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Quick Tips
Contracting and Negotiating
Over the years, Greg Coticchia, now CEO of online billing provider eBillingHub, and Stephan Zoder, a Sr. Product Manager currently with IBM’s software group, have worked both sides of deals involving the acquisition of technology licenses, reseller agreements, corporate acquisitions, and other transactions in which proprietary technologies changed hands. At a recent Product Strategy Network Roundtable, they discussed the nuts and bolts of acquiring intellectual properties. In this article summarizing that Roundtable, ‘i.p.’ refers interchangeably to technology, patents, and proprietary products which can be acquired in various ways including licenses, reseller agreements, and company acquisitions.
- Buy broad, sell narrow. As the buyer, you want the IP agreement to be as broad as possible; if you’re selling IP, you want it to be as narrow as possible. As a seller, you want to have the buyer to come back to you and ask for more in exchange for more money. On the receiving side, you want to have the broadest license you can get including any source material. You want the agreement to say that it’s “perpetual, lifelong, and worldwide.”
- Start at the end. Always start a possible I.P. acquisition by asking yourself what you want to sell to the customer in the end, and then backtrack to where you want to be in the negotiation. What should the product look like when the customer actually gets it? Take that vision through the development cycle and create sales goals for it.
- Know what you’re buying. In an acquisition, you’re either buying the technology or you’re buying a market.
- Learn pricing guidelines. As in real estate, there’s a context of comparables for pricing I.P. Licensing and acquisition have a thousand rules of thumb. In the software business if you’re a profitable, cash flow positive company, you can usually get three to five times revenue. But back in the late ‘90s, you could get 20 times revenue. A professional services company may be 0.8 to 1.0 times revenue.
- Pro-rate royalties. If you already sell a product and then insert a piece of code you’re buying which represents 10% of its value, you should only pay royalties on that 10% -- not on the overall revenue of the product you embedded it in.
- Get it down on paper. Include appropriate legal language in the contract regarding the royalties, the expectations of results, whether there’s a ceiling or floor for royalties, whether it includes derivative work using the IP, whether you can sell it in your internal direct channel, and whether you can outsource it to a partner.
- Know who’s driving. The terms of an acquisition depend on who’s in the driver’s seat and what the I.P. can do for you. If acquire a technology and your license includes the right to develop derivative works from it as you continue to grow over time, the value of the initial product actually decreases as more and more of its value results from your own work. You want to be able to put some air in your contract to adjust for that.
- Escape? It’s important to build in some escape clauses. For example, if the product’s quality certification fails to pass certain metrics, no money should change hands. A third party might even invalidate the deal.
- Get internal reviews. Give yourself a few weeks before a first draft of the deal is actually presented to the other party and run it by your own lead sales, marketing, and support people because they will give you a reality check as to what you have in the contract.
- Bring in the bank. Involve banks in the deal; they will go through financial models, the revenues and the free cash flow, to see if it makes sense.
Intellectual Property Acquisition Quick Tips Series:
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