Negotiating Deals

Phyl Speser, J.D., Ph.D.Foresight Science & Technology Incorporated

401.273.4844 ~ [email protected]

2Foresight Science & Technology www.ForesightST.com2

Property Slice and Dice

3Foresight Science & Technology www.ForesightST.com

There is a MarketHis/Her Company Sells (or Want to Sell) to this Customer SegmentAtractive Market SizePull-Through Likely with Customer Segment

Your Technology can Capture (or Help Capture) a Hefty Market Share

“PEPPY” Value Proposition: Performance, Ease-of-Use, Price, (PEP) and UMPF

Foresight Science & Technology www.ForesightST.com 4


Ease of Use

Target

$

Time

Revenuesfrom Sales

Saving from Operations

(Life or death needs such as health, environment, or military requirements and

aesthetics/taste for consumer items are the exception. )Foresight Science & Technology

www.ForesightST.com 6

Poor Richard: “The second vice is lying, the first is running in debt. …It is hard for an empty bag to stand upright”

The deal has to made sound business sense or it is a nightmare to enforceGood Deals are:

Win/Win: Net Positive Cash Flow for All Parties


Poor Richard: “Fair commerce is where equal values are exchanged for equal, the expense of transport included.”

Value is defined by the product of:

The number of units sold The profit per unitWe usually use Net Revenues or Gross Profit

Adjusted by the other costs for the buyer and seller to do the transactionAdjusted by the risk of realizing the value (discounting)


Poor Richard: “Always taking out of the pot and never putting in one soon comes to the bottom”

Your Share is Your Contribution to the End ValueCash Flow is the Lifeblood of Business

The more risk a party bears, the more upside cash flow potential it deservesCash today is worth less than cash tomorrowThe likelihood of cash tomorrow decreases as total risk increasesAllocate risk to the party able to control it or bear it. Use side payment(s) to make the deal “fair.”


Legal Terms CountGet

Move Technology to Market

Upfront FeesMinimumsLoss of Rights

CashClear and Transparent Metrics for Payments

The right amountAudit Rights

Not suedIndemnification

Infringement prosecutedRight to Sue


Poor Richard: “A good example is the best sermon.”

Make a listMust HavesNo WaysNice to Have

Be Fair and ReasonableBe Realistic About the ValueUse Your Nice to Haves to Negotiate for the OthersWhen you have:

Your Must HavesNone of Your No Ways

Sign


−

C

P (forecastedprice of the portfolio,P = Σ

1…n

IP x x p)

NPV

(mill

ion

$)

Linear Equation for the NPV (“Business Model”):

NPV = q (P)-C

NPV as a function of P

• The quality of IP (q) affects the NPV line slope.• q measures the value of:technology value at current TRL/ forecasted fair market value of current substitutes

spreadsheet value

NPV = PV of Total Revenues –

Costs


5 W’s

Who is doing it?What is being done?Where are they doing itWhy is it being done?When are they doing it?

Technology is a Tool for Doing Something



Product Innovation Stage

Bundle of FeaturesStandard User Interface

Process Innovation Stage

Eliminate StepsImprove ReliabilityImprove Efficiency of Resource Use

Extension

Extension

Extension

CoreEnabling

EnablingCompeting

Time

Strategic

Improves OutcomesBohn Knowledge LevelSkills/Know-how

Has Utility UsefulMeasured in Bundles of Groceries

UMPF


OffensiveEmerging PacingSpare

DefensiveHedgingImitativeSpare

Foresight Science & Technology www.ForesightST.com

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Lead all Competitors

Be in Top 5% of all Competitors

Lead all Direct Competitors

Be in Top Half of all Competitors

Crucial for Future Growth

Crucial for Take-off

DefensiveOffensive

Impactfrom Use ofProduct,Service, orTechnology

Function


COMPARING YOUR TECHNOLOGY WITH OTHERSYOURS

Customer Requirements Rela

tive

Wei

ghti

ng

Total Weight 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Feat

ures

and

Func

tiona

lity

of T

chno

logy

3 Strong2 Medium1 Weak

Ease

-of-U

sePe

rfor

man

cePr

ice

Oth

er


Is There a Competitive Opening?


GO NO GO

NO GOConditional GO

GO

GO

Inside the Triangles, the Technologyhas a Competitive Advantage

Conditional NO GO

Conditional GO


STAKEHOLDER ANALYSISLevel of Commitment People or Group

Supply Chain, incl. Targets Regulators Opinion

Leaders Customers Funders NGOs Industry Assoc.

Enthusiastic

Helpful

Compliant

Hesitant

Indifferent

Uncooperative

Opposed

Hostile

Key: O -

Level Necessary for SuccessX -

Current Level


Focus on the Significant Risks

2323


Technical and firm specific risk are the basis for the discount rate.

