Recently we looked at how a party's market role or position might affect the tone of a negotiation. In this post we'll take a first look at a number of other strategic factors that can influence the shape of a licensing deal. This is a very broad topic, so we will list these generally first. In our next post, we will take a look at some industry examples.
For the sake of clarity, we'll assume below that you are doing the licensing. If you're a licensee, simply reverse the analysis.
Competitive Strategy
How will the technology assist the licensee to get a competitive advantage in their market? If there isn't any clear answer to this, it could mean that the licensee won't be motivated to pay anything approaching market price for your technology. This is such an important factor that you might consider withdrawing from the negotiations unless a potential licensee can articulate exactly how your technology will help them get an edge – it’s difficult to negotiate with them unless you have an idea of what they want. Similarly, be particularly wary of discussing a potential deal with a competitor unless you are sure that the resulting license will give you a distinct advantage in the market.
Duration
How long will the license last for, and how will that change each party's strategic position both before the deal commences, and after the term is over? We find that many licensors have an optimistic view of what their untried technology can do and what it will be capable of in the long term. If the licensee agrees with that view, they will be looking to pick up a bargain. This means they will generally push for a longer term, lower royalty rates and other terms slanted in their favour.
Exclusivity
Don't give in too easily on this point - remember that the general rule of thumb is that a licensee should pay a premium for exclusivity. Some first-time licensees will give exclusivity away too easily against an assumption that they will use the initial license payload to fund further innovations. Be careful with this, because often our further innovation will be connected to the improvements provision in the exclusive license. Generally the improvements provision will require a licensor to increase the scope of the license when key improvements are added to the technology. This means that your new innovations will need to be completely separate technology builds to avoid the exclusive clutches of the licensee.
Protection
A licensee will want to ensure that you have an adequate array of legal protections in place for your technology. If the licensee has to assist you with funding to get this in place, this will reduce the price they are willing to pay for your technology. Also, if you do not have substantial assets, this will have an effect on the negotiations - the licensee will assume that it has to take on the bulk of the enforcement obligations. The concept of enforcement raises a lot of other issues that will affect the form of the license agreement - we'll take a look at these in a later post.
Utility/Publication
Think laterally about the deal you enter into – sometimes it’s better not to have a license deal at all if the incentives are right. For instance, some licensees are large enough that they might ask you to forget about a license and instead publish your technology in the public domain (Google, for instance, will often seek to have software technology open-sourced rather than licensed). This can be a clever strategy for the potential licensee - it stops other enterprises from claiming ownership over the technology and because of the licensee’s market position, they can get a head start and make best use of the technology over and against their competitors. The disadvantage for you, however, is that there is no definitive royalty base to work with. If you’re being asked to make your software open-sourced, for instance, you must make sure you evaluate what you’ll get out of the open-source deal against what you would be likely to get if you entered into a license.
Commercial Success
If your technology has a proven market appeal, a licensee should be prepared to pay more for it. When a licensee can see those proven results, there is a greater incentive to seal the deal and to ignore less proven technological alternatives.
Work in Progress
On the flipside, if your technology requires refinement for the licensee's intended purpose, the licensee will expect to pay a lot less. Licensees will be willing to pay more for technology they can use out of the box.
Development
What if your technology needs substantial development to meet the licensee's commercial ambitions? Usually, licensees will want to engage in some joint development with you to reach an intended goal. Where this occurs, be careful to clarify how the ownership of IP rights will fall before, during and after the license term – including who will apply for what and how protection responsibilities will be shared. Another issue to clarify is who will have the rights to distribute, market and sell any final collaboration products.
This is only a small selection of the factors that might affect your negotiation. The common-sense approach for most licensors is to think through all of the commercial realities affecting the outcome before discussions commence.
Image: pixtawan / FreeDigitalPhotos.net
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