Tools for Technology License Negotiation (Patent/Copyright) Mark Reeves Oak Ridge National Laboratory Albuquerque, New Mexico April 26, 2010

2 Agenda Strategy Development - Technology-based Strategy - Company-based Strategy The License Application - Business Plan Pro Forma Financials - IP Valuation Calculation Term Sheet Questions

3 Disclaimer! The course will: - Provide tips on what has worked in the past when negotiating licenses and other agreements - Share tools that have been successful - Help you avoid the effects of misinformation or lack of information Not the only way to do this business PLEASE SPEAK FREELY—DISAGREE, OFFER ALTERNATIVES, ASK QUESTIONS!

4 Agenda Strategy Development - Technology-based Strategy - Company-based Strategy The License Application - Business Plan Pro Forma Financials - IP Valuation Calculation Term Sheet Questions

5 Strategy Development Good way of recording data about the technology portfolio and the institution’s goals in licensing Offers a way to allow management and inventor participation/approval in developing the strategy - Keeps everyone on the same sheet of music - Could be very useful if future internal disputes arise Will be a “living” document (many updates as new data are gathered) Develop a Formal, Technology-based Licensing Strategy

6 Develop a Formal, Technology-based Licensing Strategy (Cont.) An internal formal document, with management approval Documents the: - State of the intellectual property/technology - Market - Competition - Fields of use - Candidate licensees - Pricing parameters - Other key factors Strategy Development (Cont.)

7 Attachment A—Technology-based Licensing Strategy Template

8 Strategy Development (Cont.) Assume we have an expression of licensing interest and need to formulate a term sheet (i.e., outline of proposed license agreement) We’re looking for an indication of ability to perform Qualify the Partner

9 Strategy Development (Cont.) Diligence on prospective licensee(s) - Dun & Bradstreet reports - Company website - SEC filings ( Yahoo! Finance, Motley Fool, etc. - Google them! -Income statement & balance sheet Qualify the Partner (Cont.)

10 Strategy Development (Cont.) Diligence on prospective licensee(s) (Cont.) -Formal market opportunity analysis -Proprietary databases -Market reports -Etc. - History on new product introduction - Technology licensing history -“Dirt?” - Stable market player Reference librarians are a superb resource! Qualify the Partner (Cont.)

11 Strategy Development (Cont.) In addition to information already in the “Technology-based Licensing Strategy,” document company-specific information that may be: - Critical in determining if this candidate is a good licensing prospect - Very useful during any negotiations that may ensue Update Licensing Strategy to “Company-based”

12 Strategy Development (Cont.) Attachment B—Company-based Licensing Strategy Template

13 Agenda Strategy Development - Technology-based Strategy - Company-based Strategy The License Application - Business Plan Pro Forma Financials - IP Valuation Calculation Term Sheet Questions

14 License Application A License application should provide you essential data from which to produce a term sheet. - Specific company data (company name, state of incorporation, contact info) - Verify the authority of the company’s negotiator and signatory - Financial data (pro forma on revenues and margins based on products commercialized from your IP) provided by the candidate licensee - Information to help you with export control issues, exclusivity determination, fields of use, etc. Probably the most useful tool in the toolkit Discourages tire-kickers!

15 License Application (Cont.) From the license application and its associated business plan and pro forma financials, calculate the financial consideration: - Up-front fee - Minimum annual fee - % sales - Perhaps equity - Perhaps sponsored research Calculate the potential profits and use the “25%” rule Base the term sheet consideration on their financials, where possible

16 Attachment C—Technology License Application Template License Application (Cont.)

17 Attachment D—Execution Fee, Royalty Rate, and Minimum Annual Royalty Calculations Based on Business Plan Pro Forma Financials License Application (Cont.)

18 Agenda Strategy Development - Technology-based Strategy - Company-based Strategy The License Application - Business Plan Pro Forma Financials - IP Valuation Calculation Term Sheet Questions

19 Term Sheet Term sheet should provide your first offer to candidate licensee regarding - Royalty rate - License fee - Expectations on licensee bearing cost of IP protection - Key legal terms (indemnification, warranties) - Sublicensing - Termination - Perhaps equity - Perhaps sponsored research - Etc. Calculate the potential profits and use the “25%” rule Base the term sheet consideration on their financials, where possible Always ask for more than you expect to get

20 Attachment E—Term Sheet Template Term Sheet (Cont.)

21 Agenda Strategy Development - Technology-based Strategy - Company-based Strategy The License Application - Business Plan Pro Forma Financials - IP Valuation Calculation Term Sheet Template Questions

22 Followup/Questions ??? Mark Reeves Oak Ridge National Laboratory (865)