Negotiating Deals

Phyl Speser, J.D., Ph.D.
Foresight Science & Technology Incorporated
401.273.4844 ~ phyl.speser@ForesightST.com
www.ForesightST.com

Foresight Science & Technology 2
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Property Slice and Dice

Foresight Science & Technology
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There is a Market
His/Her Company Sells (or Want to Sell) to this
Customer Segment
Atractive Market Size
Pull-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

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Ease of Use

Target

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Revenues
from Sales
$
Saving
from Operations

Time
(Life or death needs such as health,
environment, or military requirements and
aesthetics/taste for consumer items are the exception. )
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Poor Richard: “The The deal has to made
second vice is lying, sound business
the first is running in
debt. …It is hard for sense or it is a
an empty bag to nightmare to enforce
stand upright” Good Deals are:
Win/Win: Net Positive
Cash Flow for All
Parties

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Poor Richard: “Fair Value is defined by the
commerce is where equal product of:
values are exchanged for The number of units sold
equal, the expense of The profit per unit
transport included.” We usually use Net
Revenues or Gross Profit
Adjusted by the other
costs for the buyer and
seller to do the
transaction
Adjusted by the risk of
realizing the value
(discounting)
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Poor Richard: “Always Your Share is Your
taking out of the pot and Contribution to the End Value
never putting in one soon Cash Flow is the Lifeblood of
comes to the bottom” Business
The more risk a party bears, the
more upside cash flow potential
it deserves
Cash today is worth less than
cash tomorrow
The likelihood of cash tomorrow
decreases as total risk
increases
Allocate risk to the party able to
control it or bear it.
Use side payment(s) to make
the deal “fair.”

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Poor Richard: “A good Legal Terms Count
example is the best Get
sermon.” Move Technology to
Market
Upfront Fees
Minimums
Loss of Rights
Cash
Clear and Transparent
Metrics for Payments
The right amount
Audit Rights
Not sued
Indemnification
Infringement prosecuted
Right to Sue

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Make a list
Must Haves
No Ways
Nice to Have
Be Fair and Reasonable
Be Realistic About the
Value
Use Your Nice to Haves to
Negotiate for the Others
When you have:
Your Must Haves
None of Your No Ways
Sign

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NPV (million $)

NPV = PV of Total Revenues – Costs
NPV as a function of
P
Linear Equation for the
NPV (“Business Model”): spreadsheet value
NPV = q (P)-C
P (forecasted
price of the portfolio,
P = Σ 1…nIP xx p)

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

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Technology is a Tool for Doing Something

5 W’s

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

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Product Innovation
Stage
Bundle of
Features
Standard User
Interface
Process Innovation
Stage
Eliminate Steps
Improve Reliability
Improve Efficiency
of Resource Use

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Improves Outcomes Has Utility
Bohn Knowledge Useful
Level Measured in Bundles
Skills/Know-how of Groceries
Extension
UMPF
Extension

Enabling
Core Strategic
Extension

Competing Enabling

Time

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Offensive
Emerging Lead all Competitors

Pacing Be in Top 5% of all Competitors

Spare Impact
Lead all Direct Competitors
from Use of
Defensive Product, Be in Top Half of all Competitors
Service, or
Hedging Technology Crucial for Future Growth

Imitative Crucial for Take-off

Spare Offensive Defensive

Function

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COMPARING YOUR TECHNOLOGY WITH OTHERS
YOURS

Functionality
of Tchnology
Features and

Relat ive Weig h t in g
3 Strong
2 Medium
1 Weak

Customer Requirements
Performance
Ease-of-Use
Price
Other

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

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Is There a
Competitive
Opening?

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Conditional GO GO GO NO GO
Conditional GO
Conditional GO NO GO
NO GO

Inside the Triangles, the Technology
has a Competitive Advantage

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STAKEHOLDER ANALYSIS
Level of Commitment People or Group
Supply Chain, Opinion Industry
Regulators Customers Funders NGOs
incl. Targets Leaders Assoc.

