1	NEGOTIATION OF LICENSING AND SALES AGREEMENTS 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 idea into 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 money for 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 Ten Characteristics 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 Ten Characteristics 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