This document summarizes a presentation about IP licensing for technology entrepreneurs. It discusses how licensing can help both companies that want to commercialize their technologies and startups. The presentation covers key elements of licensing agreements such as scope, consideration, ownership of derivative works, and valuation methods. It also provides a case study of a licensing deal between a wireless startup and a large company, highlighting issues addressed around market exclusivity, ownership of new IP, and royalty rates. The overall message is that licensing can be a good strategy but also has many complex considerations to evaluate.

1. IP Licensing for Technology Entrepreneurs This presentation is provided under a Creative Commons license http://creativecommons.org/licenses/by-nc-sa/3.0/ Martin SuterEmail: martin.suter@iplicensing.net Twitter: @martin_suter, @IPLicensing LinkedIn: http://www.linkedin.com/in/martinsuter © 2010 Martin Suter, IPLicensing.net

2. Martin Suter: Personal background BBA & MBA from Canada ~20 years diverse work experience Tech & pharma Enterprise sales, trade finance, strategic alliances & biz dev Mix of BigCo and SmallCo Sat at both sides of the table Done a few deals http://www.linkedin.com/in/martinsuter © 2010 Martin Suter, IPLicensing.net

3. Show of Hands… Who aspires to start/own or lead their own company? © 2010 Martin Suter, IPLicensing.net

6. Takeaways Understand the implications of a licensing strategy Develop guiding principles outside of the deal Assess every deal through a strategic filter © 2010 Martin Suter, IPLicensing.net

7. IP Defined: More than just patents “Intellectual Property”means works of authorship, discoveries, ideas, inventions, technology, improvements, innovations, and proprietary data or information as reflected in any form (including computer programs), and any patent applications, patents, copyrights, trade secrets, mask works, trademarks, know-how and other common law and/or statutory proprietary rights under the law of any jurisdiction. © 2010 Martin Suter, IPLicensing.net

8. What is “licensing”? An agreement between parties in which a licensor (seller) grants certain rights to a licensee (buyer) in exchange for consideration (dollars) © 2010 Martin Suter, IPLicensing.net

10. Don’t “buy” software, you “license” it

11. How many people read the EULAs?

12. Do you really think Microsoft builds spell checkers?

13. Check out the “Help>About” box on MS Office apps and you’ll be amazed

14. Licensing to MSFT is not as lucrative as one might think!© 2010 Martin Suter, IPLicensing.net

15. Licensing: A Virtuous Lifecycle Companies often start as technology licensees via tech transferdeals Defense/Government labs, Universities, Fortune 500 Companies often then become licensors to commercialize © 2010 Martin Suter, IPLicensing.net

16. Some Personal Examples Knowledge House Went IPO MeshNetworks Acquired by MOT Cohda WirelessLicense deal with MOT SynChemFailed in Animal Models © 2010 Martin Suter, IPLicensing.net

19. Next gen battlefield radios

20. No commercial market capabilities

21. Raised ~$55m in venture funding

22. Developed substantial additional IP

24. Limited use license

25. M&A© 2010 Martin Suter, IPLicensing.net

26. Elements of a Licensing Agreement © 2010 Martin Suter, IPLicensing.net

27. Scope © 2010 Martin Suter, IPLicensing.net

28. Field of Use Territory A sample definition: “Field of Use” means marketsworldwide including national, federal, state & local civil and municipal government, utilities, transportation (but exclusive of Telematics), rail, petro-chemical, manufacturing, airports & seaports, and/or other markets as may be agreed in writing by the Parties, but, in all cases, specifically excluding Defense Customers. Markets Exclusions © 2010 Martin Suter, IPLicensing.net

29. New IP (aka Derivative Works) One of the most contentious areas in negotiation is ownership of derivative IP First Principles: For a more detailed explanation http://www.martinsuter.net/blog/2008/02/the-battle-over-purple-play-doh.html © 2010 Martin Suter, IPLicensing.net

30. How Might This Appear? Blue Play-Doh Red Play-Doh As between the Parties, BigCo will have and retain exclusive ownership of all of BigCo'sBackground Property and SmallCo will have and retain exclusive ownership of all of SmallCo'sBackground Property. By virtue of this Agreement, neither Party has any right, title, or interest to or in the other Party's Background Property except for the licenses expressly granted in this Section X. PurplePlay-Doh © 2010 Martin Suter, IPLicensing.net

31. Consideration (i.e. $) © 2010 Martin Suter, IPLicensing.net

32. Tech Transfer: Something for Nothing? Wrong! You’re giving them something substantial – your focus The commitment to commercialise their IP in a way they can’t/haven’t Give them skin in the game Equity ties them to your success Commit to performance milestones “NewCo will raise $X by Y date to fund R&D” “NewCo will have working prototype/customer, etc. by Z date” © 2010 Martin Suter, IPLicensing.net

33. Issues to Consider Licensing As a GTM Strategy © 2010 Martin Suter, IPLicensing.net

34. GTM: To License or Not to License? Attractive option for many reasons Focuses scarce resources in core technology development Time-to-market Exploits existing channels Risk:Reward © 2010 Martin Suter, IPLicensing.net

35. Potential Implications © 2010 Martin Suter, IPLicensing.net

37. “I need an agreement in perpetuity”

38. “I need ownership of derivative works”

