Licensing Technology to Launch your Startup Company

By Robert A. Adelson

Are you an inventor or entrepreneur seeking to license technology from a university, hospital or other institution?

Perhaps it’s a product, mechanical or medical device, a diagnostic or other technology. Perhaps it’s something you’ve been working on and developing at the institution, or perhaps its technology that you as an entrepreneur or investor have become aware of and believe you can commercialize.

As you consider forming your startup company, questions arise:

· At what stage of development can we attract seed investment?

· How do we assess marketability?

· What terms does the entrepreneur or the VC seek in licensing?

· What royalty? What license fees? What equity for licensor?

This article will discuss these questions from the viewpoint of the inventor or

entrepreneur who seeks bring a product or technology out of the laboratory or academia and into industry as a commercial enterprise.

Assessing market, need and quality of IP

The CEO and entrepreneur should work closely with the researcher and inventor. Typically, the impetus for a successful venture comes from the inventor, but the entrepreneur must understand the marketplace. The inventor alone or often working with a business entrepreneur must assess what unmet need is met. The goal is to translate research into much-needed products or services that will sell.

They must also assess the robustness of the intellectual property – the novelty of the invention, whether a real paradigm shift has occurred, whether the enabling or blocking technology is sufficient to support a new company.

Timing is also important. The technology must be proven enough to attract initial investment to attempt to take it commercial. The researcher and post docs alone or working with a businessman entrepreneur or investor must achieve that “buy-in”, that belief that they can succeed, and then approach the institution for licensing, with the position that they are the right team to commercialize the technology.

Preserving Cash, Using Equity in Licensing

In licensing technology, preserving cash is central to survival of the startup company. Often the startup ill take an option on the technology for six or twelve months to delay licensing and payments due to commence after that. Both with the option and license, the entrepreneur wants to limit up front payments and conserve cash. Typically, the parties will negotiate milestone payments over a 3-4 year period, milestones that are achievable to the startup company.

Often to achieve a reduction in those milestone fees, the startup will offer and trade some of its equity. That equity should be 5% or less and often non-dilutable through Series A. If this can be achieved, both parties will have “skin in the game”. The licensor is showing it is willing to bet some of its payments on the success of the venture.

The licensor will want patent costs, both past and future, paid for by the startup company licensee, and the license will typically provide for running royalties tied to net sales. The licensor will also seek minimum royalties so that it can pull back the license or at least make it non-exclusive if it does not see the licensee making desired progress.

Sublicensing, “Stacking” and Other key terms

Companies often seek to keep sublicensing income but the contract typically provides for sharing with the licensor. Another important issue in sublicensing is blocking technology. If there is a need for other technology, the company may have to pay out royalties to a third party. Thus, it is important to insist on “royalty stacking” provisions – that reduce the royalty the company must pay licensor when other royalties for new licenses also must be paid. Stacking provisions must be reasonable to enable the company to succeed, which is in the interest of the licensor as well.

Other terms are also important in the license. Definitions are important, especially field of use – the licensee wanting a broad field of use to justify the investment and effort to succeed in the startup company. The licensor could later seek to narrow the field if not fully exploited. The license must also be exclusive. There can be no competition from the licensor or funding will be impossible. The licensee also seeks grant backs so that future developments by licensor are also included in the license, and control over patent prosecution to assure that IP protection is in line with the company’s business strategy and business plan.

The Company should also expect due diligence obligations as part of the license. These can include time tables to secure financing, for product development and first product sales. The license will typically require at least annual reporting to licensor.

License valuable, but Team crucial to success

The negotiation of a reasonable license with the institution is an important milestone for a startup company. It establishes credibility that can truly launch the startup company. It creates an IP asset that investors will review in considering funding the venture.

Yet, the license is just a first stage to startup success. Research is not a product. Universities and other institutions license to startups because there is considerable risk in new technology. It will take great effort, skill and persistence to now successfully commercialize the new technology now licensed.

While having IP, exclusive rights and a good license agreement are essential, it is the company’s management team that must now attract investment and make the product succeed. Venture capitalists invest in management not just technology.

Robert A. Adelson is a business and licensing attorney and partner at Engel & Schultz LLP, Boston, Massachusetts. He represents startup and early stage companies, inventors and entrepreneurs.

© 2010 Robert A. Adelson