Lee M. Taylor JD, LL.M, MBA Candidate The Mahele Method and its (Dis)contents

Education University of Kansas – BS in Genetics – BA in English Literature University of San Diego – Juris Doctor (JD) The George Washington School of Law – Masters of Law (LL.M) University of Hawai̒i – Masters of Business Administration (MBA) Licensed Member of State Bars – California 2007 – Hawai̒i 2008

Experience Laboratory Technician1997 Biology Lab Instructor 1998 Field Researcher - Iceland 1999 Legal Clerk - San Diego, London 2003 Intern - IIPI 2004 Intern - ITC OUII 2005 UH Business Plan Competition 2008 UH OTTED 2008

OTTED Licensing pre-Mahele Method Negotiations took 3 to 9 months Performed sui generis (each technology is a unique entity and each licensee has unique circumstances) Licenses:  No License Issue Fee; Equity due upon Execution; Production Milestones; Business Plans; and Sales Milestones Milestones were known solely (wholly) to licensee

The Mahele Method ™ Lee Taylor, University of Hawai ̕ i 1. The License Issue Fee A.$6,500 due upon execution if the patent expenses are less than that, B.50% of patent fees due upon execution and 50% due six months later if patent expenses are between $6,500 and $13,000, or C.33% of patent fees due upon execution, 33% six months later and the remaining 33% due twelve months after execution if expenses are greater than $13, The License Maintenance Fee A.$12,000 due Dec 31 st of the first full year of the license, B.$24,000 due Dec 31 st of the second full year of the license, and C.$36,000 due Dec 31 st of the third full year of the license and thereafter. All fees are creditable against royalties received during that calendar year. 3. Royalties 5% of net sales, 10% if licensing software. If the licensee wishes to have rates below 5% then the TTO requires sales projections for the first four years. If royalties in year 3 are close to $36,000 (+/- 10%) and exceed $48,000 in year four, the lower rate is accepted. 4. Equity “Never more than four” Equity is something only sought from start-ups. It does not act in lieu of the above but in addition to it. There, the TTO takes 4% or less to allow enough equity left over for later rounds of fundraising. Equity is conveyed after the first round of $2M+ financing or at the fifth anniversary of the license—whichever is first.

The Mahele Philosophy Only a minority of licenses make substantial money Royalty rates capture the upside of disparate technology License maintenance fees capture the base rate / spur commercialization TTOs and entrepreneurs time is limited / time is money Business needs transparent, predictable terms Licenses should have few “moving parts” and be easy to administer by using objective calendar dates

The License Issue Fee People only respect things they give consideration for ($$) Some modicum of value is needed upfront Money is the best proxy for competence & intent Professors/Inventors reasonably expect the first 12 to 24 months of a license to be spent recouping significant patent expenses They look for modest gains in year 3 and more substantial gains in year 4 and thereafter

The License Maintenance Fee Technology ages and loses value There is substantial value in “locking up,” or having exclusive rights to a technology The fee is the best goad towards commercialization $25,000 is the pain point

Royalties Royalties capture the upside of disparate technologies The sliding scale forces the licensee to seriously consider the money that will be earned going forward And yet... Soft 3% on most technologies, 9% for software Rebuttable presumption as to why it should be less (foolish consistency) Licenses are “naked” research and consultation are not included

Equity Its FACT is more important than its Amount We ask faculty to waive equity if receiving it directly from the licensee UH does not need it until it has value CELA’s liquidation preference may be more elegant still

Is that it? Sublicensing? – Yes, but flow through and 10x royalty on all lump sum payments Commercial sale are less important with license maintenance fees but can have first sale at year 3, 4, or 5 Standard license is full of non-controversial and/or non-negotiable terms Improvement technology regularly granted

Takeaways The “nightmare” of the blockbuster technology is overblown (will “settle” for $30M instead of $40M in both equity and royalties) The goodwill standard terms provide is real because they: – Empower professors – reduce workload – and provides predictability The licenses are “fundable,” fast and fair – (works for companies of any size) This method is “express” but not etched in stone, it is a rapid way to get to agreed upon terms

Thank You Lee M. Taylor Office of Technology Transfer & Economic Development, University of Hawai̒i