Intellectual Property (IP)

Fundamental Considerations

Observations from our Founder and

Managing Director

Topic: IP Use Considerations for the Inventor and Licensee

Frequently, we are asked to join the commercial conversations with a

“to-be” enterprise in its embryonic stage, often involving an inventor

who has created a new invention, formula or widget, and a

“promotor” hoping to be in on the ground floor of the “multi-billion

dollar” opportunity.

As a general rule, we cannot represent both parties, and default to

representing the inventor for a number of reasons.

Practically, the wealth of the “new invention” rests with the inventor,

provided he or she does not foolishly choose to self-represent

without causing self-inflicted damage. Brilliance as an inventor does

not translate to brilliance in crafting a licensing agreement. There is a

reason a surgeon does not take out his own appendix.

The following memorandum was sent to an inventor-promotor team

in the late spring of 2025 to specifically provoke the conversations

necessary to define rights and responsibilities. Bearing in mind that

the parties had already agreed to a very bold market introduction

strategy for the invention, raised capital, spent capital, proposed

contracts to third parties without memorializing any of the details

outlined below. The unfortunate result, after this defining exercise

was initiated is revealed in the final paragraphs of this memorandum,

and underscores why these foundational issues must always be

addressed first.

Gentlemen:

I am well aware we have not yet negotiated and memorialized our

firm’s retainer for involvement, but wanted to get you rolling on some

very important processes. I am in Europe with our IP team for the

coming week, but you can make progress in my absence.

For the purpose of allowing you to begin working on some of the

core relationship issues around the IP, I am sending this brief

missive.

This writing does not concern itself with entity structure but rather

focuses on the rights to be memorialized by and between the parties.

You will need to work through these discussions before you can even

consider conducting any businesses with third parties. To be

absolutely clear, your formed entity does not yet have any defined

rights to exploit the IP, which would allow your entity to enter into

third-party agreements for use. Please, for your own protection,

unless and until you have memorialized your specific rights as

Licensor (Inventor) and Licensee (Enterprise), do not negotiate

commercial terms or execute third-party LOIs or contracts.

Mr. Inventor, you are the owner of the Intellectual Property

(hereinafter “IP”).

Mr. Licensee, you are the prospective exploiter of the IP developed

by Mr. Inventor.

As discussed briefly in our virtual meeting, details matter.

It is normal that the process of sorting through the “nits” and details

will raise some issues that need to be worked out. This writing is not

about filing IP, jurisdictional concerns, or efficient tax strategy.

It is simply a primer regarding IP and the terms of rights and usage.

It is not exhaustive or even complete. It is your starting point for the

discussion that must take place, ASAP.

Mr. Inventor:

1. Where Will the IP be Domiciled? Assume you will have a

pass-through entity (LLC or Sub S) to which you will

transfer (assign right, title, and interest) the information the

attorneys will use to file for IP protection. Moving forward,

we will use the term “IP” designation to be inclusive of

patents, formulas, trade secrets, trademarks, and all other IP

rights defined in the licensing agreement.

2. Rights or Title? As the inventor, you have a choice to convey

the IP itself or convey rights to utilize the IP to a third party.

a. If you convey the IP for some type of consideration, it is

then entitled to an entity you do not fully own or control,

and regaining those rights is typically a long and

expensive litigation process, if it is even possible.

b. Most inventors follow the course of retaining ownership

of the IP and granting rights of use (a license to exploit)

based on performance benchmarks, unless a third party

is prepared to write a significant check that fully values

the perceived lifetime use of IP and its potential future

derivatives.

3. Licensor and Licensee: If you are granting the right of use

of the IP, there are specific terms to be memorialized that

define the conditions under which the licensee may exercise

those rights. You (or your entity) are the licensor. Some of the

common terms include:

a. The Very Specific IP being Licensed. Described in

unmistakable detail.

b. Term of the Grant of Licensed Rights. This is normally

for a period that runs with the patent, subject to a first

right of renewal at termination. It can also be for a

limited time, say five years with rights to renew, perhaps

conditioned on the performance of the licensee over the

previous term, or it can coincide with the expiration of

patent protection.

c. Exclusive or Non Exclusive as to All Uses. Granting an

exclusive license to any party for any period of time or

territory carries risk. Therefore, any “exclusive” grant

must be fully analyzed for its attendant risk profile.

d. Grant to All or Limited Territories. Granting an

exclusive license for all territories normally creates

challenges that are best avoided. Granting limited use to

a specific territory with either a right of first refusal for

expansion or an automatic expansion based on

benchmarks, is a traditional strategy that protects both

the inventor and the licensee.

e. Grant for All Applications, or Limited Applications

Thoroughly Defined. An IP may have multiple future

applications that are completely unknown when the first

license is granted. It is always wise to thoroughly define

the application of the IP that is licensed to a specific

application. You may also grant a licensee a first right of

refusal for any new application, with a specific

timeframe to exercise the right before the inventor enters

licensing relationships with third parties.

f. Initial Payment or Consideration. This can be cash,

cash and a note, ownership in the entity licensing the

right of use, or some combination thereoff.

g. Royalty Stream: It is normal to have an agreement that

provides a percentage of the gross revenue of the

licensee that is backstopped by a minimum royalty

payment not dependent on the revenue of the licensee.

