Making the Licensing Decision · 2013-10-07 · information on which the document is based. We are indebted to David Lux (Bryant College) and Marvin Guthrie (Massachusetts General

LICENSING EXECUTIVES SOCIETY(U.S.A. & CANADA)

U.S. DEPARTMENT OF ENERGY

INVENTIONS AND INNOVATION PROGRAM

PREPARED FOR:OFFICE OF ENERGY EFFICIENCY

AND RENEWABLE ENERGY

U.S. DEPARTMENT OF ENERGY

IN PARTNERSHIP WITH

THE LICENSING EXECUTIVES SOCIETY

MAKING THELICENSING DECISION

M A K I N G T H E L I C E N S I N G D E C I S I O N

C O N T E N T S

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . .1INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

CHART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2

CHAPTER ONE:WHAT LICENSING IS . . . . . . . . . . . . . . . . . . . . . . . . .3

Licensing as a Business Strategy . . . . . . . . . . . . . . . . .4Licensing is an Evolutionary Process . . . . . . . . . . . . . .4Licensing Means Doing Your Homework . . . . . . . . . .4Common Motivations For Licensing . . . . . . . . . . . . . .5Licensing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

CHAPTER TWO:DECIDING TO LICENSE . . . . . . . . . . . . . . . . . . . . . . . .8

Decision Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Capital Needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Building Core Competencies and Core Technologies . . .9The Pros and Cons of Licensing . . . . . . . . . . . . . . . . .9Your Business Strategy . . . . . . . . . . . . . . . . . . . . . . .10Planning to Execute Your Licensing Strategy . . . . . . .11Doing Your Homework . . . . . . . . . . . . . . . . . . . . . .11Sources of Information . . . . . . . . . . . . . . . . . . . . . . .12Public Information . . . . . . . . . . . . . . . . . . . . . . . . . .13Trade Associations . . . . . . . . . . . . . . . . . . . . . . . . . .13Personal Contacts . . . . . . . . . . . . . . . . . . . . . . . . . .13Common Mistakes in Deciding to License . . . . . . . .14

CHAPTER THREE:FINDING A PARTNER . . . . . . . . . . . . . . . . . . . . . . . .15

Defining What and When to License . . . . . . . . . . . .15Strength of Intellectual Property Position . . . . . . . . .15Formalizing Industry and Market Analyses . . . . . . . .16Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .17Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Sources of Assistance . . . . . . . . . . . . . . . . . . . . . . . .20Partner Qualification . . . . . . . . . . . . . . . . . . . . . . . .21Setting the Deal . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

CHAPTER FOUR:NEGOTIATING A LICENSING AGREEMENT . . . . . . . . . .24

Picking a Partner . . . . . . . . . . . . . . . . . . . . . . . . . . .24Negotiations and the Agreement . . . . . . . . . . . . . . .24The Agenda–Outline Agreement . . . . . . . . . . . . . . . .25Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26Termination Clause . . . . . . . . . . . . . . . . . . . . . . . . .26Maintaining the Agreement . . . . . . . . . . . . . . . . . . . .27Schedule Periodic Review Meetings . . . . . . . . . . . . .27Maintaining Contacts . . . . . . . . . . . . . . . . . . . . . . . .27Document Exchanges . . . . . . . . . . . . . . . . . . . . . . . .27Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Reflections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28Common Mistakes in Negotiating Agreements . . . . .28Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

APPENDIX ONE: CASE STUDIES . . . . . . . . . . . . . . . .30Licensing In: White Industries . . . . . . . . . . . . . . . . .30Licensing Out: Alpha-Beta Medical Instruments . . . .32

Licensing often appears to be a quick and easy alternative to the hard and fitful process of technology development and commercialization— especially forindependent inventors and small business owners.Yet licensing is in its own right ademanding and highly-specialized process often involving participants from vastlydifferent backgrounds and organizational cultures. Quick and easy it is not.

On one side of the licensing equation, independent inventors and small businessmen search for partners. In the search, they will interact with people andorganizations with which they are unfamiliar; they will encounter new and differentlanguages and expectations; they will experience frequent barriers to communicationin expressing what they’re after and what they have to offer.Although attractinginvestors requires a sound business strategy, their strategy is often unclear or unarticulated.They often don’t understand the industry in which they are trying tolicense their technology.They find themselves dealing with people who are drivenby unfamiliar imperatives and who live in different cultures.These potential partnersrequire them to provide information (e.g., market information in sufficient quantity,technology management information, production information) which they do nothave and don’t know how to access.

On the other side of the licensing equation, the firms to which an independentinventor or small business wishes to license tend to deal effectively only with thosewho understand their imperatives and needs. Larger firms most often are driven bymarket imperatives instead of technology and are most interested in how technologycan contribute to the “bottom line.” Further, they are familiar with the licensingprocess and its requirements and may employ licensing professionals. Unlike the independent operator or inventor, the firm’s prospects are not riding on this onedeal.They will not necessarily approach partnering as the most important thingthey will do this year.

Independent inventors and small businesses find the innovation process1

challenging—at best. For the purpose of this document, the innovation process isconceived of as a series of technical, market, and organizational development tasksthat can be clearly defined, and which must be completed by someone to achievecommercial success (see Table). Only rarely can one person or small firm completethe process. Individuals and small firms must decide which segment of the innovationprocess they wish to participate in and then determine what kind of partner couldbest shepherd their product (or process or service) through the remainder of theprocess and into the marketplace so that all parties benefit financially.

Left unexplained, the differences between smaller and larger firms can constitutea nearly insurmountable barrier to licensing.This document contains informationneeded to understand the process. It attempts a straightforward, clear, and plainEnglish description of the major issues facing independent inventors and smallfirms: making the decision to license for business reasons, finding a licensee, andnegotiating a license.We emphasize identifying what an independent inventor orsmall business can do best, and obtaining expert assistance to complete those tasksbest completed by other professionals.We wish each and every reader success inhis or her licensing efforts.

A C K N O W L E D G M E N T S

The Licensing Executives Society

(U.S.A. & Canada) and the U. S.

Department of Energy, Office of

Industrial Technologies, Inventions

& Innovation Program joined

forces to produce this document

for independent inventors and

small businessmen.

The authors wish to thank the

Department of Energy for funding

development of this monograph

and the Licensing Executives

Society for providing the

information on which the document

is based. We are indebted to

David Lux (Bryant College) and

Marvin Guthrie (Massachusetts

General Hospital) for helping us

shape this document.

Special thanks to:

Russell Barron (Foley & Lardner)

for his help in enriching the

section dealing with intellectual

property strength and to Andy

Ney (Ratner & Prestia) who

contributed the case studies

contained in the Appendix. We are

also grateful to those who reviewed

and commented on our work:

Bill Damson (Damson & Associates),

Fred Hart (U.S. Department of

Energy), Varda Main (Los Alamos

National Laboratory), Willy

Manfroy (Eastman Chemical

Company), and Tom Ryder (Air

Products and Chemicals, Inc.).

As always, we remain responsible

for the material contained herein.

We hope it eases your journey

through the licensing process.

Marcia L. Rorke and Kevin DwyerMohawk Research Corporation 1996

INTRODUCTION


INTRODUCTION

INTRODUCTION

1

1 How technology proceeds from product definition (whether a product, process, or service) to fullproduction in one or more markets.

INTRODUCTION


2

TABLE 1: THE INNOVATION PROCESSRESEARCH STAGE: IDEA TO ENGINEERING APPLICATION

TECHNICAL DEVELOPMENT MARKET DEVELOPMENT BUSINESS DEVELOPMENT SKILLS REQUIRED PEOPLE INVOLVED

Idea Research literature Basic research funding Scientific/technical Principal Investigator(Basic Research)Concept Definition Needs analysis Intellectual property survey Proposal writing PI + research team(Applied Research)Proof of Concept I.D. internal factors Commercialization planning Team building PI, research team,

I.D. competing R&D Define intellectual property Core competencies Intellectual Property staffstrategy Tech Transfer staffI.D. potential partners

Engineering Applications Commercial needs analysis Research funding; Explore Applications engineering Applied research teamAnalysis intellectual property options; Industry knowledge

Refine list of potential partners; Prioritize deployment applications

INNOVATION STAGE: PRODUCT DEFINITION TO ENGINEERING PROTOTYPE

Product Definition Preliminary definition Decide to develop; Find Intuition to technical Principal Investigator(Exploratory Development) funding; I.D. product Technical to engineering Project Team

championWorking Model Market analysis Find developmental funding Engineering Project Team (?)(Advanced Development) Entrepreneur or corporate

product championEngineers: Production

Safety

Engineering Prototype Complete industry analysis Funding for advanced Engineering Project ChampionTest First formal market analysis development Legal EngineersRefine and market plan Establish intellectual Market Analysis Patent Attorney

(Engineering Development) property protection Partnership Development Industry partnersFormal commercialization Market analyst

planning Planners

ENTREPRENEURIAL STAGE: PROTOTYPE TO PRODUCTION

Production Prototype Full Market Analysis Find Big Money Engineering Inventor (?)Scale Up and Plan Complete Business Plan Production EntrepreneurTest Niches Form Business Product Safety InvestorsRefine Barriers Meet State and Federal Entrepreneurial Engineers: ProductionProduction Pricing Regulations Financing Safety

Engineering Competition Arrange Insurance Marketing Attorneys: PatentProduct Safety Cost Data Price Production Cost Analysis Corporate

Engineering Distribution Facility Legal AccountantsMethod Management Consultants: Marketing,

Alternative Product Business Management,Applications Financial

Risk Analysis Insurance BrokersSales Projections Trade Union Officers

Limited Production Contact Customers Find Big, Big Money All of the Above All of the AboveQualification Testing Commence Distribution Start-up Business -PLUS- -PLUS-Running Changes Seek Product Endorsements Build Plant Systems Engineering Foreman

Follow-up Sales Buy Equipment Specialty Engineering LaborAdvertise Hire Foreman and Labor Sales Analysis Sales PeoplePublish in Technical Arrange: Product Services Supervisory Specialty Engineers

Journals Purchasing Systems EngineersTransportationRecord Keeping

Full Production All of the Above All of the Above All of the Above All of the AboveStart-up -PLUS- -PLUS- -PLUS- -PLUS-

Expand Distribution Monitor Costs Delegation Expanding Analyze Competitor Finance Cash-Flow Deficit Marketing Forecasting Management

Response Refine Production System Strategic Planning SalesLong-Term Financial Labor Force

Initial Growth Increasingly Complex Increasingly Complex Increasingly Complex Increasingly Complex

MANAGERIAL STAGE: PRODUCTION FOR MAJOR MARKET PENETRATION

Product Improvement Complex Management Entrepreneur (?)New Products Complexities Intensify Fully BureaucratizedSustained Growth Management

R&D StaffNational Investment Firm

©Mohawk Research Corp., 1995 All Rights Reserved

WHAT LICENSING IS

Given the tremendous growth in licensing bybusinesses large and small over the past two decades,the question arises: What can licensing do for you?To answer that question, let us first consider somebusiness fundamentals.

The conduct of business is, in large measure, asearch for new opportunities. In the technology business, one searches for such opportunities in newtechnical capabilities and applications.Varieties ofmarkets exist to provide these capabilities to usersin the nearly limitless chain of producers and con-sumers that define the modern economy. Succeedingin business means succeeding in markets. In thetechnology business, one succeeds in markets bymeeting user needs; that is, by providing users withcapabilities they can use to profitable or productiveends. Getting to users requires getting to markets.

Licensing offers a way of getting to existingor new markets more quickly and at less expense.Those with new technologies or products, wholack the resources to make, market, and distributethem may find a way of introducing new technolo-gies and products into markets through licensing.Businesses operating in established markets seek-ing to expand their product base may likewiseacquire these new technologies and productsthrough licensing.

So what is licensing? Simply put, licensing isgranting the rights to make, use, or sell a propri-etary product, process, or service in return forpayment. A license is the grant of permission orrights, the granting being done by a party that hasthe right to do so. A licensing agreement isthe formal embodiment of this arrangement, spec-ifying the parameters of the permission granted—including the territory in which it can be used, thelength of time for which permission is granted,and other terms and conditions of use—as well asthe amount and schedule of payments to bemade.To put it most simply, a licensing agreementis a contract.The devil, of course, lies in thedetails which we will discuss at greater length inchapter four. For now, let us walk around with theconcept and see how licensing can be made towork for you.


