Founders of technology-based companies often recognize very early on that their company’s IP and related technology comprise a significant or even central part of the company’s overall value. Determining how to best protect and leverage that IP and tech to grow a business and maximize shareholder returns is therefore something that every founder must do.
In developing new technologies, there are a number of options to consider with respect to how to maximize the value of the resulting innovations. Ultimately, the technology will likely need to be translated to commercial application, and there are several ways to execute on such go-to-market approaches.
For example, a company may decide to develop, manufacture, and sell a given product from start to finish—from research to market and everything in between. This is challenging to do in any market space, particularly for an early-stage company and especially as they attempt to scale.
Some aggressive emerging companies hear the word “challenging” and become even more emboldened, and decide to “go it alone” and build themselves up and out to support their business model without the need to rely on third parties. This is often accomplished through a strong founding leadership team and significant funding, such as from angel or institutional sources.
Other companies see this challenge for what it is, and instead of expecting the herculean efforts and investing massive resources into going to market themselves, they shrewdly pivot to an IP/technology licensing model. Under this model, the company may open new revenue streams, create new IP in the space, build itself up as an attractive target, and create other value.
The optimal approach that fits your situation will depend on the facts, including your technology, the market, your competitors, your position in the market, what patent protection you obtain, your exit strategy, your funding, and other factors.
This post provides a general, non-exhaustive framework for such analyses.
Understand How Your Technology Fits Within the Ecosystem
Chances are, if you’re “all in” with your company, you probably believe in your technology. But how good is it? Are competitors using similar technology? Have competitors tried your technology in the past and failed? Are there any third-party patents that cover your technology or how you plan to operate in the market? Do competitors and new entrants need your IP and technology to themselves operate?
The approach you take in building your patent portfolio will depend on the answer to these and many other questions. Sometimes magic can happen as a result of this analysis, especially when you realize that you are on the cutting edge and you know where the market is going, and you build your patent portfolio around your technology and cover what will be the next big seller.
That’s the proverbial sweet spot for maximizing value and your company’s position in the market. In this position, you can decide whether to enter the market with your own products. But failing to go through this analysis will mean that you are essentially flying blind and not capitalizing on opportunities that are obtainable for the price of doing the analytical work.
During this process you will want to consider whether your team has the bandwidth to stay on top of the technological innovations by third parties in your space on a going-forward basis, and itself has the innovators who can advance the technology and help build IP around where the industry is headed.
Honestly Evaluate Whether Your Team is Ready, Willing and Able to Execute and Scale, or Not
Once you know where you stand, you are better informed to determine your execution strategy.
If you realize your technology is not what you thought it was as compared to what is out there or has been tried, or you have a serious challenge to operate in your space because of third party patents, your exit may occur sooner than you think.
On the other hand, if you emerge from your analysis and determine that you have an edge or can gain an edge with respect to the technology in your space, that’s an exciting moment indeed and when the fun really starts.
But what do you do? It really depends on your team, your market, your tech, and many other factors as indicated above. The execution steps will vary widely depending on those facts, but there are some key things to consider as you evaluate the landscape at this stage.
For example, look at your team critically and ask whether your team is ready to execute on the next phase of growth. This isn’t personal. Sometimes the runway to even get to this point has exhausted you and your co-founders, and everyone else in your collective spheres. What do you need for this phase? Do you have investor sources lined up to support it? Think critically and objectively.
If you come out of this analysis believing your team can make it to the next spot on the horizon, then that is outstanding and you can feel confident to go for it! Alternatively, if you emerge from your analysis determining that doing it alone will not accomplish the mission, then it may make sense to consider pivoting your model and partnering with third parties.
Third Party Engagements
Your company can forge any number of relationships with third parties surrounding your technology depending on the interests of the parties. Every step you take here may be critical to long-term success and you should be mindful of such long-term opportunities while not selling your company short in a deal that seems attractive in the near term.