39. I want to tie payments to cash flow”Licensor “I can’t give market exclusivity to one company” “What if my own IP is used against me?” “I want to maximize my valuation” In the heat of a deal negotiation, the issues are complex, and the positions often adversarial. A key is to build consensus internally by developing guiding deal principles before beginning negotiations. © 2010 Martin Suter, IPLicensing.net

41. Licensee typically wants it all

42. Are they really going to sell product in Japan? Latin America? Middle East?

43. Licensor typically wants it contained

44. At a minimum, ensure Field is fully and properly defined

45. What it is, and equally importantly, what it isn’t

46. Granting rights in a field and/or territory may unintentionally preclude future deals© 2010 Martin Suter, IPLicensing.net

48. Licensee = ownership of their IP

49. Licensor = Risk of “picket fence” as a result of knowledge x’fer

50. Can’t make someone dumb after you’ve made them smart!

51. Purple Play-Doh = Red Play-Doh + Blue Play-Doh

52. Indemnification

53. Licensee wants to be protected

54. What if Company B sues for patent infringement in Korea?

55. Licensor can’t bet the company on a deal

56. The licensee may have a bigger target on their back and/or be in more markets

57. Higher risk of litigation© 2010 Martin Suter, IPLicensing.net

59. Licensee typically want rights in perpetuity

60. Investing to build products and a market and can’t risk losing license rights

61. Licensor typically wants it limited

62. Shorter term is an opportunity to re-negotiate or terminate

63. A reasonable compromise is to tie Term to performance

64. Non-performance (e.g. de minimus royalty payments)

65. May still elect not to terminate, but may be a stick to negotiate higher royalty rates or other more favourable terms© 2010 Martin Suter, IPLicensing.net

67. Technology?

68. Intellectual Property?

69. Not just patents, but designs, know-how, trademarks, copyrights, etc.

70. Future versions and enhancements?

71. What can they do with it?

72. Make or have made, sell, develop derivative works, etc.

73. Public Relations

74. Licensee may not want PR for competitive reasons

75. Licensor often wants PR for competitive reasons

76. Generally, PR requires mutual consent© 2010 Martin Suter, IPLicensing.net

77. High-level Overview of Valuation Method Many different approaches to valuation Worthy of its own seminar! Income method is one way of determining present value Top-down approach to calculating cash flows Discounted for Cost of capital Risks © 2010 Martin Suter, IPLicensing.net

78. Overview of Valuation: Income Method Examples: Total Target Market All vehicles Total Addressable Market All new vehicles Total Captured Market Market share (i.e., all Fords) Units Sold Total units sold x $ royalty per NPV Cash flows discounted by cost of capital Risk-AdjustedNPV Cash flows discounted by assessment of risks © 2010 Martin Suter, IPLicensing.net

79. Commercial Licensing Agreement* Case Study: Wireless Start-up & Fortune 500 Company * Specific Terms & Conditions are confidential and covered by NDA. The information contained herein is for illustrative purposes only © 2010 Martin Suter, IPLicensing.net

80. Background BigCo wanted to be the leader in mesh networking in multi $B core franchise Viewed some capabilities as table stakes and willing to support industry standardization i.e. willing to “share”/sub-license Viewed other capabilities as key differentiators with potential competitive advantage i.e. Unwilling to “share” SmallCo in-house general counsel, outside counsel & business development vs. BigCo Legal Team! © 2010 Martin Suter, IPLicensing.net

81. Timeline t = 0 01/2003 Technical evaluation begins 08/2003 Licensing interest expressed, posturing begins around terms 11/2003 non-binding MOU signed Broad brush approach to deal structure 04/2004 Agreement signed 09/2004 Agreement announced 12/2004 SmallCo Acquired by BigCo t + ~200 days t + ~300 days t + ~420 days t + ~570 days t + ~750 days © 2010 Martin Suter, IPLicensing.net

82. What Gave Us Heartburn? Market Exclusivity Derivative Rights Royalty Rates on existing products i.e. Established, high-margin, high market share product lines © 2010 Martin Suter, IPLicensing.net

83. Market Exclusivity:How did we deal with it? Negotiated at length (or ad nauseam!), the definition of “Primary Field of Use” that was limited in scope $$ solved this dilemma Risk was that granting exclusivity would make company less attractive as an M&A target Also included “Secondary Field of Use” on a non-exclusive basis Again, clearly and narrowly defined © 2010 Martin Suter, IPLicensing.net

84. Derivative Rights:How did we deal with it? SmallCo owned the blue Play-Doh BigCo owned the red Play-Doh BigCo had the right to make purple Play-Doh, but did not own it By definition, purple contains blue Protection against “picket fence” through non-assertion clauses © 2010 Martin Suter, IPLicensing.net

85. Royalty Rates:How did we deal with it? Different % royalties by product Existing product lines Lowest rate Established gross margins, higher price (COGS) sensitivity Competitive product lines Industry standard rate Market dictated pricing “New” product categories Highest royalty rate More flexibility in setting price in market to maintain margins © 2010 Martin Suter, IPLicensing.net

86. Takeaways Understand the implications of a licensing strategy Develop guiding principles outside of the deal Assess every deal through a strategic filter © 2010 Martin Suter, IPLicensing.net

87. Thank-you! Blog: www.iplicensing.net martin.suter@iplicensing.net © 2010 Martin Suter, IPLicensing.net