Negotiation and due diligence: #6 in the 8 steps of technology commercialization

After a non-disclosure agreement (NDA) is signed, OTC strives to negotiate a deal that is a win-win for all parties involved. Compensation can take various forms but is usually some combination of a cash fee, patent expense reimbursements, royalties and equity. Other variable licensing terms include exclusivity, fields of use, duration, sublicensing rights, and required diligence milestones.

What happens when a potential licensee is interested in a university invention?

The matching process begins when OTC or an inventor finds a third party potentially interested in commercializing the UT invention. The process often begins with a meeting with the inventor to gain a deeper understanding of the invention. If interested, the prospect may follow up with an in-depth review of the science, development path, patents, or market opportunity—often referred to as “due diligence.” At the appropriate point in the process, OTC will have the prospect sign an NDA. As the prospect’s interest in commercializing the invention deepens, OTC and the prospect will begin discussing economic terms, which will ultimately form the basis of a license agreement.

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How long does it take to negotiate a license?

Typically the process takes a couple of months. OTC has reasonable template agreements which, if used in their entirety, leave only the business terms such as compensation up for discussion. (Sample term sheets and agreements may be seen in the "Forms for potential licensees" section.) If a partner is unable to accept certain terms or language in the OTC template, a more extensive legal review (and therefore lengthier) process will be necessary.

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What are the principal business points negotiated with a prospective licensee?

Patent or technology license agreements must be constructed to meet the needs of the commercialization partner while compensating the university and the inventor(s) for their contributions. Per the Bayh-Dole Act and the Regents’ Rules, UT Austin retains the rights to practice and publish its intellectual property. Negotiable licensing terms include:

  • The scope of the license grant (including, for example, exclusive vs. non-exclusive licensing, limited fields of use vs. all fields of use, and sublicensing rights)
  • The licensee’s obligations regarding development and commercialization of the technology, including milestones
  • Compensation to the university and inventors for the license grant. Compensation terms may include fixed fees (on a set schedule or based on achievement of milestones), royalties based on product sales, and/or equity in the licensee. Generally, the licensee is also responsible for paying patent expenses.

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What kind of financial terms are included in a license agreement?

University compensation can take on various forms but is usually some combination of a cash fee, patent expense reimbursements, royalties, and equity. OTC designs the compensation schedule in collaboration with the commercialization partner. The terms should reflect the anticipated commercialization plan and avoid undue burdens on licensees while providing fair compensation back to the university.

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Can equity be included in a license?

Yes. The university frequently receives an equity stake in a new ventures licensing university technology. While almost any type of ownership stake is acceptable, the university will expect a reasonable exit opportunity.

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What other types of agreements may be involved in the negotiation phase?
  • Non-Disclosure Agreements (NDAs) are often used to protect the confidentiality of an invention during evaluation by potential licensees. OTC enters into NDAs to safeguard proprietary information shared with someone outside the university.
  • Inter-Institutional Agreements (IIAs) are used when the university jointly develops an invention with another institution. The IIA defines which party will take the lead in patenting and marketing the invention and the economics of sharing patent costs and revenues.
  • Option Agreements describe the conditions under which the university grants a third party the right to license an invention. The option can either specify the terms of the license or provide an opportunity for the third party to negotiate the terms.
  • Material Transfer Agreements (MTAs) are required for incoming and outgoing materials (e.g., biological materials, chemicals, laboratory animals) at the university. The Office of Sponsored Projects administers MTAs.
  • Sponsored Research Agreements (SRAs) with industry sponsors often grant the sponsor the right to negotiate a license to inventions resulting from the sponsored research. SRAs are administered by the Office of Sponsored Projects or the Office of Industry Engagement.

If a potential partner has a specific need not addressed by the current offerings, OTC may be able to find the technology under development in a lab or facilitate a collaborative research initiative. After finding a technology you are interested in pursuing, you are ready to contact the OTC to start the commercialization process. The first step in interacting with our office is signing a non-disclosure agreement, which guarantees that the transfer of intellectual property between the two parties is confidential. NDAs are available in the "Forms for potential licensees " section of this website.

OTC uses reasonable template agreements, which, if used in their entirety, leave only the business terms such as compensation up for discussion. If the commercialization partner is unable to accept certain legal terms or language in the OTC template agreement, a more extensive legal review process is required and execution of a final agreement will take longer.

If the invention is a software application, then there is a completely different licensing process. OTC currently uses four different software license agreements, detailed in the "Software licensing and copyrights" section of this website.

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