Open Innovation Legal Insights
5 Biggest IP Legal Mistakes Small Companies Make When Working with Large Companies
by Jackie Hutter
Small companies CAN effectively partner with large companies in Open Innovation…
Open Innovation guru Stefan Lindegaard recently asked me what the biggest IP legal mistakes small companies make when they are working with large companies. This is a subject very near and dear to my heart, as I am currently “moonlighting” as GC of a start up energy company that is moving toward licensing our technology into large companies. Also, as a senior IP lawyer at a multi-national consumer products company, I was on the other side of such deals on more occasions than I can count. Prior to that, I was a law firm partner representing large and small corporations in patents and licensing issues, and in doing so, I now realize that I killed more deals than I ever facilitated, a situation that is more typical of law firm lawyers than it should be, unfortunately.
In view of this multi-faceted experience, I present this list of the 5 most common mistakes companies make when working with large companies in Open Innovation.
1. Thinking you have all the answers for the large company’s problems:
As a small company, you often have only have a single idea or technology and you quite properly focus your attention in this direction. This can be damaging to your ability to do complete an Open Innovation deal with a big company, however. The large company may not care about what you see as the value of your technology because they are the experts in their products and customers. Indeed, you may be wholly wrong about why the large company is interested in speaking to you. If you want to sell or license your technology to a large company, your best bet is to focus on the specific technology aspects, and leave the business and customer issues to the other side, at least at the early stages of discussion.
2. Bringing the wrong lawyer to the table:
Very often small companies assume the lawyer who handles their intellectual property issues is the appropriate person to bring to a conversation with the big company. However, the legal skills a small company needs to obtain its patent rights are very different than what are needed to get a deal done. While protection of your small company’s IP should be paramount in any dealings with the large company, putting up complicated restrictions about the use and ownership of your IP even before you know a deal is likely to happen, which is the natural inclination of most IP attorneys, can often end up in the other party walking away before a deal is even underway. I have found the best lawyers to negotiate deals in the Open Innovation context are business-focused attorneys, who tend to be people who have served a stint in the corporate world and who might even have little experience with high-end IP issues. It can be tough to find someone with these credentials, however. As an alternative, I like to work with licensing experts, most of whom have successfully closed most deals in a year than many law firm IP lawyers see in their entire careers. These licensing experts are frequently not lawyers, but they have negotiated enough agreements to be very good at spotting the legal issues and, in this regard, they often do a better job than lawyers.
3. Putting the legal issues ahead of the business issues:
Even if you hire a business-focused attorney or licensing consultant to deal with the large company in an Open Innovation context, deals can still go awry when legal issues are discussed before a business agreement is is made in principle. When working with small companies seeking to license their technology, I typically tell them that the last person they want in the initial discussions is a lawyer. (Interestingly, this is the opposite advice I gave when I was a lawyer billing my clients on an hourly basis.) I can coach a competent business person about the basic legal issues they need to know while building a term sheet with their counterparts at the large company, but as a lawyer, I can never fully understand their business and financial details at the level needed to sufficiently issue spot these issues. If the business parties have established a good working relationship, then it should be fairly easy to renegotiate a term sheet if it is later found out that the business agreement has resulted in legal issues arising. Of course, a deal could still get done if the lawyers lead the process, but I can almost guarantee you that the process will not only cost you significantly more money, but also more aggravation if you put your attorney out in front.
4. Not understanding the economics and low probability of success of product development:
Often, small companies believe that licensing to a large company means that a big payoff will be forthcoming immediately and for a long period in the future. Hypothetically, if I was to license my start up technology to a large company today, I should expect that a product would not be in the market for 12, 18 or 24 months or more, and that it will cost the large company hundreds of thousands, or often more than a million, dollars to introduce a product into the market, depending on the specific product. Moreover, the failure rate of new products is well above 75 %, so it can be expected that event the best technology has a better than even chance of failure. Of course, by the time the small company enters into negotiations with the large company, the small company has borne all the risk, however, moving forward, the large company will now acquire substantial risk. Rather than seek a big pay-out on the front end, I strongly suggest developing a licensing arrangement directed toward risk sharing by both parties. Certainly, the large company likely has a greater ability to bear risk than a small company, but when the small company shows it is willing to have “skin in the game,” deals are more likely to get done.
5. Assuming the large company intends to “stick it to you”:
The prevailing view of the dynamics of when a small company seeks to license or sell its technology to a large company is that the latter wishes to pay as little as possible or, even better, to crush the little guy so they don’t have to pay at all. This perspective is bolstered by Hollywood and the news that like to find situations involving drama like the theft of patent rights or the like. In reality, however, large companies engaging in Open Innovation today have made the decision that they need partners to be successful in their product development efforts. The decision to go outside of one’s own company is one that signifies a collaborative environment at a large corporation, and it is less likely that a company that has truly embraced Open Innovation will be motivated to “crush” or otherwise debilitate their partner. Why would they?: If the small company thrives, the large company will likely end up making even more money. The fact that identifying and developing a new partner costs much money and opportunity costs also cannot be ignored when considering the motivations and actions of the large company. This is not to say that there will not be disagreements in the dealings between the large and small companies; lack of alignment is inevitable in any situation involving collaboration. However, in today’s Open Innovation environment, I think it is wrong for a small company to question the large company’s motives when a disagreement arises. This is a further reason for business people at the respective companies to develop a relationship before bringing the lawyers because brewing disagreements can more easily settled by people who understand their partner’s business goals before a full-blown conflict arises.
The above list is a modest attempt to identify the issues that I have often seen arising when large and small companies deal with each other. Of course, lots more can go wrong in Open Innovation dealings than I have laid out in this post. The best advice I can give to small companies that are seeking to sell or license their technology to a large company is akin to the same advice many long-term married couples often give to others who want to know what their “secret” is: become friends first, try to understand what the other party wants out of the deal and don’t be afraid to talk out your disagreements. At the end of the day, all successful business partnerships center on building relationships and strong communication, and Open Innovation is no different.
Jackie Hutter is Chief IP Strategist and Founder of The Hutter Group: IP Business Strategy, a consultancy that assists innovation-driven organizations, entrepreneurs and investment professionals in identifying opportunities to identify, capture and maximize value from intellectual property and other intangible assets.
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