The past few months have seen several of us at Fuentek supporting multiple clients with negotiating licenses for their technologies. One project that I’ve been helping a client with embodies several best practices of license negotiations. Ironically, these concepts are so essential that they’re sometimes forgotten.
So here is a list we’ve put together to ensure that the most important aspects of license negotiations stay front and center.
1. Value Is More Important than Price
Often we are asked for help in coming up with a price for the technology to be licensed. But such attempts at “price tagging” usually yield a number that’s too high or too low, over- or underestimating how much the technology is worth to the licensee. So rather than putting a price on the technology, one must put a value on the deal.
Our client was contacted by a company asking what the cost would be to license a particular software technology. I helped her turn the question around and think about it from the prospect’s perspective. This changed it from What’s the price of our technology? to What value does our technology bring to the market? How will this licensee use it? What are the specific circumstances of the market? (BTW, ideally you’ve done the market-focused research to begin to answer these questions.)
2. Let the Licensing Prospect Make the First Offer
Actually, we recommend that TTOs require the prospect to make the first offer. Remember: You hold the technology that they want, so you get to set the rules of the negotiation. And one of the best rules is the two-step application process, which we’ve helped several TTOs successfully implement.
When the client asked me how she should respond to the company’s inquiry, I advised her in putting together the basic elements of a term sheet for the prospect to fill out and submit as an application for a license. This first step puts the TTO in a position of power, because the application sets the floor for the negotiations. (The offer won’t get lower than this, and there’s nowhere to go but up.)
3. Grant Exclusivity Judiciously
Companies often want an exclusive license to protect their interest, which is understandable. Yet there is no need to go whole-hog in granting exclusivity and hamstring the TTO if/when other companies express interest in the technology. (Yes, this vegetarian just used “hog” and “ham” in the same sentence!) A field-of-use exclusive license provides the protection companies want while maintaining the flexibility to secure additional licenses.
The term sheet submitted by the company requested across-the-board exclusivity. However, we knew other companies in other fields were interested in the technology. Plus, we knew that this small company would not be able to cover all markets for this technology, and other players were better suited for the other markets. Therefore, we advised our client narrow the blanket-exclusivity request to specific fields of use.
4. Use Caution in Setting the Royalty Rate
In looking at the royalty rate, be sure to consider (1) the percentage of the total product and (2) the portion of the product portfolio that the technology will impact. We at Fuentek call this measurement the “Attributable Portion of Revenue” — that is, the amount of revenue generated that can be attributed to the licensed technology.
The royalty rate that the company proposed looked reasonable at first. But a closer look showed me that the rate being offered was too low given how the technology would fit in the company’s product line. You see, the company wanted to sell hardware that implemented our client’s software. Their calculations assumed that the software was just a small portion of their product, which in a sense it was. Yet without our client’s software, the company had no product. Therefore, the low royalty rate was inappropriate.
For more on this topic, check out this post on negotiating a reasonable royalty rate as well as these additional examples.
5. Rethink the Concept of the “Counter-Offer”
Earlier I mentioned that the first offer from the prospect sets the floor for negotiations. A counter-offer sets the ceiling. (The offer won’t get higher than this, and there’s nowhere to go but down.) So rather than structure a detailed counter-offer, provide feedback to the prospect about the proposed terms that need adjusting. When done effectively, this feedback keeps the dialogue open and leads to a second offer from the prospect.
Since this type of conversation can be daunting, I talked through the possible dialogue in advance with the client. (If they say X, you respond with Y.) We even did a couple of dry runs so that the TTO representative could practice conveying her position without shutting down negotiations. The result: A revised offer has been received, and negotiations are ongoing.
6. Both Sides Want the Best Deal Possible
Quite frankly, that’s the essence of negotiations, isn’t it? We have found that looking at the various aspects of a deal from different perspectives gives you the whole picture, which empowers you to negotiate more effectively and get the best deal for your organization.
And remember: The person on the other side of the negotiating table is doing the same thing. So don’t assume their first offer is their best offer.
Feel free to contact me to find out more about how Fuentek can help your organization proceed successfully through deal negotiations.