Over the last few years, I was approached by several companies about licensing the intellectual property (IP) of my Web site: www.meta-calculator.com.
I wanted to share my experiences and some of the commonalities of:
- Negotiation processes
- Legal agreements and terms
- Risks and rewards
Show me the money!
When you’re a pretty small company with only 1 or 2 employees, the idea of licensing your IP to a big company sounds great and exciting! It’s a validation of what you’ve done and your hard work. Plus, these big, public companies have deep pockets, right? Well, it turns out that licensing your IP can be a major headache. It’s also quite a different process from being a target of an acquisition.
I can’t name the specific companies that contacted me due to non-disclosure agreements (NDAs) that are about as severe as they get, but I can say that the companies are some of the biggest names in the education industry. There were definitely some consistencies in their negotiations.
What to Expect
1. The first thing that happens is that you are approached by a project manager (PM), who genuinely wants to get your product on board. This person identified you as a target for potential licensing. The PM, in my experience, is great to deal with. First, they like what you’re doing. Your opinion of them will probably always remain positive. This is because—it turns out—they don’t have anything to do with the nitty-gritty parts; legal or compensatory. If you and the PM can agree on some basic things like, “Yes, I will consider licensing my IP,” and “Yes, my IP can do what you want, and your big company will pay me something for all of this,” then you move on and talk to someone higher up the corporate food chain.
2. Typically, this is some vice president (VP) of a division who, in more than one case, seems to be primarily interested in getting your price down. You have to remember why these companies reached out to you in the first place—because they hope that it will be cheaper to license your code than to pay their own developers to create the same product. In one case, involving the biggest company I dealt with, the two PMs were open and honest. They had no sway over the licensing terms, only the VP did. If there’s one piece of advice I’d give on this step, it is:
Decide on the lowest amount of money you will accept. And, most importantly, ensure that the other side is the first one to name its price.
There are really no downsides here. If the offer is too low, then the company probably would not have agreed to your lowest acceptable asking price; but, more likely than that, I found the opposite to be true. The company was willing to pay more than you might have considered. The only way to get a sense of the company’s price is if the company produces the first number. I assume that these business types already know this because they try to squirm out of giving an initial number. Your best answer to this is either:
You approached me, what number did you have in mind?
Obviously, this doesn’t work if you’ve been doing a lot of licensing, which eventually became true for me. The dilemma is: if you start doing a lot of licensing, then you will want to bring that up during initial negotiations to boost your credibility. So you need a different way to get the company to name its number. I used the following method:
Listen, I have different arrangements with different companies. No two are the same in any way. You guys approached me, so I’ll leave it to you to tell me what you want exactly and what you’re willing to pay.
This worked well for www.meta-calculator.com because we had different types of companies interested in disparate parts of the calculator. For instance, one test prep company only wanted the scientific calculator portion. Other education publishers wanted the graphing and scientific calculator. Another company that makes online math media only wanted the graphing calculator
Legal Agreement= Indentured Servant
If you can wrangle some satisfactory terms and everything is looking good, then just wait until the company sends you a 5-page legal agreement that basically makes you its indentured servant;) The biggest issue that I had with the licensing agreements is the necessity to provide the companies with unlimited indemnification. What that means, my lawyer explained to me, is that if the big company gets a lawsuit, however frivolous, and if that lawsuit somehow involves your product, then you’re stuck paying the company’s expensive legal fees for any and all things that relate to your product. You could be responsible for beaucoup bucks! That can be a pretty scary situation. You really need to pay attention to this part—maybe you already figured out why. People like to sue, and especially file lawsuits against companies with deep pockets. We live in a litigious time. It doesn’t matter if a lawsuit has any merit. But it does matter if you agree to foot the bill for all of the legal hours and manpower to help a big company defend itself from frivolous lawsuits. It doesn’t matter if your IP is solid and your software developers have implemented unique code. The fact is if you indemnify Big Company X, then you have to pay to help it defend any frivolous claims that involve your product. The problem stems from what I wrote at the top about big companies having deep pockets! Well, deep pockets can cut both ways.
Risks and Rewards
Ultimately, like everything, you have to weigh the risks and rewards. If your product has solid IP, then it’s very, very unlikely that you’ll have to worry about a lawsuit. On the other hand, nothing ever goes wrong until it goes wrong. Make sure that the amount of money you’re being offered is enough to offset the chance, however unlikely, of the worst case scenario—a lawsuit that somehow involves the IP you licensed out.