WHAT LICENSING IS

CHAPTER ONE

Licensing requires at least three things: aproduct (defined as a product, process, service),a seller (licensor), and a buyer (licensee).The product, process, technology, or service beingoffered or sought constitutes what the lawyers callthe “licensable subject matter.” Licensing is a means of exchange whereby one party enters contracts for permission to use a licensable subjectmatter owned by another.The party granting thispermission is called the licensor.The buyer in thisrelationship—the one obtaining permission to use(or make or sell) the product—is the licensee.

Licensing presumes ownership of intellectualproperty.As such, licensing requires recognizableforms of intellectual property protection. Patents,trademarks, copyrights, trade secrets, etc., demon-strate ownership rights to inventions, products,services, or technologies. Ownership needs to bedemonstrated if someone is going to pay for theright to use intellectual property. Prudent companieswill not even talk to potential partners aboutlicensing items not readily identified by such tangibleproofs of ownership.

Because licensing requires legally bindingagreements about legally protected properties, theprocess also involves experts. Get good ones.Twotypes of professionals are generally needed to dolicensing: a patent attorney (for intellectual propertyissues), and a licensing professional (for finding andnegotiating with partners). While some patentlawyers can do both jobs well, assume for planningpurposes that you will need to hire two profession-als. Presume a prospective licensing partner, depend-ing on the size of the business, employs at least twospecialists: a patent lawyer and a licensing pro. Ideally,preparing to deploy or acquire technology throughlicensing will work best when you can assemble ateam to manage the process; a licensing team (yourresources permitting) will bring technical, marketing,business, and legal expertise to the table. In caseswhere such experts cannot be assembled, the princi-pal champion of the technology (this very likelymeans you) will have to pick up the slack andacquire working knowledge of the technical, market,and business considerations that drive licensingactivity in the industries where you seek to license.

3


CHAPTER ONE

4

LICENSING AS ABUSINESS STATEGY

Licensing is a strategic tool for growing a business. It is used by large and small firmsalike. In common usage, when a firm acquires atechnology through licensing, it is said to belicensing in; when a firm grants permission touse its technology to someone else, it is calledlicensing out. Many firms engage in both formsof licensing. Some firms, although increasinglyfewer in number, practice neither.

The words “business strategy” and “strategic” appear frequently in this primer.Let us take a moment to consider what theymean. By business strategy, we mean theapproach you will take—most usefully embodied in a business plan—to meet yourbusiness goals. If you are not accustomed tothinking of your business in terms of strategiesand goals, we encourage you to do so. Even ifyou have a technology and would like to leavethe manufacturing, marketing, sales, and distribution to others, you will need to developa strategy to find a partner. Remember that notjust any partner will do; as we will emphasizetime and time again, successful business relationships—your ultimate goal in licensing—depend most often on finding appropriate partners.To face the facts, partners (let alonethe right partners) will not simply find you.You must find them or at least put yourself in a place where they can find you.Thus, theneed to develop a strategy.

Business goals and objectives—for small businesses especially—are likely to be tightlybound to personal goals and objectives.Theseonly further necessitate the need for a wellthought-out strategy for your business (whetheryou decide to license or not). Chapter two will focus closely on the factors comprising thedecision to license. But if you are not in thehabit of thinking strategically about your business—of thinking how you will relate themeans at your disposal to the ends you wouldlike to reach—there is no time like the presentto begin. Before we embark on that discussion,though, let us consider a few more general features about licensing that you should bear in mind.

LICENSING IS ANEVOLUTIONARY PROCESS

If you decide to license, understand what youare getting into.The search for a licensing partnerrequires an escalating need to gather, organize, andanalyze information. In the early stages, informationwill come in small quantities, the sort of stuff youcan collect in a shoebox.As you become morepracticed in the art of looking for a partner, theinformation will require sorting and organizing intofile folders.As the level of detail of your informationand the sophistication of your analysis increase, youwill eventually need a filing cabinet—or at least adrawer in which to hang your folders.Welcomethis process.

Looking for a licensing partner is like lookingfor a job.The search can be thought of as a processin which you will need to gather a finite amount ofinformation and make a finite number of contactsbefore you find the one that works for you. Everynotecard collected with information about a busi-ness, every meeting held or phone call made andduly recorded and filed is one more step towardthe finite number. Remember this at the earlystages especially, when your spirits can rise highestand fall lowest depending on the outcomes of aparticular day.Again, as with a job search, the mainthing is to keep going.

The amount of expert help you will need alsoevolves.At the beginning of the process, you shouldconsult with a patent attorney to secure appropriateintellectual property protection (if you are aprospective licensor) or to verify intellectual proper-ty ownership (if you are a prospective licensee). Ifyour resources permit, you may want to consultwith a licensing professional. It can save you an enor-mous amount of time. Over time, your network ofcontacts will expand, and, as you approach the deal-making stage, you should have built a team consistingof a patent attorney, a licensing professional, andother consultants hired to help navigate the shoalsof particular industries or companies. Resign yourselfto this fact early: You will need expert help.

LICENSING MEANSDOING YOUR HOMEWORK

As all of the above very clearly implies,licensing requires that you do your homework.You

WHAT LICENSING IS

5WHAT LICENSING IS

will need to collect information on the industry orindustries where your technology will most likelybe put to use, on the firms in those industries, andon the markets where users in those industries dotheir buying and selling. If your resources are sufficient and your connections are good, you maybe able to find consultants to do your legworkwho can obtain the needed information in shortorder. But few of us are so lucky.

The need to do your homework, like theneed to think strategically, is a point about thelicensing process that you must accept andembrace.To convince potential partners of thebenefits of your technology, product, process, orservice, you must speak the language most persuasive to them—the language of their busness,their industry. If you don’t know this language, you’llhave to learn it. Learning the language, in time,means learning their business.You will need toknow the factors they use to make their decisionsto acquire technologies (buying keys), the forcesthat compel operations in their industry (industrydrivers), and the benefits your technology mayoffer them.

Likewise for prospective licensees. In orderto communicate effectively with technical develop-ment and intellectual property specialists fromwhom you seek to acquire technology, you must beable to articulate the capabilities you need, the spe-cific technologies you hope to acquire, and theapplications to which you intend to put them.All ofthis means homework.

In cases where you seek to license in anindustry with which you are familiar, the homeworktask will, of course, be less burdensome. On theother hand, do not limit yourself to familiar indus-tries alone. Multiple applications for your technolo-gy may be found in a number of unrelated indus-tries; the same may be true for technical capabili-ties you seek. Explore your options widely: themore you do, the more opportunities you are likelyto find.

COMMON MOTIVATIONSFOR LICENSING

Some small businesses use licensing to verygood effect and with a great deal of forethought.


CHAPTER ONEOthers do not. Below are the five “worst” motivations for licensing, among small businesses in particular:

• Small firms that license their technologiesfrequently do so to avoid being “in business.”Such people and firms want to create innova-tions, rather than manufacture or sell them.This fairly common motivation does notremove the onus of being “in business” fromthe licensor, however. Licensing is a businessdecision and needs to be approached andmanaged as such—even if the ends soughtare to stay out of the business of making andselling technologies and products.

• The desire to move on to other things— beit other projects, other personal pursuits, oreven retirement—is another common “negative” motivation for licensing. For manylicensors, the thrill is gone after the work ofinnovation is complete.While such a mindset often views all that comes after as “meredetail,” there remain quite a number ofdetails that need to be addressed before anew product or technology gets to market.Realizing the success of getting somethingnew into the hands of users (or any revenueto be derived from it) demands that thetechnology be licensed to someone who canget it there. Success comes from finding theright partner, and that takes work.

• The empty “cookie jar”—that is, being out ofdough—is another common reason whysmall businesses often turn to licensing as aproduct development or revenue raisingoption. Raising the capital required for devel-opment is a difficult business in itself. Manysmall businesses and inventors thus turn tolicensing-in a product or technology that fitsa need rather than developing one, or theylicense-out a technology or product ratherthan continuing to develop it themselves.

• An unpleasant past experience, that is, havingtried before and failed at a technology devel-opment or product launch— for any one of ahundred different reasons—provides anothercommon motivation for many a small busi-ness licensee or licensor. Successful licensing


CHAPTER ONE

6

requires that one try again.While it is analternative approach to development or ven-turing, licensing will nonetheless involve con-tact with business people and conditions—often the same sorts of people and condi-tions that caused discouragement the lasttime around.

• A fifth and related defensive motivation forlicensing stems from a small businessman’s“inferiority complex”: the belief that “onlythe big boys” can play the game of new prod-uct acquisition and deployment.This ispatently false. Sure big businesses can bringmore resources to bear and have teams ofexpert staff ready to facilitate the process ofa commercial acquisition or product launchthrough licensing. But the business world isreplete with examples of small players whofound the right partners, made smart deals,and profitably enjoyed successful licensingagreements.

LICENSING STRATEGY

While the motivations for licensing differfrom business to business and person to person,the need to go about it strategically does not.Licensing strategically is more than simply licensingopportunistically; it is licensing opportunisticallywith forethought, licensing that helps your businessreach a desired end.

Companies that succeed in licensing employlicensing in a strategic way, as the following exam-ples show. Quabbin Corporation, a small NewEngland steam turbine packing ring manufacturingfirm, was looking for ways to expand its productline and grew its business significantly by licensingin new technology.Through an industry contact (inSweden, as it happened), the president of the firmlearned of an industry veteran, also in NewEngland, with an improved packing ring who hadunsuccessfully approached the leading packing ringmanufacturers about licensing the technology. Uponhearing of the new component, Quabbin pursued alicense with the inventor.While unable at first tomeet the inventor’s price, a licensing agreementwas finally signed owing to creative negotiating anda willingness to compromise.The firm brought theinventor on board as a consultant to oversee new

product development, meeting the inventor’s strat-egy to keep inventing as well as their own.Whilenot a technology developer, Quabbin used thelicensing option to secure what it needed to launchnew products into markets—and to meet theobjectives of its business.

DuPont Chemical Corporation, on the otherhand, which invests heavily in research and develop-ment activities, uses licensing primarily as a meansfor increasing revenue.This practice derives fromtheir corporate strategy—which is to focus onspecific competencies and maintain industry leader-ship in those areas.When the laboratory folk comeup with novel chemical compounds that do not fitwith the core competencies of the company’s busi-nesses, DuPont will license out such inventions tointerested parties.The company’s strategic direc-tion is focused.The intellectual property governingnew materials with commercially useful propertiesgets licensed out, DuPont saves itself the distrac-tion of developing something tangential to its busi-ness strategy, and—not least—the company col-lects royalties on the success of the licensedprocess, technology, or product.

In other cases, technology developers decideto simply sell the patent.Take the case of an inde-pendent inventor who decided that it was time tolet go of his technology.The invention was novelenough that the prospective buyer (a real entrepre-neur with an engineering background) had to seekexpert technical assistance to determine its viabili-ty.With viability affirmed, the entrepreneur did hismarket research, contacted potential buyers, andactually obtained orders for the technology.Theinventor (who asserted that the technology wasabsolutely ready to be manufactured) wanted tosimply sell the patent and drawings for a priceequal to the cost of a boat he wanted.They made adeal, signed the papers, exchanged the intellectualproperty and the entrepreneur left to begin settingup a manufacturing facility.The entrepreneur (a professional production engineer) nearly passedout when he saw the drawings that were deliv-ered—they were only sketches! What can belearned from this case? For one, it shows that pric-ing can sometimes be determined for very personalreasons having nothing to do with quantitativeresults of predetermined formula.The case alsoillustrates that “stage of development” is often in

WHAT LICENSING IS

7

the eye of the beholder.What an inventorbelieved to be production-ready was, in a produc-tion engineer’s world, nine months away frombeing manufacturable.The case offers a vividexample of the need to ensure that all parties are“speaking the same language.” In the final analysis,the price was set and met, and the technologywas licensed.


CHAPTER ONEEach of these examples shows that licensing

can be pursued for a variety of reasons to fit avariety of scenarios.Their common point is thatsuccess in exercising the licensing option is morelikely when licensing is used to meet a specificallydetermined end. So before you enter into a searchfor a partner, know what you intend to use licens-ing to achieve.

WHAT LICENSING IS


DECIDING TO LICENSE

CHAPTER TWO

8

Contemporary business is replete withexamples of the multiple uses of licensing. Somefirms will use licensing as a defensive mechanism, togain control of a technology or product that mayprovide an uncomfortably strong measure of com-petition in a market where they are comfortablysituated. Such a firm may pay you handsomely foran exclusive license to control your invention, andthen bury it to prevent its ever coming to market.Be creative, and expect your potential partners to be.

