Licensing Strategy for Intellectual

Property

Observations from our Founder and Managing

Director

From Balance Sheet to Royalty Income: Licensing Strategies

for Intellectual Property

Intellectual Property has many descriptors. It can be a design. It

can be an actual widget. It can be a process. Or, it can be a

trade secret formula that is not patented, but protected by

contract law. The question arises: how do we take proprietary

intellectual property and exploit its commercial potential

efficiently, and effectively, with the optimum return on the

minimum of capital spend?

The owner(s) of unique proprietary intellectual property,

individually or corporately, may desire to exploit the revenue

potential without building a company for commercial

exploitation, or defaulting to a franchise business model that

requires the inventor to establish a franchise support company.

One alternative option with significant upside potential for both

initial and recurring revenue, and market penetration without

capital spend is licensing.

The objective of a Licensing Agreement is four-fold, defining

expectations and the intended working relationship of the

grantor of rights (the Licensor), and the recipient of rights (the

Licensee):

1. Generate revenue from the Intellectual Property by both the

licensor and licensee.

2. Protect the Intellectual Property from brand damage for the

benefit of both parties.

3. Enter markets on another party’s capital spend, with

protective measures built into the agreement for the licensee

expending the capital.

4. Remain compliant with all regulations that impact the

commercialization of the intellectual property.

Benefits to the Licensor Include:

1. Potential market penetration, with reduced time and

expenses.

2. Collection of initial licensing fees and long-tail

royalties.

3. Preservation of capital that can be used to expand

research & development (R&D) and broaden the IP

portfolio.

4. Prophylactic measure to strengthen ownership claims of

IP by creating a documented history of use.

5. Establishment of a test bed for IP utilization that

provides a feedback loop to properly sort necessary

improvements surfaced by market utilization at the

licensee’s expense.

6. Avoidance of the time and expense of creating a

company “go to market,” or the alternative, of creating

a franchise model that requires a properly funded and

staffed franchisor company. While many great

enterprise brands exist in a franchise business model, it

by definition, with compliance typically limits upside

potential and cannot limit downside risk for

compliance, brand protection, and execution.

Potential Pitfalls of Licensing:

1. The licensor, in the excitement and rush to bring the IP

to market, shortcuts the normal and fully appropriate

due diligence requirement to carefully and fully screen

the potential licensee(s).

2. The licensee may not be able to deliver on the promises

of market penetration due to inexperience, staffing

issues, or capital shortages.

3. Quality control standards within the licensee's

operations are difficult to enforce.

4. Cross-border enforcement of licensee terms and

regulatory compliance is much more difficult when

done internationally.

5. The IP’s reputation may be damaged by licensee's

actions, which may adversely impact the ability to

secure additional licensees.

6. The licensee may knowingly or unknowingly violate a

regulation or a law, resulting in a cease-and-desist order

that damages the IP’s brand.

7. Locus of control over how the IP is taken to market

transfers from the inventor to the licensee.

8. The licensor may underestimate the necessity of

technical support and be inadequately capitalized or

staffed to be responsive to the licensee's needs,

resulting in default under the terms of the licensing

agreement.

9. It is possible to violate the guidelines of the Federal

Trade Commission (in the U.S. market) through the

structure or execution of the licensing agreement.

Is Licensing the Best Option?

It can be an excellent option, but there are many details that

cannot be overlooked. A licensing agreement is a form of

“business marriage” in which both the licensor and the licensee

make “vows” that bind both parties to specific actions, for

many years, often twenty years or more, with the recognition

that the future is an uncertain mosaic, and no risk mitigation

strategy can or will be developed that perfectly addresses all

potential events.

Mixing metaphors, an inventor is trusting a third party to raise

and mature his or her “child” in a local, regional, national, or

international marketplace beset with competition, thieves,

opportunists, and other very smart innovators at work in R&D

labs attempting to create new alternative solutions that have

potential to eviscerate the licensed IP’s differentiator.

