The spike and the long tail: impact, income and collaboration in university IP licence negotiations

Yes, universities do care about making money on their IP licences. But making money is not a substitute for advancing the mission of the university. IP licensing should support the university’s mission, and how has been frequently articulated (see note below). If you are an industrial research sponsor, startup entrepreneur or investor who wants to do business with a university, you should be familiar with these principles. But what should you expect from the university’s technology licensing professional, when you are sitting across the table in a licence negotiation?

Here are seven suggestions for the university’s licensing professional. These can also be helpful to the potential corporate or startup licensee sitting across the negotiation table.

1 Pick the right licensee: the value of the licence is determined more by the choice of licensee than by the licence terms. If the commercial licensee is successful, the university licensor should share in the success. However, no one benefits from a non-performing licence, regardless of how good a job the parties did negotiating the royalty terms. This is especially true for exclusive licences, which are very common for university technology – hence the importance of marketing the technology as early as feasible, evaluating potential licensees carefully, and selecting the licensee or licensees who can best help advance the university’s mission.

Attracting multiple qualified licensees for early-stage university technology is more challenging than it might appear. Nevertheless, you can improve your chances by making your technology visible to the business world early and through effective channels. You can also make your technology more broadly attractive by bringing it as far along as possible within the university, through translational research, proof-of-concept programs, and by helping your inventors network with entrepreneurs, investors and potential commercialisation partners.

2 Understand the “spike and long tail” of university IP licence outcomes. University technology can be highly innovative, as well as grounded in solid science, but it is often licensed before product or market exist. As a result, a small fraction of university licences typically generate most of the financial return to the university (the “spike”), while the majority of licences do not (the “long tail”). This is not surprising, or necessarily bad – universities should be doing the high-risk research that the private sector often shies away from, and some of the licences that end up in the tail still advance the university’s broader mission – deploying socially useful inventions, supporting the local economy and jobs, transferring relevant technology to developing nations. Reasonable licence terms also serve to attract corporate research sponsorship.

But the “spike and long tail” reality has three important implications for how universities should be negotiating licences.

(a) Do a lot of deals without dragging out the negotiation, because most of your deals are likely to end up in the long tail anyway.

(b) Negotiate a reasonable royalty rate, but without a cap – because only an unpredictable few of your deals will be blockbusters that end up in the spike, and those blockbusters need to generate enough royalties to pay for all the rest.

(c) Limit your losses first. Continuing expenses on a large inventory of unlicensed cases, and unreimbursed patent expenses from struggling licensees, if they are allowed to accumulate, can negate the return on the few big successes. Carefully re-evaluate your unlicensed IP at every office action and maintenance payment decision, and put priority on prompt patent cost reimbursement from every licensee.

3 Understand the licensee’s business model and industry before negotiating the licence. As much as possible, have your licences negotiated on the university side by individuals with business experience, ideally in the industry of the licensee. This will improve your success in achieving suggestion 1, and also help you construct a win-win licence that contributes to the licensee’s success, rather than getting in its way. Your university’s licence negotiator should be a partner and resource who adds value to the licensee’s business plan, before and after the licence is signed. The university licensing professional should be thinking: How can I help this licensee end up in the spike rather than in the tail? And only afterwards: What is a fair deal for my university?

4. Don’t issue a licence to an unfunded licensee. For startups, raising that first funding round is a big step, which may take much longer than the entrepreneur anticipated. You do not want to have to pull the licence back from an unfunded licensee to look for an alternative. Far better to issue a simple short-term licence option that can be converted to a licence upon a successful funding commitment. If your potential licensee has trouble fundraising, they may have to re-engineer their team or business model, and if they are eventually successful at fundraising, the lead investor may make the investment conditional on a renegotiation of the licence. In either scenario, the licecse option helps the various parties work together towards their common goal.

5 The diligence terms are more important than the commercial terms. The diligence terms are the financing, product and business development commitments and milestones that are key to the licensee’s commercial success – for example, product development budget, development schedule, regulatory milestones, customer evaluation timeline, and so on. These should be agreed before the commercial terms – they flow naturally from suggestion 3. If a conversation about diligence terms is arduous, you may want to reconsider your choice of licensee (suggestion 1). Be demanding of a high level of commitment from your licensee, but also be willing to rework the licence if and when the licensee runs into challenges. As with suggestion 3, your objective here is to maximise the chances that the licensee will end up in the spike rather than in the tail.

6 Equity and royalty serve different purposes. Royalty payments are a fair return to the university on the value that the IP adds to the licensee’s product or service. Equity (ownership) shares are a fair return to the university on the opportunity cost of an exclusive licence, and on the value of the licence itself in getting the licensee’s business financed and launched. Indeed, the licence is often a determining factor in the licensee’s launch and access to investor financing. The university’s equity stake should reflect that value, and not subtract from or replace royalties.

It is possible that the university will never see a penny of royalty payments from some successful licensees. Startups are sometimes sold at a high premium before commercialising anything, or the startup’s product strategy may switch directions, radically and away from your IP. Even more frequently, the university’s early-stage equity stake will be severely diluted if the startup requires substantial additional capital. Universities should negotiate reasonable and limited anti-dilution protection, but this should be done by negotiators who understand the realities of venture financing. No one will benefit from a licensee whose ability to raise further financing is crippled by overaggressive anti-dilution protection for the university.

7 Share your method for determining licence fees, milestone fees and royalty rates. Every business model is different, and different universities have different licensing models, so the licensee should not expect a set of standard commercial terms. However, university licensing prof
essionals should be able to explain their valuation method clearly and promptly, and how it leads to the university’s licence proposal using the results of suggestion 3. This helps build trust and quick convergence on a done deal. A potential licensee who has provided the licensing professional with sufficient information to evaluate the licensee’s qualifications deserves a quick, complete and logical set of commercial terms to evaluate in turn.

These seven suggestions are not a guarantee of success. However, they encourage using the licensing process in a collaborative approach to a mutual objective, rather than as a zero-sum negotiation of terms. More importantly, they can help enhance the role that IP licensing plays in broadening and deepening the university’s overall relationship with the big and small companies that fund an increasing portion of the university’s research, deploy the university’s inventions in society, and derive an economic return for all the parties.

Note: For example: “Statement to the AAU Membership on University Technology Transfer and Managing Intellectual Property in the Public Interest”, March 2015 (www.aau.edu); “In the Public Interest: Nine Points to Consider in Licensing University Technology”, March 2007 (http://www.autm.net/AUTMMain/media/Advocacy/Documents/Points_to_Consider.pdf); “Managing University Intellectual Property in the Public Interest”, Stephen A. Merrill and Anne-Marie Mazza, National Academies Press, 2010

Christopher Noble (CLP, RTTP) is chairman of AUTM’s valuation course committee and teaches university IP valuation and licensing for AUTM and WIPO around the world. He is also MIT’s licensing officer for energy technology. Before joining MIT, he worked in executive positions for international technology companies, was a VC-backed entrepreneur, investor and board member, and raised money for many startups. He was a 2012 recipient of the LES Deals of Distinction award.

This piece was first published on LinkedIn here.