Market risk is a probability distribution for outcomes.

Cost vs. Delays for all Risks along Value Chain

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20%

Resulting DelaysR

esul

ting

Cos

t Inc

reas

es

24

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Risk Level Approximate DR(%) DescriptionRisk Free 10-18 Existing product, high demand,

building more of the same

Very Low Risk 15-20 New well understood technology for an existing product

Low Risk 20-30 New features, well understood technology into an existing market

Moderate Risk 25-35 New product, well understood technology into market with competition

High Risk 30-40 New product, not well understood technology into an existing market.

Very High Risk 35-45 New product, new technology, new market

Extremely High Risk 50-70 New company, unproven technology, new market

Source: Richard Razgaitis, Early Stage Technology


q: the measure of potential utility is the inverse of the discount rate


Any numbers in green found in the following fields can be changed and will be reflected in the tables below

Factor Rate Weight ImpactIndustry Norm 0.0% 0.0 0%

Significance (Breakthrough add 5-10%, Major add 0-5%%, Minor subtract 0-3% 0.0% 3.0 0%Refinement/Maturity of Technology (High add, Low subtract) 0.0% 2.0 0%Breadth and Strength of IP Protection (Yes add, No subtract) 0.0% 2.0 0%Portfolio, Not Single Patent Being Licensed (Yes add, No subtract) 0.0% 2.0 0%Exclusive Market Position in Field of Use Gained (Yes add, No subtract) 0.0% 3.0 0%Immediate Utility in Market (Yes add, No subtract) 0.0% 2.0 0%Commercially Successful (Already Successful in Market add, Not Yet Proven in Market subtract) 0.0% 3.0 0%Competition Exists which Will Inhibit Ability to Exploit (Yes subtract, No add) 0.0% 1.0 0%Foreign Rights (Yes add, No subtract) 0.0% 3.0 0%Sales Conveyed or Highly Likely (Yes add, No subtract) 0.0% 2.0 0%Duration (Over Ten Years add, Under Three Years subtract) 0.0% 1.0 0%Upfront Payment Required (Yes subtract, No or Conditional add, Standard neutral) 0.0% 2.0 0%Minimum Royalties (Yes subtract, no add, Standard neutral) 0.0% 2.0 0%Know-How Included in Deal (Yes add, No subtract, Standard neutral) 0.0% 3.0 0%Support/Training Provided After Initial Transfer (Yes add, No subtract, Standard neutral) 0.0% 2.0 0%Maintenance and Enforcement Burden (Licensee subtract, Licensor add, Standard neutral) 0.0% 2.0 0%Exposure to Liability (Yes subtract, No add, Standard neutral) 0.0% 2.0 0%Total 0%Add to Industry Norm 0.00%RATE 0.000%

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Transitioning

Design & Production Engineering Regulatory Approvals Equipment and Set-upVendor QualificationCustomer Support and Maintenance Systems DevelopmentProduct Launch

Deal

Transaction CostsTest and EvaluationNegotiationsLegal

On-Going CostsCollection/Payment of RevenuesPatent FeesInfringement Monitoring and Prosecution



End User AdviceEnd User Testing

Target Advice

TargetTesting

Idea –

Design –

Proof –

Brass –

Prototype –

Product –

Production –

Sales –

Distribution –

Customer of of Board

Engineering

Marketing SupportConcept Feasibility


CORE

Technology Familiarity

Mar

ket F

amili

arity

Control

Partner

Divest orMonitor

STRATEGY

Control:InternalDevelopment

AcquisitionsIn-License

Partner:Joint VenturesAlliancesInternal VenturesOut-License

Divest:AssignmentsSales

Monitor:Venture CapitalEducationalAcquisitions

Market Development

TechnologyDevelopment

Adapted from Roberts and Berry, SMR 1988.

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Past Present Future

Strength of Intellectual Asset Portfolio

Staff Capacities of to Realize Plan

©

Foresight Science and Technology

High

LowRevenue From Entry Market Application

Long-Term Sustainable Competitive Advantage

Short and Mid-Term Competitive Advantage



Social Networking –

SBIR Phase I or Earlier

Monitoring and Collaboration. Option Agreement for Right of First Refusal

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http://en.wikipedia.org/wiki/File:NASA_TRL_Meter.jpg


Six Sigma –Mission Agency

Phase II or Phase III

Strike Licenseor Equity

Investment. Joint Venture

Possible.May have Option to Acquire

Farm Teaming –

SBIR Phase II

Cooperative R&D Contracts .Option for License

or Equity Investment

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There is always a reason for NO

Understand itRespond to it

MailersNon-Proprietary

Fact Sheet, Quad Chart, Specifications Sheet, BrochureWhite PaperPatents/ Published Patent Applications

ProprietaryTest Protocols and ResultsUnpublished Patent Applications

DemonstrationsWorking, Tested PrototypePresentation SlidesFollow-Along Manual and/or Check List

Term Sheet (Be Careful with These)Legal Documents

Standard Contract or LicenseOne-Way and/or Two-Way Non-Disclosure AgreementsMaterials Transfer Agreement where Relevant


ForesightScience & Technology 36

“Plough deep while sluggards sleep, and you shall have corn to sell and keep”

Define the agenda Provide the initial offering

“It is easier to suppress the first desire than to satisfy all that follow”

Know when to say no Know how to say no. If no is not really no, explain how it can become yes.