Enthusiastic

Helpful

Compliant

Hesitant

Indifferent

Uncooperative

Opposed

Hostile

Key:
O - Level Necessary for Success
X - Current Level

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Focus on the Significant Risks

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Cost vs. Delays for all Risks along Value Chain

Technical and firm specific risk
30%

are the basis for the discount 25%

Resulting Cost Increases
rate. 20%

15%

10%
Market risk is a probability
distribution for outcomes.
5%

0%
0% 5% 10% 15% 20%
Resulting Delays

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Risk Level Approximate DR(%) Description
Risk 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

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

Factor Rate Weight Impact
Industry 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 Deal
Design & Production Transaction Costs
Engineering Test and Evaluation
Regulatory Approvals Negotiations
Legal
Equipment and Set-up
Vendor Qualification On-Going Costs
Collection/Payment of
Customer Support and Revenues
Maintenance Systems Patent Fees
Development Infringement Monitoring
Product Launch and Prosecution

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Target Target
Advice Testing

Idea – Design – Proof – Brass – Prototype – Product – Production – Sales – Distribution – Customer
of of Board Engineering Marketing Support
Concept Feasibility

End User Testing
End User Advice
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Market Familiarity STRATEGY

Control:
Internal
Development
Divest or Acquisitions
Monitor In-License

Partner:
Market Joint Ventures
Development Alliances
Internal Ventures
Out-License

Partner Divest:
Assignments
Sales
Control Monitor:
Technology Venture Capital
Development Educational
Acquisitions

CORE
Adapted from Roberts and
Berry, SMR 1988.
Technology Familiarity

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High Past Present Future
Long-Term Sustainable
Competitive Advantage

Staff Capacities of
to Realize Plan

Strength of Short and Mid-Term
Intellectual Asset Competitive Advantage
Portfolio

Revenue From
Entry Market
Application Low © Foresight Science and Technology

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Social Networking – SBIR Phase I or Earlier

Monitoring and Collaboration.
Option Agreement for Right of First Refusal

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Six Sigma –
Mission Agency
Phase II or
Phase III

Strike License
or Equity
Investment.
Joint Venture
Farm Teaming – SBIR Phase II Possible.
May have
Cooperative R&D Contracts . Option to
Option for License Acquire
or Equity Investment

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There is always a
reason for NO
Understand it
Respond to it

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Mailers Demonstrations
Non-Proprietary Working, Tested Prototype
Fact Sheet, Quad Chart, Presentation Slides
Specifications Sheet,
Brochure Follow-Along Manual
White Paper and/or Check List
Patents/ Published Patent Term Sheet (Be Careful
Applications with These)
Proprietary
Test Protocols and Results Legal Documents
Unpublished Patent Standard Contract or
Applications License
One-Way and/or Two-Way
Non-Disclosure
Agreements
Materials Transfer
Agreement where Relevant

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“Plough deep while “Always taking out of the
sluggards sleep, and pot and never putting in
you shall have corn to one soon comes to the
sell and keep” bottom”
Define the agenda – For issues you can give on,
Provide the initial offer “horse trades” or side
offering payments
“It is easier to suppress – Ask for the data to
the first desire than to understand their concerns
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.
ForesightScience &
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Technology

Partnr Partner Partner
Wants Deal Walks
SME
SME Wants $10m, $0.0m,
Deal $0.5m -$0.05m

SME Walks $0.1m, -$0m,
-$0.05m -$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?
Sponsor Lawyer How long does the decision process
take?
What criteria will be important and why?
What information will they want?
Decision Technica
Technical
Gatekeeper Project Leader What kind of deals have they signed in
Maker l Expert the past and what do they prefer?
Expert Do they have standard agreements they
prefer to use?
Champion
Champion
End User 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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Poor Richard: “Pride is as Everyone always Three
loud a beggar as need Options:
and a good deal more Buy
saucy” Wait/Stall
Walk Away
Ask for the Deal
IF THEY DO NOT BUY
…
ASK WHY!
Do not be a “true believer”
Do not assume they are
stupid
Understand their needs,
requirements, and
constraints
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Open the Black Box if Possible
Come back with data driven answers or
questions
SEC, Yahoo Finance, Hoovers, trade publications

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

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Allocate tasking to the
most competent and cost-
efficient party
Allocate liability to the
party best able to mitigate
it
Structure hand-offs for
success
Clear Deliverables
Milestones
Progress Payments
Penalties
Use transfer payments to
make fair
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Govt. or
Foundation
Subsidy

BUYER SELLER

Don’t get greedy
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Partnr Partner Partner Partner
Moves Steps Abandons
SME Forward

