I was pleased to be asked to serve on a bootstrapping financing panel. The event is entitled “Beyond Bootstrapping Panel Discussion.” Susan Barahia, leader of the Business Network Chicago (BNC) Entrepreneur Group, targeted “licensing” as my area of discussion.

Format – 2.0

Our four panelists will give five minute presentations followed by questions from Susan, and then open questions from the audience.

The style is “2.0″: We were asked that the presentations be educational and geared for general startup entrepreneurs, focusing on how the area we are presenting can help the entrepreneur raise capital for a business. The presentations are intended to give a good overview of the topic and let the attendee decide if this is something he/she can/wants to pursue.

Why Consider Licensing?

What does this mean to me? Let’s start with the premise you or someone you can identify for a potential business relationship has something that otherwise is missing from the marketplace and a customer would be willing to pay a premium to receive. That “something” we can consider a form of creativity.

Next, we can consider the realities that budgets are limited, resources need to be invested wisely, and competition is a race.

Scenario A

The creativity is yours, but others are in a better position to help your creativity achieve greatest margins in the market. In this case, you may wish to structure a license for the other entity to help carry your creativity to market success.

Scenario B

Your wizardry is business execution and you have identified an attractive concept developed, or that could be developed, by another person lacking the ability to impact the marketplace. In this case, you may wish to structure a license for you to commercially exploit the creativity developed by the other person.

Scenario C

Further variations: where you can identify value in a strategic business relationship.

Introduction to Licensing

Creativity can be protected under intellectual property (IP) laws.  Owners of IP can choose what they wish to do with their IP rights, including whether to enforce or license their IP rights.  A license is used by the IP owner to grant permission to another party for performing specified rights belonging to the IP owner. For background on IP, please see my earlier post outlining the categories of IP: Copyrights, Trade Secrets, Trademarks, and Patents; kindly look under the heading:  “What are the steps to secure my new idea?”

A license, as is true for many types of agreements, can have a wide variety of forms for the language, taking different directions as approved by the parties.

Disclaimer

My presentation serves to introduce some topics and business opportunities that may be advanced through licensing.  Coupled with a standard disclaimer this presentation is not legal advice, kindly note this presentation is not a template for a license.

Licensor and Licensee

Under a license, the owner is the licensor and the party receiving permission is the licensee.  The licensor keeps title to the IP and the licensee receives authorization to use the IP under the terms and conditions of the license.  The license is a substantive agreement and should be in writing to avoid misunderstanding.

Language of the License

The terms and conditions of the license should be clear and understandable.

Licensed Property

The license should specifically identify the subject matter with exact parameters and clear scope.  The licensor and licensee need to make sure the terms and conditions are satisfactory to their business interests.  A license can include a schedule that specifically identifies each item of the subject matter, for example, the item’s title, description, registration number and date, and jurisdiction.

Examples of Breadth Needing Clarification

Trademarks can be federally registered and exist under common law rights from actual use of the mark.  Federal trademarks can exist in multiple classes for different products or services.  Trade names or corporate names of a business are different than trademarks, as further explained in an earlier post under the heading:  “Registration and Use.”  Computer software may be distinguishable between source code and object code.

Grant

The timing of the grant is expressed well in the present tense:  “Licensor grants to Licensee…” The licensor wishes the grant to carefully convey only the specific rights agreed to between the licensor and licensee.  The licensee prefers a more general grant.

Emphasis of Terms and Conditions

To encourage abidance, the licensor may provide in the grant that the license is subject to the terms and conditions as stated in the agreement. The licensor should want the license to state that performance by the licensee of any rights not expressly granted to the licensee is beyond the scope of the license and a breach of the agreement.

Permissions and Rights

The terminology “permissions” and “rights” may express ways of looking at the ownership retained by the licensor and the activities available to the licensee.  The license should clearly spell out the nature of the agreement, so that relationship is defined whether “Proprietary” or “Open Source” licensing is expected. Further discussion of the open source approach appears in an earlier post under:  “Copyright, Licensing, Open Source – General Pointers.”

List of Permissions

The grant to the licensee under the owner’s IP may include an ability to make, use, sell, import, reproduce, offer for sale, publicly perform, or have made products or works.

Field of Use

The grant may restrict the field or area, such as in a part of a market.

Examples of Restrictions on Field

Specific products or services.  Specific activities or programs.

Geographical Restrictions

So long as antitrust laws are respected, the grant may limit the licensee’s use to specific geographical areas. Where geographical changes are contemplated, the license could refer to an attached schedule that the parties may agree to amend as occasions arise.