Making the decision to license demandsanswering a fundamental question:“Is it worth it?”Answering that question fully and well requires thatyou consider several scenarios, and that you staymindful of the goals and objectives—both personaland professional—you hope to achieve.This chap-ter discusses the factors you should consider inmaking a decision to license.

DECISION FACTORS

Several factors are likely to affect your deci-sion to license or not to license as a businessoption: strategy, capital needs, and core competen-cies and technologies.These are discussed below.

STRATEGY

What are your business goals and how canlicensing help you achieve them? These are thestrategic questions which will determine whether a licensing deal will work for you. In the examplesgiven of licensing strategically, Quabbin set a goal of expanding its product line—to secure new markets, spur company growth, and secure a better position in the steam turbine packing ringindustry.The company had choices about how toachieve this goal. One, it could have established aresearch and development capability in-house. Butthe company was in the service and manufacturingend of the business, not the research end. Bylicensing strategically, Quabbin acquired the newproduct it needed but lacked the capability todevelop.The deal helped the company meet its goalof product-line expansion more quickly and withmuch less expense than by developing an in-houseR&D capability. DuPont, on the other hand, licensed

out technology that did not fit its strategy of main-taining industry leadership in its principle compe-tencies, thereby generating a revenue stream forthe company while maintaining strategic focus. Ourindependent inventor’s strategy was to makeenough money from his innovation to get a newboat.With the sale of his patent, he did just that. Inall of these cases, the company’s business strategydrove its licensing strategy.

CAPITAL NEEDS

Capital needs are frequently a primary factorin the decision to license.While licensing can offeraccess to cash, it is infrequently a means for gettingrich quick. Superior technologies may generatemore revenue, but it is far from prudent—althoughaltogether too common, especially among thosenew to the licensing business—to think that onedeal is going to provide revenues sufficient to keepthe company awash in cash (when licensing out) orthe one killer application that will establish a firmas an industry leader (when licensing in).As inother matters of finance, prudence should remainthe watchword in calculating the impact of licensingon the capital position of a business.

Expectations of the value of licensing need tobe realistic. Licensors in most cases will not get allthat they are seeking in terms of royalties, andlicensees will probably wind up paying more in royalties than they intended. The general rule ofthumb about licensing is that 25-33% of the licensedsubject matter’s value goes to the licensor, althoughthere is some variance from industry to industry.The price of a license generally takes several otherparticular factors into consideration.These include:

• Value to the customer• Dynamics of the marketplace• Competitive situation• Financial forecasts• Impact in the marketplace

While you will seldom get rich quick bylicensing, licensing agreements can be used veryeffectively to add a measure of stability and pre-dictability to the cash flow of a business.A research

DECIDING TO LICENSE

DECIDING TO LICENSE

and/or development business, for example, maylicense out several technologies it has neither thedesire nor expertise to manufacture, thus generat-ing a reasonably predictable revenue stream thathelps to stabilize cash flow.A manufacturing com-pany in a seasonal industry, on the other hand, maypenetrate new markets with licensed technology,generating revenues that help ease the crunch ofthe slower season in its principal business. Theseare very straightforward scenarios which illustratethe basic point. Business life, of course, can bemore complex.Take the case of the research anddevelopment company that derives the bulk of itsrevenues through licensing products combining several component technologies, some of which itowns, and some of which it does not. In such acase, the firm pays royalties to licensors whosetechnologies it needs to develop products.Thefirm, in turn, licenses these to a manufacturer.Such a firm is engaged as both licensee and licensorin its business as a technology developer—a fairlycommon scenario in higher technology industries.In such cases, R&D funding is exchanged for licens-ing revenues. Expertise in a particular field is paidfor through a licensing agreement, and the expenseof having to conduct such research and develop-ment in-house is saved.

While licensing can ease cash flow problems, asa business decision one must keep in mind thatlicensing too much of your technology can, in time,put you out of business. Every licensor risks turning alicensee into a future competitor. Using your technol-ogy as a starting point, a licensee may develop thecapability to develop the next generation technology.Thus, licensors need to be especially mindful of whatconstitutes their core technologies. If a firm is notmindful of this prospect, for the sake of a stable cashflow today it may license away the key technologythat keeps it in business tomorrow, as the machinetool industry did in recent memory. As part of yourbusiness strategy you must set limits for what youare willing to transfer out of your company.Above all,protect your interests by securing and maintainingstrong intellectual property protection.

BUILDING CORE COMPETENCIESAND CORE TECHNOLOGIES

Another decision factor is the extent towhich licensing may assist in building your business’


CHAPTER TWOcore competencies and core technologies. Corecompetencies (the fundamental areas of your com-pany’s expertise) and core technologies (the tech-nical areas or technologies which form the basis ofyour business) derive from a business’ capabilities,and—to the extent to which a firm intends todevelop them further—from corporate strategy.The degree to which the acquisition or deploymentof a given technology or product will assist indeveloping these competencies and technologiesshould be a primary concern for assessing thedesirability of a potential licensing deal. In theexamples above, Quabbin enhanced its core com-petency in steam turbine packing ring manufactur-ing and developed its core technology by acquiringan improved component through licensing. DuPont,on the other hand, took something of the oppositeapproach when technologies developed there didnot fit with the firm’s core competencies.

Again a word of caution: In seeking to devel-op your core competencies and core technologies,you must be careful to protect your intellectualcapital. When you license technology in eitherdirection, other businesses get a look inside yourbusiness. You may take pains to reduce your expo-sure through established methods such as confi-dentiality agreements, and, as a general rule, thesemethods work. In all cases, it is vital to your owninterests that you do not give away processes,approaches, management techniques, and otherforms of intellectual property to potential or actuallicensing partners. Some of the people you will meetin this process will adopt the attitude that “If you’regoing to give it to me, why should I pay for it?”

THE PROS AND CONSOF LICENSING

Like most everything else in business, licens-ing agreements involve as much taking as they dogiving.As you consider the licensing option, keep inmind the pros and cons.To take the bad news first,consider that when licensing:

• You lose control of your property—usuallytotal control, for a long time, and often forever.

• The involvement of the licensor with theproperty is reduced. In most cases, to thepoint of no further direct involvement at all,

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after perhaps a limited stint as a consultantto the licensee.

• Finding the right partner is tough.The rightone may make for great success.The wrongone may cost you terribly. Finding eithertakes looking. Despite our happy mythologyabout better mousetraps and beaten paths,do not expect your partner to find you.

• Protecting your interests is crucial. It is alsodifficult. Expect potential partners to utilizeskilled negotiators, shrewd bargainers, and/orseasoned professionals. Negotiation of alegally-binding agreement is no place for anamateur. Go alone at your peril.

But there is also good news—often, very good:

• Licensing is a resource multiplier.A dynamiclicensee can immediately put whole teams ofprofessionals to work on developing, produc-ing, and marketing an invention, product, ser-vice, or technology.The licensee can quicklyobtain access to such property it currentlyneeds but does not have: to produce or distribute a product, to perform a profitableservice, to advance the goals of the businessthrough the use of property acquired.

• Licensees see things you will not see.Licensees often perceive uses—and, there-fore, markets—for a technology that thelicensor does not. One licensee turned a saltwater taffy machine into a new and highlyefficient type of concrete mixer.The moremarkets, the more potential income.

• You may make some money and you maymake it soon.The licensee may pay youmoney up front, although probably not asmuch as you would hope. In addition, theymay agree to a minimum amount of royaltiesfor some period.

• Licensing frees you to do something else. Ifwhat you want to do is retire, or go back toinventing, or to avoid having to continue withtechnical development by using a piece oftechnology that someone else developed, thenlicensing may serve your interests quite nicely.

YOUR BUSINESS STRATEGY

Clarity of purpose, though difficult toachieve, is one key to business success—especiallyin the business of licensing.Translating clarity ofpurpose into clarity in action is what implementinga business strategy is all about. Using licensingstrategically assumes that your business has a strategy.To define and to develop your businessstrategy, you need to consider the most basic question: What business are you in? Research?Development? Manufacturing? You may, perhaps, beinvolved in all three areas.When you confront thedecision of whether licensing will work for you,consider the business goals that option will helpyou to meet. What do you want for yourself?What do you and your business do best? And conversely, what do you do least well? Or not liketo do at all?

The most fundamental tenet to bear in mindas you think about licensing is that licensing is abusiness decision.Therefore, any proposition tolicense must be judged on the extent to which itmeets the goals of your strategy. For some it isprofit (never a bad measure), for others it is theextent of change you are able to render—that is,how many users you get to use your technologyor product; the extent to which it changes theworld—even in the small world that your technol-ogy or product improvement will inhabit.Regardless of what drives you, remember to alignthe decision criteria you bring to a proposedlicensing agreement with the business goals youseek to achieve.And remember as well that yourpotential partners—if at all intelligent about theway they conduct their business—will be doingthe same.

A strategy, in essence, is a plan of actiondesigned to meet specific goals.When consideringthe licensing option, consider your business strategy and how you might develop a licensingstrategy that fits with it. Making this decisionassumes that you are clear on several issues: youknow what you want; you know what businessyou are in. It is, ultimately, about business—whatwill allow you to continue doing what you wantto do, going where you want to go (providing thatyou are doing it already)? What will allow you tomove into areas where you have yet to go butwould like to?

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PLANNING TO EXECUTEYOUR LICENSING STRATEGY

Let’s suppose that several decision factorsindicate that licensing will work for your business.Now you must begin planning to execute.You willneed to formalize a variety of information aboutyour technology (the filing cabinet stage) and collect considerable amounts of information abouta variety of related matters: competing technolo-gies, users of these technologies, the industry or industries where your technology will most likelybe put to use, the firms in those industries, and themarkets where users in those industries do theirbuying and selling. This is your homework.As was true of it in your school days, homeworkthoroughly done bears more promising results atgrading time.

You must be able to persuade potential partners of the benefits of your technology,product, process, or service in the language mostpersuasive to them—the language of their business,their industry. (Likewise for prospective licensees:in order to communicate effectively with technicaldevelopment and intellectual property specialistsfrom whom you seek to acquire technology, youmust be able to articulate the capabilities and userbenefits you need, the specific technologies youhope to acquire, and the applications to which youintend to put them.) Thus you will need to understand the factors they use to make decisionsto acquire technologies, the concerns that drivetheir industries, the competitive pressures they face in their markets, and the benefits that yourtechnology may offer them. Furthermore, knowingabout the industries and markets of potential partners serves the vital function of risk reduction.The successful licensing prospector reduces therisk that potential partners perceive by knowing asmuch as possible about the market, the industry,and the technology being discussed.The ability toreduce this information to clear, coherent summarystatements of technical, market, and business issueswill further enhance your credibility with potentialpartners, and reduce the risk partners will naturallysense in coming to a licensing agreement.

In very real terms, your job is to understandthe effect your technology will have on thelicensee’s bottom line. How many new customerswill the licensee sell to? Where will they be? Why


CHAPTER TWOwill they buy? How will the licensee have to changethe production line? What will it cost? Will produc-tion personnel work habits need to change?

DOING YOUR HOMEWORK

Homework enables you to provide detailedanswers to the fundamental business questionabout licensing for your business: Is it worth it?Remember that the question must be answered inthe affirmative for both parties to the licensingagreement. Both will have to believe that thelicense offers a clear value.Answering the question“Is it worth it?” for yourself and persuading poten-tial partners that it’s worth it for them, too,requires some detailed investigations into technical,market, and business factors.

Technical considerations are a first topic forinvestigation and study as you plan to execute yourlicensing strategy. If you are seeking to license atechnology out, a prospectus or “tech brief” of thetechnology—one to two pages long—is a goodthing to prepare.This prospectus will describe thetechnology and its primary and secondary applica-tions. It should also compare the subject technolo-gy with competitive technologies, providing perfor-mance data if such is available.To help prospectivelicensees assess the value of the technology fortheir business, the prospectus should also crediblyforecast business savings that can be expected as aresult of the technology. If you are seeking tolicense technology into your business, ask theprospective licensor for a prospectus on the tech-nology.And, if performance data and business sav-ings are not part of the presentation, ask thewould-be licensor to provide them. Such questions,while they may put the technologist on the spot,will give you some sense of the business considera-tion built into the subject technology.