SME Moves >$5m, $0.1m, $0,
Forward >$0.25m $1m, +-$0.03m

SME Steps $1m, +-≥$3m, $0,
$0.3m ≤$0.5m +-$0.1m

SME +-$0.03, +-$0.01m $0,
Abandons $0 $0 $0

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If NPV = q (IP xp) − C = (0.2 x $9,000m) – $1750m = + $50
million, do you buy now if the Discount Rate is 10%?
t=1
E[P+] = $19 ⇒ NPV+ = + $150 million
Wait
50%

t=0
Abandon
50%
E[P] = $18 / technology E[P−] = $17 ⇒ NPV − = − $150 million
NPV(t=0) = − 50 million $
Rational manager will not exercise
this option ⇒ Max (NPV−, 0) = zero
At t = 1, the portfolio NPV is: (50% x 150) + (50% x 0) = + $75 million
The present value is: NPVwait(t=0) = 75/1.1 = 68.2 > 50 so wait
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NPV = q (IP x p) − C = (0.22 x $9,000m) – $1750m =
+ $230 million
t=1
E[P+] = $19 ⇒ NPV+ = $340 million
50%
Move Forward
t=0
E[P] = $18 / technology 50% Wait
E[P−] = $17 ⇒ NPV − = $120 million
NPV(t=0) = $230 million

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

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Provision Focus – Comments and Issues
Business/Legal
Identification of parties Legal This section is straightforward and factual.

1.Date
2.Addresses
3.State of incorporation
Whereas clauses (recitals) Business These recitals are important for future interpretation of the agreement.

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

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

1. Field of agreement
2. Licensed product/process/service
3. Licensed intellectual property
4. Confidential information
5. Affiliates
6. Net revenues
Grant of rights Business These clauses are determined by business considerations, although attorneys will put them into proper
terminology.
1. Exclusivity
2. To make, use, or sell
3. Grantbacks
4. Geographic information
5. Field of use information
6. Cross licenses and sublicenses
Consideration paid for intellectual property rights 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.
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
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Technology Development Issues 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
1. Goals of the license and technology development plan sensitive so that it is very clear to both parties when the license has strayed outside of its original intention.
2. Key goals/milestones that the licensee needs to accomplish These plans are not only important to make sure both parties are on the same page, but they also help reduce
and timelines the risk that the licensor has picked a bad licensee while increasing the value of the license through payments
3. Milestone Payments to reflect when the technology risk is reduced.

Payment of consideration 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
1. Accounting methods acceptable to both parties. The only audit information that can be reported to the licensor is information
2. Timing of payment and reporting defining errors in royalty payments.
3. Record-keeping requirements
4. Audit rights
Major license restrictions Legal These considerations are specific to each agreement, but the attorneys normally take the lead in assembling
the relevant information.
1. Government export limitations
2. Liability limitations-indemnifications, insurance, warranties,
etc.
3. Tax payments, lack of partnership, tax-like payments
4. Guarantees, test runs
Confidentiality Legal Confidentiality is treated as a legal issue, but business input is needed.

1. Definition
2. Term
Enforcement of /defense against intellectual property rights 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
1. Notification of infringement the majority of the operating profit from the technology and thus, they should pay these costs. It is important
2. Responsibility for enforcement/defense for the licensor to retain the right to go after infringers if the licensee defers.
3. Payment for enforcement/defense

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

1. Responsibility for protection
2. Payment for protection
Duty to use (best efforts) Legal This is to protect against a licensee sitting on technology.
Termination 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
1. Term of agreement to exercising a termination provision.
2. Conditions for termination
3. Default
4. Post-termination obligations-confidentiality, payments, etc.

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Other provisions Legal This is usually standard terminology.
The governing law provision can be contentious. The licensor generally prefers to have the state in which the
1. Impossibility to perform (force majeure) corporate office is located as the governing law. The licensee may have a preference for the governing law in
2. Severability their home state.
3. Arbitration
4. Assignments
5. Entire agreement
6. Governing law
7. Notices
8. Execution

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Poor Richard: “We can give The decision is
advice, but we cannot give management’s
conduct” Decide on sound business
reasons (personalities
change as people change)
Don’t get greedy
Go back to your three
columns: Must Have and No
Way
Cross 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
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• 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; phyl.speser@ForesightST.com

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