Some companies enter into technology and patent licensing agreements with larger third parties that agree to use their resources to bring a product to market and exploit the subject product(s) commercially. Under this approach, a company licenses its patents and technology and receives royalties and other revenues based on sales the third party makes to customers.
Here, you can leverage your partner’s commercial expertise, while expecting a substantial upfront fee and significant ongoing product royalties if the product is successful. This can be attractive for startups that lack the infrastructure to maximize commercial value for the product, and the partner who is positioned well to do so including for completing any testing/trials, manufacturing scale-up, regulatory approval, and commercialization (usually without any added know-how or ongoing tech support).
In all cases, especially if pivoting to a licensing model, early-stage companies should take caution to make sure they secure patent protection in key markets. Deals can end fast when the counterparty seeking to license startup technology realizes that the startup failed to seek or secure patent protection in countries outside of the US, for example, where non-US markets carry significant value. The international patent process can become expensive fast, so being judicious on where to file is important to both control costs and optimize your company’s value to your shareholders and such potential suitors.
In connection with the agreement terms themselves, while most patent licenses generally allow the licensor to make, use, sell, or important the technology disclosed in the patent, these arrangements can be narrowed and further specified according to the parties’ needs. For instance, you may want to limit the geographical scope of the license. While the licensee may need to share the patented technology with suppliers, manufacturers, etc., you may want to consider limiting sub-licensing to maintain some control over and accountability for the technology.
Although it may be difficult for a licensee to make use of your technology profitably without the exclusive rights to make, use, or sell the technology, ideally you would not want to restrict your freedom to do business with other licensees. If the company insists that the license be exclusive, however, you can limit exclusivity contingent on the licensee making minimum royalty payments or product sales, or limit exclusivity to a certain time period, certain markets in which the licensee can achieve a particularly strong market position, or to only certain aspects of the patented technology. Many other factors and terms come into play when licensing your technology to third parties, and you should discuss your options and overall strategy with your counsel.
Other arrangements can be made with third parties also, including collaboration agreements that carry numerous titles (e.g., joint development agreements, sponsored research agreements, joint venture agreements, collaboration agreements, and other titles). Terms like “partnership” and “joint venture” can carry separate meaning under the statutory and common law and while those terms are used as part of normal business speak, caution should be used when using those terms in the agreement itself.
The actual arrangement companies should utilize will depend on the facts, but generally speaking these agreements typically involve a significant level of cooperation between the parties as a means to the end of accomplishing key objectives in bringing products to market. In the pharmaceutical industry, for example, startup drug companies often partner with large pharmaceutical companies that have the infrastructure, regulatory personnel, sales force, and other resources to bring a product to market that it would not be possible for the startup to do. Such arrangements will often involve licensing along with additional efforts and contributions by the startup.
Working with larger companies can be advantageous for early-stage companies for many of the reasons already stated, while also gaining access to new resources and the industry recognition that comes with working with a large corporation.
In all cases, it is important under the licensing or collaborative models to be crystal clear in the agreements about who owns what IP, what the diligence milestones are, what effect the purchase of the startup has on the agreement, the scope and accounting of sub-licensing rights, whether there are royalty stacking issues, and many other considerations. Of course, it is also important that before entering into any agreement with or disclosing your technology/invention to a larger corporation, you have an NDA in place to keep the shared information confidential, to do some due diligence to see if the potential partner is a good fit for collaborating/licensing with your company.
Key Takeaways
Founders of technology-based companies should carefully evaluate how to best leverage their IP and tech in the context of the overall commercialization approach value of the company. This analysis requires a deep dive into the technology, the market, key competitors, the company’s position in the market, patent protection, exit strategy, funding, and other factors. If a company decides it needs third parties to help with development and/or commercialization, many agreement options exist to engage with such third parties and execute on go-to-market strategies. Founders should take the time to judiciously assess these items with their counsel and stakeholders to set the stage for ongoing success.
