A mid-sized technology firm faced the challenge of expanding its product line to include an innovative software module. The team had identified a promising intellectual property (IP) that could drastically enhance their product offering, but were hesitant to commit to a long-term licensing deal without thorough evaluation. To address this, the tech company took a strategic step by negotiating a test drive agreement with the IP owner.
This agreement allowed them to integrate the software module into their existing systems for a limited period, enabling the team to assess functionality, compatibility, and end-user feedback. Through this trial phase, the company not only confirmed the IP’s value but also uncovered additional integration opportunities, leading to a more beneficial negotiation when finalizing their long-term arrangement.
When licensing new technology, it’s prudent to try before you buy. A smart approach is to obtain an evaluation license, which enables you to test the intellectual property before committing to a full license. This article highlights essential points, including the advantages of evaluation licenses, their role in minimizing risk, and strategies for negotiating favorable terms in evaluation agreements.
What is an Evaluation License?
An evaluation license is a low-cost, non-exclusive short-term license that grants you the rights to test the market potential of the IP. This enables you to determine if it aligns with your business goals and is worth commercializing. Here are the key benefits:
- Cost-effective Testing Ground: Assess the commercial viability and market demand without a significant upfront financial commitment.
- Low-risk Relationship Building: Develop a relationship with the licensor with minimal upfront commitment in both time and money.
- Streamlined Licensing Process: A shorter licensing agreement means faster approvals and quicker access to the IP.
- Smooth Transition to Long-term Licensing: If the evaluation is successful, moving to a long-term licensing agreement is straightforward and efficient.
Evaluation licenses play a crucial role in various industries, enabling companies to test and validate new technologies before full commercialization. Examples include a biotech startup testing a drug delivery system, an AI innovator integrating a new algorithm, a medical device company trialing a diagnostic tool with a healthcare provider, and a renewable energy startup refining solar technology in collaboration with a national lab.
Structuring an Evaluation License
An evaluation license can also be structured as an option agreement, where terms for a long-term licensing agreement are negotiated as part of the evaluation license. This approach allows the licensee to conduct R&D and market studies on the IP. If deemed commercially viable, the licensee can transition smoothly into a long-term licensing agreement.
Here are some key points to keep in mind when negotiating an evaluation license:
- Non-exclusivity: The license is typically non-exclusive and grants a limited period for evaluation and the long-term licensing option.
- No Minimum Sales or Royalty Guarantees: Evaluation licenses usually don’t require minimum sales or royalty guarantees but restrict commercial sales since the license is for evaluation only.
- Evaluation Fee and Performance Benchmarks: There is usually a minimum evaluation fee and performance benchmarks, such as a timeline for completing development and evaluation tasks (e.g., beta testing or market studies).
- Option Exercise Period: The agreement specifies when and how you must exercise the option, usually no later than 30 to 60 days before the evaluation period expires.
- Long Form License Agreement: If an option is included, it will specify when the long form license agreement must be executed, generally within 60 days after exercising the option. Ensure to negotiate the business terms of the long form agreement before signing the evaluation option agreement.
Conclusion
An evaluation license or option agreement serves as a strategic method for navigating new, unproven technologies in the marketplace. By minimizing risk, you can better assess the true value of the intellectual property and its fit within your business strategy. Additionally, these agreements often lead to significant cost savings compared to full licenses, allowing you to avoid expensive commitments if the technology doesn’t meet your needs. Finally, the insights gained from testing the IP can open doors for further negotiation, ensuring a more informed and advantageous decision-making process.
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Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He’s licensed some of the biggest Hollywood entertainment blockbusters, including the Batman Movies (1 and 2) and the number one kid’s action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges, and startup events. His first book, Hidden Wealth: The Money-Making Power of Licensing, was released in 2019 and is available on Amazon.com. He’s also a published writer, and his articles have appeared in several prestigious trade magazines, including The Licensing Journal, Intellectual Property Magazine, and License India.
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