The Basics of Technology Funding and Business Deals

1
The Basics of Technology Funding and Business
Deals

• Rosemary French
• Innovation Strategist
• IC2 Institute, University of Texas at Austin

2
Biographical Info

• Rosemary French, BA
• Innovation Strategist _at_ IC2 Institute
• Expertise in Licensing
• Managed Life Science portfolio of over 100
  patents alongside a Senior Licensing Specialist
  at the UT Austin OTC
• Strategic partnership formation for early-stage
  RD for over 20 selected high-value technologies
• Patent license agreement negotiation 15 licenses
  signed
• Start-up creation identified and vetted
  potential CEOs, negotiated startup licenses
  mentored entrepreneurs to create investor-ready
  pitches

3
Biographical info continued

• OTC stats
• UT Austin OTC 25.6 MM FY 10-11
• 150 disclosures, 300 patents processed FY 10-11
• 34 US and 28 Foreign patents issued in FY 10-11
• Involvement in International TTO Initiatives
• Performed on-site training and mentoring at two
  TTOs in Portugal, conducted research on 12
  incubators across Portugal
• Worked with over 50 innovators to provide
  strategic technology development and
  commercialization mentoring

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Key Learning Topics

• 1. Identifying technology funding vehicles
• 2. Rationale for RD partnering relationships
• 3. Basic business deal structures
• 4. Basic business negotiation techniques

5
Fact

• On an average, only 5 to 20 of RD sees the
  light of day
• the rest wither away on the shelf over time.
• (The Aberdeen Group, Boston)

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Discussion

• What is the goal of technology commercialization?
• Why create a TTO?

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Creating a Tech Commercialization Hub

• Pieces of the tech commercialization puzzle
• University research
• TTO Commercialization Strategies
• University-Industry Partnerships
• RD, Start-up Company Incubation Efforts
• Enhance technology commercialization outcomes,
  university reputation

8
Developing TTOs to Leverage Research for Public
Benefit

• Lessons Learned
• 1. Establish networks of TTOs
• Mexican government encourages its public
  technology institutes to establish TTOs as
  networks
• Example Portugal TTO Network generated through
  UTEN
• Small TTOs difficult to gain international
  recognition
• UTEN established common framework for best
  practices
• TTOs can exchange contacts through the network
• International visitors can vet the top
  technologies from the entire network instead of
  visiting one institution at a time
• 2. Define Clear Rules on IP Rights
• Encourage researchers to commercialize their ideas

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Percent of RD Financed by Private Sector
10
Low Level of Patenting in LAC
Public funding of research in LAC has emphasized
the generation of conceptual knowledge but has
been less efficient at energizing technological
innovation such as the production of patents
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RD Investment in LAC

• Challenge Private participation is relatively
  low in LAC ( of RD financed by private sector)
• the majority of countries in LAC invest less in
  research and development (RD) than other
  countries with similar income levels
• LAC Less than 50 percent of RD investments are
  financed by private industry, which contrasts
  with the experience of dynamic global innovators
  such as China, Korea, and the United States

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Things to Consider

• What are some ways to increase interaction
  between your university and potential industry
  partners?
• Examples at UT Austin Ready to Commercialize
  vs. UT system event

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Sponsored Research Example
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CardioSpectra, Inc.

• Prof. Milner in collaboration with Interventional
  Cardiologist Marc Feldman, MD at the UT Health
  Science Center San Antonio
• developed an Optical Coherence Tomography (OCT)
  diagnostic catheter for detecting vulnerable
  plaque.
• allows doctors to better predict the likelihood a
  patient will suffer a heart attack based on
  vulnerable plaque,
• provides diagnostic capabilities currently
  unavailable through existing technologies such as
  MRI, computed tomography (CT), and ultrasound
  devices.
• Milner and Feldman founded CardioSpectra, Inc., a
  company through which the OCT system and catheter
  were marketed.
• Sold to Volcano Corp. for 25MM, with additional
  milestone payments of 38MM

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1. Identifying technology funding vehicles

