Issues with Employees
Many companies wage wars against employees who leave them for other companies or independent ventures if there is a good reason to believe they are utilizing proprietary knowledge developed under their previous job. This issue raises many questions, especially in the software field. For instance, routines developed by software engineers in one job may be later used for other software, and different schemes may serve various applications. Many employees tend to keep private copies of material they participated in creating in their previous jobs. Such copies may later serve as evidence against them in potential legal suits. Many other employees diligently prepare business plans in their new jobs, specifying new developments they intend to make, only to find out later that—to their surprise—their previous employer is sometimes entitled to claim ownership of such ideas and developments, since they fall in the realm of their area of activity in their previous job, or as their ideas were developed during the normal business hours.
Moreover, many entrepreneurs naturally want to recruit workers from their previous places of employment, partially because they are familiar with the recruited workers. However, such recruitments may not only violate their employment contracts, but may also provoke indignation in the previous employer over other issues to which he or she had chosen to turn a blind eye until then (for example, the fact that the new venture was planned when the entrepreneurs were still employees of the company).
Many entrepreneurs are anxious about divulging the main ideas of their businesses. These anxieties are understood in certain cases, particularly when the ideas are new technological inventions. Such entrepreneurs may ask investors to sign non-disclosure agreements (NDAs). However, most investors refuse to sign such agreements. The main reason for their refusal is that investors are exposed to many similar ideas which are presented to them by different entrepreneurs within the numerous deals they are offered. In this state of affairs, even if they are discreet but invest in only one of the similar projects, the entrepreneurs of the projects which were not chosen may sue them for the divulgence of information, and the investors will be forced to prove in court what actually happened, while incurring costs and jeopardizing their reputation.
In order to overcome the unwillingness of investors to sign NDAs, entrepreneurs can file provisional patent applications, thus surmounting the obstacle of disclosing information (even partially) to investors.
Considerations in the Granting of Licenses
This section will review the main methods for pricing licenses to use intellectual property. It will focus on the granting of licenses to use technology in consideration for payment, as distinguished from licenses to use other information, such as customer lists. In many cases, a technology is leased or sold, in which case the difficult problem of pricing arises due to the complexity of the parameters involved. In practice, the legal and economic significance of the sale of software is the granting of a license to use the technology.
There are several methods for pricing the lease or sale of technology. One customary method is based on the payment that is common in the field. According to this method, which is undoubtedly the simplest to implement, the pricing is based on the accepted rate of royalties in the specific market and is adjusted to the expected return on the technology and to the current stage of its development. The contracts themselves will often be written based on the revenues or different profit measures, while taking into consideration the projected profit margins in the sale of the ultimate product or service. In the drug market, for instance, royalties in the amount of 15–20% of the sales are not uncommon, since drugs often carry high gross profit margins exceeding 80%.
Other than the projected volume of sales, the amount of the royalties depends on the degree of innovation of the patent. Royalties may be up to three times higher for innovative inventions than for similar inventions that are not equally innovative.
Sellers tend to perform the pricing based on the profit they deem reasonable in view of their total investment until such time and therefore often extremely misvalue their asset. In general, it is important to understand that pricing should not be based on the development costs incurred until a certain stage, but rather on the future return which the invention is expected to generate. A developer must always remember that any investment made until a certain point in time constitutes a premium on an option for success. If the development fails, then the investment is meaningless, and if the development is successful, then the return on it does not depend on the investment made until that time (except, of course, its significance as a barrier to rapid duplication by third parties).
In many cases, a lump sum or upfront license is paid in cash for the right to use intellectual property for a fixed period of time. In addition to this payment, there are usually other components, which essentially include payments for the period of use of the technology (time-based payment) and payments based on the success of the technology (success-based payments). Calculating the correct combination of the payment components, which may be made in cash or in shares, is an art that takes into consideration various elements relating to the identity of the owner of the intellectual property and of the licensee, the technological innovation, and the relevant field of activity.
Pricing a License to Utilize a Patent
The total payment for a right to use a patent may include a lump sum, commitments for future payments (certain minimum payments), an equity component, debt, and so forth. The components which have a material effect on the pricing of rights may be classified into several principal categories, each presenting many questions which need to be addressed. The following list does not purport to be comprehensive, and its sole purpose is to indicate the main considerations which need to be taken into account when negotiating a license to use a patent: