Negotiating license agreements that protect your investment
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NEGOTIATING LICENSE AGREEMENTS THAT PROTECT YOUR INVESTMENT. Robert M. Hunter, Ph.D. Director of Research YES Technologies. The Innovation Process. Find a potential customer with a problem Obtain money and form a team Make sure it’s a big problem Obtain more money

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Negotiating license agreements that protect your investment l.jpg


Robert M. Hunter, Ph.D.

Director of Research

YES Technologies

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The Innovation Process

  • 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

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The Innovation Process (continued)

  • 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

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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

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When do companies pay money for new ideas?


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How to convert an ideainto 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

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Types of Intellectual Property

  • Patents

    • Utility (technology), design and plant

  • Plant variety

  • Trade secret

  • Copyright

  • Semiconductor mask work

  • Trademark/service mark

  • Trade dress

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Hard Lesson No. 2

Use appropriate forms

of intellectual property protection

to secure your idea

so you have something to sell!

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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+)

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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

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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

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I have this great idea:Three-legged panty hose!

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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

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When do companies pay moneyfor intellectual property?


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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

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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

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Present Value Valuation Factors

  • 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

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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

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Call Option Valuation Factors

  • 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

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Approaches to Making Money

  • “Carrot” approach

    • 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

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Finding Customers

  • Customers are the people who work for the 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

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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

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Relationship Building

  • In larger companies, try to develop at least 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

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Overcoming Paranoia (Yours)

  • Try not to be too paranoid (a little caution is OK)

  • Excessive paranoia appears to be a "workplace 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!

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Types of agreements

  • Where to have dinner

  • Two-way non-disclosure (confidentiality) agreement

  • Standstill agreement

  • Option (to license) agreement

  • Biological materials transfer agreement

  • Non-exclusive license agreement

  • Exclusive license agreement

  • Sales agreement (assignment)

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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 agreement”

  • Negotiate details and execute

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Typical License Terms Checklist

  • 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

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Typical License Terms Checklist (continued)

  • Efforts the licensee will make to commercialize the 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

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Top TenCharacteristics of a Good Negotiator

  • Preparation and planning skill

  • Knowledge of subject matter

  • Ability to think clearly and rapidly under pressure and uncertainty

  • Ability to express thoughts verbally

  • Listening skill

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Top TenCharacteristics of a Good Negotiator(continued)

  • Judgment and general intelligence

  • Integrity

  • Ability to persuade others

  • Patience

  • Decisiveness

    Does your negotiator have these characteristics?

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Negotiation Techniques

  • Be knowledgeable: know the customer, their 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

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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

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Secrets of Success

  • 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

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  • Patent marketplaces on the Web




    • www.



  • Protecting and licensing inventions