Licensing or Optioning Technologies
Do you need an option or license for your startup? Use this information to decide which option to pursue.
INVO encourages founders to consider an option rather than a license. An option is fast and less expensive and, further, it gives the entrepreneur more time to raise funds. Legal fees for patent prosecution are typically deferred during the option period; however, the company agrees to reimburse INVO for such legal costs upon license execution. The company has an exclusive right to license the technology as long as the agreed upon conditions are met before the license option expires. A term sheet, which sets forth all the business terms, is typically attached to the option and can serve as a starting point for license negotiations.
Assuming there are not multiple potential licensees competing for a technology, INVO is generally willing to grant an exclusive option for 6 months at no charge to the licensee and term extensions are possible. The company has the right to exercise the option if agreed upon conditions are satisfied which might include raising a certain amount of capital, finding a CEO and completing a business plan.
Input from the inventor is important in licensing decisions. However, because of the inventor's potential conflicts-of-interest, he needs to negotiate with Northwestern from an "arms-length" relationship. In general, Northwestern gives priority to startups founded by Northwestern researchers; however, agreements with faculty-initiated companies need to be reviewed carefully to ensure that Northwestern is justified in granting rights to the technology to the startup (as opposed to a larger company). For this reason, a startup must demonstrate that it is better positioned to commercialize the invention than another larger more established company.
It is important for the founder and the businessperson from the startup to be familiarized with the general license template and financial terms for startups at Northwestern. Please contact your invention manager for a template. License negotiations can be very fast or take several months. In general, the length of the negotiation depends on the experience of the management team in transferring technology out of the university environment into a startup.
Universities are required by the Bayh-Dole Act to include diligence terms to ensure that significant progress is being made towards commercialization of the invention. Business and development plans are required. These plans need to include basic information such as: the company’s purpose, a description of the technology, a market analysis, opportunity, stages for development, timelines, milestones, and a management and financing plan. The business plan is not a procedural manual but more of a high-level view of the startup’s intended structure and function. Because business plans are subject to frequent revision as directions change, they are a snapshot of the company at a particular point in time. The exercise of writing the plan is itself invaluable in that it makes the entrepreneur confront the key aspects of building a new business and form realistic rationales for why he or she believes the company will be successful. Invention managers at INVO can provide a general template of a business plan.
Once the license is executed, the licensee will reimburse Northwestern for the legal costs associated with the prosecution of the IP. If, for some reason, extraordinary legal expenses have been accrued during the prosecution of the intellectual property, a reimbursement payment plan will be established to help the startup spread out costs over time in the short term.
Some general terms to expect in the license:
- Field of use restrictions, since a startup company often cannot develop all the applications of an invention.
- Performance milestones expected by the company which may include completion of an acceptable business plan; putting the initial management team and governance structure in place; product development stages; clinical and/or market testing; initial rounds for financing; commercial product introduction (“first commercial sales”); and/or minimum revenue targets during the first five years.
- Equity, milestone payments and royalties to the university because Northwestern invested resources, salaries, and space in the creation of the IP
- Maintenance fees to ensure that the company is serious about developing the invention. In order to help the startup, the maintenance fees may be delayed/waived the first year.
- Requirement of sufficient insurance as specified by Northwestern University.