Conducting an applications analysis for thepotential uses of a technology is another helpfulexercise for determining the value of technology—and for searching out potential new uses and markets for it.The applications analysis will consider, among other factors:

• A technology’s robustness (the number ofuses to which it may be adapted) and potential spin-offs from those applications

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• Anticipated target industries for potentialapplications (i.e., one industry’s taffy makermay be another’s concrete mixer)

• Contacts and assets (e.g., vendors, users,manufacturers, technical credibility, R&Dcapability, regulatory drivers, availability ofdata) in these industries

• Rationales for developing technology forapplications in target industries—which appli-cation, if developed, stands the greatestchance for acceptance in the marketplace,versus which would command the mostlucrative market, if successful?

Finally, the strength of the intellectual proper-ty protection of a technology will also impact con-siderably on its prospective value. (See chapterthree, Strength of Intellectual Property Position.)

Your assessment of the value of the technol-ogy must also consider industry factors. For eachapplication you envision, analyze the industry inwhich the technology would be licensed.The nextchapter reviews full-scale industry analysis in detail.The process of collecting and analyzing informationis an evolutionary one.As you begin to assess the business value of the technology,collect what information you can about the industry, building toward a broader analysis. Suchindustry analysis should consider:

• Concentration of firms in an industry• Decision making structure• Technology and product development patterns• Capital formation characteristics• Regulatory drivers• Life cycles• Market buying characteristics• Attitude toward intellectual property• Technology transfer patterns• Industry/government relationships• Pricing policies and required returns on

investment

In cases where you seek to license in anindustry with which you are familiar, the task ofdoing homework will be less burdensome than inother cases. On the other hand, do not limit your-self to familiar industries alone. Multiple applica-

tions for your technology may be found in a num-ber of unrelated industries; the same may be truefor technical capabilities you may be seeking.Explore your options widely: the more you do, themore opportunities you are likely to find.

No assessment of the business value of atechnology would be complete, of course, withoutattention paid to the market.Technology develop-ers must take market needs and competitive advantages of a technology into consideration dur-ing development. Building market needs and user capabilities into the technology will make it easierto demonstrate to potential licensees exactly howthe technology can meet their goals. In addition,you will need to assess the size of the market tobe served by the licensed technology, to better determine the boundaries of the opportunityunder consideration. Eventually, this determinationwill require a full-scale, formal market analysis.Aswith industry analysis, however, compiling data onmarkets is an iterative process.The elements to consider when analyzing potential markets include:

• Market size• Market expansion• Market segmentation• Value of market in dollars• Market share percentage• Buying keys• Competition• Market trends and competition analysis• Market idiosyncracies and drivers• Pricing requirements• Distribution channels• Market entry requirements• Key selling points (“points of difference”

from other technologies)

SOURCES OF INFORMATION

As you search for a licensing partner, you willneed to gather data on industries and markets.Generally speaking, you must find out who doeswhat.That is, which firms use technologies, process-es, or capabilities like yours? Which firms licensetechnology in (or out)? How big is the market foryour technology?How much of that market can yourealistically expect to get, and why? What are thetrends in the market? Who do you need to know inorder to sell there?

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Finding answers to these questions will takea good deal of legwork and the help of someexperts who can point you in the right direction.For the moment, however, let us focus on the legwork part—that is, work that is most likelygoing to have to be carried out by you or someonein your firm.

PUBLIC INFORMATION

A good deal of the information you need toget is public.Your local public library will have anumber of helpful resources either on-line or onthe shelf.The popular literature (Inc., Fortune,Barron’s, etc.) may provide you with snippets of thelatest developments in particular industries andmarkets, or about particular companies.While farfrom definitive, this may not be a bad place to start.In addition, your local library should also receiveregular reports from the U.S. Small BusinessAdministration.

You may, in fact, want to start your search forinformation by contacting the Small BusinessAdministration. SBA publishes a variety of reportsand other literature, as well as videotapes on smallbusiness topics—such as managing your business,researching your market, and writing a businessplan—that may be helpful to you. For a list of SBApublications, write:

Small Business AdministrationP.O. Box 15434, Fort Worth,Texas 76119

You may also call for the list of publicationsor other information or for answers to commonlyasked questions toll free at 1-800-U-ASK-SBA. Ifyou have Internet access, check out the SBA homepage at http://www.sba.gov, where you will easilyfind your way to state and local SBA offices in your region.

TRADE ASSOCIATIONS

Trade associations also provide useful infor-mation and assistance. Chances are the industryyou are interested in has a trade association youcan contact for a list of member firms.

Licensing trade associations should be of particular value in the search for experts in yourarea. We recommend contact with the Licensing


CHAPTER TWOExecutives Society (LES) and the Association ofUniversity Technology Managers (AUTM) as placesto begin.These associations regularly offer oppor-tunities to present and/or display technology offer-ings—good places for prospective licensors toshow their wares and for licensees to prospect fornew technology. In addition, LES publishes theConsultants and Brokers List every two years.

PERSONAL CONTACTS

As useful as the trade association publica-tions are, the contacts they can provide are moreuseful. Keep good lists of the helpful people youhave spoken with, and always look to expand yourlist by asking people you get on the phone or meetat trade fairs for the names of other people youmight be able to speak with.

Remember that, in gathering information,talking is important—especially when other peopleare talking, so listen carefully. A good conversationwith an experienced contact can put years ofindustry knowledge right in your ear. Such conver-sations can provide you with more useful informa-tion than weeks of library research or publicationsordering. Moreover, such people can tell you com-mon industry knowledge that you might not findwritten down anywhere. So even if you are not a“people person,” try to get people to talk withyou, and listen carefully.

Through these various sources of informa-tion, you begin to get some idea of the shape of atarget industry and the dynamics of particular mar-kets. Leads about companies looking for technolo-gies like yours (or looking to license technologieslike the ones you are looking for) will begin todevelop as a result of this process. Follow them up.

When you get that opportunity, it behoovesyou to know what you are talking about. In additionto the technology prospectus you have put togetherdescribing what you have to offer, you also need tobe able to speak with some knowledge aboutdevelopments in the industry and dynamics in themarket.The best preparation in this regard involvesconstructing industry and market analyses.Whetheryou present these documents to potential partnersright away is your decision to make.The primarybeneficiary of completing these documents,

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remember, is you.The degree to which you havedone so will be evident in your discussions withpotential partners.

COMMON MISTAKES INDECIDING TO LICENSE

A number of standard mistakes occur frequently in licensing decisions.The sections abovehave touched on some of these. Let us highlightthree common mistakes made during the earlystages of the licensing game.

First is the propensity—especially amongsmall businesses—to seek a licensing agreementtoo soon. Generally, upon the discovery of aninnovation, a smaller business may leave very littletime for reflection and information collection andinstead march directly into a licensing agreement.The consequences of such a mistake may be cost-ly—costing licensors a greater share of the profitsthat may have been realized from a more fullydeveloped technology or concept, and costinglicensees money to develop interesting conceptsinto products or technologies that actually work.As noted above, getting a technology to the engi-neering prototype stage ensures the licensor afuller share of the profits realized from the inven-

tion and the licensee a technology that has beenshown to work.

A second common mistake in making thedecision to license is the belief that the optionwill offer a “silver bullet” for your business. “If wecan just find that one technology, then we canturn this company around!” think too manyenthusiasts of licensing in. Or, “if we can just findthat one manufacturer to make this product forus, then we’ll grow rich off royalties on the salesonce it makes it to the market,” the booster oflicensing out may hope. Gamblers ruin! For sure,such things do happen. But not too frequently.The fact is, if your business is failing, the odds areagainst you that any licensed technology, no mat-ter how good, will save you.

Finally, licensors, especially those who look for acquirers of their technologies, oftenhope to escape doing business—especially themarketing part.That is simply not possible.To find another business to license technologyfrom you by definition implies that you will haveto market technology.The belief that one canavoid that fate through licensing is misplaced. Ifyou fail to market, you will probably fail to find a licensee.

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Having determined that licensing makes goodbusiness sense—that it fits your corporate strategyand can help you achieve the ends you seek—thequestion arises: How do you find a partner? Theshort answer is, you conduct a search and youinterview prospective matches.The longer answer,of course, involves a good deal more than that.

In your search, you will need to locate, gath-er, and analyze information about industries, mar-kets, and companies. Some of this you can doyourself, but with some you will need help.There ishelp available—some of it is free. Once you locateprospective partners and impress them with yourpotential, you need to investigate theirs. If they passmuster, then you can begin to investigate how apotential deal with them might be done.This chap-ter considers each of these steps in the search fora partner who is right for you.

DEFINING WHATAND WHEN TO LICENSE

With the strategic intent for a licensing decision clarified and the rationale considered, thequestion of definition arises.What, exactly, are youthinking about licensing? If you are licensing in,what kind of performance capability do you seek?On the other side of the ledger, how well can your product or technology perform? In terms of technical capability acquired or deployed, severalelements will determine how to define the technology or product.

The first of these is the technology’s stage of development.The stage of development of atechnology or product will help to determine thevalue of a technology—what the licensee is willingto pay or what a licensor can expect to make fromit. Someone must pay for the development of aconcept—however original or novel—into a functional and marketable technology or product.The further along in the development process thelicensor has taken the technology, the greater itsvalue.A technology on the drawing board, forexample, with some measure of development actually taken toward product definition, will beworth more than a concept; and a working model


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of the drawing will be worth more than the draw-ing itself. If the licensor has not proven that the concept can be reduced to practice, the licenseewill have to do so, and will, consequently, pay lessfor the licensed property.

How much better does your technology perform than similar technologies or productsalready on the market or under development?Answering that question means that your technolo-gy’s performance needs to be measured—usingstandard indices—against competing technologiesor products.That implies testing.Again, the level ofdevelopment rules.Technical feasibility, taking theneeds of users into account, will be demonstratedin early stage tests, while tests at later stages willconfirm feasibility and generate data upon whichthe design of a prototype can be based. Prototypetesting will lead to engineering and production prototypes, which will confirm the adequacy of thedesign and its performance characteristics andparameters. Here again, the technical stage ofdevelopment will influence value by reducing perceived risk.The further along the developmentprocess an innovation has been taken, the moreaccurate the measurements of how it compares toother technologies.

A solid definition of the product or technologyshould be nailed down before licensing negotiationsbegin.This is particularly important to a potentiallicensor. Put another way, for the purposes of nego-tiating with potential licensees, the technologyshould be “frozen” at a given stage of development.The concept of freezing is especially important fornew technologies that are a work in progress.Youmust be very clear on what capability you are pre-pared to license. Otherwise, the licensee may layclaim to advances or improvements you make toyour technology while the licensing agreement isbeing negotiated.

STRENGTH OF INTELLECTUALPROPERTY POSITION

A related issue involves the strength of theintellectual property position of the technology tobe licensed.A license will by definition involve

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access to property which may be patented, copy-righted, or protected by trade secret.The strengthof those protections will factor in how much thelicense will be worth.Access to a competing technology that performs a similar function—orcould with some additional design work—willlower the prospective value of the subject matterto be licensed.The risk of infringement will be considerably less if patents exist for multiple technologies that perform similar functions in similar (if patentably different) ways.

Factors that impact on the strength of theintellectual property position include:

• Coverage—You need to make sure that yourintellectual property position protects yournew development in as many aspects as possible: final product, product components,manufacturing processes (machinery andcomponents), spare parts, etc. Sufficient coverage means more than just having apatent (or trademark or copyright).Adoptinga systems approach to your intellectual prop-erty protections and securing protection foreach component will help. Individual patentscan be engineered around; the prospect ofsuch mischief befalling your new developmentwill be significantly decreased if you can pro-tect your whole system.

• Competitiveness—Ideally, your intellectualproperty protections exclude competitorsfrom infringing on your development. Butcopycats abound in the technology business.The competitive intellectual property posi-tion is one that excludes infringement notsimply of your technology but, to the extentpossible, of your concept.This may meanpatenting technologies that you have reject-ed, as well as the one you actually use.Assembling a team of engineers explicitly forthe purpose of trying to design around yourtechnology may prove a useful exercise fordemonstrating where the competitiveness ofyour position is most vulnerable.

• Marketability—Applications for intellectualproperty protections provide a means ofmarketing your technology that most inven-tors and small businessmen tend to overlook.

Write your patent application in plain English(which is easy enough to do if you plan on itfrom the beginning). Prospective partners willbe more interested in your widget if they canunderstand what it does and how, and whyit’s important. Illustrations, clear explanationsof advancements offered over the state ofthe art, and a detailed discussion of the priorart are all things you can use as a part ofyour application to help turn a normally dry,technical document into a document thatsupports your search for a licensing partner.

