If due diligence indicates the proposed venture can proceed with acceptable confidence, a next step is to determine how legal rights to the IP will be held and conveyed during commercialisation.
Assignment - selling your IP
An assignment is an outright sale of your IP in which you transfer your ownership to another entity usually through an up-front lump-sum payment. If IP rights are sold, the IP is legally assigned to the new owner/s. This is because the IP legal rights are issued on a country-by-country basis.
If assigned, the commercialisation vehicle benefitting the seller (the ‘assignor’) is a sale arrangement and the assignor’s commercialisation process is complete. The lump-sum payment for an assignment should be regarded as a purchase price. You should factor in:
- all costs including direct and indirect costs of research and development, materials, any outsourcing and the cost of protecting the IP
- a profit component
- the potential market value of the technology or IP.
Although this commercialisation vehicle may achieve a quick and simple exit, it’s usually less profitable than any of the alternatives because the assignment does not reduce the risk of commercialisation for the assignee.
Direct in-house use of IP
Owners of IP rights may choose to commercialise the IP entirely within an existing entity already controlled by them. That entity is then the commercialisation vehicle. When you commercialise in-house you develop your product to a market-ready state without any external ownership of your venture. This means that, apart perhaps from outsourcing some manufacturing, you take on the work and risk associated with launching a new product. It also means that if you are successful you reap all the benefits.
This vehicle is common if the IP was originally created in-house, or if the IP was acquired because it was a good match to the established business interests of the existing entity. Commercialising in house might involve:
- having (or acquiring) your own manufacturing facilities
- manufacturing the product using your own facilities, staff and resources
- marketing and promoting the product using your own staff and resources
- arranging all distribution and sales channels.
Start-ups and spin-offs
If an IP commercialisation vehicle is a new entity created specifically to commercialise the IP, it’s called an ‘IP start-up’.
An ’IP spin-off’ is an IP start-up created by partitioning it off from an existing (parent) company.
Start-ups have the advantages of being fresh and free of the distractions and liabilities or legal encumbrances often associated with established entities, particularly as regards choice of directors and shareholders. Unfortunately, these same factors often imply lack of experience and stability.
Start-ups are often preferred for highly inventive IP because then new arrangements are required anyway. They’re also a fundamental link for technology transfer between research organisations and industry.
The creation of a start-up can be a complex process. It requires the development of a separate business with allocation of IP rights, project and risk management and, in certain circumstances, fundraising to attract investors.
A conventional start-up company can be set up in two ways:
- a new company, a spin-off, is created from a parent organisation that contributes financial, human and intellectual capital. The aim is to further develop and commercialise the IP created at, and assigned by, the parent organisation. Together with the relevant intangible asset, the parent organisation also transfers the obligations and risks of commercialising the IP.
- a start-up can also be a company established independently of the existence of any parent organisation, with a view to exploiting the licensed intangible asset. This encourages interested venture capitalists to invest in the development of the IP created by the organisation.
A common commercialisation vehicle is to license, not sell, the IP rights via one or more licensing agreements. It means that you give permission for another entity 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 (the IP owner) requires each licensee to pay a percentage of its 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:
- whether the rights are exclusive to that licensee, or non-exclusive, or sole
- 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.
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.
Franchising extends the use of licensing to create a significantly different commercialisation vehicle.
In a franchise agreement, one party (the franchisor) grants one or more other parties (the franchisees) the right to use its trade mark or trade name as well as the use of its business systems and processes (which may also involve IP). These licensed rights are used by the franchisees to provide goods or services to agreed specifications controlled by the franchisor. In return, the franchisees pay royalties and often pay fees and contribute to marketing costs.
Examples of franchise operations include McDonald’s restaurants, 7-Eleven, Jim’s Mowing, Pizza Hut and H&R Block tax agents.
The franchisor gains rapid expansion of business with minimal capital expenditure. Based on the franchisor’s initial success, the franchisees gain immediate brand recognition and established business processes and products.
Franchise agreements tend to be more complex than licensing agreements, partly because the franchisor must ensure that franchisees consistently provide high quality products and services so that the brand’s reputation is not tarnished. Consequently, many countries have regulations specific to franchising. In Australia, the Franchising Code of Conduct applies under the Competition and Consumer Act 2010.
Mergers and acquisitions (M&As)
‘M&As’ are a pair of legal transactions at corporate level that are similar to each other in the way they produce a desirable business entity to serve as a commercialisation vehicle.
A merger is the legal consolidation of two business entities into one. An acquisition occurs when one entity takes ownership of another. Both transactions result in the consolidation of assets and liabilities into a single entity, and the distinction between a merger and an acquisition can be vague in commercial terms.
For example, if you’re an inventor you may hold IP as an asset in a small, non-operational company that you own and run for prototyping and demonstration purposes only. You then seek acquisition or merger of your company by or with a larger organisation with the funds to commercialise the IP.
An acquisition (rather than a merger) is considered to occur when your company is significantly smaller than the other, or when the transaction is forced upon your company.
Joint venture (JV)
A JV is a legal arrangement similar to a merger in its desired outcome of providing a suitable commercialisation vehicle. However, unlike a merger a JV does not alter the ownership of participating entities.
A JV is an agreement for two or more entities to collaborate on a specific venture of limited term, such as the commercialisation of IP which may or may not be jointly owned. The JV is separate from other business interests that the participants have. The participants may have any business structure individually.
If you participate in a JV, you’re usually responsible for your own costs, incurred individually. (By contrast, a legal partnership is a business structure that in Australia usually requires the partners to be jointly and severally liable for costs. The JV participants are often loosely called partners, using the common non-legal meaning.)
A common use of JV is to partner with a local business to enter a foreign market and benefit from an existing distribution network. Some countries have restrictions on foreigners entering their market, making a JV with a local entity the only means of access.