5 Key Considerations When Negotiating a License Agreement

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License agreements can be a great way for a start-up company to generate revenue from sources other than the founders/funders. Start-ups can license their technology separately, or as part of a collaboration with another company. For example, two companies may decide to cross license technology so that each company has a better opportunity to commercialize their own technology. Although the complexity and scope of these types of arrangements can vary widely, there are five basic provisions most license agreements share:

Exclusive vs. Non-exclusive

An exclusive license is more valuable to the licensee (the party receiving the license rights) than a non-exclusive license because exclusivity enables the licensee to invest in the technology without others benefiting from the investment. But because exclusivity also creates more concerns for the licensor (the party granting the license rights), before granting rights to an exclusive license, consider the following:

Compensation/Royalties

There are many options for the licensor to receive compensation for a license. You may decide to offer the license for a fixed license fee, a royalty based on revenue generated using the technology, a combination of an upfront “license fee” and ongoing “royalties,” or the licensee may give the licensor equity in the licensee's company. To avoid surprises, consider:

Modifications/Enhancements

A licensee may want to modify the technology, so determining which party owns the modifications and the rights of use are important to consider:

Term/Termination

When license agreements do not generate anticipated revenues, unhappy licensors may wish to terminate the agreement. With some advanced planning, licensors can be better positioned to deal with an agreement that is not meeting expectations. Consider the following:

Additional Risks

The licensee will want the licensor to have liability if the technology does not perform, or if a claim is brought against the licensee based on use of the technology. Licensors can limit this risk in the following ways:

With care consideration of the terms, new companies can generate licensing revenue, limit risk, and protect future options.