“Always taking out of the pot and never putting in one soon comes to the bottom”–

For issues you can give on, offer “horse trades”

or side payments

–

Ask for the data to understand their concerns


\\PartnrPartnr\\

SME SME \\

Partner Partner Wants DealWants Deal

Partner Partner WalksWalks

SME Wants SME Wants DealDeal

$10m, $10m, $0.5m$0.5m

$0.0m,$0.0m,--$0.05m$0.05m

SME WalksSME Walks $0.1m, $0.1m, --$0.05m$0.05m

--$0m, $0m, --$0m$0m

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Do you correctly understand why the technology is attractive?What is the decision process and who else is involved in what roles or functions? How long does the decision process take?What criteria will be important and why? What information will they want?What kind of deals have they signed in the past and what do they prefer? Do they have standard agreements they prefer to use?Who is (are) the decision maker(s)?Is there other insights they want to pass along to make the process smoother and quicker

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End User

Project Leader

Sponsor

Gatekeeper

Champion

TechnicalExpert


Decision Maker

Lawyer

Technica lExpert

Champion

Poor Richard: “Pride is as loud a beggar as need and a good deal more saucy”

Everyone always Three Options:

Buy Wait/Stall Walk Away

Ask for the DealIF THEY DO NOT BUY …

ASK WHY!Do not be a “true believer”Do not assume they are stupidUnderstand their needs, requirements, and constraints


Open the Black Box if PossibleCome back with data driven answers or questions

SEC, Yahoo Finance, Hoovers, trade publications


Cash Flow is the Lifeblood of Business

The more risk a party bears, the more upside cash flow potential it deservesCash today is worth less than cash tomorrowThe likelihood of cash tomorrow decreases as total risk increasesAllocate risk to the party able to control it or bear it. Use side payment(s) to make the deal “fair.”


Allocate tasking to the most competent and cost-efficient partyAllocate liability to the party best able to mitigate itStructure hand-offs for success

Clear Deliverables MilestonesProgress PaymentsPenalties

Use transfer payments to make fair



Govt. orFoundationSubsidy

BUYER SELLER

Don’t get greedy

http://upload.wikimedia.org/wikipedia/en/6/6b/PutWrite.png

http://en.wikipedia.org/wiki/Image:CallOption.png

\\PartnrPartnr\\

SME SME \\

Partner Partner Moves Moves ForwardForward

Partner Partner StepsSteps

PartnerPartner

AbandonsAbandons

SME Moves SME Moves ForwardForward

>$5m, >$5m, >$0.25m>$0.25m

$0.1m,$0.1m,$1m,$1m,

$0,$0,++--$0.03m$0.03m

SME StepsSME Steps $1m, $1m, $0.3m$0.3m

++--≥≥$3m, $3m, ≤≤$0.5m$0.5m

$0,$0,

++--$0.1m$0.1m

SME SME AbandonsAbandons

++--$0.03,$0.03,$0$0

++--$0.01m$0.01m$0$0

$0,$0,$0$0


If NPV = q (IP xp) − C = (0.2 x $9,000m) – $1750m = + $50 million, do you buy now if the Discount Rate is 10%?

E[P] = $18 / technologyNPV(t=0) = −

50 million $

E[P+] = $19 ⇒ NPV+ = + $150 million

E[P−] = $17 ⇒ NPV −

= −

$150 million

Rational manager will not exercise this option ⇒ Max (NPV−, 0) = zero

50%

50%

t = 1

t = 0

At t = 1, the portfolio NPV is: (50% x 150) + (50% x 0) = + $75 millionThe present value is: NPVwait (t=0) = 75/1.1 = 68.2 > 50 so wait

Wait

Abandon


NPV = q (IP x p) − C = (0.22 x $9,000m) – $1750m = + $230 million

E[P] = $18 / technologyNPV(t=0) = $230 million

E[P+] = $19 ⇒ NPV+ = $340 million

E[P−] = $17 ⇒ NPV −

= $120 million

At t = 1, the portfolio NPV is: (50% x 340) + (50% x 120) = $230 millionThe present value is: NPVwait (t=0) = 230/1.1 = $209.1 < $230. Deep-in-the-money (high NPV) means exercise the option

50%

50%

t = 1

t = 0Wait

Move Forward



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Provision Focus –Business/Legal

Comments and Issues

Identification of parties

1.Date 2.Addresses 3.State of incorporation

Legal This section is straightforward and factual.

