License Agreement Overview
The University’s primary objective in licensing an invention is to maximize the likelihood that products based on the invention will reach the market in a timely fashion. Negotiations will include input from the inventor(s), consideration of the needs of the prospective licensee, and consideration of the needs and policies of the University.
The licensing process may include execution of a Confidentiality Agreement preceding the sharing of confidential information about an innovation. An Option Agreement may be executed in order to give a prospective licensee a set amount of time to fully evaluate interest in a technology without risk of losing the technology to a rival.
Negotiations for a License Agreement will culminate in a legal contract detailing the rights and responsibilities of the parties to the agreement. Financial terms will be such that, in total, the University receives fair value for its technology. The terms will be structured so as not to place such a burden on the licensee that its ability to successfully develop a product is inhibited.
The following are among the relevant terms of a license:
Development Terms – Development milestones will be tailored to the particular technology and may include commitments to achieve specific goals in product development, initiation of clinical trials, initiation of sales by a specific date or simply the commitment of a certain level of resources by the licensee.
Financial Terms – License agreements may include one or more of the following elements:
- Reimbursement of expenses. This could include all expenses associated with the technology that heretofore had been borne by the University, such as past and future patent costs
- An initial upfront payment. This may include equity in the company. Because of the long developmental lead time required for certain types of products, especially pharmaceuticals, startup and early stage companies which are financing product development out of capital rather than out of cash flow from existing products often attempt to minimize cash payments until close to product introduction. One way for them to compensate the University under these circumstances is to issue stock rather than making cash payments. When the company’s stock subsequently becomes publicly traded, the University can sell the stock, effectively obtaining its cash compensation from the public market rather than from the company. The University of North Carolina at Chapel Hill has adopted a policy on equity acceptance as part of licensing transactions
- Milestone payments. It may be appropriate to seek additional payments when key steps in product development are achieved that significantly enhance the value of the technology. Such steps may be technical (e.g., humanization of an antibody, over-expression of a gene); proprietary (e.g., issuance of a patent); regulatory (e.g., initiation of different phases of clinical trials, approval to market); or commercial (e.g., issuance of a sublicense, start of commercial sales, amount of capital raised)
- Annual minimum royalties. Annual minimum royalties represent a guarantee by the licensee that a certain level of royalties will be paid. They normally will be negotiated based on a percentage of expected earned royalties and are intended to motivate the licensee to diligently promote sales of the technology in the marketplace. Annual minimum royalties also serve as a means by which both the University and the licensee periodically can evaluate the development of the technology. If the licensee is not aggressively pursuing commercialization, then it is unlikely that it would be willing to meet the minimum royalty requirement. In such cases, the license can be terminated, and the University can seek a different licensee
- Running (earned) royalties. Running royalties are payments, normally expressed as a percentage of sales, representing the University’s participation in the commercial success of the product. Running royalties are relatively risk free to the licensee, because they are paid only when the licensee is receiving revenues from the sale of products
- Lump sum payments. It may be possible to negotiate a lump sum payment for the technology. The amount will reflect the size of the market for the product and how soon market entry can be achieved.
- Other financial terms including research support and/or provision of research materials at no charge, etc. may be included in a license agreement from time to time.
It is frequently possible (and often required by the licensee) to establish a personal consulting agreement with one or more of the inventors of a technology. Such negotiation is separate from the licensing transaction, but often quite relevant to its outcome.
Under U.S. law and absent an agreement to the contrary, if there are co-inventors at other universities, each can exploit the patent without a financial accounting to the other(s). For this reason, the University generally negotiates an Inter-Institutional Agreement with the other university in order to be able to market the jointly held invention with respective University rights as a bundle.
Licensing proposals are developed by OTC staff using their experience and access to comparable proposals that have been executed in the past. Input from the inventors, particularly on the fields of the invention, is very important in ensuring that all markets for the technology are addressed. Final approval of license terms and execution of resulting license agreements is the responsibility of OTC or other authorized agents of the University.