Transcript NEGOTIATION OF LICENSING AND SALES AGREEMENTS

NEGOTIATING
LICENSE AGREEMENTS
THAT PROTECT
YOUR INVESTMENT
Robert M. Hunter, Ph.D.
Director of Research
YES Technologies
The Innovation Process
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Find a potential customer with a problem
Obtain money and form a team
Make sure it’s a big problem
Obtain more money
Understand the customer and the problem
Obtain more money
Solve the problem (the easy part)
Obtain more money
The Innovation Process (continued)
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Make sure you thought of it first
Obtain more money
Prove you have solved the problem (SBIR/STTR)
Obtain more money
Protect your solution
Obtain more money
Convince the customer to pay you for using your
solution
Pay back ten times the money (not SBIR/STTR)
Improve your solution—go to step 1
Hard Lesson No. 1
It is MUCH easier
to start your quest
with a customer
that has a problem,
than with a solution
looking for a problem
When do companies
pay money for new ideas?
THEY DON’T
How to convert an idea
into a property, your property
• Ideas are free for all to use
• Must place the idea in a “vessel”
– Convert it into intellectual property
• Governments have created a variety of
forms of intellectual property
• In some cases, use of more than one form
is appropriate
Types of Intellectual Property
• Patents
– Utility (technology), design and plant
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Plant variety
Trade secret
Copyright
Semiconductor mask work
Trademark/service mark
Trade dress
Hard Lesson No. 2
Use appropriate forms
of intellectual property protection
to secure your idea
so you have something to sell!
How do you patent an idea?
• Document conception of your invention
• Document diligence in reduction to
practice
• Confirm subject matter is appropriate
• Perform a novelty search ($1,000+)
• Prepare and file one or more provisional
patent applications (technologies and
plants only) ($2,000+)
How do you patent an idea?
(continued)
• Prepare and file a regular patent
application ($4,000+)
• Negotiate wording of claims with Examiner
– First Office action ($1,000+)
– Final Office action ($1,000+)
– Appeal, if necessary ($5,000+)
• Pay issue fee ($1,000+)
• Proofread issued patent
What are the odds?
• Odds of obtaining a patent
– Overall, about 50-60 percent
– If you hire a patent practitioner, over 90
percent
– May fail to cover much intellectual property
• Odds of making money from a patent
– One in 50 patents is licensed/assigned
– One in 100 new products makes money
– So, your odds are about 1 in 5,000
I have this great idea:
Three-legged panty hose!
Hard Lesson No. 3
It costs just as much money
to develop and patent a worthless idea
as a valuable one
Choose a valuable one and focus on it
When do companies pay money
for intellectual property?
ONLY WHEN THEY ABSOLUTELY HAVE TO
Valuing your intellectual property
• Amount a willing buyer will pay to a willing
seller
• Example of a traditional approach
– Present value of a future net income stream
• Example of a new approach
– Call option on a future technology asset
Present Value Approach
• Market size
• Market share
• Net unit income = unit price less unit cost
• Discount potential future income stream
for risk and the time value of money
• Inventor’s share (royalty) as a percentage
Valuation spreadsheet
Factor
Market size,
units
Market share,
percent
Market share,
units
Unit selling
price, $
Year
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Valuation spreadsheet (continued)
Factor
Unit cost, $
Net annual
sales, $
Present value,
$
Inventors’
share, $
Year
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Year
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Present Value Valuation Factors
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Market size – projection based on research
Market share – logistic (S-shaped) curve
Unit price – value to customers
Unit cost – manufacturing + overhead
Discount factor
– Venture capitalists: 50-100 percent/year
– Manufacturing companies: 25-50 percent/year
• Inventors’ share – 25 percent of pre-tax profit or
industry practice
Call Option Approach
• A patent behaves as if it is a call option on
a future technology asset
• Derivative of the Black-Scholes options
pricing model used by professional options
traders
• Software and consultant referrals
available from The Patent & License
Exchange at http://www.pl-x.com
Call Option Valuation Factors
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Size of market of technology in same category
Expense of developing the technology <How long this development is likely to take <Likelihood of similar technology's value
exceeding the cost to develop it
Length of patent protection the technology
enjoys <Comparable financial returns available from
using capital in investment choices other than
buying technology
Approaches to Making Money
• “Carrot” approach
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Locate a potential licensee/assignee (preferably 2+)
Find an internal champion and help him sell idea
Negotiate a deal
Collect
• “Stick” approach
– Find an infringer
– Convince a contingency-based litigator to represent
you (for 35-50 percent of the award)
– Sue the infringer (will cost each side about $1 million)
– Win and collect
Finding Customers
• Customers are the people who work for the
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companies, not the companies
A potential customer for you is someone else’s
dissatisfied customer
Customers are people with money and the
authority to spend it
Only customers’ problems require solutions. If
you really understand a problem, solving it is
usually trivial
If you want to sell something to someone, you
must first listen to that person
Identifying Potential Licensees
• Avoid market leaders (not hungry enough)
• Focus on second and third tier companies
• Seek those with longer term perspective
– The company is owned or managed by its founder
– The company is owned or managed by a first- or
second-generation immigrant to the U.S.
