The ins and outs of licensing and IP

A common commercialisation vehicle is to license, not sell, an IP right via one or more licensing agreements. It means that you give permission for another party to use your IP on agreed terms and conditions. If you don’t have the resources or experience to develop and market your product or service, licensing can be an effective strategy.

Usually, the licensor (IP owner) requires each licensee to pay a percentage of sales revenue in arrears to the licensor at regular intervals. These payments are called royalties.

Many variables may be negotiated for each licence agreement, including the type of license, license conditions and license royalties. You should consider:

  • whether the rights are exclusive, non-exclusive or sole to the licensee
  • whether sub-licensing by the licensee is allowed
  • what ‘territory’ (e.g. which country/ies) applies
  • what limitations (if any) exist to the fields of application (i.e. uses) of the IP
  • what limitations (if any) exist to the avenues of exploitation (marketing, manufacturing, R&D)
  • what time limitations apply (expiry terms)
  • what lump-sum payments (if any) are required to be paid by the licensee
  • what is the royalty rate and what other royalty terms apply
  • what performance obligations (e.g. development milestones and minimum sales) are imposed upon the licensee.

Types of licenses

The license can be:

  • an exclusive license
  • a sole license
  • a non-exclusive license.

An exclusive license is the most common form of commercialisation as it’s financially beneficial to both the IP owner and the licensee.

The IP owner will receive an agreed sum through royalty payments or future sales of the product, as well as avoid risking the product not reaching the market or being successful. The licensee will be the sole recipient of profits after bringing the product to a market-ready state.

It’s important to understand that there are limits to an exclusive license, as the IP owner can specify certain product, field and territory restrictions to their licensees.

Cross-licensing is a version of licensing in which two or more entities each grant rights to their IP to the other entity/ies. By use of this vehicle, the licensor gains rapid expansion of business with minimal capital expenditure. However, the licensee’s control of the use of the IP is diminished.

Licence conditions

Licence conditions may be put in place to cover:

Licence royalties

Licence royalties are paid to the owner of the IP by the person licensed to commercialise the IP. There are a number of things to consider:

More information

Published: 
21 April 2017

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