Summary
The post discusses how startups can leverage their intellectual property portfolios through IP licensing, distinguishing it from outright assignments or transfers. It outlines the advantages of licensing, such as retaining ownership and generating ongoing revenue via royalties or fees. The post explains typical license agreement clauses, including grant, consideration, warranties, indemnity, reporting, dispute resolution, transferability, and termination. Different types of licensing agreements are highlighted, along with the importance of structuring these agreements to protect business interests. The post emphasizes that IP licensing is a strategic tool for commercializing innovation while maintaining control over the assets.
Start-ups that have cultivated an IP portfolio — comprising trademarks, copyrights, patents, know-how, trade secrets, and industrial designs — may choose to retain those assets for their competitive value, or may elect to share them with others in return for compensation. The latter arrangement is known as IP licensing. Where the IP asset is transferred outright, the arrangement constitutes an assignment or complete transfer rather than a licence.
Advantages of Licensing over Assignment
IP licensing is preferred by many IP owners over an outright assignment for several reasons. A licence provides more flexibility because the licensor retains ownership of the IP asset. It also avoids the risk of the IP being undervalued in an acquisition. A well-drafted licence agreement makes explicit the rights and permissions conferred upon the licensee as well as those that are not. In most circumstances these licence rights are granted in exchange for consideration in the form of licence fees or royalties, thereby providing the licensor with an ongoing income stream.
Common Forms of Licence Agreements
Common examples of licensing agreements include software licences, website terms of use, embedding agreements, technology transfer agreements, collaboration agreements, cross licences, and franchise agreements. These licences may be exclusive — meaning licence rights are limited to one licensee — or non-exclusive, where multiple parties may acquire licence rights.
Standard Clauses in a Licence Agreement
Regardless of the type of IP or combination of IP involved, every licence agreement should contain the following standard clauses: the grant, consideration or compensation, warranties, indemnity, reporting, dispute resolution, transferability, and termination.
- Grant clause: sets out the rights conferred by the licensor on the licensee.
- Consideration clause: addresses the compensation in exchange for the grant, which may take the form of milestone payments, upfront payments, or royalties.
- Warranty clause: assures that the IP is fit for use as represented.
- Indemnity clause: indemnifies the licensor against inaccuracies or damages arising in contrast to the warranties provided.
- Reporting clause: requires the licensee to report on activities related to the IP.
- Dispute resolution clause: sets out the agreed mechanism for resolving disputes — either through traditional legal proceedings or through alternative dispute resolution mechanisms such as arbitration or mediation.
- Transferability clause: determines the licensee’s right to sub-licence to another party. Transferability may be restricted entirely or made permissible subject to prior approval.
- Termination clause: defines the conditions under which the licence agreement may be terminated by either party.
IP Licensing as a Business Strategy
Only approximately 20 per cent or less of the IP created by a business has direct commercial value. Nonetheless, licensing provides a mechanism for releasing cash from assets that would otherwise remain a cost to the business. IP licensing can be a viable method for bringing an innovation to market while retaining ownership and control over how and where it is used. It should form an integral part of any start-up’s business plan.
Disclaimer
This article is for general information and does not constitute legal advice. Readers should consult a qualified attorney before acting on any matter discussed here.