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Example Licensing Structures

The following licensing structures and their general descriptors are intended to generally inform the reader–but not as specific recommendation for any client. Always consult an attorney for help in making the right decision for you.

Annual Fixed Payments.  Is a clause of a licensing agreement requiring an annual cash payment during the term of the license.  Consider when there is no definite measurement associated with the use of your IP.  Expect the licensee to Desire for consistent (non-variable) payment

Equity Stake.  Is a clause of a licensing agreement wherein the licensor takes an equity stake in the licensee entity, or a related equity-based compensation as a partial royalty payment.  Alternatively, the equity stake may by the licensee in the licensor entity.  Often the currency for such combinations is in the form of non-common shares – such as preferred shares, convertible preferred, convertible debt, etc.  Consider when a continued equity stake in your IP when you are very comfortable with the risk-reward profile of your IP.  Under this licensor-favorable risk-reward profile, expect the licensee to view the licensor as an acquisition candidate.

Grant Forward Is a clause of a licensing agreement wherein the licensor or licensee grants its counterpart a royalty-free (or no-additional-cost) license of use of improvements on the current IP.   Consider when you need IP for future licensing efforts or when you want to also share in your licensee’s improvements of the IP you have licensed.  Expect the licensee to perceive the licensor is more likely to develop technology that will be useful or required.

Guaranteed Minimum/Maximum Annual Payments Is a clause of a licensing agreement requiring either a minimum or maximum annual cash payment during the term of the license.  Consider when you need to incentivize the licensee to implement your IP.  Expect the licensee to search for predictability of its long-term sales forecast to cover such a minimum. 

Lump sum Payment Is a clause of a licensing agreement requiring a single cash payment at time of executing the license, which the sole payment to the licensor.  Consider only if your IP is minimal and you does not financially support substantial upfront expenditures.  Expect the licensee to have limited desire to disclose sales information to the licensor.

Milestone Payments Is a clause of a licensing agreement requiring a single or multiple cash payment(s) over the life of the license.  Typically milestone payments are due and payable upon the occurrence of specific milestone events. Such events typically include productizing goals, third party approvals, and market-based penetration goals.  Considerwhen you plan to continue research with a strong likelihood of market-realizable results.   Expect the licensee to focus pay only on milestone(s) achievement.

Patent Select Is a clause of a licensing agreement wherein the licensor pre-agrees to allowing the licensor select at least one future IP from a selection of the licensor’s future available IP.  Such agreement is generally grounded in a present day consideration for such future selected benefit.   Consider when you think the licensee is underestimating the value of your IP.  Expect the licensee to pick-and-choose amongst your IP.

Running Royalty Is a clause of a licensing agreement that is useful for delaying royalty payments until the licensed IP is actually used.  Such triggers include first sale, first sale in a territory, etc. requiring a single or multiple cash payment(s) over the life of the license.  This clause can also contain tiered inflator or deflator multipliers on a base royalty rate. Consider this method of sharing in commercial success of licensee as a means of maximizing the value of your IP. Expect the licensee to attempt to shift to you a larger share of commercial risks in return for your taking a larger share of the potential sales.

Sublicensing Rights Is a clause of a licensing agreement wherein the licensor shares in any revenues that the licensee realizes as a result of sublicensing the licensor’s IP to third parties.  Always consider and deploy when licensee is either motivated or in a better position to license technology more broadly.  Expect a licensee need for sublicensing rights as pertains to contractually based supply second-source requirement.  Be particularly aware of patent exhaustion issues as concerns sublicensing rights.

Supply/Purchase Contracts Is a clause of a licensing agreement wherein the licensor or licensee agrees to buy or sell products or services at commercially favorable terms to the licensee or licensor.  Such products or services may include future or anticipated rights as well as current products or services.  Consider when you need to secure a long-term source for products utilizing your technology.  Expect the licensee to attempt to the secure purchase contract(s) prior to agreeing to the IP deal.

Up-Front Payment Is a clause of a licensing agreement requiring a cash payment at time of executing the license, which is often also construed as a pre-payment of future royalty payments.  This payment can also be construed as a technical assistance fee or non-accrual fee relative to future royalty payments.  Consider as a viable combination with a fixed or variable royalty rate.  Expect the licensee to take the up-front payment as a credit against its payment of future royalties.  Also, expect the licensee to heavily discount the fair-market royalty rate in return for sourcing a substantial up-front payment. 

 

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