IP licensing can be a complicated process. According to Rob McInnes, a partner at Dibbs Barker and a specialist in IP licensing and negotiation, negotiating and completing a well-considered and comprehensive technology licensing agreement requires at least 6-9 months of intensive work to complete. So what do you need to do, how do you do it, and what sort of support do you need to get the best possible outcome? McInnes shares his top tips below.
Getting expert advice
While most companies will hire the services of an IP lawyer for the formal negotiation process, you can increase your advantage by getting a lawyer on board from the beginning of the licensing journey, well before it’s time to sit down and make a deal.
An experienced lawyer can provide advice on your IP strategy and insights into the sorts of licensing terms you should be able to negotiate. They can also protect you from inadvertently agreeing up front to proposals that may not be in your best interests.
“People tend to use lawyers when the time comes to do the formal agreement, but the problem is that they might have already agreed in principle on a term sheet that is very unfavourable to them, making it difficult to pull the final agreement back into a decent contract,” McInnes says.
Developing your IP strategy
Licensing is about the selling of intellectual property, rather than the selling of a product. Before you’re ready to license you’ll need a robust IP strategy that outlines all your IP assets, what you’re planning to do with them, and how you intend to protect and exploit them. Your assets should be protected by registered IP rights, where possible.
“It’s important if you’ve got a licensing business model that you plan the IP protection of your products right from the start, and that you plan your research and development with an IP outcome in mind,” McInnes says.
Identifying your market
Extensive market analysis is essential to building a comprehensive picture of prospective licensees – it’s important for you to understand who’s out there in the market place, and why they’d want to access your IP. Remember that a licensing deal doesn’t have to be just between you and a single buyer; you can license in different sectors, across different countries and for different applications.
Determining where along the value chain you should be pitching your idea is also important. If you’re selling an automotive technology, don’t automatically assume that your licensees will be automotive companies like Ford or GM. If you look further up the value chain, you may find another company that supplies specific parts to all the major car companies, giving you access to a much bigger market while still only dealing with one licensee.
Structuring the deal
When it’s time to structure your deal, you need be thinking about both financial and non-financial terms. Financial terms include royalty rates and other terms that define the parameters of the return to the licensor. Non-financial terms include a licensee’s obligations to achieve performance targets, like minimum sales and product launch dates.
When it comes to negotiating a deal, an experienced IP lawyer will help you define a series of reasonable terms on which to begin negotiations. Knowing what you want is key, but it’s important to base your expectations on real-world transaction data that reflects a range of deal outcomes from similar transactions.
“Most start-up licensors have no idea what to actually ask for, so one of the services that an IP lawyer will provide is giving you access to databases of royalty rates and template spreadsheets with which you can model a realistic royalty deal,” McInnes says.
Protecting yourself from unscrupulous operators
As a licensor, you may find yourself fielding shonky proposals that are not in your best interests. Common among these is a request from licensees to keep the deal ‘simple’ – something McInnes says is never, ever a good idea.
“One way that licensees scam licensors is by saying ‘Let’s have a very short, simple commercial agreement. However, the shorter and simpler a license agreement is, the worse it is for the licensor – always, no exceptions,” McInnes says.
“If you’re the licensor, you want the agreement to be as long and comprehensive as possible. All the licensee needs is two lines granting them the rights they want. Everything else in the document is for your protection.”
Rob’s top tips for preparing a successful licensing deal
- Don’t just negotiate with one potential licensee. Identify other prospective competitors in your target marketplace and get them competing with each other.
- Know what you want. A lot of licensors will go into a negotiation without a clear idea of what they want to achieve, which makes it difficult to get a satisfactory outcome.
- Understand that it’s the intellectual property you’re selling and not the product. The product can be as good as you like, but unless the intellectual property portfolio around the product is high quality, you won’t get a good result.