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NEGOTIATING LICENSE AGREEMENTS THAT PROTECT YOUR INVESTMENT Robert M. Hunter, Ph.D. Director of Research YES Technologies.

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Presentation on theme: "NEGOTIATING LICENSE AGREEMENTS THAT PROTECT YOUR INVESTMENT Robert M. Hunter, Ph.D. Director of Research YES Technologies."— Presentation transcript:

1 NEGOTIATING LICENSE AGREEMENTS THAT PROTECT YOUR INVESTMENT Robert M. Hunter, Ph.D. Director of Research YES Technologies

2 The Innovation Process Find a potential customer with a problem Find a potential customer with a problem Obtain money and form a team Obtain money and form a team Make sure it’s a big problem Make sure it’s a big problem Obtain more money Obtain more money Understand the customer and the problem Understand the customer and the problem Obtain more money Obtain more money Solve the problem (the easy part) Solve the problem (the easy part) Obtain more money Obtain more money

3 The Innovation Process (continued) Make sure you thought of it first Make sure you thought of it first Obtain more money Obtain more money Prove you have solved the problem (SBIR/STTR) Prove you have solved the problem (SBIR/STTR) Obtain more money Obtain more money Protect your solution Protect your solution Obtain more money Obtain more money Convince the customer to pay you for using your solution Convince the customer to pay you for using your solution Pay back ten times the money (not SBIR/STTR) Pay back ten times the money (not SBIR/STTR) Improve your solution—go to step 1 Improve your solution—go to step 1

4 Hard Lesson No. 1 It is MUCH easier to start your quest with a customer that has a problem, that has a problem, than with a solution looking for a problem

5 When do companies pay money for new ideas? THEY DON’T

6 How to convert an idea into a property, your property Ideas are free for all to use Ideas are free for all to use Must place the idea in a “vessel” Must place the idea in a “vessel” –Convert it into intellectual property Governments have created a variety of forms of intellectual property Governments have created a variety of forms of intellectual property In some cases, use of more than one form is appropriate In some cases, use of more than one form is appropriate

7 Types of Intellectual Property Patents Patents –Utility (technology), design and plant Plant variety Plant variety Trade secret Trade secret Copyright Copyright Semiconductor mask work Semiconductor mask work Trademark/service mark Trademark/service mark Trade dress Trade dress

8 Hard Lesson No. 2 Use appropriate forms of intellectual property protection to secure your idea so you have something to sell!

9 How do you patent an idea? Document conception of your invention Document conception of your invention Document diligence in reduction to practice Document diligence in reduction to practice Confirm subject matter is appropriate Confirm subject matter is appropriate Perform a novelty search ($1,000+) Perform a novelty search ($1,000+) Prepare and file one or more provisional patent applications (technologies and plants only) ($2,000+) Prepare and file one or more provisional patent applications (technologies and plants only) ($2,000+)

10 How do you patent an idea? (continued) Prepare and file a regular patent application ($4,000+) Prepare and file a regular patent application ($4,000+) Negotiate wording of claims with Examiner 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+) Pay issue fee ($1,000+) Proofread issued patent Proofread issued patent

11 What are the odds? Odds of obtaining a patent 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 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

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

13 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

14 When do companies pay money for intellectual property? ONLY WHEN THEY ABSOLUTELY HAVE TO

15 Valuing your intellectual property Amount a willing buyer will pay to a willing seller Amount a willing buyer will pay to a willing seller Example of a traditional approach Example of a traditional approach –Present value of a future net income stream Example of a new approach Example of a new approach –Call option on a future technology asset

16 Present Value Approach Market size Market size Market share Market share Net unit income = unit price less unit cost Net unit income = unit price less unit cost Discount potential future income stream for risk and the time value of money Discount potential future income stream for risk and the time value of money Inventor’s share (royalty) as a percentage Inventor’s share (royalty) as a percentage

17 Valuation spreadsheet FactorYear0Year1Year2Year3Yearn Market size, units Market share, percent units Unit selling price, $

18 Valuation spreadsheet (continued) FactorYear0Year1Year2Year3Yearn Unit cost, $ Net annual sales, $ Present value, $ Inventors’ share, $

19 Present Value Valuation Factors Market size – projection based on research Market size – projection based on research Market share – logistic (S-shaped) curve Market share – logistic (S-shaped) curve Unit price – value to customers Unit price – value to customers Unit cost – manufacturing + overhead Unit cost – manufacturing + overhead Discount factor 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 Inventors’ share – 25 percent of pre-tax profit or industry practice

20 Call Option Approach A patent behaves as if it is a call option on a future technology asset 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 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 Software and consultant referrals available from The Patent & License Exchange at http://www.pl-x.com

21 Call Option Valuation Factors Size of market of technology in same category Size of market of technology in same category Expense of developing the technology <- Expense of developing the technology <- How long this development is likely to take <- How long this development is likely to take <- Likelihood of similar technology's value exceeding the cost to develop it Likelihood of similar technology's value exceeding the cost to develop it Length of patent protection the technology enjoys <- Length of patent protection the technology enjoys <- Comparable financial returns available from using capital in investment choices other than buying technology Comparable financial returns available from using capital in investment choices other than buying technology

22 Approaches to Making Money “Carrot” approach “Carrot” approach –Locate a potential licensee/assignee (preferably 2+) –Find an internal champion and help him sell idea –Negotiate a deal –Collect “Stick” approach “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

23 Finding Customers Customers are the people who work for the companies, not the companies Customers are the people who work for the companies, not the companies A potential customer for you is someone else’s dissatisfied customer A potential customer for you is someone else’s dissatisfied customer Customers are people with money and the authority to spend it 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 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 If you want to sell something to someone, you must first listen to that person

24 Identifying Potential Licensees Avoid market leaders (not hungry enough) Avoid market leaders (not hungry enough) Focus on second and third tier companies Focus on second and third tier companies Seek those with longer term perspective 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 Develop brochures, presentations Contact marketing departments Contact marketing departments

25 Relationship Building In larger companies, try to develop at least three different contacts (people who work for large companies have a habit of disappearing) 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.) 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) Ask open-ended questions: who, what, when, where, how (listen and paraphrase) Nothing happens without an internal champion Nothing happens without an internal champion

26 Overcoming Paranoia (Yours) Try not to be too paranoid (a little caution is OK) Try not to be too paranoid (a little caution is OK) Excessive paranoia appears to be a "workplace hazard" for inventors Excessive paranoia appears to be a "workplace hazard" for inventors Before someone can trust you, you must be able to trust them 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!) 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“ 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! Protect yourself, then show him/her the pig!

27 Types of agreements Where to have dinner Where to have dinner Two-way non-disclosure (confidentiality) agreement Two-way non-disclosure (confidentiality) agreement Standstill agreement Standstill agreement Option (to license) agreement Option (to license) agreement Biological materials transfer agreement Biological materials transfer agreement Non-exclusive license agreement Non-exclusive license agreement Exclusive license agreement Exclusive license agreement Sales agreement (assignment) Sales agreement (assignment)

28 General Approach Secure two-way confidentiality agreement Secure two-way confidentiality agreement –Use customer’s standard form, if possible Understand customer’s wants and needs Understand customer’s wants and needs Come to agreement on key aspects Come to agreement on key aspects –Use a checklist appropriate for the type of agreement Draw up terms sheet Draw up terms sheet Have your attorney prepare your “standard agreement” Have your attorney prepare your “standard agreement” Negotiate details and execute Negotiate details and execute

29 Typical License Terms Checklist Effective date of the agreement Effective date of the agreement Who the parties to the agreement are Who the parties to the agreement are “Whereas clauses," explain intentions of the parties “Whereas clauses," explain intentions of the parties License grant that explains type of license, field of use and/or the geographic area 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. 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 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 Term of the license and what happens after it’s over An agreement to share information and to keep secrets An agreement to share information and to keep secrets Who owns improvements to the invention Who owns improvements to the invention

30 Typical License Terms Checklist (continued) Efforts the licensee will make to commercialize the invention Efforts the licensee will make to commercialize the invention Requirement that the licensee mark patented or "patent pending" products 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 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 Which party is responsible for paying patent costs How conflicts are resolved, typically by arbitration How conflicts are resolved, typically by arbitration Under which state’s law the agreement is to be interpreted and where suits may be brought 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 Mailing addresses of the parties to the agreement How agreement can be amended by the parties and who will sign for each party How agreement can be amended by the parties and who will sign for each party

31 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

32 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?

33 Negotiation Techniques Be knowledgeable: know the customer, their problems, how much money your invention will make or save them 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 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 persistent: keep things moving on your end Be assertive, but fair: negotiate a win-win deal Be assertive, but fair: negotiate a win-win deal

34 The Devil Is in the Details Be prepared for negotiation gambits Be prepared for negotiation gambits –“Our standard contract” –Higher authority –Nibbling Written agreements are for when something goes wrong Written agreements are for when something goes wrong Understand tax consequences Understand tax consequences

35 Secrets of Success Know yourself Know yourself Think big Think big Fail forward fast Fail forward fast Be persistent Be persistent Do not try to do it alone - hire, partner, network Do not try to do it alone - hire, partner, network Success is a process, not an event - enjoy it Success is a process, not an event - enjoy it

36 INVENTION MARKETING WEBSITES Patent marketplaces on the Web 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 Protecting and licensing inventions –www.webpatent.com


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