Whereas clauses (recitals)

1. Purpose of the agreement 2. Facts leading up to the agreement 3. What each party brings to the agreement

Business These recitals are important for future interpretation of the agreement.

Definitions

1. Field of agreement 2. Licensed product/process/service 3. Licensed intellectual property 4. Confidential information 5. Affiliates 6. Net revenues

Business Background information is needed for the understanding of other clauses in the agreement

Grant of rights

1. Exclusivity 2. To make, use, or sell 3. Grantbacks 4. Geographic information 5. Field of use information 6. Cross licenses and sublicenses

Business These clauses are determined by business considerations, although attorneys will put them into proper terminology.

Consideration paid for intellectual property rights

1. Up-front payments-lump sum, sum for paid up licensees (no running royalty) 2. Running royalty — base rate 3. Annual or other minimums 4. Technical support-scope, cost 5. Patent maintenance-scope, cost 6. Special provisions-currency, stock, etc. 7. Most favored licensee

Business These are primarily business decisions, although input from the legal staff will be needed, particularly on up-front patent costs to be recovered and projected maintenance fees.


Technology Development Issues

1. Goals of the license and technology development plan 2. Key goals/milestones that the licensee needs to accomplish and timelines 3. Milestone Payments

Business Extremely important for exclusive licenses, but many firms are scared to negotiate. Companies can have two different technology development goals under the same license. The goals need to be explicit and time sensitive so that it is very clear to both parties when the license has strayed outside of its original intention. These plans are not only important to make sure both parties are on the same page, but they also help reduce the risk that the licensor has picked a bad licensee while increasing the value of the license through payments to reflect when the technology risk is reduced.

Payment of consideration

1. Accounting methods 2. Timing of payment and reporting 3. Record-keeping requirements 4. Audit rights

Legal Licensors will normally have set provisions for these that they will try to keep consistent in all of their agreements. Audit provisions are sometimes a concern. The usual resolution is to use an outside audit firm acceptable to both parties. The only audit information that can be reported to the licensor is information defining errors in royalty payments.

Major license restrictions

1. Government export limitations 2. Liability limitations-indemnifications, insurance, warranties, etc. 3. Tax payments, lack of partnership, tax-like payments 4. Guarantees, test runs

Legal These considerations are specific to each agreement, but the attorneys normally take the lead in assembling the relevant information.

Confidentiality

1. Definition 2. Term

Legal Confidentiality is treated as a legal issue, but business input is needed.

Enforcement of /defense against intellectual property rights

1. Notification of infringement 2. Responsibility for enforcement/defense 3. Payment for enforcement/defense

Legal Payment for enforcement is usually a contentious issue, as it can be more costly than the royalties. Licensors usually will resist having to pay these expenses. The argument is that the licensee is receiving the benefit and the majority of the operating profit from the technology and thus, they should pay these costs. It is important for the licensor to retain the right to go after infringers if the licensee defers.

Future intellectual property

1. Responsibility for protection 2. Payment for protection

Legal This issue is tailored to the circumstances of a specific license.

Duty to use (best efforts) Legal This is to protect against a licensee sitting on technology.

Termination

1. Term of agreement 2. Conditions for termination 3. Default 4. Post-termination obligations-confidentiality, payments, etc.

Legal Termination is particularly important for exclusive licenses. If, after a strong effort, an exclusive licensee cannot sell enough to meet minimum royalties, converting the license to a non-exclusive license is preferred to exercising a termination provision.


Other provisions

1. Impossibility to perform (force majeure) 2. Severability 3. Arbitration 4. Assignments 5. Entire agreement 6. Governing law 7. Notices 8. Execution

Legal This is usually standard terminology. The governing law provision can be contentious. The licensor generally prefers to have the state in which the corporate office is located as the governing law. The licensee may have a preference for the governing law in their home state.

Poor Richard: “We can give advice, but we cannot give conduct”

The decision is management’sDecide on sound business reasons (personalities change as people change)Don’t get greedy

Go back to your three columns: Must Have and No WayCross off items on Must Have and No Way If no No Ways and all Must Haves, sign

If you have not been there before, work with someone who has



•

Nothing happens without a sale.

David Speser

•

If opportunity doesn’t knock, build a door.

Milton Berle

•

A well-defined imagination is the source of great deeds. Chinese Fortune Cookie

401.273.4844, ext. 35; [email protected]

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Negotiating Deals

Technology

Transcript of Negotiating Deals