• Licensability—Packaging your intellectualproperty in a manner potential partners willfind attractive makes your technology easierto license. Offering data from field tests,recommendations on raw materials, manufac-turing process parameters, a copyrightedoperators’ manual for your technology, orother supporting (and protected) pieces ofintellectual property will enhance the valueof your package to a potential licensee.Astrong package that ties up loose ends shouldalso help to speed the process of reaching anagreement and shorten the time it takes alicensee to enter your technology into use.

• Litigability—How well will your intellectualproperty position hold up in court? The bet-ter you can demonstrate a strong, defensibleposition, the more valuable your intellectualproperty becomes. Hundreds of factors—some human, some technical, some business-related—can affect the strength of your position. Once again, assembling a team ofexperts to brainstorm ways around yourprotections will suggest areas where yourposition may be vulnerable.

FORMALIZING INDUSTRYAND MARKET ANALYSES

To make a compelling case for why a potential partner should license with you, you need to be able to speak in a language they canunderstand. And, if you expect to be taken seriously, you need to have a command of thedetails. Hence, you need to be able to speak topotential partners in a knowledgeable way aboutthe industries they are part of and the markets

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they serve. Getting up to speed will take time and information.

Constructing industry and market analyseswill help you sort and analyze the information youare collecting, and to sound credible when you talkwith people. In the evolutionary process of licens-ing, the search for a partner creates an escalatingneed to gather, organize, and analyze information.As early as possible, you should begin organizingyour information into a usable format.Writing yourown analysis is probably the best way to becomeactively engaged in the task of learning about theconditions your potential partners face. It willdemand that you organize, analyze, and synthesizethe information you have gathered on industries,markets, and competing technologies.

Keep in mind that it’s best to write industryand market analyses for each potential applicationyou are investigating. For you, the search is aboutfinding a licensing partner for your technology, butthat technology will find its way into the marketone application at a time.Thus, you need to beknowledgeable about each industry and marketoffering a potential application for the technology.

INDUSTRY ANALYSIS

Industries are like people: Although they allshare some common characteristics, each one isdifferent.A generic set of questions about theindustries’ salient characteristics will yield valuableinformation about them. Let’s consider these common characteristics and the significance ofeach in your analysis.

Concentration: Industry concentration is definedas the number of firms in an industry and the relative power of each. Industries with more firmstend to be more competitive (and less profitable)than those with fewer firms. In industries dominated by a few firms, in-house technologydevelopment tends to be the rule, although this ischanging in some industries. Generally speaking,larger firms tend to be more reluctant to entertainlicensing proposals (from small businesses and individuals) than smaller ones. Industry concentra-tion will indicate the leaders in the industry andwhere the larger market niches tend to be. Smallerfirms may profitably enter into licensing


CHAPTER THREEagreements focused on exploiting such niches ifthey offer superior capabilities to users, at a sufficiently better price.

Decision making structure: Firms in particularindustries generally tend to acquire and deploytechnologies in similar ways. If you intend to market a technology to those firms, you need toknow who and where the decision makers are.Specifically, you will need a champion on theinside willing to go to bat for a partnership withyou. If that person is not the decision maker, orsomeone who cannot get close to the decisionmaker, you may be in for a long wait.

Technology and product development patterns: Do you know how, in the last 10 or 20 years, a given industry has developed new technologies and turned them into new products?Knowing about such development patterns willenable you to talk to decision makers with references they understand and will also provideyou with something of a road map of the wayproduct development works in a given industry.As a general rule, do not expect that your technology or product will deviate from theirestablished patterns of development.

Capital formation characteristics:Understanding innovation financing in a given industry will provide you with a sense of whatyou— and your potential partners—are upagainst, especially if your prospective licenserequires a significant capital investment. The onus will be on you to prove to your championsthe financial impact of your technology or product. If they can not understand how tofinance its development based on the capitaliza-tion characteristics of their industry, it is doubtful that they will seek to persuade otherswithin their organization that a deal with you is doable.

Regulatory drivers: The regulatory environmentin which firms operate is an increasingly importantindustry characteristic.To market a technology in a given industry, you need to be aware of theregulatory environment in which firms operate. Ifthere is some doubt that your technology complieswith various environmental, health, and safety regulations, firms in an industry generally will

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show you the door. On the other hand, if what you have to offer stands to enhance compliancewith a given regulation, that can be a particularlyimportant selling point for the technology.

Life cycles: Life cycles exist for technologies,products, markets, and industries.These follow patterns from concept and growth to maturationand decline (and, in some form or another, renew-al). Know where your technology (or the tech-nology you seek to acquire) fits in the pattern oflife-cycle development.The latest iteration of atechnology or product that is in decline probablyis not something a licensor can expect to havegreat success marketing to industry. Likewise, it isnot anything a licensee will want to be tied to forfive years when the state-of-the-art is about tochange dramatically. Similarly, declining industrieswill offer fewer opportunities for profitable busi-ness than growing ones. The future of a particularindustry is one of the more important points forconsideration when a technology has multipleapplications.A declining industry may be an easierplace to market your technology in the short-term, but if the industry does not have much of afuture, then neither does that application.

Market buying characteristics: What drives thebuy decision in a particular industry? In making thedecision to procure technology, what do firms inthe industry respond to? Price, quality, reliability,service, and reputation of the supplier all make thelist for consideration. Different industries have different priorities.

Attitude toward intellectual property:Different industries view the importance of intel-lectual property differently. It is important to knowwhat kind of intellectual property protection firmsin the industry tend to seek for their technologiesso that you can acquire the same— if needed—foryours.Then present your technology in the kind ofpackaging firms expect to see.

Technology transfer patterns: The patterns bywhich firms in an industry acquire technology willgo a long way toward determining your chances forsuccess at licensing in that industry. Some indus-tries use licensing agreements less than others.Before getting your hopes sky high about doing alicensing deal with a firm in a given industry, it is

prudent to discern which, if any, of the firms in thatindustry license, and what they look for.

Pricing policies and required returns oninvestment: Most firms have benchmarks thatmust be met to green-light acquisition or deploy-ment of new technologies. If your licensing propos-al cannot make a reasonable claim to a certainreturn-on-investment, your chances of doing a dealare slim. In addition, firms have established thresholds for what they will pay to acquire newtechnologies. If your asking price is out of the ballpark (a common mistake of many a would-be licensor), you probably will not get a deal. Knowthe industry norms for technology acquisitions;expect that is what they will be willing to pay foryours. Decision makers will seldom be empoweredto make exceptions—even for you.

Attempt to validate the data that you collect fromtrade publications, contacts, magazines, etc.A pru-dent rule of thumb holds that you should have twoauthoritative sources for each piece of informationbefore it can be considered fact. Of course, this isnot always possible. Do not let lack of absolutecertitude delay you from beginning to assemble theinformation you have gathered about an industry inuseful ways. Make guesstimates when you need to.Like other aspects of this process, the confidencewith which you can analyze the behavior and characteristics of a given industry will evolve.

MARKET ANALYSIS

As you collect information about industries,information about their markets will come to light.Markets drive business. If you cannot show howyour proposed license should work in a given market, you cannot convince a partner that yourdeal is worth their while. (And if you can, maybeyou'd better take a second look at your partner.)For each potential application, it is important thatyou clearly define a particular market.

What is a market analysis? It is a detailedbreakdown of who the potential customers are,how many of them there are, how much they willpay, what the competition is, and how you can beatit.Your analysis should describe the market chan-nels through which products like yours reach theuser. Moreover, you should be able to define three

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significant points of difference between your prod-uct and its competition. (If you cannot, you have aproblem.) Above all, your analysis has to demon-strate clearly why people will buy your product,using statements from prospective customers,backed up with believable figures in dollars andcents.The surest way to turn off any prospectivepartner who asks about the market is to say:“When they see it, they’ll buy it.” Their likely reac-tion (probably unstated):“You obviously have nevertried to bring something to market before.”Regardless of technical elegance, a technology orproduct will succeed only if a large enough marketexists to support it. In light of that cold, hard fact,your market analysis had better show that the busi-ness risk stands a good chance of paying off.

The following are fairly standard considera-tions in any market analysis:

Size/Scale: Market size is a critical factor in target-ing potential licensees and licensors.A $20 million market may be pocket change to a large corpora-tion.At the same time, the same market may over-whelm the production capabilities of a smaller firm.Somewhere in the middle there is a firm for whichthis market is ideal.The critical nature of this mar-ket “scale” factor makes it imperative for smallbusiness innovation managers to carry out whatamounts to a double-edged market analysis as theypursue licensing agreements.That is, they mustcarry out a standard market analysis with precisionsufficient to approach potential licensees with reli-able data.They also need to carry out an industryanalysis to identify the market thresholds theirpotential partners will seek.

Market segmentation: Most markets break intosubdivisions, or segments. Segments can be based, forexample, on price (high-end, medium-range, low-end),or quality (from very reliable to reliable enough), ortypes of product variations (i.e., nylon-fiber, wax-coat-ed, or uncoated dental floss).You need to know thesegments of a given market in order to reliably esti-mate the impact of a technology or a product in thatmarket:Will it work in all segments, some segments,and how much product can be sold in each?

Dollar value of market: Fairly reliable data existfor the size of almost any market imaginable.Market size drives all other marketing calculations.


CHAPTER THREEHow big—exactly—is the pie? You should be ableto discuss the future prospects of the market: Is itlikely to expand (by how much), or contract (byhow much), and why over the next several years,including the factors affecting market size.

Market share percentage: In keeping with thepie metaphor, market share is your slice. Estimatesof potential market share are best made in ranges,from best to worst case scenarios about thepotential sales, and why.

Buying keys: These are the reasons customers buy agiven technology or product. Following are seven,fairly generic such categories. In your market, theremay be more, and they may be different, and theweight given to each is particular to a market.

• Competition—The degree of competition ina market will determine the attractiveness ofwhatever capability you have to offer. In verycompetitive markets, new technologies tendto be more in demand. In less competitivemarkets, there is less impetus for buyers toacquire or deploy new technologies. Lackinga sense of urgency to breed marketdynamism, such markets tend toward the status quo.

• Market trends and competitive analysis—Present and future trends in the marketplace,as suggested, impact the decision to acquireor deploy new technology.To build a persua-sive case for your capability, buyers need tosee that you have anticipated or at leastcaught up with a trend in the market, andhow that capability will help them pull withinthe market leader or stay out in front of thepack.This is an especially important point incases where the market is changing quickly,and where all players are scurrying to ridethe latest or next wave.To be thorough, youshould be able to discuss who the competi-tors in a given market are, the strengths andweaknesses of each, and other factors thataccount for their position in the market.

• Market idiosyncracies and drivers— What isthe “personality,” so to speak, of a particularmarket? What stimuli does it respond to, oris it responding to at present? A couple of

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years ago, for instance, the makers of dispos-able lighters seemed hellbent to come upwith a variety of mechanisms to challenge thedexterity of adults by making their products“childproof” in response to regulatory pressure. Such idiosyncracies often have aprofound—and lasting—effect on markets.You need to be aware of them, and to tailoryour proposals accordingly.

• Pricing requirements—Buyers pay what theydo for a technology or product for a varietyof reasons, depending on the market.Regardless of what other advantages yourtechnology might have to offer, you have tomeet the price that buyers are willing to pay.

• Distribution channels—Every market isstructured around certain channels of distri-bution, and the logistics of each need to beconsidered as you look to enter a market.Many industries tend to cluster in certainregions (the more obvious examples includeautos in Detroit, oil along the MississippiDelta, semiconductors in Silicon Valley), hencethe fairly localized channels of distribution ofmany markets that serve them. Others tendto be seasonal, with large lot purchases happening at specific times during the year.Your market analysis needs to address thespecific conditions of the distribution channels that serve the target market.

• Market entry requirements—Every markethas certain thresholds which a product mustcross in order to compete. Company prof-itability depends on obtaining a certainamount of sales. Selling that much will mean,in turn, contact with so many distributors ata fairly predictable volume. Meeting the dis-tributors demands will require so much pro-duction. If along the way your partnershipcannot produce a certain volume and accessenough distributors, your product will notget to the market in sufficient numbers toturn a profit—a condition no business ven-ture can survive indefinitely.

