By: Russ Krajec
Patents encapsulate the hopes and dreams of a company and many investors, CEOs, and inventors have a negative gut reaction about not “owning” their patents. For some reason, “owning” their patents is a deeply emotional issue, but it should not be.
Sophisticated investors recognize the benefits of exclusive licenses and many prefer exclusive licenses over the cost, hassle, and uncertainty of having a startup manage its own patent portfolio.
Exclusive licenses are regularly done by universities and other technology transfer offices, as well as by patent holders and patent finance companies. These agreements are the way technologies can be moved into the marketplace without burdening a startup company and while giving the patent owner participation in the success.[1]
A licensor will grant an exclusive license when it wants another company to bring a technology to market. The exclusivity gives the licensee the incentive to invest in developing the market potential of the technology.
In contrast, a non-exclusive license dis-incentivizes the licensee from investing in developing a market. This is because the licensor could sell licenses to all of the company’s competitors after the first licensee educates and cultivates the market for the product.
For a startup, having an exclusive license to a patent is actually more valuable than “owning” a patent.
Patents are a big capital investment for a startup company, but so is an office building. However, no startup company owns their office building outright. Even if they did own the building, they would take a mortgage on the building to free up capital. Exclusive licenses are the same thing as a lease agreement: the startup has full control of the assets, but does not have to spend capital to build or maintain the asset.
An Exclusive License Aligns Incentives
In a licensing agreement, the licensee and licensor have aligned incentives. Both parties want the licensee to be successful.
The patent holder has every incentive to have a good patent.
The patent holder’s only stock in trade is a quality patent. If the licensee cannot find any commercial value in the patent, the deal never gets done. It is incumbent on the patent holder to provide and maintain the highest quality patent possible.
Many licensing organizations, such as a select few of the major universities, have professional patent management systems in place. They professionally curate inventions and manage their portfolio to maximize the value to their licensees.[2]
When this is done well, the licensee startup company can benefit from professional patent management systems that they otherwise could not afford. Further, the licensor is incentivized to invest in the patents by paying for expedited costs, the additional costs for going up on appeal with the Patent Office, assistance in defending the patent from reexamination, or other costs that the startup can avoid.
An Exclusive License Eliminates Unpredictable Patent Costs
From a purely financial standpoint, an exclusive license reduces immediate patent costs and makes the costs predictable and manageable.
For a startup, unpredictable costs make for very difficult decisions. Should the CEO spend $4,000 on an office action response for the patent, or have a booth at a startup conference to attract investors? Which of these expenses will have the best return on investment for the company in the short term? Which expenses would be best in the long term?
In the analogy of owning the office building, a startup might be faced with an emergency roof repair, a plugged drain the bathroom, or repaving the parking lot. The unpredictable nature means that capital needs to be set aside to deal with the variability.
Unpredictable costs, such as patent costs, are managed by keeping a prudent reserve. The reserve can be managed explicitly, such as setting aside so many dollars for patent costs, or may be reactionary, where there is a churn of unpredictable expenses.
The prudent reserve – no matter how prudent – is still capital that cannot be deployed to grow the business. The more costs that can be predicted, the fewer reserves need to be set aside for the unpredictable costs, and the more capital can be fully deployed to advance the business.
Read More >> https://www.ipwatchdog.com/2016/06/25/exclusive-patent-licenses-valuable-owning-patents/id=70367/