• Key Concept Funding technologies and funding
  companies are two different things
• When you ask for money, you need to know what you
  are selling
• Colombia example

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How to fund companies

• Friends, Family and Fools
• Private Equity VCs and Angels
• Government Funding
• National Science Foundation
• SBIR (Small Business Innovation Research)
• DARPA (Defense Advanced Research Projects Agency)

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How to fund technologies

• University sponsored research (not typical)
• Government grants
• Industry sponsored research
• Examples of Sponsored Research at UT

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Funding Technologies

• Strategic RD Alliances between Industry and
  Research Centers
• Mexico Example the aeronautics alliance between
  several companies in Queretaro, universities and
  a public technology institute (established joint
  RD lab in aeronautics the first in Mexico).

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When can a company become involved with a
university technology?

• Commercialization Timeline

Company
Sponsored research
Funding Company Formation
Initial Technology Prototype Developed By Inventor
Start-up Company formed
Commercialization Roadmap STP
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2. Rationale for RD Partnering Relationships

• University-industry relations consist of a
  variety of activities, including
• Sponsored Research
• Licensing
• Gifts and endowments designated for colleges,
  schools, departments, or individuals
• University-industry exchange programs and student
  internships.
• Continuing education and training of
  professionals

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Rationale for RD Partnering Relationships
(continued)

• Participation of industry representatives in
  campus advisory groups
• Cooperative research projects
• Use of university facilities on a fee-for-service
  basis
• Industrial parks RD facilities housed on
  university property
• Faculty consulting

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Why RD Partnerships with Industry?

• Collaboration between industry and research
• Create knowledge with a specific industrial
  application in mind
• RD partnership is about business deals and
  funding
• Pursue Sponsored Research Opportunities
• Enhance commercialization output
• Enhance university reputation

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Activity

• Make a list of 4 companies that could be
  potentially interested in licensing your
  technology and explain your rationale.

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Creating a strategic visions for
University-Industry Partnerships

• Applied research focus
• Will your TTO actively pursue SRAs?
• Office of Sponsored Projects
• What kinds of firms will you target?
• Large, leading international firms?
• SMEs? local sectors
• Industry/market sector focus?

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Defining the Scope of Collaborations

• Guiding Principle 1 A successful
  university-industry collaboration should support
  the mission of each partner. Any effort in
  conflict with the mission of either partner will
  ultimately fail.
• University mission education of students,
  creation and dissemination of knowledge
• Industry mission create value for investors,
  provide useful goods and services, expand the
  state of the art

Source National Council of University Research
Administrators and the Industrial Research
Institute
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University Contribution to the Industry Mission

• Retention of Trained Work Force Training of
  future and current industry workforce (students)
  through undergraduate and advanced degrees
• Publication Contribution to the general
  knowledge base for public benefit Advancing the
  state of the art in a field
• Knowledge Transfer Acting as a filter to
  distill, from the general public knowledge base,
  a subset of that knowledge particularly
  applicable to industrys product needs
• Sponsored Research Performance of specific
  research on behalf of industry

Source National Council of University Research
Administrators and the Industrial Research
Institute
29
University Contribution to the Industry Mission
(continued)

• Technology Transfer Licensing inventions and
  developments (Intellectual Property) for
  commercial purposes, including revenue generation
  
• Providing access to university-owned equipment,
  materials, facilities and specialized resources
• Fostering economic development that expands
  markets
• Objectively testing, evaluating and reporting on
  new technology

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Industry Contribution to the University Mission

• Employing students and graduates
• Donating (equipment and money either
  unrestricted or earmarked e.g., for scholarships,
  research, or facilities)
• Providing either materials or funding for student
  internships and faculty sabbaticals
• Employee time and knowledge donation through
  involvement in activities such as assisting
  student projects, guest lectures, service on
  thesis committees, service on advisory boards.
• Material Transfer Enabling access to
  industry-owned equipment, materials, facilities
  and specialized resources

Source National Council of University Research
Administrators and the Industrial Research
Institute
31
Industry Contribution to the University Mission
(continued)

