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


Robert M. Hunter, Ph.D.

Director of Research

YES Technologies

the innovation process
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
the innovation process continued
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
hard lesson no 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

how to convert an idea into a property your property
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
types of intellectual property
Types of Intellectual Property
  • Patents
    • Utility (technology), design and plant
  • Plant variety
  • Trade secret
  • Copyright
  • Semiconductor mask work
  • Trademark/service mark
  • Trade dress
hard lesson no 2
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
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
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
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
hard lesson no 3
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

valuing your intellectual property
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
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
present value valuation factors
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
call option approach
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
call option valuation factors
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
approaches to making money
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
finding customers
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
identifying potential licensees
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
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
overcoming paranoia yours
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!
types of agreements
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)
general approach
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
typical license terms checklist
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
typical license terms checklist continued
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
top ten characteristics of a good negotiator
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
top ten characteristics of a good negotiator continued
Top TenCharacteristics of a Good Negotiator(continued)
  • Judgment and general intelligence
  • Integrity
  • Ability to persuade others
  • Patience
  • Decisiveness

Does your negotiator have these characteristics?

negotiation techniques
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
the devil is in the details
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
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
invention marketing websites
  • Patent marketplaces on the Web
    • www.
  • Protecting and licensing inventions