IP Licensing Strategies for Ventures

By licensing intellectual property (IP), ventures allow others to use their intangible assets in specific ways. The license agreement stipulates how and when these assets can be used. A good licensing strategy allows ventures to gain monetary returns by growing and accessing new markets without requiring significant capital investment or operational expansion.

Choosing the right IP licensee

Ventures can license their IP to different stakeholders legally known as licensees. Licensees are entities that have been granted permission to use, produce or sell a licensor’s IP and can include for example:

• A manufacturer to produce the venture's assets
• A distributor to sell the venture's assets in other markets
• A company or research institution to co-develop new technology based on the venture's IP
• A company so that it can independently co-develop and commercialize new technology based on the venture's IP

Selecting the appropriate type of IP licenses

An IP license agreement includes all conditions agreed between the venture (IP owner and licensor) and the licensee. Depending on how much control over IP assets ventures want to retain, key elements of the IP license agreement may be negotiated differently.

Exclusive license

Under an exclusive license agreement, IP can be used by a single party only, often preventing the licensor from using it. Exclusivity may apply to an entire IP portfolio, to a specific market or field. This provides the licensee with a competitive advantage as no other entity can use it.

As this may limit commercialization opportunities, ventures need to negotiate the right conditions before granting exclusive licenses:

• Don't give away more than necessary – for example, restrict exclusivity to a specific field (industry area) and/or territory.
• Incentivize partners to succeed – include terms that incentivize licensees to maximize the use of venture IP and returns, for example commercial milestones, staggered royalties, etc.
• Maximize the benefits obtained – exclusivity should be more expensive, so ventures acting as licensors can expect higher entry lump sums and more expensive royalties, as well as other benefits.
• Protect the venture and assets – always keep the option for a way out in case collaboration doesn't work, such as renewable terms instead of long-term license agreements.

Non-exclusive license

Under a non-exclusive licensing agreement, the licensor grants rights to multiple licensees simultaneously but keeps ownership of the IP. This type of licensing agreement provides more flexibility and can be an effective way to promote a brand or enter a new market by working with several partners.

Sole license

Under a sole licensing agreement, the licensor grants exclusive rights to a licensee but is still permitted to exploit the IP they own, allowing them to still operate in the market while tapping into the licensee’s manufacturing capability and distribution network.

Drafting the IP licensing agreement: key clauses to include

Type

• Non-exclusive
• Sole
• Exclusive

Content

• What rights?
• What field?
• Which markets?

Reward

• Lumpsum
• Royalties
• Other benefits/combination

When drafting a license agreement, ventures should ensure that they include specific clauses defining which rights, what areas, and in which markets their IP can be used.

1. Identify parties

Identify the licensor (the venture) and the licensee (users of IP) referring to the company by name and including their registration number.

2. Grant of rights provision (scope)

Decide what kind of rights licensees can have on venture IP – for example, to manufacture, to sell and distribute, to use for R&D, etc. and define whether the license is exclusive, non-exclusive or sole.

3. Obligations of the licensor

To ensure effective knowledge transfer, provide the licensee with all the documentation (technical manual) and a provision for consulting hours (free and/or paid) to allow the licensee to effectively exploit the licensed technology. To protect the venture’s know-how, and trade secrets provide access to documentation to only a limited number of users.

4. Obligations of the licensee

Define quality standards the licensee must comply with when using, manufacturing or distributing licensed IP.

This is particularly relevant when licensing brand IP assets, which is when licensor ventures can also include guidelines to ensure proper use of technical aspects of their IP.

The licensor venture should also request that regular audit sessions are conducted to ensure licensees are using and commercializing IP correctly.

5. Sublicensing provision

Specify whether the licensee is allowed to grant rights to others and if licensor’s approval is required.

6. Field of use

Define in what technical and commercial area licensees can operate with venture IP – for example, healthcare, medical imaging, aerospace, etc.

7. Compensation

By licensing IP, ventures obtain a number of benefits and returns on investment. Below are examples of the most common benefits:

• Up-front lumpsum – ventures may ask for up-front lump sums at the beginning of license partnerships. This ensures immediate return on investment as well as reassurance that licensees are determined to commercialize the venture's IP.
• Royalties – ventures may ask for royalties, periodic payments calculated on the basis of licensee performance, such as percentage of sales or returns.
• Other benefits – ventures may include additional benefits as part of agreements, such as access to distribution or manufacturing.
• Combination – ventures can structure license agreements that include combinations of these benefits.

8. Territory

Specify in which markets licensees can perform their rights – for example, a list of countries.

9. Improvements

Define whether or not the licensee can access any improvements made to the IP.  

10. Warranties and settlement of disputes

Both the venture licensor and the licensee will grant warranties to each other. The licensor can for instance give warranties on ownership, the validity of IP and the fact that to their knowledge, no third-party has infringed the IP.  

Decide in advance where both parties will resolve potential disputes, including applicable law and forum.

11. Confidentiality

Include a confidentiality clause to protect the venture’s know-how and trade secrets.

12. Term and termination

Determine how long the agreement is valid (for example, limited in time, renewable, as long as the IP exists, etc.) and define the circumstances under which the parties can terminate the agreement (non-payment of royalties, insolvency, change of control, etc.).

Conducting due diligence on the licensee

When negotiating an IP license agreement, the venture must assess if the licensee can successfully exploit their IP to mitigate risks by checking:

• The licensee’s reputation: investigate if they have had any lawsuit in the past by conducting background checks.
• Their financial stability: request audited financial statements and review credit reports to determine if they have sufficient resources to manufacture and sell the licensed products.
• Their operational capability: review technical expertise, existing distribution channels and experience with manufacturing and selling similar products, whilst ensuring that they don’t have a conflicting IP license that could violate exclusivity and cause a potential conflict of interest.
• Their legal compliance: check that the licensee complies with local laws on IP and other aspects such as employment and safety regulations.
• Brand alignment: review their business plan and target customers to ensure that their strategy aligns with your own brand.

Preparing for the licensee’s own IP due diligence

Conversely, the IP licensee will also conduct due diligence on the venture to assess their IP portfolio. To make sure that you are ready for this process, check our ultimate guide on how to prepare for IP due diligence.  

IP licensing strategy enables ventures to generate revenue and access new markets with minimal capital investment. However, success of it depends on selecting the right licensee, choosing the appropriate license type, and drafting a comprehensive agreement that protects the venture's IP while incentivizing partners to maximize commercial returns.

Navigating IP licensing can be complex for early-stage ventures, the Hub has outlined the key concepts and strategies to help you approach the process with confidence. For more information the World Intellectual Property Organization (WIPO) offers a comprehensive guide on Successful Technology Licensing, and with the appropriate legal advice your venture can structure IP license agreements that protect your rights while maximizing commercial value.