• Applied Research Providing leading-edge research
  directions
• Sponsored Research Providing financial and/or
  in-kind support for specific research activities
  of interest to the industry partner
• Paying technology licensing fees and royalties,
  which support ongoing research and educational
  programs
• Publication Contributing to general knowledge
  base (publication)
• Technology Transfer Bringing university
  contributions to the public in the form of goods
  and services

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University Constraints

• Must educate students
• Must perform research for public benefit
• Must operate within changing federal and state
  rules and regulations, e.g. non-profit tax rules,
  export regulations and increased regulations on
  the use of humans, animals and hazardous
  materials
• Must manage potential and actual conflicts of
  interest and commitments
• Must be consistent with all sponsors
• Academic year limitations on student and faculty
  time
• Facing federal funding that is limited or
  nonexistent
• Lack of match between industry segmentation of
  research and university segmentation (shared
  constraint)

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Industry Constraints

• Research investments must show returns
• Can distinguish basic and applied research, but
  distinction not always recognized by universities
• Differences between external and internal
  research must be recognized and planned for by
  industry
• External research must be part of a competitive
  business plan and budget
• Must establish agreements in a commercially
  timely manner
• Must establish agreements to ensure the ability
  to commercialize with appropriate returns
• Research funded by industry usually requires
  clear goals, milestones, and specific time frames
  for completion

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A Long Term Relationship is the Desired End State

• Guiding Principle 2 Institutional practices
  and national resources should focus on fostering
  appropriate long-term partnerships between
  universities and industry.
• university/industry partnership extends human
  intellectual reach and is key to regional
  competitiveness, innovation and economic
  development

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Establishing Long-Term Relationships with
Industry Partners

• The value of a long-term relationship can be
  greater than the sum of the individual
  transactions, and the relationship between the
  university and the industry partner may be more
  important than the results of one isolated
  project.
• individual institutions should examine their
  policies, training, reward structures and
  business practices with an eye to whether they
  promote long-term partnering

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Establishing a Framework that Encourages Long
Term Collaborations

• Guiding Principle 3 Universities and industry
  should focus on the benefits to each party that
  will result from collaborations by streamlining
  negotiations to ensure timely conduct of the
  research and the development of the research
  findings.
• Reducing time spent in negotiating terms

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Working with Industry Key Considerations

• IP rights current and future joint IP
• Material transfer affect on IP rights
• Sending a sample to a company
• Receiving equipment/material from a company

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3. Basic Business Deal Structures

• Challenges of Making a Deal Happen
• Licensing vs. Spinout vs. Divestiture
• Patent License Agreements Goals and Prospective
  Outcomes

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Fact

• On an average, only 5 to 20 of RD sees the
  light of day
• the rest wither away on the shelf over time.
• (The Aberdeen Group, Boston)

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As a result
10_ 9_ 8_ 7_ 6_ 5_ 4_ 3_ 2_ 1_
of Patents/Other IP
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Discussion

• How many technologies does your TTO manage?
• How many provisional patents would you file? How
  many full patents?

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Challenges Technology to Market

• Disconnect between RD and potential market needs
• Most IP are only part of a solution
• IP developed for one use, ends up far more useful
  in another area
• Lack of business sense
• Lack of radical entrepreneurs/best practices
• The ability to first say yes and then figure
  out how
• Sense of risk aversion coupled with fear of
  failure
• Failures are a necessary part of success
• Lack of qualified risk capital
• Big bets, big wins

Source International Business Accelerator, 2010
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What does this mean for TTOs?

• Proactive engagement with 20-30 potential
  licensees per technology is required to obtain a
  license
• Focus on the technologies with the lowest risk
  and highest potential reward
• Actively engage with industry what does industry
  want/need? Does the technology fill that need?

