NPV = q (IP xp) − C = (0.2 x $9,000m) – $1750m = + $50 million, do you buy now if the Discount Rate is 10%? t=1 E[P+] = $19 ⇒ NPV+ = + $150 million Wait 50% t=0 Abandon 50% E[P] = $18 / technology E[P−] = $17 ⇒ NPV − = − $150 million NPV(t=0) = − 50 million $ Rational manager will not exercise this option ⇒ Max (NPV−, 0) = zero At t = 1, the portfolio NPV is: (50% x 150) + (50% x 0) = + $75 million The present value is: NPVwait(t=0) = 75/1.1 = 68.2 > 50 so wait Foresight Science & Technology 47
  48. 48. NPV = q (IP x p) − C = (0.22 x $9,000m) – $1750m = + $230 million t=1 E[P+] = $19 ⇒ NPV+ = $340 million 50% Move Forward t=0 E[P] = $18 / technology 50% Wait E[P−] = $17 ⇒ NPV − = $120 million NPV(t=0) = $230 million At t = 1, the portfolio NPV is: (50% x 340) + (50% x 120) = $230 million The present value is: NPVwait(t=0) = 230/1.1 = $209.1 < $230. Deep-in-the-money (high NPV) means exercise the option Foresight Science & Technology 48
  49. 49. Foresight Science & Technology Provision Focus – Comments and Issues Business/Legal Identification of parties Legal This section is straightforward and factual. 1.Date 2.Addresses 3.State of incorporation Whereas clauses (recitals) Business These recitals are important for future interpretation of the agreement. 1. Purpose of the agreement 2. Facts leading up to the agreement 3. What each party brings to the agreement Definitions Business Background information is needed for the understanding of other clauses in the agreement 1. Field of agreement 2. Licensed product/process/service 3. Licensed intellectual property 4. Confidential information 5. Affiliates 6. Net revenues Grant of rights Business These clauses are determined by business considerations, although attorneys will put them into proper terminology. 1. Exclusivity 2. To make, use, or sell 3. Grantbacks 4. Geographic information 5. Field of use information 6. Cross licenses and sublicenses Consideration paid for intellectual property rights Business These are primarily business decisions, although input from the legal staff will be needed, particularly on up-front patent costs to be recovered and projected maintenance fees. 1. Up-front payments-lump sum, sum for paid up licensees (no running royalty) 2. Running royalty — base rate 3. Annual or other minimums 4. Technical support-scope, cost 5. Patent maintenance-scope, cost 6. Special provisions-currency, stock, etc. 7. Most favored licensee 49
  50. 50. Technology Development Issues Business Extremely important for exclusive licenses, but many firms are scared to negotiate. Companies can have two different technology development goals under the same license. The goals need to be explicit and time 1. Goals of the license and technology development plan sensitive so that it is very clear to both parties when the license has strayed outside of its original intention. 2. Key goals/milestones that the licensee needs to accomplish These plans are not only important to make sure both parties are on the same page, but they also help reduce and timelines the risk that the licensor has picked a bad licensee while increasing the value of the license through payments 3. Milestone Payments to reflect when the technology risk is reduced. Payment of consideration Legal Licensors will normally have set provisions for these that they will try to keep consistent in all of their agreements. Audit provisions are sometimes a concern. The usual resolution is to use an outside audit firm 1. Accounting methods acceptable to both parties. The only audit information that can be reported to the licensor is information 2. Timing of payment and reporting defining errors in royalty payments. 3. Record-keeping requirements 4. Audit rights Major license restrictions Legal These considerations are specific to each agreement, but the attorneys normally take the lead in assembling the relevant information. 1. Government export limitations 2. Liability limitations-indemnifications, insurance, warranties, etc. 3. Tax payments, lack of partnership, tax-like payments 4. Guarantees, test runs Confidentiality Legal Confidentiality is treated as a legal issue, but business input is needed. 1. Definition 2. Term Enforcement of /defense against intellectual property rights Legal Payment for enforcement is usually a contentious issue, as it can be more costly than the royalties. Licensors usually will resist having to pay these expenses. The argument is that the licensee is receiving the benefit and 1. Notification of infringement the majority of the operating profit from the technology and thus, they should pay these costs. It is important 2. Responsibility for enforcement/defense for the licensor to retain the right to go after infringers if the licensee defers. 3. Payment for enforcement/defense Future intellectual property Legal This issue is tailored to the circumstances of a specific license. 1. Responsibility for protection 2. Payment for protection Duty to use (best efforts) Legal This is to protect against a licensee sitting on technology. Termination Legal Termination is particularly important for exclusive licenses. If, after a strong effort, an exclusive licensee cannot sell enough to meet minimum royalties, converting the license to a non-exclusive license is preferred 1. Term of agreement to exercising a termination provision. 2. Conditions for termination 3. Default 4. Post-termination obligations-confidentiality, payments, etc. Foresight Science & Technology 50
  51. 51. Other provisions Legal This is usually standard terminology. The governing law provision can be contentious. The licensor generally prefers to have the state in which the 1. Impossibility to perform (force majeure) corporate office is located as the governing law. The licensee may have a preference for the governing law in 2. Severability their home state. 3. Arbitration 4. Assignments 5. Entire agreement 6. Governing law 7. Notices 8. Execution Foresight Science & Technology 51
  52. 52. Poor Richard: “We can give The decision is advice, but we cannot give management’s conduct” Decide on sound business reasons (personalities change as people change) Don’t get greedy Go back to your three columns: Must Have and No Way Cross off items on Must Have and No Way If no No Ways and all Must Haves, sign If you have not been there before, work with someone who has Foresight Science & Technology 52
  53. 53. • Nothing happens without a sale. David Speser • If opportunity doesn’t knock, build a door. Milton Berle • A well-defined imagination is the source of great deeds. Chinese Fortune Cookie 401.273.4844, ext. 35; Foresight Science & Technology 53