Amounts, and timing must be clearly stated. It is

uniformly unwise to base royalties on the net income of

the licensee.

h. Guarantee of Payment: Is a third party guaranteeing

royalty payments? If so, who, under what conditions,

and over what period of time?

i. Penalty for Non-Performance: Are there penalties for

deadlines missed, payments missed, or failure to execute

the business plan as agreed? Are there penalties

assessed for violations of the terms and conditions?

j. Limitation of Use. Typically, the grant of the license to

use the IP describes the:

1.) Territory. A geographic reference such as a city, a

state, a country, or a non-geographic reference, such

as a specific industrial vertical.

2.) The Specific Application or Use. IE: Limited to

certain verticals or geographic targets, such as

airports in six states only, which would preclude

manufacturing verticals in the same geographic

territories.

k. Benchmarks for Performance Necessary to Retain

Rights of Use.

1.) It is never wise to grant a license based only on an

initial royalty payment from the licensee. What

capital must be available to the licensee for

exploitation of the IP to obtain and maintain rights?

2.) What financial or deployment benchmarks must be

achieved to retain rights? These benchmarks can

include production milestones, deployment

schedules, or revenue targets per quarter.

l. Reversionary Rights: What actions or conditions would

trigger a reversionary action, taking back the right of

use? These are not only financial issues. The list will

frequently include a bankruptcy filing by the licensee,

cease-and-desist orders from a regulatory agency, a

felony conviction of a principal, litigation losses, or the

death of a key player.

m. Assignment of Rights of Use: Can your licensee assign

the rights you have granted to another party? If so,

under what circumstances, conditions, or disclosures?

n. Sub-Licensing of Rights: Can your licensee sub-license

the rights of use to a third party? If so, under what

conditions? Must you approve the sub-licensee? Under

what conditions can you disapprove?

o. Right of Inspection: Retaining the rights to inspect the

books and records of the licensee is standard practice to

ensure that the royalties paid align with the actual

financial records.

p. Substitution for Breach by Licensee: Regarding quality

control of operations, can the licensor step into

contracts negotiated by the licensee if the licensee is in

breach or defaults to avoid financial or reputational

damage to the IP?

q. Ownership of Improvements: Assuming the technology

continues to evolve, and the licensee actually makes

improvements, who owns the enhancements? Typically,

the IP owner retains ownership of all the improvements

made by a licensee but grants an additional license to

the licensee for those improvements at no additional

charge, running concurrently with the original term of

the agreement.

r. Define Responsibility:

1.) Who bears economic and legal responsibility for

compliance?

2.) Who bears economic and legal responsibility for

defense of the IP?

3.) Who bears economic and legal responsibility for

liability issues that arise from use of the product,

injuries, or damages?

4.) What are the benchmarks for the fiscal strength of

the licensee? How often is it verified?

5.) What insurance is necessary for the licensee, and in

what limits?

6.) Who provides training to utilize the IP?

7.) Who pays expenses for training processes?

8.) What constitutes breach, and what are the cures for

breach?

No one has the ability to predict all future events that

could impair the licensee's ability to exploit the IP, and

therefore, you must define what constitutes breach, how

and when a breach may be cured, and what happens if

the breach is not cured.

Mr. Licensee:

1. What are your intentions for exploiting the IP?

2. What are your current resources for exploiting the IP?

3. Under what terms have you funded the development and

testing of the IP?

4. What rights do you expect to have to exploit the IP, and

under what terms?

5. Where, in terms of territory?

6. Which, in terms of verticals?

7. When, in terms of timetable?

8. How, in terms of financial and human resources?

9. Under what conditions: financial, liability, support, training,

etc?

10. What demands for continuity of research and development

(R&D) and support from the inventor must you include?

11. Last, but certainly not least in terms of importance, what

safeguards are in place to demonstrate that the IP is unique,

properly filed, protected, and not infringing on other IP?

While all parties recognize the business plan is a work in progress, it

must be included as an exhibit to the proposed licensing agreement

as multiple paragraphs in the licensing agreement will reference the

business plan.

In Closing:

Gentlemen, good luck sitting down and addressing the questions,

assumptions, and details outlined above. This is the beginning of the

process. Once you reach agreement, legal will draft the first set of

agreements for your review.

I have secure access to the documents as you upload them. I will be

in Europe with our IP attorneys again during the third week of July.

Hopefully, we will be far enough along sorting the relationship

process to begin clarifying the IP strategy prior to that trip, which is

about two months from now. If the discussions are not finalized by

that time, I will be returning to Europe in late August and can

reconvene then.

See you on my next trip. My assistant will follow up to arrange

appropriate meeting times.

Best, Donald

The Unfortunate, but All-Too-Common Result: After reviewing

this memorandum, the parties discovered that their perceptions about

rights of use and terms and conditions for use were, quite literally,

irreconcilable.

The result? They dissolved the relationship when the prospective

licensee could not, or would not, agree to normal, reasonable terms

and conditions for a licensing agreement that protected the inventor's

rights. They are, as of the date of this memorandum, remain in

litigation.

There is no substitute for a detailed prophylactic planning process for

the inventor of any new IP entering into agreements to license IP. It

protects both parties, optimizes the value of the IP, and addresses the

many “what ifs” that inevitably arise in any IP-centered commercial

enterprise.

Successful commercialization of intellectual property begins long

before contracts are signed; it starts with clarity of rights, roles, and

expectations. When those fundamentals are defined early, both the

inventor and the enterprise can build lasting value on a foundation of

mutual protection and trust.

-From the Office of the Managing Director