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Strategy Advice on Technology Licensing (Part 5)

On Behalf of | May 25, 2011 | Uncategorized

If you’re new to this series, you may want to begin by reading the previously-published Parts 1-4. The purpose of this series is to help entrepreneurs consider licensing strategy from a university’s perspective, so that you can be more successful in planning the future of your business. I have organized my thoughts into the following categories: Getting Skin in the Game, Taking (and Disposing Of) Equity, Royalties vs. Upfront Fees, Options and Contingent Licenses, Keeping the Innovators Involved, and Owning Future Inventions.

Options and Contingent Licenses

Most startups have a catch-22 problem — they can’t get a license without money, but they can’t secure funding without a license.  One potential solution is a contingent agreement: the university will agree to offer a license contingent on the startup receiving some set dollar value in financing.  Alternately, the startup will convince an angel investor to agree to a financing deal, contingent on the startup receiving an acceptable license for the technology.

Note that this sort of strategy doesn’t work everywhere: In my conversations with university licensing offices, I’ve been told that licensing programs at universities with medical schools generally will not agree to a contingent license, and instead require startups to have financing before they will talk.  This rule could be generalized to mean that institutions with very strong hard IP rights have enough demand from funded entrepreneurs that they can avoid taking the risk of offering a contingent deal.

One way some universities seek to level the playing field is to offer an inexpensive exclusive option on a license for a short period of time. typically six months to one year.  An exclusive option will allow your company to raise money from investors, while reducing the worry that the innovation will be licensed out from under you by some other startup with more momentum and better funding.  Keeping the time frame short means that if the deal doesn’t come together, the university can still realize value from the technology by offering it to other buyers.

Recommended Strategy

If your startup is stymied on paying for the license up front, or caught in the catch-22, ask if you can take a license contingent on raising sufficient funding to operate for a given period of time.  Look for the university to ask for a reasonable fee to lock up an exclusive option to license, but don’t expect exclusivity to last for more than a year.