Technology Pointer

Statutory and regulatory restrictions exist on countries and foreign nations to which select technical information may be provided. For reference, see the Export Administration Regulations Marketplace.

Exclusivity

A sole grant allows the IP owner make use of the IP along with the licensee, where the licensor agrees *not* to make further grants on the specific IP.  An exclusive grant gives the particular right to the licensee, and only the licensee.  A non-exclusive grant specifies rights for the licensee, where the licensor is free to have agreements on the same subject matter with additional licensees.

Copyright Pointer

An exclusive grant to copyrighted material needs to be in writing.  A non-exclusive grant can be oral, or implied from conduct between the licensor and the licensee.

Sublicense and Transfer

The sublicensability and transferability of rights in the IP should be addressed in writing.  Licensors typically resist allowing the licensee unrestricted rights to assign or transfer the IP.  Some circumstances may make sense for the licensor to grant to the licensee, rights of sublicensing or transfer.

Example of Sublicensing

The licensor and licensee may agree to a marketing plan with the understanding the licensee will sublicense the licensee’s rights to retailers.

Language to Prevent Sublicensing

For express confirmation that downstream licensing is denied, the license should state the grant is nontransferable, nonassignable, and without the right to sublicense. Including “nonassignable” avoids ambiguity, even though licensing and assignment are different mechanisms. As a helpful explanation, an assignment would serve to change ownership, while a license allows the IP owner to retain ownership.

Payment Structures

Sample consideration structures include:

fixed payment;

a royalty calculated as a percentage of sales or income connected with the licensed property; and

a combination of fixed payment followed by royalties.

Definition Usable in Royalty

A royalty percentage may be based on net sales.  The net sales may subtract enumerated items from gross sales.  The items taken from the gross sales can include:

transportation charges;

insurance;

taxes and other governmental charges;

normal and customary trade, quantity, and cash discounts; and

allowances or credits to customers.

Range Limitable for Licensor

Payment provisions can set a minimum or a maximum for the royalties the licensor receives.

Royalty Scaling – Inverse Proportionality

A percentage royalty may decline as the gross sales rise.

Patent Pointer

Where patents are involved, the license should terminate the obligation to pay royalties upon the expiration of the last-to-expire licensed patent. This expiration contributes to keeping the license clear of patent misuse, as would otherwise exist for royalties collected on a patent after its expiration.

Mechanics of Payment

Sample payment provisions involve: frequency, dates, late fee, currency, authority for anticipated monetary conversions, and penalties.

Sample licensee reporting provisions involve: regular statements showing calculations for royalties, authorization to withhold any required withholding tax, and keeping of complete and accurate records of all transactions involving the licensed property for reasonable inspection by licensor or the licensor’s independent auditor.

Duration

Sample durations follow.

Fixed Term

The license begins on the date of this license and continues in effect until ________[insert agreed date].

Perpetual Term

The license continues unless terminated under the early-termination provision of the license.

Extensions

An initial term of fixed duration may be followed by extension periods.

Evergreen

Extension periods that automatically renew unless terminated are evergreen terms.  The royalties may automatically adjust upon reaching each extended term. The license may or may not list an overall limit on the number of term extensions.

Options

Extension periods that require an opt-in or qualification are options.  To exercise the option, the licensee may need to provide advance written notice and meet criteria.

Examples of Qualifiers

Royalties reach a threshold level.  Research reaches a milestone. Product is marketed and distributed in identified geographical areas. General compliance with terms and conditions of the license.

Termination

A material breach allows the non-breaching party to terminate the license.  The licensor is well-served if the licensee’s rights cease immediately upon early termination exercised by the licensor.  The license should discontinue all use of the subject matter, with possible exceptions allowing the licensee a limited duration to sell inventory on hand embodying the subject matter.

Licensee Breach Examples

Failure to pay royalties due.  Failure to maintain confidentiality of trade secrets.  Exceeding the scope granted such as selling the licensed product in unauthorized territory or for unauthorized uses.  Sometimes a change in ownership or control of the licensee, where the licensor demonstrates inability to rely on an unknown character of the unfamiliar entity.

Trademark Licensee Example of Material Breach

Failure to meet specifications of quality standards.  Use of marks with unauthorized products or services.

Licensor Breach Examples

Material breach by the licensor is less common of course since the licensor has fewer obligations under the agreement.  Substantive failure can arise under the license from agreements on representations, warranties, improvements, maintenance, confidentiality, technological support, or indemnification.

Text Copyright © 2009 Bob Brill

BNC, BNC Entrepreneur Group, Business Network Chicago, entrepreneur