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Converting IP into Cash
Research Development
Patents
Intellectual Property
Return On Investment ROI
Return On Investment ROI
Source International Business Accelerator, 2010
46
Commercialization Models
RETURNS BENEFITS DRAWBACKS
Divestiture Cash (one-time) One time windfall cash Loss of IP
Technology License Upfront Fees Royalties Control over pricing and profits Control over operations Responsibility (documentation, installation maintenance) Sales force staffing Warranties, liability
Business Spinout Equity Potential of high returns Responsibilities off-loaded to Spinout Limited control - pricing operations Higher initial costs Dilution by outside investors Losses upon failure
Source International Business Accelerator, 2010
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Divestiture Valuation

• Cost-Based Method
• This is the minimum that you should accept
• Materials and Supplies
• Lab time (use of equipment, electricity,
  resources)
• PI and team hours (weighted)
• Discounted Net Present Value
• Seven years credible sales/Revenue Projections
• Directly attributable to your IP
• 20-30 discount rate
• Market Value
• What the buyer is willing to pay
• Underlying purpose of acquiring IP

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Licensing Valuation

• Early stage technology high risk
• Fees and royalty rates are rarely large
• Most royalty rates are in the 3-6 range (at
  best)
• Deciding factors
• Type of technology
• Development stage
• Size of potential market
• Profit margin for anticipated product
• Amount of perceived risk
• Strength of the patents
• Projected costs to bring a product to market

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What is the technology worth?

• A patentable idea increases in value with every
  step of the cycle.

Source Licensing Executive Society, Inc. The
Basics of Licensing.
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How do I determine the value of an idea?

• Factors that influence royalty rates
• The strength and scope of the protected IP
• The expense necessary for a license to reach full
  production
• The cost of any additional RD required
• The exclusivity or non-exclusivity of the
  licensing agreement
• The geographic scope of the license
• The competitive product, processes, and
  technology available to the prospective licensee
• The total market and its estimated growth
• Common industry or standard license rates and,
• Whether the license covers all or part of a
  process or product.

Source Licensing Executive Society, Inc. The
Basics of Licensing.
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Evolution of Agreements in Commercialization
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Whats Missing from the List??

• Consultancy Agreements can and usually do happen
  at various stages in the commercialization
  process.

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Scenario 1

• Researcher at Public Institution want to engage
  in collaborative research exchange with an
  interested partner.
• Proprietary Chemical/Biological Materials
  Developed are Present
• Examples would Include
• transgenic animals
• cell lines cultures
• Antibodies
• Microorganisms (Bacteria, enzymes, yeast, etc.)
• vectors (plasmids, baculoviruses)
• chemicals (including drugs/pharmaceuticals)

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CDA vs. MTA

• MTAs take CDAs a step further by covering
• Permitted Use of Materials
• Prohibited Use of Materials
• Access to Results
• Use of Results
• Publication Rights
• Ownership of Resulting IP
• Royalties Can be Introduced

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Scenario 2

• Researcher wants to enter into a research
  collaboration with another partner
• Can be Public or Private, but usually academic or
  research focused in nature
• Can cover almost any level of science
• Examples
• Joint researcher grant applications
• Co-Orientation of PhD student research outside of
  home institution
• Co-Technology Development
• Shared Laboratory Space and Equipment for
  Research Among Institutions

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Key Components of Inter-Institutional Agreements

• Roles and Responsibilities in Research
• Governs Resource Allocation
• Resulting IP Ownership Splits are Pre-Defined and
  can be Re-Negotiated during research
• Defines PI and Co-PI relationship
• Defines Responsible Party for Publication and/or
  Commercialization Efforts

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Scenario 3

• Researcher has a proprietary IP on an invention
  which has garnered commercial interest
• Interested Party would like to exclusively
  evaluate IP for validity and applicability to
  its own needs
• Interested Party wants to
• To acquire a particular right (e.g. a patent
  licence) or asset (e.g. a patent)
• To require another party to enter into an
  agreement (in a specified form) or to negotiate
  the terms of a further agreement
• To evaluate materials, products or assets to
  determine whether to enter into further
  agreements (such as further research or licensing
  arrangements).

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Evolution of a Licensing Deal

• No single process for developing a licensing deal
• Critical factors for success
• Networking
• Research
• Proactive marketing tactics

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Evolution of a Licensing Deal

• Establish mutual interest at the non-confidential
  level.
• IP rights can be lost if the idea is disclosed
  without taking adequate precautions.
• Licensee may ask to see related publications.
• Multiple discussions needed to develop trust and
  interest.
• Can get discouraging dont give up!

