Business Transactions

Negotiating Technology Licensing Agreements

I received a query asking opinions on which portions of an otherwise boilerplate technology licensing contract merit special attention. Setting aside for a moment my belief that there is no “boilerplate” and every contract provision requires review, here’s my brief take on a few important technology licensing provisions.

License Fee. Obviously, the parties will be concerned with the amount of money that exchanges hands. Setting the license fee is often the highest hurdle for the parties – especially when there are no objective benchmarks to determine the value of the technology. In those circumstances, the final license fee is determined by bargaining power, negotiation skill, and an accurate sense of what the market will bear.

Representations and Warranties. In our litigious world, warranties are often hotly negotiated provisions. The customer buying the rights wants the technology company to guarantee that the customer will not have any problems or suffer any losses as a direct or indirect result of using the technology. In contrast, the technology company wants to limit its exposure to liability and provide as few guarantees as possible.

Indemnification. This is the technology company’s promise to reimburse the customer for any money the customer loses due to the technology company’s breach of any of the guarantees made in the representations and warranties. The technology company need not leave its responsibility to indemnify the customer completely open-ended. For example, a technology company might use language that (i) limits indemnification to losses suffered only in the United States, (ii) gives the technology company the right to negotiate and settle any covered claims made against the customer, and (iii) explicitly negates the technology company’s indemnification obligation if the customer uses the technology in an unauthorized manner.

A Few Do’s and Don’ts for Small Business Contracts

Important Do’s:

• Make an honest assessment of what you want from the working relationship.
  
• Discuss expectations candidly with your prospective partners.
  
• Put your agreement in writing – ideally with the assistance of a qualified attorney.
  

An Important Don’t:

Don’t leave yourself without an exit strategy in the event the relationship fails. When possible, formulate an exit strategy that doesn’t destroy the business. I talked about this topic, “When Business Partnerships Go Bad”, in a twelve-minute podcast interview with Steve Mullen of Start-Up BizCast. You can find the interview here. (It’s episode #30. My interview starts about 2 ½ minutes into the podcast.)

Seller Financing for Company Purchases

If you’re a prospective buyer who is short on cash or a seller who wants to sell his company quickly, you might consider seller financing.

With seller financing, the seller defers a portion of the purchase price. The buyer pays a portion of the purchase price at closing and pay the remainder over a period of years at a market interest rate. Structures for seller financing are as varied as structures for residential mortgages. The seller typically wants payment completed within one to five years and a security interest in the assets of the company. The seller’s willingness to be flexible in financing terms is directly proportional to the seller’s eagerness to sell the company.

From the buyer’s perspective, the seller financing arrangement should be independent from other aspects of the deal. For example, sellers often hang around as consultants to the company. Sometimes, those arrangements do not work out. If the consulting arrangement with the seller goes sour, there should be no ripple effect that negatively impacts the financing deal between the seller and buyer.

How the SEC’s Electronic Filing System Might Trick Start-Ups Into Violating Securities Laws

In 2009, the SEC began requiring that the Form D notice filings used for Regulation D offerings be filed electronically. The SEC’s motivation for the mandatory electronic filing included a desire to make information included on Form D filings more easily available to and searchable by the public.

A By-Product of Form D Electronic Filing

Well, it worked – as I’ve learned. Within days of filing Form D in connection with clients’ private placement offerings, announcements of the clients’ Form D notices and the information therein begins appearing on websites and blogs. There’s one little hiccup with that situation.

Many Securities Registration Exemptions Used by Start-ups Prohibit Advertising

Regulation D is a common exemption to securities registration used by companies seeking financing. In order to qualify for one of the Regulation D exemptions, the company cannot use advertising to find investors. (There is an exception to the no- advertising rule for certain Rule 504 offerings.)

Posting information online or using any type of viral email marketing to find capital would likely be considered advertising and could make the company ineligible for the more streamlined securities law compliance procedures offered by Regulation D.

What Companies Should Not Do with Those Postings about Their Form D Filings

That means you should not re-distribute links to websites that mention your Form D notice filing and private offering. For example, DON’T mention those third-party announcements on the company’s Twitter account, blog or other social media. Re-distribution by the company might be viewed as solicitation and general advertising.