Case Study: Licensing

Different Strokes

Licensing is one of the many strategies entrepreneurs and companies use to commercialize technologies and intellectual property. Putting together a strong and successful license transaction is like putting together a three-dimensional puzzle with both static and moving parts. Following are two case summaries that illustrate how the most important considerations differ from transaction to transaction.

Case Study 1:
Small to Mid-size Company

If you are interested only in licensing transactions with large companies, please click here.

BTJ, LLC is an R&D company formed by two scientist engineers. The principals develop and patent technology that they are anxious to commercialize. They recruit ASiQ to assist them. The facts that stand out are:

  • The technology promises to perform 20-30% better than current products in the target market niche, and it will be 30% cheaper to manufacture.
  • Current annual revenue for the products in the market niche is roughly $200,000,000 in the United States.
  • The inventors want to continue as an R&D business and do not want to start up a business to manufacture and market their technology.
  • The products that will use the technology are a logical extension of existing product lines already sold wholesale to retailers.
  • The technology will require a proof of concept in order for a substantive commercializing transaction to take place.

License for Others to Develop and Market

After considerable thought and dialogue, the inventors and ASiQ agree that the best path forward for BTJ is to license BTJ's technology for others to develop and market. This strategy permits the inventors to stay focused on inventing and to avoid having to find an operations management team and build a whole new enterprise. But, they must learn and implement some promoting and fundraising to effect a successful licensing strategy while their fundamental R&D business stays the same. ASiQ and the inventors agree to focus the search for prospective licensees on successful companies already serving the target market niche. They agree to exclude entrepreneurs who want a license to launch a startup by commercializing BTJ’s technology.

LLC Exclusive Irrevocable License

ASiQ suggests that the inventors form a new LLC and grant it an exclusive irrevocable license to the patents that they will continue to hold individually. Concurrently the inventors design the process necessary to demonstrate a clear proof of concept and performance. The cost of the proof of concept process with a 15% cushion is $90,000. ASiQ assists the inventors into a local incubator that coaches entrepreneurs on packaging and presenting their ideas.

New Markets New Money

New technologies often end up solving problems for which they were not originally intended. Accordingly, ASiQ works with the University’s Business School to form a team of MBA students and MS candidates in electrical engineering. The team is charged with evaluating the current and future markets and applications of BTJ’s technology.

ASiQ then leads the inventors into courtships of an Economic Development Corporation as well as some private angel investors. BTJ wins a $10,000 award from the Economic Development Corporation's Accelerator Program. Angel investors invest $60,000 in the LLC, and the inventors ante up another $30,000. Meanwhile, the team of graduate students reports that in addition to the market niches the company BTJ has been targeting to sell through large retailers, there is a unique application that would be of substantial benefit to the oil and gas industry.

Vetting Angel Investors

Once in a great, everything works more or less as planned. Proof of concept is completed and is convincing. BTJ now has a target list of 18 prospective licensees put together by the Business School and ASiQ along with the angel investors and the inventors.

ASiQ vets the list based on criteria of:

  • Market strength, including their rank in the target market niches
  • Management team
  • Financial strength
  • Customer reviews of quality, products, and services
  • Marketing aggressiveness and recent new product introduction history
  • Possible conflicts with the technology

The list is winnowed down to six very strong candidates for the consumer-oriented markets and three strong candidates for the oil and gas industry market. ASiQ, the inventors, and the investors prepare a road show and arrange to make presentations.

Negotiating Licensing Agreements

ASiQ Business NegotiatorsOne of the manufacturer/distributors to the oil and gas industry states immediate interest and urgency. Three of the consumer market companies express strong initial interest. The oil and gas vendor is a substantial company that wavers between seeking an outright purchase and a license. In the end, ASiQ negotiates a license agreement with a substantial up-front payment, two years of exclusivity, a royalty stream for the life of the patent, and a field of use restricted to the oil and gas applications of BTJ’s technology. Nine months after closing, the new Licensee to the oil and gas field of use has built an order book exceeding its forecast and returns to the table. ASiQ negotiates an amendment to the License Agreement. BTJ receives an even larger payment than it had at closing of the initial License Agreement. The Licensee now has exclusivity. The royalty agreement continues unchanged. Win-Win.

Second Non-Exclusive License

Meanwhile the consumer manufacturer/distributor companies and ASiQ are engaged in an auction. Somewhat to the surprise of ASiQ, the license auction is won by a company that is willing to pay the largest up-front payment but then elects to trade not receiving exclusivity for paying a slightly lower royalty than ASiQ and BTJ had put on the table. Six months later, ASiQ and BTJ close a second non-exclusive license with one of the original losers of the auction.