– The company is a foreign company, preferably
European (manufacturing must occur in U.S.)
• Develop brochures, presentations
• Contact marketing departments
Relationship Building
• In larger companies, try to develop at least
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three different contacts (people who work for
large companies have a habit of disappearing)
Start developing trusting relationships with your
contacts/customers (first date, second date,
third date, etc.)
Ask open-ended questions: who, what, when,
where, how (listen and paraphrase)
Nothing happens without an internal champion
Overcoming Paranoia (Yours)
• Try not to be too paranoid (a little caution is OK)
• Excessive paranoia appears to be a "workplace
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hazard" for inventors
Before someone can trust you, you must be able
to trust them
Nothing happens in the technology transfer field
without trust (so, cool that imagination!)
Your potential licensee does not want to steal
your invention, or buy a "pig in a poke“
Protect yourself, then show him/her the pig!
Types of agreements
• Where to have dinner
• Two-way non-disclosure (confidentiality)
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agreement
Standstill agreement
Option (to license) agreement
Biological materials transfer agreement
Non-exclusive license agreement
Exclusive license agreement
Sales agreement (assignment)
General Approach
• Secure two-way confidentiality agreement
– Use customer’s standard form, if possible
• Understand customer’s wants and needs
• Come to agreement on key aspects
– Use a checklist appropriate for the type of agreement
• Draw up terms sheet
• Have your attorney prepare your “standard
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agreement”
Negotiate details and execute
Typical License Terms Checklist
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Effective date of the agreement
Who the parties to the agreement are
“Whereas clauses," explain intentions of the parties
License grant that explains type of license, field of use
and/or the geographic area
Description of the technology/invention/know-how that
is being licensed, usually including a listing of the
patents in an appendix.
Payments (e.g., running royalties and minimum annual
payments) involved, how determined and accounted for,
and when to be paid
Term of the license and what happens after it’s over
An agreement to share information and to keep secrets
Who owns improvements to the invention
Typical License Terms Checklist (continued)
• Efforts the licensee will make to commercialize the
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invention
Requirement that the licensee mark patented or "patent
pending" products
Which party is responsible for suing infringers of the
patent, if either, and how costs of suit and any moneys
recovered are treated
Which party is responsible for paying patent costs
How conflicts are resolved, typically by arbitration
Under which state’s law the agreement is to be
interpreted and where suits may be brought
Mailing addresses of the parties to the agreement
How agreement can be amended by the parties and who
will sign for each party
Top Ten
Characteristics of a Good Negotiator
1. Preparation and planning skill
2. Knowledge of subject matter
3. Ability to think clearly and rapidly under
pressure and uncertainty
4. Ability to express thoughts verbally
5. Listening skill
Top Ten
Characteristics of a Good Negotiator
(continued)
6. Judgment and general intelligence
7. Integrity
8. Ability to persuade others
9. Patience
10. Decisiveness
Does your negotiator have these characteristics?
Negotiation Techniques
• Be knowledgeable: know the customer, their
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problems, how much money your invention will
make or save them
Be cool: just the negotiations phase can take
six months to a year, depending on how
fossilized the company is
Be persistent: keep things moving on your end
Be assertive, but fair: negotiate a win-win deal
The Devil Is in the Details
• Be prepared for negotiation gambits
– “Our standard contract”
– Higher authority
– Nibbling
• Written agreements are for when
something goes wrong
• Understand tax consequences
Secrets of Success
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Know yourself
Think big
Fail forward fast
Be persistent
Do not try to do it alone - hire, partner, network
Success is a process, not an event - enjoy it
INVENTION MARKETING WEBSITES
• Patent marketplaces on the Web
– www.pl-x.com
– www.yet2.com
– www.delphion.com
– www. ipex.net
– www.patex.com
– www.inventorfraud.com
• Protecting and licensing inventions
– www.webpatent.com