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Thursday, April 7, 2011

Select Technology and Negotiate Rights

Several aspects of selecting a technology have already been discussed as has the intro to licensing terms.  These are important topics and worthy of more discussion.  Your ability to fund the NewCo, attract partners, and become profitable will be impacted by the type of technology and what your financial commitments are in the license agreement. 

The technology field must be appealing and have potential for significant financial upside.  If the technology covers a wide range of product opportunities via an umbrella type patent, this can be quite attractive.  The downside is a failure in your first product could make investors nervous about other potential products related by the technology. 

Selecting your first product for the development pipeline is a critical next step.  You will conduct a more extensive diligence review of the product opportunity and its relation to the licensed technology.  Many times, technology companies can scrape enough funding together to move a single product closer to a launch.  Getting funding for several products in the pipeline can be challenging and many investors will be concerned you will lose focus.  Several years ago, having multiple products proceeding through development was acceptable.  With the economic changes since the year 2000, a stronger emphasis by investors has been placed on advancing the primary product further in a highly focused way. This may change in the future, but for now, FOCUS is best.

The NewCo product development selection is important because the initial product focus is used to estimate the near term value of the technology.  Your investors will weight their financial risk/reward and establish a valuation on the company based on the theoretical revenue stream of the lead product and NewCo’s ability to make money.  The product selection will also help you research similar stage product licensing/acquisition deals and the terms which were used to license or acquire the technology.  Give consideration to both how much was paid to obtain the technology as well as the future license or selling terms; i.e., what partners will pay NewCo to obtain rights.  For example, the royalty at purchase by NewCo and what can be received in the future by NewCo on an out-licensing deal are considerations for your negotiation.  You do not want to agree to an excessively high payout in royalty.  Suppose you agree to pay a 7% royalty to an institution to acquire the rights and learn that your first product can only net an 8% royalty from a partner.  Your future profit is limited to 1% on sales of the product, hardly worth much for any investor! Time to launch and development costs are also considerations.  Assuming the same size market opportunity, a product taking 7 year to develop at projected costs of $100MM should cost less than a product opportunity with $5MM to develop and taking 2 years to product launch.  Always consider the business opportunity as a whole in your negotiation because it is NewCo’s objective to make money.  You must do your homework before negotiating so you can decide on terms that fit your goal of making money.

You may be a bit nervous and feel you have no negotiating skills.  This may be your first attempt to obtaining rights to a technology.  You still will need to negotiate an agreement!  Negotiating is done daily by most everyone; they just think of it in different terms.  Getting your children or spouse to do something different than they would like, but is what is exactly what you want to do, is a negotiation.  Buying or selling a car or a house involves a negotiation.  Trying to get a higher starting salary, a promotion, or other improve compensation issues all require a negotiation.  You negotiate already, just with different people and on topics which are not technology acquisition related.  I tend to joke with entrepreneurs when introducing the topic by saying the “Seller wants all your money and wants to give you nothing, the buyer wants all product opportunities and for the seller to pay all future expenses.”  In some respects, it is a bit true.  So you will have to find an acceptable middle ground you both can live with.  That is the key, YOU CAN LIVE WITH THE DEAL; i.e. it may not be perfect.

There are multiple techniques and attitudes displayed during the negotiation process and everything can change several times before reaching a final agreement.  Always adapt to the situations and activities and try to stay calm and business like.  Win-Win deals are my personal preference because the parties often must interact with each other in the future.  If one side feels cheated, that disadvantaged party will lose interest and their contributions will fade or the party may even become confrontational.  This will have a negative impact on your business, even if you got the really great deal.  Nearly every business person has experienced a Winner-Take-All negotiation.  I do not feel these really end well because such negotiations are much more difficult and you do not want to work with the other side in the future.

Coming back to the negotiation for a product opportunity, identifying the value of the product revenue in the future and factoring in the costs and time, should lead you to establishing the value of what you can offer.  Your best way of negotiating is to identify fair price and have both parties agrees.  You may need to persuade the other side that the terms are fair but that is always the case.  Fixing the terms around the potential payout will married with the example terms I listed earlier in the blog.  For example, you increase milestones for a lower royalty, or you offer equity and less cash, possibly you have different royalty levels on different levels of sales, all the terms fit together to make up a deal that both parties can live with.  No question you will have to discuss why some offers and counter offers just will not work, but that is part of a business negotiation.  Remember, neither side makes money if the product never gets launched.  If the terms create excessive difficulty that the product is never launched, the technology is likely to languish due to lack of investor financial support.

The final consideration is the risk to get to a final approved product to sell.  There are many risks to the development of a NewCo as I discussed earlier in the blog.  The FDA, USDA, EPA and other regulatory agencies can add significant uncertainty to your ability to get a product to market in a defined time and cost.  Increased risks always require a higher premium for return on investment by the financial and business community.  You will need to factor this into your estimates as well.

Always do your homework in advance and work to get a deal you can live with when acquiring the rights to a technology that you find exciting.  There are no set rules and no one-size-fits-all terms for a technology licensing deal; each situation is different and negotiations vary with the technologies and personalities.  This is the reason the segment is more general on description of terms and negotiating styles.  I am always willing to consider specific topics and welcome suggestions or questions. 

 Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon