Download - 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
Foresight Science & Technology www.ForesightST.com 5
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
7Foresight Science & Technology www.ForesightST.com
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
Foresight Science & Technology www.ForesightST.com 8
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)
Foresight Science & Technology www.ForesightST.com 9
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.”
Foresight Science & Technology www.ForesightST.com 10
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
Foresight Science & Technology www.ForesightST.com 11
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
Foresight Science & Technology www.ForesightST.com 12
−
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
Foresight Science & Technology www.ForesightST.com 13
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
Foresight Science & Technology www.ForesightST.com 14
Foresight Science & Technology www.ForesightST.com 15
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
Foresight Science & Technology www.ForesightST.com 1616
OffensiveEmerging PacingSpare
DefensiveHedgingImitativeSpare
Foresight Science & Technology www.ForesightST.com
17
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
Foresight Science & Technology www.ForesightST.com 18
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
Foresight Science & Technology www.ForesightST.com 19
Is There a Competitive Opening?
Foresight Science & Technology www.ForesightST.com 20
GO NO GO
NO GOConditional GO
GO
GO
Inside the Triangles, the Technologyhas a Competitive Advantage
Conditional NO GO
Conditional GO
Foresight Science & Technology www.ForesightST.com 21
Foresight Science & Technology www.ForesightST.com 22
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
Foresight Science & Technology www.ForesightST.com
Focus on the Significant Risks
2323
24Foresight Science & Technology www.ForesightST.com
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
25
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
Foresight Science & Technology www.ForesightST.com 25
q: the measure of potential utility is the inverse of the discount rate
Foresight Science & Technology www.ForesightST.com
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%
26
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
Foresight Science & Technology www.ForesightST.com 27
Foresight Science & Technology www.ForesightST.com 28
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
Foresight Science & Technology www.ForesightST.com 29
Foresight Science & Technology www.ForesightST.com 30
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.
31
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
Foresight Science & Technology www.ForesightST.com
Foresight Science & Technology www.ForesightST.com
Social Networking –
SBIR Phase I or Earlier
Monitoring and Collaboration. Option Agreement for Right of First Refusal
32
Foresight Science & Technology www.ForesightST.com
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
33
Foresight Science & Technology www.ForesightST.com 34
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
Foresight Science & Technology www.ForesightST.com 35
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
Foresight Science & Technology www.ForesightST.com
\\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
37
Foresight Science & Technology www.ForesightST.com 38
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
39
End User
Project Leader
Sponsor
Gatekeeper
Champion
TechnicalExpert
Foresight Science & Technology www.ForesightST.com
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
Foresight Science & Technology www.ForesightST.com 40
Open the Black Box if PossibleCome back with data driven answers or questions
SEC, Yahoo Finance, Hoovers, trade publications
Foresight Science & Technology www.ForesightST.com 41
Foresight Science & Technology www.ForesightST.com 42
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.”
Foresight Science & Technology www.ForesightST.com 43
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
44Foresight Science & Technology www.ForesightST.com
Foresight Science & Technology www.ForesightST.com 45
Govt. orFoundationSubsidy
BUYER SELLER
Don’t get greedy
\\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
Foresight Science & Technology www.ForesightST.com 46
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
Foresight Science & Technology www.ForesightST.com 47
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
Foresight Science & Technology www.ForesightST.com 48
Foresight Science & Technology www.ForesightST.com
49
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.
Foresight Science & Technology www.ForesightST.com 50
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.
Foresight Science & Technology www.ForesightST.com 51
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
Foresight Science & Technology www.ForesightST.com 52
Foresight Science & Technology www.ForesightST.com
•
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]
53