1.12 Negotiation

1.12.1 Preparing for Negotiation

The license negotiation is where the action is – it’s where Tech Transfer truly occurs. It is a challenge to achieve a mutually satisfactory License Agreement in which all the terms (especially financial) and conditions suit all parties. Negotiation of a license is both science and art, analytical and qualitative. It requires a thorough understanding of the invention, the nature of the IP, the value of the IP/invention in the marketplace and to the Licensee, and empathy/understanding of the risks and challenges the Licensee faces. Good negotiators know their position and their preferred outcome; they know when to stick firmly to a position, when to be very flexible, and ultimately how and when to compromise to achieve a win-win License Agreement. Although negotiations are almost always a challenge, they can be either unpleasant, or enjoyable. They can result in a less-than-optimal outcome (or a failed negotiation) or a deal that is very positive for all concerned. The difference is preparation – preparation by the negotiators. The TTP must go into the negotiation with preparation and the right mindset. 

1.12.2 Preparing the TTP/Inventor Team

The successful TTP not only prepares themselves for a negotiation, but they also prepare the inventor. Although we recommend that the TTP always be the lead negotiator (not the inventor), the negotiation is done as a team effort of the TTP and the inventor(s). The TTP must explain to the inventor what to expect in the negotiation dynamics. In optimal negotiations, the TTP is the only voice to speak about financial and business terms – not inventors. But the TTP takes a back seat if and when technical issues of the invention arise in the discussion. The TTP needs to manage the expectations of the inventor so they know what to expect regarding timing, outcomes and dynamics of the negotiation. 

1.12.3 Pre-negotiation Valuation of Technology

Eventually, all license negotiations will reach the point where the discussion will hinge on what value each party (Licensee and Licensor) assigns to the IP. Ultimately, the two parties must agree on a common monetary value of the invention/IP. A common misperception is that an accurate value for an invention/IP can be developed with some advanced methodology and sophisticated mathematical manipulations. While it is true that sophisticated valuation methods can be used to arrive at a specific value for a new invention, such methods are completely based on unknowns. They are imprecise and totally arguable. Experienced TTPs know that it is impossible to arrive at an absolute and correct value for a new technology.

We recommend beginning with a starting point of valuation for a negotiation. Using some preliminary and simple valuation methods, the TTP should outline some approximate ranges of value that both parties will agree to. So, rather than creating a value (using whatever method) and telling the potential Licensee to “take it or leave it.” the successful TTP negotiator will do some preliminary “pre-negotiation valuation” to establish parameters to begin building the “value capture envelope” (see details below) of the License Agreement. In summary, valuation refers to the use of methods to establish a financial value for an invention/IP at a certain point in time, with certain built-in assumptions and parameters. Pre-negotiation valuation develops a starting point for negotiation – a range of values for the IP. This range can be achieved through the multifaceted mechanisms of a License Agreement. 

1.12.4 License Terms and the Value-capture Envelope

One of the biggest hurdles to overcome in the sale of an invention/IP is arriving at a sales price. When a new, untried (in the marketplace) invention/IP is sold for a certain lumpsum price, it is almost certain that the price will turn out to be too high or too low – one of the parties will pay or receive too much or too little. This is because no one can accurately predict its future sales and profitability. This is one of the primary reasons to license rather that sell a new invention/IP. A License Agreement typically comprises various financial terms, conditions, and interlinking mechanisms that, when designed well, flexibly and equitably, share risk and return between the parties. This set of flexible and interlinked mechanisms can be thought of as a “value-capture envelope.” This envelope is constructed of the various terms and conditions that the two sides (Licensor and Licensee) design to allow both parties to capture optimal commercial value from the IP. License terms such as scope of commercial rights, territory, upfront fee, royalty amount and structure, minimum annual royalty/license maintenance fee, IP costs, etc. all contribute to this envelope. Most importantly, this envelop allows value capture to meet the parties’ interests while continually adjusting for the realities of the marketplace and product development dynamics. 

1.12.5 Term Sheets and the Negotiation Dynamic

The Term Sheet is an essential step in the path from early discussions between potential Licensor and Licensee to signed License Agreement. Typically, the IP owner presents the Term Sheet well after serious discussions of the technical, IP, research, business and commercialization issues, potential business (license) arrangements, and marketplace realities. The Term Sheet starts the direct and detailed negotiation over the important terms and conditions that will eventually go into the signed License Agreement. The Term Sheet is an easy-to-read summary of the key terms and conditions of a potential Agreement, without legal language and peripheral (but eventually important) clauses. The Term Sheet provides a relatively easy way for the parties to negotiate precise terms and conditions without the cumbersome use of an entire License Agreement. Term Sheets are typically 1-3 pages, while License Agreements are anywhere from 10-50 pages of text. 

The Term Sheet is a key tool in the negotiating dynamic between the parties. It gives the negotiating parties an excellent vehicle for presenting terms and conditions, offering counter terms, substantiating arguments, and moving the negotiation towards a mutual agreement. The Term Sheet is not legally binding like the License Agreement. This gives a certain level of freedom for the parties to “think out loud” on paper, and to try different value-capture approaches and negotiation mechanisms to reach agreement.

1.12.6 Getting the Deal Done: Tricks of the Trade

Getting a signed License Agreement is the key achievement of any TTP. All the policy, planning, operations, management, discussions, intellectual work, and emotional commitment ultimately lead to this crowning moment. The successful negotiation and signing of a quality License Agreement is cause for celebration and is the hallmark of success in the TTP’s career. Experienced and successful TTPs learn that there are ways to get the deal done more smoothly and efficiently. Through experience and trial and error, a TTP develops a tool kit of practices and techniques that will add more successful negotiations to their reputation.