March 18, 2013
As you develop your business, you may discover that you either need to license technology into your company to augment your product development efforts, or create a new revenue stream by licensing technology that you’ve developed to other people. A license is a contract that transfers the right to use, but not the ownership of, intellectual property (IP). Any kind of intellectual property such as patents, copyrights, trademarks, source code, designs, logos, and trade secrets can be licensed.
When negotiating a license (regardless of which side of the transaction you’re on), here are the elements that come into play. Your attorney will dress up the contract, but these are the major business terms you need to be concerned about. This is being offered from the perspective of a company that is licensing IP into the company. You can reverse everything if the transaction is in the other direction, and you are licensing your IP to someone else.
1. What is being licensed?
Is it a patent? A copyright? An image? A computer program? A song? A recipe? You need to define very carefully what you are licensing.
2. What rights are being conveyed (or granted)?
In typical license agreements, one can get the right to use, to sell, to make, or to have made (if you have someone else manufacture for you) the licensed IP. You’ll want to be certain to get the rights you need.
3. Is the license exclusive? Non-exclusive? Or partially exclusive?
There are infinite ways IP can be carved up. If you are licensing a patent, are you the only one who can use it? Or is the owner of the patent licensing it to anyone and everyone? For example, when you “buy” a copy of Microsoft Office, you are actually licensing it non-exclusively, and Microsoft licenses the identical program to millions of other people. Read the license carefully – it says exactly what you can and can’t do with your copy of Microsoft Office. One thing you can’t do is embed the code into a product you sell (if you want to do that, you’ll need a different license).
On the other hand, if you license technology that still requires a lot of development from a university, you may want to negotiate for an exclusive license to justify the expense you’ll put into it.
4. Are there any geographic limitations?
The rights to a license can be carved up by geography or territory (much like a franchise agreement). You could get the right to sell in North America but not in Europe, for example.
5. Are there field-of-use restrictions?
Likewise, you might license technology for use in one industry but not another. I’ve seen several nanotechnologies that have been licensed on a partially exclusive basis to one company for electronics and to another for life sciences applications.
6. Rights to sublicense
If you license a technology into your company, do you have rights to license it again? This may be very important if you plan to incorporate it into your products.
7. Assignment clause
If your company gets bought, does the license get cancelled or does it get assigned to your acquirer?
8. Diligence clauses
You can expect that the company licensing the technology to you (the licensor) is going to want you to do something useful with it. Particularly in the case of technologies that are developed with taxpayer dollars (such as those coming from universities), there may be a requirement for you to use your best efforts to commercialize it. In other words, the contract terms will prevent you from sticking it in a drawer.
9. How will you pay?
You might be asked to pay an upfront fee, or you might pay running royalties based, typically, on the sales of the product.
Sometimes you’ll pay both. If you think about this for a minute, you’ll discover that defining what you pay royalties on can be complicated. For example, if you license a library that gets embedded into a larger product that you sell, how do you calculate the royalties due? What if you’ve licensed several pieces of code from different entities into your finished product? What if you license a patent to make a material that is a component of your final product? What if you don’t charge for your product?
Sometimes startups, because they typically don’t have a lot of cash, will pay the upfront fee with equity.
The licensor, especially with an exclusive license, may insist on minimum annual fees.
10. Other esoteric items
- Export restrictions
- Confidentiality clauses
- Who handles and pays for the patent prosecution?
- If the patents are infringed, who goes after the infringers?
- Do you have any rights to any improvements that the licensor makes to the products, such as a new version of the code?
- Does the licensor have any rights to any improvements or modifications that you make?
You will want to make sure you get good counsel and talk to people who have seen many license agreements, like investors or experienced attorneys, before finalizing anything. Doing this right can have an immeasurable impact on your valuation. This is not the area where you want to learn on the job.
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