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Option Agreement Characteristics

• Provide Right of First Refusal
• Usually involves a Fee
• Generally Provides Exclusivity
• Limited in Time (Usually up to 6 Months)
• Can be Stand Alone or part of other types of
  agreements (i.e. clause)

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Scenario 4

• Researchers Lab has developed Method for Drug
  Discovery
• IP is Present
• Industry (or Increasingly Institutions) want
  access and control of technology future
  development
• Term Sheet has been Presented
• Negotiations have concluded

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Critical Elements of Licensing Agreement

• Definition of IP to be transferred
• Geographical Coverage
• Fields of Use
• Exclusive vs. Non-Exclusivity
• Third Party Rights
• Sublicensing
• Recovery Provisions
• Royalty Rates
• Patent Payments and Maintenance Responsibilities
• Up Front Fees and Payments
• Development Fees and Requirements
• Others

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Example of PLA Terms

• Patent License Agreement
• Patent License Agreement for Startups

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Resources For You

• Praxis Unico http//www.praxisunico.org.uk/resourc
  es/practical-guides.asp
• AUTM (Assoc. of University Technology Managers)
• LES (Licensing Executives Society)

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Evolution of a Licensing Deal

• 1. Non-disclosure agreement if there is interest
  to discuss a potential licensing opportunity.
• Licensee is often reluctant to sign an NDA.
• Due Diligence Both Sides
• a. Licensee does the technology have real
  commercial potential?
• Licensor motives for licensing, types of past
  deals with universities, current related products
  and level of success

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Patent License Agreement Basic Goals

• Refund patent costs and future conversion fees
• Ongoing considerations to the university (a
  royalty)
• Required minimum annual royalties after a
  specified period of time regardless of actual
  sales
• Performance milestones to assure that the
  universitys technology enters the market

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PLA Basic Goals (continued)

• This "formula" hopefully assures
• technology is developed to completion and put in
  the stream of commerce
• a fair return to the university
• the technology is returned to the university
  should the licensee not pay the minimums or
  achieve the specified performance milestones.

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Evolution of a Deal

• 4. License Negotiation
• a. A license is a trade
• b. It only happens when both sides conclude
  that they will benefit by entering the deal more
  than the cost, or loss, required to make the deal
  possible.

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Basic Terms and Conditions of a Patent License
Agreement

• In general, all licenses fall into three
  categories, namely
• 1. Exclusive Only the licensee can exploit the
  license.
• 2. Sole Both the licensee and licensor can
  exploit the license (this kind of license is
  relatively rare).
• 3. Nonexclusive The licensor and an unlimited
  number of licensees can exploit the license.

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Patent License Agreement Terms

• Patent Fees Licensee is expected to repay all
  patent costs to date, and to cover future
  conversion fees
• Payments associated with Diligence Milestones
• Sponsored Research
• RD Milestones associated with a fee
• First sale of Licensed Product
• Sublicense fees
• Annual royalties
• Equity

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Royalty Rate Definition

• are usage-based payments made by one party (the
  "licensee") to another (the "licensor") for the
  right to ongoing use of an asset, sometimes an
  IP.
• Royalties are typically agreed upon as a
  percentage of gross or net revenues derived from
  the use of an asset or a fixed price per unit
  sold of an item of such, but there are also other
  modes and metrics of compensation.

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Determining Royalty Rate

• No such thing as an industry standard patent
  royalty rate
• On the average, royalty rates tend to run between
  4-6 of Net Sales
• Other important factors to consider
• Minimum royalties
• It is unwise to draft a license agreement,
  especially exclusive licensing agreements, unless
  there is a provision for minimum royalties.

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Determining Royalty Rate

• The primary purpose of minimum royalties is to
  give the licensee an incentive to exploit the
  license.
• Royalties Based on Net Sales
• Generally paid quarterly
• Net Sales are usually defined as gross sales
  minus usual trade discounts, taxes,
  transportation and returns.

