NEGOTIATING LICENSE AGREEMENTS THAT PROTECT YOUR INVESTMENT

1. NEGOTIATING LICENSE AGREEMENTSTHAT PROTECTYOUR INVESTMENT Robert M. Hunter, Ph.D. Director of Research YES Technologies

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

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

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

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

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

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

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

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

10. How do you patent an idea? (continued) • Prepare and file a regular patent application ($4,000+) • Negotiate wording of claims with Examiner • First Office action ($1,000+) • Final Office action ($1,000+) • Appeal, if necessary ($5,000+) • Pay issue fee ($1,000+) • Proofread issued patent

11. What are the odds? • Odds of obtaining a patent • Overall, about 50-60 percent • If you hire a patent practitioner, over 90 percent • May fail to cover much intellectual property • Odds of making money from a patent • One in 50 patents is licensed/assigned • One in 100 new products makes money • So, your odds are about 1 in 5,000

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

13. Hard Lesson No. 3 It costs just as much money to develop and patent a worthless idea as a valuable one Choose a valuable one and focus on it

14. When do companies pay moneyfor intellectual property? ONLY WHEN THEY ABSOLUTELY HAVE TO

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

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

17. Valuation spreadsheet

18. Valuation spreadsheet (continued)

19. Present Value Valuation Factors • Market size – projection based on research • Market share – logistic (S-shaped) curve • Unit price – value to customers • Unit cost – manufacturing + overhead • Discount factor • Venture capitalists: 50-100 percent/year • Manufacturing companies: 25-50 percent/year • Inventors’ share – 25 percent of pre-tax profit or industry practice

20. Call Option Approach • A patent behaves as if it is a call option on a future technology asset • Derivative of the Black-Scholes options pricing model used by professional options traders • Software and consultant referrals available from The Patent & License Exchange at http://www.pl-x.com

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

22. Approaches to Making Money • “Carrot” approach • Locate a potential licensee/assignee (preferably 2+) • Find an internal champion and help him sell idea • Negotiate a deal • Collect • “Stick” approach • Find an infringer • Convince a contingency-based litigator to represent you (for 35-50 percent of the award) • Sue the infringer (will cost each side about $1 million) • Win and collect

23. Finding Customers • Customers are the people who work for the companies, not the companies • A potential customer for you is someone else’s dissatisfied customer • Customers are people with money and the authority to spend it • Only customers’ problems require solutions. If you really understand a problem, solving it is usually trivial • If you want to sell something to someone, you must first listen to that person

24. Identifying Potential Licensees • Avoid market leaders (not hungry enough) • Focus on second and third tier companies • Seek those with longer term perspective • The company is owned or managed by its founder • The company is owned or managed by a first- or second-generation immigrant to the U.S. • The company is a foreign company, preferably European (manufacturing must occur in U.S.) • Develop brochures, presentations • Contact marketing departments

25. Relationship Building • In larger companies, try to develop at least three different contacts (people who work for large companies have a habit of disappearing) • Start developing trusting relationships with your contacts/customers (first date, second date, third date, etc.) • Ask open-ended questions: who, what, when, where, how (listen and paraphrase) • Nothing happens without an internal champion

26. Overcoming Paranoia (Yours) • Try not to be too paranoid (a little caution is OK) • Excessive paranoia appears to be a "workplace hazard" for inventors • Before someone can trust you, you must be able to trust them • Nothing happens in the technology transfer field without trust (so, cool that imagination!) • Your potential licensee does not want to steal your invention, or buy a "pig in a poke“ • Protect yourself, then show him/her the pig!

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

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

29. Typical License Terms Checklist • Effective date of the agreement • Who the parties to the agreement are • “Whereas clauses," explain intentions of the parties • License grant that explains type of license, field of use and/or the geographic area • Description of the technology/invention/know-how that is being licensed, usually including a listing of the patents in an appendix. • Payments (e.g., running royalties and minimum annual payments) involved, how determined and accounted for, and when to be paid • Term of the license and what happens after it’s over • An agreement to share information and to keep secrets • Who owns improvements to the invention

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

31. Top TenCharacteristics of a Good Negotiator • Preparation and planning skill • Knowledge of subject matter • Ability to think clearly and rapidly under pressure and uncertainty • Ability to express thoughts verbally • Listening skill

32. Top TenCharacteristics of a Good Negotiator(continued) • Judgment and general intelligence • Integrity • Ability to persuade others • Patience • Decisiveness Does your negotiator have these characteristics?

33. Negotiation Techniques • Be knowledgeable: know the customer, their problems, how much money your invention will make or save them • Be cool: just the negotiations phase can take six months to a year, depending on how fossilized the company is • Be persistent: keep things moving on your end • Be assertive, but fair: negotiate a win-win deal

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

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

36. INVENTION MARKETING WEBSITES • Patent marketplaces on the Web • www.pl-x.com • www.yet2.com • www.delphion.com • www. ipex.net • www.patex.com • www.inventorfraud.com • Protecting and licensing inventions • www.webpatent.com