In part 2 of this series on commercial collaboration, the head of Virtuoso Legal’s commercial team, Kirsten Toft, examines the method of licensing and collaboration agreements.
In the previous post on the subject of collaboration, I looked a joint ventures as an avenue to explore. Read my thoughts (and the pros and cons of JVs) here.
Another way that businesses can collaborate is through licensing and collaboration agreements. In this post I will look at the benefits and drawbacks of approaching collaboration this way.
What is a Licensing Collaboration Agreement?
Where there is a joint project it is possible for both parties to licence in know-how, trade marks, patents and expertise to make this happen.
It frequently happens where small company brings a modest but important bit of technology to existing providers, manufacturers or distributors.
Licensing allows you to enter new markets and create lots of business opportunities from your intellectual property rights, e.g. patents, copyright, know-how, design rights or trade marks etc.
Doing so is much less onerous on both parties that a joint venture – allowing for both businesses to exist separately from each other in the endeavour.
How much does it cost to set up a Licensing Collaboration Agreement?
In short, it varies!
In these sort of arrangements it is possible to contractually bind both parties so that the obligations and costs of “who brings what to the table” are distributed in proportion to their size and ability.
The Collaboration Agreement could set out who brings what to the table: know-how, patents, processes, IP, finance, risks.
It is absolutely key to the success of the licence for it to be properly negotiated and drafted.
Licensing can be a complex arrangement and it is important for a licensor to be properly guided in terms of: royalty payments, audit provisions and minimum sales amongst other things.
Simply put, such agreements put on paper exactly what should be enacted between both parties as part of their relationship – so for each side it is important that no stone is left unturned.
What’s the main advantage of a Licensing and Collaboration Agreements?
The big advantage of a collaboration agreement is it is much easier to unravel if it doesn’t work out.
Such disagreements can be commonplace when two working cultures collide!
It’s generally a better arrangement compared to a JV for the smaller of the two parties as it removes the potential of shareholder and financial disputes.
The walk away position of both parties can be set out at different stages – that rarely happens with a JV.
It is also good to note that a collaboration agreement can move towards a JV if the project grows or merits it.
As such it is not always the most optimal approach to seek a joint venture when working with another business from the outset.
That’s something worth bearing in mind.
Things to consider when thinking about or setting up a Licensing and Collaboration Agreement:
- The size and scope of the project and the overall market position. Who are the competitors? How do they operate?
- The size of the parties. A Collaboration Agreement is generally better for the smaller of the two parties as it takes away shareholder and financial disputes.
- The view of the customers. Like it or not, some large organisations/customers only like to contract with similarly large organisations as they perceive the risks to be less. A new company may or may not be welcomed. A customer may want warranties and insurance that a small new company can’t afford.
- Expertise and staff. How well will people work together? It is important that key staff get on and have similar cultural values.
- Facilities. Where will the project / manufacturing take place? What investment will both parties need to put in for equipment, testing, training?
There is much to consider when setting up an arrangement to collaborate between businesses and it is equally important that you make the choice that is the right fit.
The correct decision will ensure that your working relationship is functional and beneficial to both parties. When that is in place, you can focus on the task at hand.
If you’re thinking about a project with another company, I hope this series has been a helpful starting point.