1. Recitals. Often overlooked and underdeveloped, the recitals (i.e., the “Whereas” statements that begin most agreements) should “set the stage” for a third-party reader of the agreement. Generally speaking, in a later dispute, the recitals are presumed to be true statements held against both parties. Thus, the recitals should tell the story about how the parties got here. They should reference what technology, funding, personnel and/or other resources and capabilities each party brings to the table. The recitals should also reference any other agreements between the parties (e.g., an earlier confidentiality or funding agreement) which are now amended or rendered void.
2. Definitions. There is no more important task in drafting an agreement than defining the (capitalized) terms which will be used throughout the agreement. That is, the definition section is the skeleton of the agreement upon which the business terms and conditions of the term sheet can be fleshed out. Thus, such terms as “Licensed Product,” “Field,” “Licensed Services,” “Net Revenue,” “Territory,” “Licensed IP,” “New IP,” “License,” “Party A’s IP” and “Party B’s IP” must be precisely and accurately defined. In sum, the definitions section, like the rest of the agreement as a whole, must strive for clarity and be the basis for each party’s (realistic) expectations of the other.
3. License Grants.The heart of any IP-related agreement is the precise description of exactly what IP is licensed to whom, under what conditions (e.g., only after regulatory approval or receiving a next round of financing), under what restrictions, for how long, for what purposes, exclusively or non-exclusively, and with or without sublicense rights.
4. Royalties. The agreement must specify the type (and amount) of consideration for any IP license grants. Such consideration can be monetary or non-monetary, and includes: a one-time fee, royalty payments based on net or gross revenue, options, access to licensee’s IP, development of complimentary IP, equity position, or any combination of these. The refundability and any minimums with respect to royalties should also be specified.
At the end of the day, any IP-related agreement must answer the “what if this happens” questions raised by the parties’ contemplated relationship. While no agreement can answer all the “what if’s,” a properly drafted one will anticipate those that are most probable. The considerations presented in this post will help start your thinking about IP-related agreements, but do not substitute for quality legal advice that is tailored to your company’s unique situation.