• Key selling points ("points of difference")—What are the advantages that your technolo-gy, product, or process offers users? Why

should they buy it? When marketing yourcapability, you need to be able to clearlyidentify its key selling points, the features thatdifferentiate it from what’s currently available.Generally speaking, you should be able toidentify at least three “points of difference”between your technology and currently available products or capabilities. Price maybe one such point, as may greater reliability,greater ease of use, energy efficiency, betterquality, improved regulatory compliance, oranother.The point is, you need to be able totell prospective partners quickly and persua-sively why what you have to offer is betterthan what they can get right now.

SOURCES OF ASSISTANCE

Finding a licensing partner requires a greatdeal of legwork, to be sure. In order to make themost of your efforts, you will need expert guid-ance. Find it, and use it. Expert help does not comecheap. But the shortcuts knowledgeable profession-als can show you and the blind alleys they can helpyou to avoid will in most cases save you muchmore in time than the cost of their assistance.

Find talking partners with whom you can discuss your licensing strategies and the progressof your search.A talking partner is an experiencedprofessional who will take an interest in your business, and who will point you in the right direction for whatever reason: it is an interestingproject, for a fee, for a percentage of profits realized from a successful deal, or for some otherreason. Such partners can prove to be invaluable ina number of ways: as a sounding board for yourideas, as a referral source to experts in particularfields (e.g., finance, marketing) or industries, and asa business confidant with whom you can shareyour impressions of and, occasionally, your frustrations with people met, firms contacted, orthe process in general.

With corporate downsizing, right sizing, andother efforts to streamline organizations to focuson core competencies and capabilities, the availabil-ity of licensing professionals has grown consider-ably.And an increasing volume of licensing activityhas made expert help more generally available thanit was, say, 20 years ago. In seeking such assistance,

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contact trade associations, such as your local chap-ter of the American Bar Association,AmericanIntellectual Property Law Association, LES, orAUTM, which can provide you with references toexperienced professionals.

For decades, licensing has been viewed as atraditional preserve of the patent attorney.Theincreasing use of licensing as a strategic tool inbusiness has created a demand for a more special-ized form of expertise—the licensing profession-al—who may offer more assistance than a tradi-tional patent or general business attorney.Thesedays, the high tech section of a general businessfirm has become a standard repository of suchexpertise. Attorneys employed or retained byfirms that routinely license are more plentiful thanever.You may not always be able to find one inyour area. But there is no reason, save for an aversion to conducting business by phone, fax, andmail, not to retain an expert located elsewhere.

Apart from legal expertise, a variety of otherexpert help with marketing, finance, licensing, man-agement, technical development, and other areas is available in the form of consultants. Check theirreferences, and if references are not positive orforthcoming, look elsewhere.This bow to prudencenot withstanding and your resources permitting,qualified consultants can save you time and money.Use them.

PARTNER QUALIFICATION

So far, we have focused mainly on what youcan do to impress potential partners as a knowl-edgeable, capable professional in business. Such animpression will, of course, encourage people to dobusiness with you. But in the excitement of themoment when someone contacts you about maybedoing business, remember that you, too, have ques-tions to ask. Principal among these: Is this someoneyou want to do business with? Can they do whatthey promise to do? Not just any partner will do.Licensing your technology to the wrong firm canruin its chances for success, and may jeopardizeyour entire business.

You must find a partner whose capabilitiescomplement your own, and one capable of holdingup their end of the bargain.You are responsible forchecking them out.


CHAPTER THREEA number of elements need to be consid-

ered when examining the qualifications of a poten-tial partner. Develop a list of characteristics andcapabilities you want in a partner; evaluate howprospective partners measure up to that standard.Listed below are some of the more importantfacets about the partner’s business to check. Foreach, the overriding question is: Can this potentialpartner deliver what they promise, and do theyhave a track record to substantiate their claims?

• Scale and Scope—How big is your partner,and what is the range of their activities?Questions of scale and scope indicate howimportant your partnership might be in thebroader scheme of your partner’s view ofthings. If, for example, you enter into a part-nership with a $20 billion business, howmuch attention will be paid to the $2 millionin sales that your partnership generates?How much time will they give the agreementbefore they declare it a loser and cut youloose? On the other hand, partnering with asmall firm that is entirely dependent on therevenues your licensing agreement brings inmay be equally unnerving. If the firm needsyou that badly, are they competent to be inbusiness, and— more importantly—do youwant to be the only one with anything tobring to the table?

Preliminary research into licensing agree-ments strongly suggests that licensing agree-ments tend to work best among firms ofsimilar size.“Individual inventors and smallfirms fare much better in their licensingendeavors when they target potentiallicensees incrementally larger than themselves,”according to one report.“Technologies farebetter if they pass up the corporate foodchain one level at a time,” as one licensingexecutive put it. Organizations of similarscale do tend to communicate better.Theygrasp each other’s manufacturing, marketing,and business problems more easily, they cancoordinate solutions to them more quickly,and implement licensing agreements with significantly less friction than organizations ofvery different sizes.

• Technical capability—A would-be partneralso needs to demonstrate technical aptitude.

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Does their firm have a history of performingthe sorts of tasks expected of them under aproposed agreement using similar technology,and what is their performance like? Whattechnical strengths and weaknesses do theybring to the deal? The partner’s ability to workout kinks smartly, without major disruptions inthe flow of production or service delivery, willinvariably impact the success of your licensingagreement and the fate of your business.

• Marketing capability—When your partnerwill be marketing the product, technology, orother subject capability of the licensingagreement, its marketing capability deservescareful scrutiny. Has the firm shown goodjudgment in past marketing decisions on pro-jects similar to the one you are contemplat-ing? Does the firm possess the requisiteknowledge of the market into which you willbe selling? Does it have access to the appro-priate distribution channels to sell to thatmarket? If not, what plan are they offering toget there?

• Business management capability—How wellis your partner’s firm run? What do its finan-cials look like? What sort of reputation doesthe firm have in the industry and in the mar-ket? Steady, forward-looking management willnot necessarily attract a lot of attention, butits performance will speak for itself.

• Ability to take risks and overcome barriers—As a corollary to the management capability,you need to know whether a potential part-ner has the capacity to overcome technicaland market barriers, and whether they willbe willing or able to take the risks necessaryto make inroads in new markets.The trackrecord of your potential partner in newproduct launches or product improvementsshould provide some indication of whetherthe firm has taken risks or merely riddenwaves to get where it is.

Project specific inquiries need to be madeabout any partner. Qualification criteria will tell youabout a partner generally: how well they run theirbusiness, about their capabilities and characteristics.But you also need to assess whether a partner can

and will provide the things needed to make yourlicensing venture a success.

Specifically, you need to assess your partner’scapital acquisition capacity. If the success of yourlicensing agreement is contingent upon significantup-front capital outlay, and you are looking to yourpartner to provide it, it behooves you to knowyour partner’s capital acquisition capacity.Whatlines of credit from banks do they have at their dis-posal? What kind of access do they have, have theyhad, to venture capital? What are the limits of thatcapacity? Will they be able to raise the money youneed? Do they understand the relationshipbetween an excellent plan and capital acquisition?Success in the market will be contingent upon theability to provide resources generically—technical,financial, human, etc.As with capital acquisition,assess the ability of your partner to provide otherresources where and when they will be needed.

SETTING THE DEAL

Partners will be as excited to find you as youare to find them. Getting enthusiastic about theprospect of doing a deal where both sides stand towin is only natural. But, especially when you’re feeling optimistic, it is imperative that you remainfocused on what got you this far in the first place:your strategy and the search for a partner that fitinto your strategy.While it is fine to talk aboutpotential deals, keep your head. Do not commit toanything and do not dare sign anything (with theexception of, say, a confidentiality agreement) whensuch conversations begin.

Know what you want from a deal when youbegin talking seriously to prospective partners.Refer back to your strategy and consider the sortsof modifications that might need to be made inorder to do a deal with a particular prospect.Whileflexibility is a necessary part of doing business,you will need to set clear limits beyond which youcannot bend; elements were included in your strategy for a reason, after all.At what point do thechanges demanded of you take you places that youdid not intend and do not want to go?

Likewise with potential terms of the deal.Your market analysis, for example, will show that agiven application should produce a certain amount

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of sales, and, consequently, a certain amount of revenue—of which you should be entitled to a certain percentage.A potential partner, however,may value the technology differently, or project asmaller market (perhaps because this is not theirprimary niche)—and they estimate that you shouldreceive a certain, smaller percentage.Again, knowwhat you want. If you and a potential partner viewa particular opportunity altogether differently,perhaps you should not be partnering.

Knowing what you want from a deal is less amatter of complex calculation than it is about focusand clarity. Going into preliminary discussions, youneed to know and be able to articulate clearly theranges within which you expect the deal to fall.(You will be willing to commit between this muchand that much capital, this much and that muchtime, this much and that much technology and


CHAPTER THREEtechnical assistance, etc., to the deal.) If yourpotential partner’s ranges fall completely outsideyour own, be willing to accept the possibility thatyour expectations just may be too different toreach a mutually workable agreement.

Such should not be taken as advice to stormout of talks and dramatically smash relations with people you barely know. (As we will discussin the next chapter, such tactics, in the long run,seldom produce the kind of results you want.)Instead, we argue that you need to be able to layout your expectations clearly. Let the other sidedo the same. If the difference between the twosets of expectations is too great, there simply maybe nothing to negotiate. Do not waste too muchtime pursuing a deal with this firm. Find anotherwho sees the world more along the lines that you do.

FINDING A PARTNER


NEGOTIATING A LICENSING AGREEMENT

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When preliminary discussions demonstratethe seriousness of all parties—when visions seemto match, interests in a project dovetail, the viewsof a potential licensing venture align, and personalrelationships work— then it is time to take thenext step in making the project happen: negotiatingan agreement.The “details” of the agreement canmake or break a project from the point of view ofeither party. Negotiating the details should neverbe left to amateurs. More than ever, at this stageyou need the benefit of professional assistance. Ifyou have not had the time or the money to bring alicensing professional into the process yet, now isthe time when you absolutely must.

While you will need professional help to navigate the negotiating process, you will, of course,be more than a detached observer.The followingchapter outlines the process of doing a deal with apartner, and covers some additional factors to consider as you make your selection.An overviewof the negotiation process and the framework of alicensing agreement follow. But the deal does notstop there—contrary to popular belief.An agree-ment is an organic thing.As such, it requires maintenance. Maintaining your agreement is a keycomponent of building the long-term relationshipwith your partners that will ensure amicable andmutually beneficial results for the term of theagreement and beyond.

PICKING A PARTNER

The last chapter detailed things you need tobe cognizant of when examining a potential part-ner’s qualifications.What it did not tell you is whichpartner to pick.That is a choice that no one canmake for you. In determining your “fit” with apotential partner—and their fit with you—the fun-damental things are important.Your strategy willdetermine, to some degree, who you want or needto license with. If you seek national distributioncapabilities, for instance, a local firm that sells intwo states may fit in every other respect but itsscope.You have a choice to make—trade off agood fit and the prospect of a good working relationship for access to a larger market. If your

analysis tells you that your capability has nationalpromise, a larger partner (or at least one withaccess to a larger market) may be worth holding out for.

Other factors you need to consider involvethe harmony between the partner’s vision and your own. Do you view the project (and businessgenerally) in the same way? Are your views consid-erably different? As in other relationships, a commonvision of the future of a licensing relationship isimportant.A shared vision gives the partners a senseof what to expect from the future.While visionslikely will not—and need not—match perfectly,visions in sharp conflict will ultimately manifest them-selves as strains on the relationship, when decisionsneed making and the partners see things differently.

Apart from but related to a common vision,the partners need to have harmonious expecta-tions.This means, first, that you are clear aboutwhat you expect—about what your business needsto make the agreement worthwhile (e.g., rights toproduct improvements, access to markets in a par-ticular region, exclusive rights to manufacture fortwo years).At bottom, you have to be absolutelyclear with yourself on what you need from thisrelationship. (Remember, needs come beforewants.) If the partner cannot provide what youneed to make a project work, no matter how har-monious your visions, no matter how well youseem able to get along, the agreement will fail.What you need is not necessarily the same thing aswhat you will settle for.A smart business personshould arrange to make a buck—not to breakeven. But knowing what you need will provide youwith a basis from which to extrapolate the rest:what you want, what you are willing to settle for. Beclear on these things as you approach negotiations,and during negotiations, be firm, but reasonable.

NEGOTIATIONSAND THE AGREEMENT

Going into negotiations, you will need anagenda.That is, you need to know what you want from the agreement—what your ranges of


25

acceptability are in each area covered by the agreement.An agenda is not a secret plan for fool-ing the other side—for breaking their concentra-tion, dividing and conquering, or anything like that.Some will advise you to employ tactics to that endin your negotiations. Such tactics are, in our view,counter-productive. Do not bother with them and,if you are subjected to them, you may want toreconsider your partner.

You must protect your interests.And youshould also respect the other parties’ need to do the same. Negotiation is not war, after all. It isabout reaching consensus, coming to agreement.The goal of a negotiation, moreover, is not simplyto hammer out an agreement that works for you.It is to come to an agreement that helps to develop a long-term, mutually-beneficial businessrelationship—a partnership, in the truest sense.

THE AGENDA—OUTLINE AGREEMENT

Negotiations should be clear and open.Youhave nothing to hide.As such, a particularly helpfulstrategy is to begin by presenting a prototypeagreement detailing positions you find acceptablefor the different agreement clauses. Let us take amoment to outline a typical licensing agreement.As a rule, a licensing agreement will contain the following clauses:

A. Identification of parties1. Date2. Addresses3. State of Incorporation

B. Whereas clauses (recitals)1. Purpose of the agreement2. Facts leading up to the agreement3. What each party brings to

the agreement

C. Definitions1. Field of agreement2. Licensed product/process/service3. Licensed intellectual property4. Confidential information5. Affiliates6. Net revenues


APPENDIX ONED. Grant of rights

1. Exclusivity2. To make, use, and/or sell3. Grantbacks4. Geographic limitations5. Field of use limitations6. Cross licenses7. Sublicenses

E. Consideration paid for intellectual property rights 1. Up-front payments—lump sum, sum

for paid up licenses (no running royalty)2. Running royalty—base rate3. Annual or other minimums4. Technical support—scope, cost5. Patent maintenance—scope, cost6. Special provisions—currency, stock, etc.7. Most favored licensee

F. Payment of consideration1. Accounting methods2. Timing of payment3. Record-keeping requirements4. Audit rights

G. Major license restrictions1. Government export limitations2. Liability limitations—indemnifications,

insurance, warranties, etc.3. Tax payments—lack of partnership,

tax-like payments4. Guarantees, test runs

H. Confidentiality1. Definition2. Term

I. Enforcement of/defense against intellectual property rights1. Notification of infringement2. Responsibility for enforcement/defense3. Payment for enforcement/defense

J. Future intellectual property1. Responsibility for protection2. Payment for protection

K. Duty to use (best efforts)



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L. Termination1. Term of agreement2. Conditions for termination3. Default4. Post-termination obligations—

confidentiality, payments, etc.

M. Other provisions1. Impossibility to perform

(force majeure)2. Severability3. Arbitration4. Assignments5. Entire agreement6. Governing law7. Notices8. Execution

This is the general format that your agree-ment— the formal embodiment of your deal—willtake. It is, to reiterate, a complex, legally-bindingdocument that should be written and reviewed byexperienced hands.

Providing a draft or prototype agreement to your potential partner will make your positionsclear. It will also provide them with a chance tothink about how they would like to respond.Generally speaking, and assuming the good will ofyour potential partner, providing a prototypeagreement allows the parties to be clear on whateach party is after. Negotiating in a spirit of consensus-building, each should be able to workout the details in a way that meets the positionsthe other party considers vital.

DEFINITIONS

Given all the legalese a license agreement contains, it is particularly important that key termsof the agreement be spelled out with utmost precision and clarity.Those terms which could leadto disagreements between parties—terms like “technology,” “royalty base,” “improvements,” andthe like should be defined clearly in the document.They should also be defined once—in the definitionssection. One common problem in licensing agree-ments is the use of the same term (e.g., technology)to mean different things in different parts of theagreement.This practice leads only to confusion.

Carefully defined terms that all parties under-stand are one of the most important things youcan do to ensure not only compliance with theagreement, but the development of a mutually beneficial and harmonious business relationship forthe long haul.At the moment, it may seem to behaggling over technical details. But the few hours itcosts will be more than worthwhile down the line,when the memory of the negotiation is hazy—andso is the definition in the agreement. Either partymay feel perfectly within its right to take actionsthe other considers grounds for termination ifterms and conditions are not carefully and precise-ly defined. Such circumstances can lead only to discord.To avoid them, make sure your definitionssay what you mean in exacting detail.

TERMINATION CLAUSES

Termination clauses are an unpleasant subjectto broach in the midst of good feelings that accom-pany a successful negotiation. No one ever wantsto rain on the parade. But business is business.And the best time to negotiate these clauses iswhile both sides feel positively about one another.

Termination clauses involve the conditionsunder which a license becomes null and void.Generally, these clauses stipulate actions taken inviolation of the agreement and actions promisedbut not performed as causes of termination.Mature parties can—and should—negotiate theseclauses while continuing to define the relationshippositively.They must be negotiated to guard notjust against bad faith, but bad luck. If things donot work out as planned, if one party cannot liveup to the obligations it agreed to, the othershould be free from its obligations.While onewishes that such unforeseeable events neveroccur, they do; thus the need for clear grounds fortermination in the event that such unanticipatedconditions arise.

An important corollary to termination claus-es are clauses covering conflict resolution. It is wiseto describe in the agreement how the parties willresolve their problems without recourse to termination. In some agreements, an objective person (i.e., someone who does not work foreither party) may be specified as a mediator ofsorts—the person who will listen to the concerns


27

of the licensee and the licensor and offer an opinionabout how to settle the dispute.

MAINTAININGTHE AGREEMENT

Many first-time licensors believe that thelicensing deal ends when the agreement is signed.But signing the agreement is really only the beginning of the partnership.The agreement establishes terms and conditions—these alone donot a business relationship make.

Like any other relationship, a business relationship requires maintenance, basic up-keep,especially if it is to stand the test of time. Some ofwhat you can do to develop this kind of businessrelationship has to be done in the agreement andin the negotiation process leading up to it. If youhave agreed to reasonable terms, rather than dri-ven for the utmost advantage for yourself on everypoint without regard to your partner’s position; ifyou have shown yourself to be trustworthy in thenegotiation; if you have demonstrated your willing-ness to undertake this risk in a spirit of goodwill,then you have made a good start. More, however,remains to be done.

SCHEDULE PERIODIC REVIEW MEETINGS

Regularly scheduled review meetings tocheck the status of the project provide a structuraltool for maintaining contact with your partner.Such meetings, held monthly at first perhaps, thenquarterly, will keep each partner attuned to theproject and its progress.Technical, market, and business issues attending to the venture may bediscussed—and ideas exchanged about possiblesolutions in problem areas.

Such meetings also provide opportunities toexplore additional options, related to this ventureor others. If the agreement has granted rights touse a technology in a given region, for example, andthe licensor has yet to find partners in other areas,while the licensee has developed access to largerchannels of distribution, the parties may find it intheir mutual interest to revisit that portion of theagreement. Periodic review meetings provide theopportunity for information exchange and they keepthe parties in touch with one another.As such, they


CHAPTER FOURserve a useful function in the maintenance of theagreement and the business relationship.

MAINTAINING CONTACTS

Another thing you can do to maintain a relationship involves an amazing technology: thetelephone. Pick it up from time to time and callyour partner. Find out how things are going— onthe project and with business generally. Perhaps atechnical person at the company was your firstcontact, at a trade show in Cleveland, who somehowsince dropped out of the picture; or a marketingperson who once explained to you in great detailthe potential of your technology if applied to a particular market, and who, in the process, gave youan excellent explanation of how distribution channelswork. Call these people! Even if you have sincemoved on to having a relationship with the presi-dent of the company, your first contacts are oftenyour best contacts. Keep the lines of communica-tions open.You never know what you may hear.

DOCUMENT EXCHANGES

Sharing documentary information is anothermeans of maintaining your business relationship.Perhaps you have developed a new application foryour technology, or have improved your capability.News of these things would certainly interestyour partner. Perhaps the new application mightapply to their business—perhaps not. But the actof sharing information can itself be a confidencebuilder, and is another way to keep the lines ofcommunications open.

Sharing information can be profitable as well.An idea you come across that strikes you as mar-ginally interesting may provide your partner withthe inspiration needed for a product improvement.Provided you have covered your bases in the agreement in regard to grant backs and productimprovements, sharing such information should notcause you problems.

EXTENSIONS

Earlier we noted that a well drafted licensingagreement should contain termination clauses,which allow you or your partner to escape fromthe deal if, for some reason, things do not work out.



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If you succeed in maintaining a positive businessrelationship with your partner, at the end of theterm of the license both sides may want to agreeto an extension. In anticipation of this possibility,a carefully drafted agreement should also provide for extension of the license, providedboth parties consent to such an extension at theend of the term. Such a clause will have theadvantage of sparing the parties the need to renegotiate the license, and may in fact help keepthe partners looking beyond the term of theagreement and focused on maintaining a mutuallybeneficial relationship.

REFLECTIONS

A wise licensing professional once shared thismaxim:“The success of any licensing agreement isinversely proportional to the number of times it istaken out of the filing cabinet over the term of theagreement.” His point goes to the importance of“spirit” in a licensing agreement.

Partners who trust one another and expectto work well together do not need to go checkingthe chapter and verse of an agreement every timea question comes up. Successful partners workthings out.They discuss disagreements candidly,they maintain contact with one another, and theystay focused on making the agreement work forboth parties.

The “spirit of agreement” is especiallyimportant. For agreements, as exacting and ascomprehensive as they should be, cannot possiblyanticipate every contingency. Invariably, unforeseendevelopments will arise, and partners will have todiscuss the details and ramifications and workthem out.That—not legally-binding words on anotarized page—is what a partnership is all about.

Finally, such unforeseen developments do notalways call for amendments to the agreement. Infact, they seldom do. Letters or memoranda ofunderstanding often suffice to document new plansbased on unexpected developments.Agreementsshould be amended only in cases of fundamentalchanges. If you have done your legwork, done yourhomework, and sought the counsel of experiencedprofessionals, such fundamental changes should be rare.

COMMON MISTAKESIN NEGOTIATING AGREEMENTS

The most common mistake one finds inlicensing is the tendency of licensees and licensorsto negotiate themselves.The experienced hand inindustry, after all, may have seen hundreds of licens-ing agreements in his or her time.The questionnaturally arises:“Why do I need to hire someoneto do something I’ve been doing all my life?”Because, even if you are a lawyer, you need an outside professional to handle the negotiations andthe documentation. For the licensor who has spentyears developing a technology, critical questionsabout its performance may deliver a personal stingand trigger an emotional response—as if the otherside had insulted one’s children. Furthermore, thedetachment and attention to detail that outsidecounsel will bring to the negotiation will serve youbetter in the end. Perhaps, having focused on whatyou wanted to achieve from the agreement, andbeen given it, you make a concession simply toconclude a deal that six months later you regret.A professional paid for this service, on the otherhand, will be less vested in the negotiation, and better able to critically examine the potentialimpact of each clause.

Another entirely too common mistake is thetendency to see negotiations as adversarial. Peopleadopting the “warfare” view of negotiations willemploy techniques like using “good guy/bad guy”scenarios, throwing fits of temper, low-balling,changing negotiators, walking out of negotiations,and more.The tactical use of such techniques is aserious mistake. First, they threaten to seriouslydamage your credibility (if you think the other sidehas not seen them, you are probably wrong).Second, they invite the same kind of response fromyour potential partner, bogging negotiations downin posturing rather than in getting an agreementdone, which, since you both hired lawyers, is costing the two of you money.And third, it undermines the potential for long-term amicabilityand profitability in the relationship, by causing theother party discomfort, by forcing them to makeconcessions they probably should not make, and bycommitting them to doing things they probablycannot do.While the more self-consciously “hard-nosed” will call our approach naive, webelieve that theatrical contrivances will cost youeventually by making you look silly, by forcing a


partner to accept conditions that they cannot livewith, and by poisoning the reservoir of good willthat a successful deal creates.

Remember that a licensing agreement isabout a relationship and that a relationship issomething you maintain through contact.While the“thanks very much, now send me my royalties.”mentality is common enough, it does not, in thelong run, do very much to protect one’s interests.Keep contacts open and regular, and stay abreast ofthe latest developments. Call people. Bother tokeep an eye on things.At the very least, you willstand a much smaller chance of being surprised.

