When thinking about the value of a licensing agreement, it’s easy to focus on the financial terms, such as up-front payments and royalty rates. However, licensing revenue isn’t the only area to negotiate financial terms. And in many cases, non-financial terms can have significant value.
Financial terms beyond licensing revenue are pretty straightforward to negotiate:
- For a university, the terms could involve the company providing ongoing research dollars or an endowed chair.
- For the company licensee, the terms may require consulting from the inventor or access to university equipment for testing.
- If a company is licensing out its own technology, the terms could include the licensee providing final product back to the company at a discount.
Non-financial terms are a little less typical but no less valuable, particularly when they help achieve your goals for the deal. Consider the unusual non-financial terms negotiated in these two examples, one from a university and one from a commercial company.
Tapping into the Licensee’s PR Machine
When Fuentek helped a university negotiate a license for medical imaging technology, we found ourselves in an unusual situation with the inventor. Whereas most faculty are eager to bring in dollars, this guy had all the research funding he could handle. He also wasn’t particularly interested in his royalty earnings.
But he was interested in making sure the licensee actually launched the product. This was, in part, because the new product would help ensure patients benefitted. More importantly, product launch would contribute to establishing a new protocol standard.
So, the inventor didn’t want the technology to just sit on the licensee’s shelf. The question was: What terms would help achieve that goal?
Of course, the university could have set specific terms related to product launch, such as number of products sold by a specific date. But there was still too much development and risk to accurately predict the timing and ramp-up of sales. Plus, setting sales goals didn’t necessarily address the desire to establish this technology as a new standard. So, we came up with terms that came at the goal indirectly.
Under the negotiated deal, the company agreed to present papers at key industry conferences as well as buy program ads and exhibit hall booths. The company also agreed to feature the technology in its monthly promotional magazine.
These terms provided important value:
- The publicity helped put the company “on the hook” for moving forward with commercialization.
- Specifying the trade shows ensured the licensee targeted the correct market in a very visible way.
- The licensee didn’t perceive these terms as having a cost, since the company would have attended these conferences and published the magazine anyway. Plus, a different budget in the company pays for these activities.
- Although the company viewed these terms as non-financial, we could estimate a dollar value to present to university management.
Think about what the other party has that is valuable to you but that they may take for granted. Then you can negotiate terms that benefit you without them feeling like they gave something up.
Ensuring a Quality Product
Fuentek was helping a commercial company license out a unique material used in its own products to another company selling products in an entirely different market segment. The licensee would have access to our client’s know-how in making the material and the technique for integrating it into the product, achieving cost savings and increasing its market size.
But there was a catch.
Our client wanted the licensee to purchase the resin needed for its material from a specific supplier. You see, the material’s quality was highly dependent upon the quality of the resin. If the resin did not achieve certain specifications, the final material would not work well. This would result in an unhappy licensee. Or an inferior product with dissatisfied customers. Or very likely both!
So, we developed a term to manage the supply chain, ensuring that the target supplier’s high-quality resin was required as part of the agreement.
You must structure a term like this very carefully. And you can’t specify a supplier for commodities. But if success depends on a special product that is a crucial component needed to meet critical standards, then devise terms that provide some level of control over that component or the supply chain. (BTW, this structure may also allow for additional revenue outside of the license agreement, if there is a financial relationship with the supplier.)
Look to the Experts
Fuentek has more than 15 years of experience helping clients develop and implement negotiation strategies that achieve a wide range of financial and non-financial goals. To learn more, check out our licensing insights, our deal-making services, or contact us to discuss how Fuentek can help in your negotiations.