...And Now the Rest of the Story

The first licensee’s confidence that it would never be caught by the companies also bidding in BTJ's auction turns out to be correct. They excel and profit in the niche. The second licensee does develop and sell products and pay royalties, but never at the level of the first licensee. Win-Win-Win.

Case Study 2:
Licensing to a Very Large, Sophisticated, Aggressive Company

ABC Corp. is a designer and manufacturer of equipment for the telecommunications industry. Blessed by its CEO, the engineering team burns through a substantial budget, makes several wrong turns in its research, and then in the end finds a technologist’s Holy Grail. They invent and file patent applications on what promises to be a breakout technology for the industry. Theirs is not an improvement of mere increments. It is four orders of magnitude faster and more efficient than current technology.

ABC Corp.’s CEO has a friend who has told him that ASiQ represented his company very well in a transaction with a very large technology company. He calls in ASiQ’s CEO. The two CEOs meet with ABC’s Senior Engineers and develop the following list of determinants for commercialization:

  1. Development and commercialization of this technology’s first products alone will cost $30-$60 million and require a sophisticated team of engineers with unusual production expertise.
  3. Maximum protection of the Intellectual Property (IP) is a prerequisite to being able to disclose, much less negotiate a sale or licenses and/or sublicenses of the technology.
  5. Speed to market is a vital factor for an advanced technology requiring substantial production and market entry cost.
  7. Breakout technologies that are a full generation ahead of the moment often encounter slow adoption curves.
  9. The commercialization of this technology will require a company that is as outstanding in marketing and selling as it must be in ultra-high quality manufacturing of advanced technologies.
  11. ABC does not have the business base or financial resources to productize the technology, and/or manufacture it, and/or market it.

Joint Venture Partner Needed

It is clear that ABC needs a very special and unusual joint venture partner to bring the product into production. There appear to be only about 12 companies in the world that have the capability, capital, and know-how to commercialize ABC’s very innovative technology. ASiQ vets these prospects with particular focus on their recent and current culture of innovation and new technology, research and development, financial liquidity, and aggressiveness/creativity of their marketing groups.

Enhanced Patent Protection a Must

ASiQ counsels ABC Corp. that very large high technology companies in ABC’s target group are all, by competitive necessity, very aggressive in their acquisition and expansion of intellectual property. They are typically fierce in defending that IP against infringement.

Business Negotiators and Transaction Advisors ASiQ John RiceASiQ advises that ABC/ASiQ need to make presentations to the top prospects to attract and assess interested suitors. Concurrent with that marketing effort, ASiQ sets out to reposition ABC with enhanced patent protection and a top-tier legal counsel before negotiating a sale or license of intellectual property to such companies.

ASiQ conducts a search for the six best United States Intellectual Property and Patent Law firms relevant to the technology. ASiQ interviews each of the targeted partners in the six firms. Four have been engaged in some form of litigation, either representing or opposing VLC Technologies, the very large company that ASiQ and ABC now believe will be the best match. (VLC has shown a high level interest in ABC, while a number of companies have passed on the technology).

ASiQ and ABC’s CEO agree on which IP law firm to retain. It is one of the firms that have prevailed in prior litigation against VLC. The first order of business is strengthening the ABC patents with certain amendments that broaden the scope of the patents and IP. The second order of business is to map new patent filings to broaden and deepen the domain of coverage. ASiQ and the new firm confer and prepare for the negotiation to come.

Preparing for Negotiations

ASiQ researches the team representing VLC in the negotiation, person by person. Their job is to acquire exciting new technologies that will have much higher profit margins than VLC’s mature product lines in competitive niches. ASiQ’s job is to gather the best intelligence possible on all facets of the negotiation.

Phase one: The negotiation starts with a mutual discovery phase. VLC satisfies itself that the technology has the potential it was seeking. ASiQ and ABC satisfy themselves that VLC has a substantial need for the technology, the resources to develop it, and no incentive to try to capture and shelve it in order to protect a current in-house technology. ASiQ learns that VLC’s New Products Initiative is very well funded.

Phase two: VLC and ABC agree that a license is the best instrument for the companies to utilize in order to do business together. ASiQ develops a strategy that is intended to concede to VLC what ASiQ/ABC know or believe that VLC must have and then to negotiate very hard to sell those concessions for high return future benefits to ABC. ASiQ is betting that VLC will value certainty for itself today over uncertainty of what it may have to pay ABC in the somewhat distant future.

Sometimes the negotiation turns frosty and stalls. It is useful that ABC’s counsel is a respected, perhaps even feared, adversary of VLC. There are breaks in the negotiation of weeks and in one case, months, as the parties test each other’s resolve. Mutual need ultimately prevails. Finally the deal is done.

...And Now the Rest of the Story

Both companies win their bets on what turns out to be a very large, very fair, and very successful transaction. Win-Win: $$$-$$$.