By Lauren Celano, Founder and CEO of Propel Careers (a TCN sponsor)
On October 26th 2010, I attended a TCN Life Sciences Breakfast: Opportunities, Challenges and Traps for the Unwary. I wanted to learn about how early stage life sciences companies can negotiate and leverage interests in their Intellectual Property (IP).
I was impressed with the panel of experts:
- James McArthur, Chief Scientific Officer, Synovex Corporation (Entrepreneur)
- Steve Gullans, PhD, Managing Director, Excel Venture Management (Venture Capitalists)
- Paul Sweeney, Partner, Foley Hoag LLP (Lawyer)
- Bob Creeden, Managing Partner, Partners Innovation Fund (Moderator)
Throughout the panel discussion a number of interesting themes emerged:
1. IP is Essential to Raising Capital: Companies should properly document their IP to protect their research, since the state of a company’s IP protection can have a big impact on how their technology or assets are perceived. Investors will do thorough due diligence on the IP and a lack of faith in a company’s IP is one of the easiest ways to stop a deal. Companies with a strong IP strategy can enhance the probability of success. IP is critical to the valuation and eventual monetization of technology-intensive companies and can often directly translate to an exit. One exception to the IP rule is IT- and service-based companies which are likely to be valued more on their revenue base than on their IP.
2. Challenges of In-licensing: Challenges of in-licensing technology often arise from differences in expectations for upfront costs, annual payments, or royalties between the licensee (i.e. tech transfer office) and the in-licensor. This can be due to differences in the perceived value of a patent, expectations to protect and, if needed, prosecute claims, or lack of trust between the parties. In order to increase the probability of a successful negotiation, both parties should do their due diligence and start with reasonable expectations, lay out objectives and limitations, and focus on the end goal. For those companies looking to license or sell their IP to a large pharma/med device company, realize that these latter companies have tremendous resources to confirm your IP value. Having a clear understanding of the organizations and people at the other end of the table should assist in negotiations.
3. Ensure You Know Who Owns the IP: Since IP is the lifeblood of most technology based companies, failure to ensure ownership of the IP could compromise the viability and success of the company. In seeking to protect their IP, companies should make certain that all research and data generated through collaborations with CRO’s or academic institutions are owned by the company. If you are a researcher working at an institution that receives federal funding, familiarize yourself with the Bayh-Dole Act which often gives ownership of IP to the university rather than the researcher. Companies should implement written agreements to protect ownership rights. Always use a CDA/NDA before disclosing anything to employees, consultants, and third parties. Once exception here is that many sophisticated investors won’t sign NDA’s – but don’t worry, this is standard industry practice. As a licensee, be aware of the potential conflict between publication and protection: in Europe companies need to be protected before disclosing anything while in the US companies have one year to file after disclosing information.
4. Read the Patent Literature to Understand the Space You Are Working In: This may seem simple, but some companies and individuals don’t do a thorough job ensuring that they understand the entire IP landscape around their technology. Read the patent literature to ensure that there is not something already protected in the space you’re working in. As I mentioned earlier, an investor’s lack of faith in your company’s IP is one of the fastest ways to stop a deal.
5. Patents Do Not Mean Automatic Cash Flow: Just because you have a patent, doesn’t mean you’re going to become wealthy. Very few patents actually translate into a substantial technology breakthrough which translates into a large revenue/royalty steam. Most patents see value at years 15-18 and this knowledge is an important consideration for someone looking to gain financial value from their patent. Make sure you find strategic partners who also see the potential value in developing the assets under patent from year one to years 15-18.
6. Understand License Agreements: Ensure you know what terms you are committing to in licensing agreements since these agreements will have an impact on your company as it develops. For example, some agreements include a first of right refusal or a sub-license approval which could complicate future financing negotiations. A sub-license approval requires you to get the approval of the institution before licensing the technology. Also be aware of payment provisions which may include upfront payments, minimum annual payments, sales based royalties, milestone royalties, and royalty stacking. In particular royalty stacking can make situations complicated and can undermine the value of the patent’s backend royalty stream.
In general, the key to smart IP Licensing is doing your homework! Make sure you understand who all the players are and where their interests lie. It is also imperative that you work with a lawyer who is familiar with these topics, such as TCN sponsors Foley Hoag and Bingham McCutchen. The cost of being informed will ensure that you are protecting your IP and building a strategic company!
If you have any comments, please leave them below! For more information about TCN, visit www.thecapitalnetwork.org.