The Process of Creating a Mutually Beneficial Licensing

Agreement Includes, at a Basic Level:

1. Defining the exact grant of rights to be included.

2. Determining under what terms.

3. Defining the period of time.

4. Specifying the territory (geographic area, business

vertical, or specific customers).

5. Defining conditions: What must the licensee actually

commit to do and spend, how and when is the licensor

paid, payment timelines, what constitutes a breach, and

how is a breach cured.

6. Establishing rights of access, accountability and

transparency, (when and how the licensor can examine

books, bank records, or contracts in place or

prospective contracts).

7. Requiring a defined amount of capital to be spent, and

banked by both parties.

8. Setting measurable performance benchmarks

(definable, measurable, accountable).

9. Identifying rights retained by the licensor (including

rights to improvements created by licensor).

10. Establishing protective terms and conditions defined

and binding for both the licensor and licensee.

11. Creating a clear roadmap for who defends the

intellectual property from liability or misuse lawsuits if

such events occur.

12. Articulating rights of assignment or sale to third parties.

There is literally no substitute for utilizing a law firm with

practical historic experience, in both successful licensing

arrangements, as well as failed licensing agreements. Such

counsel should act as advisor to the proposed transaction and,

drafter of the actual binding agreements, and all the supporting

exhibits. Typically the full document set, including the

requisite exhibits, exceeds two hundred pages. This is not a

“Google search” for a boilerplate document download from a

sample document subscription service.

Learning from Experience

Business schools such as Wharton, McGill, and Harvard,

among others that offer practical business case studies,

successful as well as disasters, as a component of the MBA

offerings curriculum, have no shortage of failed licensing

arrangements to review. Inventors who died as paupers while

their creations went on to generate millions or even billions in

revenue. There are licensees who discovered they were

unprotected in a territory after spending their precious capital

to establish a “market beachhead,” only to find that language in

their licensing agreement allowed the licensor to salt additional

licensees in other market verticals creating direct competition

with the licensor.

Licensing an intellectual property to a competent, well funded,

properly staffed, experienced business licensor is often the very

best solution to rapidly enter a market and reap mutual benefits

of royalty revenue and business profit. But, it is a “marriage,”

and as a business marriage, ongoing divergent priorities or in

the alternative, a divorce is costly to both parties.

Anecdotal Information

We were recently retained to conduct a full review of an

intellectual property based startup, including the requisite

review of documentation granting rights of use for developing

intellectual property. In the process, we discovered that no

documentation existed that actually granted the right of use

from the inventor to the enterprise. Because the enterprise had

raised several million dollars of private capital to exploit the IP

with assumed, but undocumented right of use, our lead legal

counsel on the project made a checklist of supporting

documents that needed to be prepared and executed.

In the process of properly sorting the intended grant of rights

from the inventor to the licensee versus the perceived rights

assumed by the licensee, the parties entered into a full scale

melt-down, and are now leaning toward litigation, rather than

negotiating a satisfactory arrangement. In this case specifically,

absence of documentation creates serious securities compliance

problems for the promoter, and unfortunately ties up the

intellectual property of the inventor until all issues that could

have been sorted prophylactically, are resolved either through

negotiation or litigation.

Final Observations

There is absolutely no substitute from the perspective of either

the inventor, or the licensee for shortcutting the process of

defining rights regarding the commercial exploitation of IP.

Good intentions do not work. Handshakes do not work.

Promises do not work. Hand-written agreements on legal pads

do not work.

The process of creating the documents that clearly articulate

expectations of both parties forces the inventor, licensor, and

entrepreneur licensee to address, define, and negotiate an

agreement with clearly articulated terms for mutual

performance, and necessary covenants for performance that

must, in most cases, survive many decades. In our experience,

advancing such a project on a weekly basis takes ten to twelve

weeks to reach executable documents if all parties are fully

cooperating.

— From the Office of the Managing Director