Franki Chamaki » Blog Archive » Things to consider when striking a license deal in a startup
Things to consider when striking a license deal in a startup

Below is a quick summary of things to consider when setting up a partnership such as joint development agreement or licensing.

 

  1. First determine the “Principles of  our partnership”  – who brings what, why and expectations?
  2. Determine what structure is the business to proceed with (i.e. Joint spinout vs licensee agreement)
  3. Determine the business terms (i.e. Term sheet) we would like to operate under
  4. Determine the commercial terms based on terms sheet.

With #2, determine the business terms, you need to determine few things such as.

 

1. Key business terms over IP:

  1. Right to manufacture the product as we see fit
  2. Right to distribute in x geographic territory
  3. Right to use the IP in x field of use
  4. Right to  negotiate licensee at time x and time z
  5. Right to use IP over x time/years
  6. Right to access documentation, service and support for the IP from licenser
  7. Right to sublicense IP to x partners (i.e.  manufacture and design firms)
  8. Right to future versions of the IP (i.e. Any updates or advancements)
  9. Agree to a non-compete provision
  10. Others –  what else do we need to consider ???

Granted, the MORE you add these “exclusive terms” to the license, the more expensive the royalty fee becomes.

You can either therefore:

  • Limit above terms to when we have “achieve certain minimum” product sales only
  • Limit the time to a shorter time period
  • Limit the field of use or  geographic territory etc.

2. Financials

If you agree on the above terms, you than need to consider the financial aspect of your agreement such as:

  1. Upfront fee:  How much should you provide as upfront (if any). For example, shall pay you $X US dollars upon execution of our agreement or is it once you release a beta version or if sales reach a minimum etc? Or others?  What is best for us?
  2. Royalty fee:  For example, should royalties be paid based on X % of “adjusted gross sales” or is it “net prices” or “revenues”?  You need to consider your partner’s  affiliates and sublicensees too.   What minimums on royalties (if any) do you propose? Should put a caps these royalties once sales reach x?  If cap, and they agree, when is it ideally do we to renew it? Annually or at milestone?
  3. Non-sale based fees on income:  what about things that are not directly related to sales, like data cloud usage and storage for your product  If you do, what additional x% do you pay for all non-sale based income?  Again do you cap this?  Is it a step scale?
  4. Minimum royalties:  do you need to be proactive and suggest an annual minimum commitment?  For example, you shall pay annual minimum royalties according a schedule:  2013 x%, 2014 x%, 2015 x% etc. A royalty may begin at say 2% (of the average sales price), but decrease to 0.5 percent over the life of the agreement.

3. Milestones

  1. Payment milestones triggers: Need to consider key milestones from when royalties are made (i.e.  When certain minimum average monthly sales are met or instalments may be timed to coincide with development milestones a beta release??)
  2. Working milestones triggers:  When MVP testing is completed successfully or we have submit a formal business plan, release a beta version or commencement of manufacturing or first 50,000 sale.

4. Questions

  • What leverage do you have that can be used to negotiate a desirable outcome?
  • Is there anything else you can use to leverage your position to get a “good deal”?
  • What specifically do you want to licensee? What aspect of the IP do you want to license?
  • How much should you pay for the IP licensee?  This will again depend on number of exclusivity you set, but need to consider:
    • How much can I afford to pay for this license?
    • What is the maximum % realistically can you pay to make reasonable profit if your product sells for $50?
    • What will our market bear?
  • What data and documents do we need from your business partner to help you develop your product and provide to marketing, manufacturing etc
  • What are performance/warranties/indemnities?  What happens if their is IP defect? Or legal action/claim against your IP partner?
  • What is our exist strategy should we decide, after 1 or 5 years its not meeting business objectives?