April 27, 2011
This is the second part of a two part post focused on using licensing to grow your business, by guest contributors Blaire Jones and Aaron Horn. Read the first part here.
And now the big question… Should I license?
It may be a good idea if your IP is original and can satisfy a need, or be used in a way that won’t limit your future growth. You will need the time and ability to value the software in question properly, and to identify and manage licensees and provide defined technical assistance to them. Beyond that, you’ll need to take all the necessary steps to protect your specific product and your intellectual property later on to make sure that you will be entitled to all the profits springing from your creativity.
Keys to the Kingdom.
The specifics of a well-developed licensing strategy, as part of a larger growth strategy, will ultimately depend upon the specific business and inventory of what is being licensed. There are, however, certain critical success factors that must be seriously considered in any company’s attempt to recap benefits from the efforts of outwardly transferring intellectual property. Without paying attention to these critical success factors, you make yourself vulnerable to an unprofitable licensing arrangement or worse, diluting the reputation of your company and product.
Understand your capabilities, obstacles and commitment. Take inventory of your intellectual property, identify what can be used, and weigh the risks and benefits of using each. A risk analysis should be used to determine whether to license out intellectual property that is core to the business—some companies are more comfortable outwardly transferring “core” technology, while others prefer to only use “surplus” technology. Understand which properties have the most potential for creating revenue, determine what the intellectual property’s value is, and know how much money you need to receive to justify sharing your intellectual property. Understand what barriers there are to licensing the property. For example, some companies use licensing passively with committing minimal resources, while others are aggressive in seeking out licensing partners and provide constant attention and support. Decide how much you are willing to devote to the strategy in terms of commitment and human capital—will it be feasible for you to create a business unit dedicated to the strategy and to devote the time and energy to making it effective? How aggressive do you want to be in your licensing effort? If you are successful in attracting licensees, how much support can you provide to them without detracting from your core business?
Use a strategy that fits. Identify the specific goals of a licensing strategy, and define your objectives. Know what you want the gain to be, the IP you have, what you can afford to share, the length of time you want the property licensed, and the conditions you will require to make the deal. Decide whether you want a licensing strategy that serves long-term objectives or just serves a short-term tactical cash infusion. Aim to minimize negative interference with your own market and keep an eye out to make sure that all licensing moves you toward the overarching goals for your firm—whether directly or with revenues and royalties that can be reinvested for growth, such as incentivizing the best employees or developing new IP to keep in front of your competitors.
Choose the right licensing scheme. There are a variety of schemes that are available, including license per a named user; license per installation; license per a client; no license fees (making software available as part of a marketing scheme); license per developer; site license; floating license; royalties per item sold; and cross- licensing. Cross-licensing, used where the licensee owns intellectual property that may be useful to the licensor, may be an attractive and low-cost way to acquire intellectual property to help the business grow. Choose a scheme that fits your objectives and licensees.
Focus on the right market. When choosing a marketing scheme, think about the market and the customers. Evaluate potential licensees and understand where they are financially, so you can set up an appropriate price point and payment structure. Choose the licensees with care, and determine the risks and benefits specific to them. The relationship between licensor and licensee can be something of a marriage, so choose wisely. Decide whether you want to license to competitors. It may seem counter-intuitive, but licensing to competitors can give you an edge: competitors are paying you fees and royalties that can be reinvested in your own growth, and they will be dissuaded from coming up similar IP at great expense if yours can be effectively used at an affordable cost.
Choose defensive strategies and take their cost into account. One of the main risks in licensing out property is the risk that it will be used in a way that the licensor does not approve of, which can lead to losing control of the property and its dilution. As noted, there are ways that these risks can be mitigated, such as choosing the licensees carefully, appropriately choosing the structure of the license agreement, and adequately drafting the agreement. However, in the case of breaches of agreements and other unauthorized uses, it is important that a company has a comprehensive plan in place (such as having monitoring systems and legal processes- including occasional litigation) and understands the resources it may require.
Image by Patrick Hoesly
Guest contributors Blaire Jones and Aaron Horn are the founders of the Georgetown Venture Law Society, an association of professionals and students at the Georgetown University Law Center dedicated to cultivating a greater understanding of the legal and financial issues facing emerging companies.
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