Finally, the best agreements are ones thatinvolve technology licensed at an appropriate stageof development.Too many licensors have rushedinto a deal for a technology that would have fetched


CHAPTER FOURa higher price had they only taken another coupleof months to do the testing themselves; likewise,too many licensees regret having made deals fortechnologies too early in the game, thus saddlingthemselves with development and testing work thatcosts them time, money, and anxiety.A licensingrelationship is like a marriage in many ways. One ofthe worst things you can do is rush into it.

CONCLUSION

You now have enough information to beginmaking the licensing decision. Licensing is not foreveryone.And licensing can be as difficult, in itsown way, as starting or expanding your own busi-ness.The trick of succeeding in licensing is to “ridethe expert express” thereby avoiding the pitfalls aprofessional will steer you around.We wish you thebest possible experience with licensing.

29NEGOTIATING A LICENSING AGREEMENT


APPENDIX ONE

30

LICENSING IN:WHITE INDUSTRIES

White Industries has been a manufacturerof industrial brooms, mops, brushes and the likefor many, many years. It is a public company, withthe White family owning a substantial amount ofthe stock.

A few years ago, Jim White, the CEO ofWhite Industries and the grandson of the founderof the business, decided that industrial cleaningchemicals was a natural diversification for WhiteIndustries. Of real importance to White was hisdetermination that there was room in the U.S. market for another source of industrial cleaning chemicals, particularly one in the advantageous position of White Industries.White reasoned that the customers of brooms, mops,and brushes were users of industrial cleaningchemicals, so the new products could be soldthrough the existing channels used to sell the current products and under the highly regardedWhite Industries label.

White could not achieve its diversificationgoal through the acquisition of a manufacturer ofindustrial cleaning chemicals.The cost of doing sowas beyond the means of White Industries andWhite was unwilling to part with a large block ofstock to make such an acquisition.

White decided against “starting-from-scratch” to develop the new product line, hiringexperienced product development professionals,feeling that the risks were too great.Although thecompany had a certain amount of knowledgeabout industrial cleaning chemicals because theirnature and characteristics had to be taken intoconsideration in the design and development ofthe brooms, mops, and brushes, neither White noranyone else in his company knew enough aboutthe new business to develop adequate confidencethat they could manage product development andestablish the manufacturing capability for the newventure entirely on their own.Also,White esti-mated that it would take at least three years forWhite Industries to introduce its new productline if the company proceeded in this way.Thiswas far too long to suit White.

White also considered a sales agreementwith a manufacturer of industrial cleaning chemicalswho would bottle and package these productsunder the White Industries label. But he decidedagainst such an arrangement because White wantedto control the manufacture of products sold byWhite Industries.White did not want to be at themercy of another party in negotiating prices nordependent upon someone else for timely deliveriesof products. Much of White’s thinking reflected the mindset of a manufacturer who wants to manufacture the products it sells, rather than resellsomeone else’s products.

White decided that his diversification goalcould be achieved best by a license with a manufac-turer of industrial cleaning chemicals and he setout looking for such a manufacturer. He contacteda few U.S. manufacturers and quickly confirmedwhat he expected, that none were interested insetting up a U.S. competitor by putting WhiteIndustries in the industrial cleaning chemicals business. It became apparent that White wouldhave to find a foreign manufacturer who had noU.S. market to protect.

White’s search for such a manufacturerinvolved reviewing trade directories, contactingtrade associations, and making informal inquiries ofusers of industrial cleaning chemicals. He concen-trated his efforts in Europe and Australia. Hisrequirements were that the manufacturer have acommercially proven product line and a good repu-tation. By contacting customers,White not onlyfound prospective licensors but also learned aboutthe quality of the products sold by these manufac-turers and their reputations and reliability.A greatdeal of time and effort went into the search.Whitemade two trips to Europe and one trip toAustralia.While on these trips,White visited a fewmanufacturers who, after an initial impression,seemed to meet his requirements.

One of the companies that White visitedwhile in Australia was Down Under Chemicals.Down Under Chemicals indicated to White that itwas interested in a manufacturing license. Early inthe initial meeting, the parties discussed anarrangement that included a sales agreement

APPENDIX ONE: CASE STUDIES

which would precede the license.With such anarrangement, Down Under Chemicals wouldachieve increased sales and White Industries could enter the industrial cleaning chemicals business fairly quickly.White decided on DownUnder Chemicals as his first choice and, threemonths after embarking upon his search, startednegotiations with the company.

Over three months,White and DownUnder Chemicals negotiated a deal that included:

1) a two-year sales agreement under which Down Under Chemicals would bottle and package products for White Industries with the White Industries label, and

2) a manufacturing license that included:A. technical assistance, andB. patent rights.

For the most part, the arrangement wasnegotiated during visits by White to Australia and byDown Under Chemicals people to the United States.

White, at the outset, was interested in onlya one-year sales agreement, but Down UnderChemicals explained that it needed some quickbenefits to justify entering into the license andthat two years of sales would satisfy this need. Inreturn, the manufacturing license did not includeany initial, up-front payment.

The manufacturing license called for royaltypayments by White Industries based on sales, withthe royalty rate declining as volume increased. Inreturn, Down Under Chemicals agreed to providetechnical assistance in helping White develop itsown manufacturing capability.This included assistance in layout of the manufacturing facility,selection of equipment, choosing U.S. suppliers ofraw materials, and much documentation about theproducts and manufacturing procedures. In addi-tion, employees of White Industries were to betrained at Down Under Chemical’s plant inAustralia and at the White Industries’ facility after it was in place.Although the license includedthe grant of rights under patents, the moreimportant part of the license, as far as White was concerned, was the commitment to providetechnical assistance that would establish White


APPENDIX ONEIndustries as a qualified manufacturer of industrialcleaning chemicals.

With the agreements signed,White Industrieswas selling industrial cleaning chemicals made byDown Under Chemicals nine months after thedecision was made to enter this business by licens-ing. After two years and with the White Industries’manufacturing facility in place,White Industriesstarted producing industrial cleaning chemicals.The parties decided to extend the sales agreementfor six months for some of the products, so thatWhite Industries could ease into manufacturemore gradually.

The White Industries story is typical ofarrangements of this type that are taking place allthe time. Companies looking to grow by licensingtechnology identify the technology of interest. If, asin the case of White Industries, the new productsrepresent a diversification, the company looks forcommercially proven technology because, not beingfamiliar with the business to which the technologypertains and lacking experience with the technicalfield, the company is not able to judge the potentialof unproven technology and cannot afford the riskof basing a new business on unproven technology.

By comparison, a company seeking to expandits existing product line can be interested in eithercommercially proven technology or unproven tech-nology. It is able to assess the merits of unproventechnology falling within its technical expertise andthe risk of predicating a new product on this tech-nology is acceptable. If we revisit White Industriesyears after it has become an established manufac-turer of industrial cleaning chemicals, we see that itis in a good position to acquire unproven newtechnology pertaining to industrial cleaning chemi-cals because now, after years of experience withsuch products, it is able to judge the potential ofsuch technology.With the acquisition of such tech-nology, the emphasis will be on the proprietaryposition of the technology being acquired, namely,patent protection and trade secrets, because WhiteIndustries needs little technical assistance in a business in which it is established.

For the most part, I have told the WhiteIndustries’ story from the perspective of the buyerof the technology. However, for every buyer of

31APPENDIX ONE: CASE STUDIES


APPENDIX ONE

32

technology there is a seller and, therefore, theprospective buyer, especially one who initiatesthings as White Industries did, must determine veryearly why a prospective licensor is interested inlicensing its technology. Down Under Chemicalswas interested because of the two-year salesagreement and the long-term licensing income thatwould be generated from sales in a market inwhich it did not participate and had no plans fordoing so.

The search for the technology and theprospective licensor is dependent upon the nature of the technology.When searching for commercially proven technology, the identificationof prospective licensors is fairly straight-forward.They are the companies already producing theproducts of interest.

When searching for technology that isunproven, identifying prospective licensors is likelyto be more difficult because the public’s exposureto such technology is not nearly as great as toproducts that are already on the market.Typically,the sources of unproven technology are individuals,universities, independent R&D companies, the U.S. government, corporations having by-producttechnologies that for various reasons are not thebasis of a business, and consultants or brokers representing a party having technology available forlicensing.Technologies available for licensing can belocated in databases or published listings or oftenare exhibited at technology fairs. Fortunately forprospective buyers of technology, many partiesinterested in licensing their technology will be theones who initiate things by approaching theprospective buyers.

Once contact is made and there is an initialindication that the parties are interested in makinga deal, the prospective licensee must assess thetechnology and determine if the prospective licen-sor has the wherewithal to provide technical assis-tance if that is important. If the patent position ofthe technology is important, the prospectivelicensee should arrange for a study and analysis ofthe scope of coverage afforded by the patents andof the validity of the patents.

Negotiation of the terms of the license canbe simple or complex depending on the nature of

the arrangement, and quick or protracted depending on the experience and skills of the parties. Except for the subject matter of the negotiation, negotiation of a technology license isgenerally similar to the negotiation of other business transactions.

LICENSING OUT:ALPHA-BETA MEDICAL INSTRUMENTS

Alpha-Beta Medical Instruments is a suc-cessful young American company that produces aline of proprietary medical monitoring equipment.Alpha-Beta management recognized early on thatthere were both domestic and foreign markets forthe Alpha-Beta equipment. Alpha-Beta manage-ment also recognized that Alpha-Beta could notafford to establish foreign manufacturing facilitiesduring its initial growth. Nor could Alpha-Betadevote the management time, effort, and attentionrequired to establish and operate foreign market-ing, sales, and service organizations through which it could sell its equipment made in theUnited States.

Alpha-Beta decided to do something aboutexploiting the foreign markets.Alpha-Betaapproached two established and well-known manufacturers of medical equipment, GammaMedical Products in France and Delta MedicalProducts in Japan, with proposals that the twocompanies enter into sales agreements withAlpha-Beta to market, sell, and service in Europeand the Far East equipment made by Alpha-Beta inthe United States.

Delta Medical Products was interested insuch an arrangement and entered into a salesagreement with Alpha-Beta. Gamma MedicalProducts was more interested in making and sell-ing the Alpha-Beta product line under a licensefrom Alpha-Beta, rather than selling units made by Alpha-Beta.Alpha-Beta, on the other hand, being amanufacturer, preferred to make and sell prod-ucts, rather than simply receive licensing income.After considering a number of alternatives andthe possibility that Alpha-Beta might lack thecapacity to meet the needs of both Delta MedicalProducts and Gamma Medical Products if bothwere very successful in operating under salesagreements,Alpha-Beta decided that the best way

APPENDIX ONE: CASE STUDIES

to proceed in Europe was to grant the licenserequested by Gamma Medical Products.

The license agreement was predicated mainlyon the grant of exclusive rights under theEuropean patents of Alpha-Beta directed to theAlpha-Beta product line.The transfer of productdrawings and product specifications was alsoincluded in the license. Being a long-time producerof medical equipment, Gamma Medical Productsneeded little more to introduce and market theAlpha-Beta products under its own trademark.

As a result of the license agreement withGamma Medical Products,Alpha-Beta received substantial licensing income and the only effortrequired, besides negotiating the license agreement,has been the collection, copying, and delivery ofproduct drawings and specifications. Of majorimportance to Alpha-Beta was the large up-frontpayment received from Gamma Medical Productsthat made it unnecessary for Alpha-Beta to obtainoutside funding for a new product research anddevelopment program.


APPENDIX ONEIn the license granted by Alpha-Beta to

Gamma Medical Products, the European patentsthat covered the licensed products were the mostimportant part of the license to Gamma MedicalProducts. Because of these patents, Gamma MedicalProducts was the only company that could produceand market these products in Europe. It obtainedand continues to enjoy a proprietary position withthese products.

Gamma Medical Products, being an establishedsupplier of such products, did not need any assis-tance in the design, manufacture, and marketing ofthe licensed products.The product drawings andspecifications were included in the license to faciltate introduction of the products in the newEuropean market. Gamma Medical Products savedtime and money because it had these materials, butit could have succeeded without this know-how.Thedrawings and specifications did not add appreciablyto the knowledge base of Gamma Medical Productsand, therefore, were of limited value to them.

© Ratner and Prestia, 1989,All Rights Reserved.

33APPENDIX ONE: CASE STUDIES

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Documents

Making the Licensing Decision · 2013-10-07 · information on which the document is based. We are indebted to David Lux (Bryant College) and Marvin Guthrie (Massachusetts General