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Licensing Setting a Royalty Rate

• The 25 Rule
• Usually applied to set a royalty rate
• Estimate the licensees operating profit (related
  to your IP), over royalty period
• Divide that total profit, by the net sales over
  that period Profit rate
• Royalty rate 25 of the profit rate
• Can also be used for a single payment deal
• Estimate the licensees operating profit (related
  to your IP), over royalty period
• Licensors share 25 of operating profit
• Single payment Probabilistic net present value
  of (25 of operating profit)
• The 25 rule applies only if both sides agree
  to use this method

Goldscheider et al. Use of the 25 rule in
Valuing IP
75
Licensing Royalty Rates

• Lower Limit Upper Limit Median
• Chemicals 0.5 25.0 3.6
• Computers 0.2 15.0 4.0
• Consumer goods 0.0 17.0 5.0
• Electronics 0.5 15.0 4.0
• Energy 0.5 20.0 5.0
• Food 0.3 7.0 2.8
• Health care 0.1 77.0 4.8
• Machine / tools 0.5 25.0 4.5
• Pharma biotech 0.1 40.0 5.1
• Semiconductors 0.0 30.0 3.2
• Software 0.0 70.0 6.8
• Telecom 0.4 25.0 4.7
• (3 to 7)

Goldscheider et al. les Nouvelles. Dec. 2002
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4. Basic Business Deal Negotiation Techniques

• What Makes a Good Negotiator?
• Preparing for Negotiations
• Patent License Agreement Negotiating Terms

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• Qualities of a Good Negotiator

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Negotiation Myths

• The average person is not tough enough to
• win at negotiations
• Negotiation is not a combat sport bullies are
  not successful for very long.
• Negotiation is all-or-nothing. You are either
• a winner or a loser
• Negotiations should be a win-win proposition.

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Negotiation Myths

• Only good talkers make good negotiators
• Good listeners make the best negotiators.
• Negotiation requires people who are selfish
• and rude
• Not rude but okay to be assertive, not timid
• Women do not make effective negotiators
• Women generally tend to be better listeners and
  more collaborative.

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Profile of a Negotiator

• Negotiation consciousness
• Listening
• The ability to ask good questions
• High aspirations
• Patience
• Flexibility
• Focus on satisfaction
• Willingness to take risks
• Solving the problem
• Willingness to walk away

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Are you a good negotiator?

• How much experience do you have with license
  negotiation?
• How confident are you with your negotiations
  skills?
• What has gone well for you in your past
  negotiation experiences?
• What has not gone well? How can you be more
  prepared next time?

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Negotiations 4 Outcomes

1. Lose-Lose Neither party achieves their needs or
   wants e.g. exercise exclusive option sponsored
   research
2. Win-Lose, Lose-Win One party makes outstanding
   gains while the other one loses out

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Negotiations 4 Outcomes

• 3. No Outcome Parties are not able to come to
  terms that they can agree upon Not always a bad
  thing better not to do a deal than to do a bad
  deal
• 4. Win-Win The needs and goals of each party
  are met

84
Negotiations 4 Outcomes

• Three keys to creating a win-win outcome
• Avoid narrowing the negotiation down to one
  issue
• Realize your counterpart does not have the
  same needs and wants you do
• Do not assume you know your counterparts
  needs

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Recap

• University-Industry Partnerships
• Focus on developing a relationship
• Be careful about IP
• Funding technologies and funding companies are
  two different things
• Create unique pitches for every meeting
• Win-win negotiation
• Be prepared
• Be flexible and focus on the relationship
• Know when to walk away

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Questions?
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Preparing for Licensing Negotiations

• Who are the parties to the prospective agreement?
• (University, RD organization, Large Co.,
  Small Co.)
• What are the objectives of each party?
• (Is there a basis for a commercially viable
  agreement?)
• What are the performance expectations? (Is each
  party able to perform what the other expects?)
• Who should drive the licensing negotiations?
• (Internal Drivers vs. External Drivers)
• Does IP owner provide RD, Tech support,
  know-how, consultants, or other deliverables in
  addition to IP?