When licensing a new technology, try before you buy is a good option to consider. One way of doing that is to test drive it using an evaluation license before committing to a full license.
Evaluation licensees offer several key advantages:
- They’re a low-cost, non-exclusive short-term license that gives you rights to test market the IP and see if it makes sense to commercialize it or meet your business goals.
- It’s a low risk way to develop a relationship with a licensor since it only requires a minimal upfront commitment in both time and money.
- The licensing process is faster since it uses a shorter licensing agreement and approvals take less time.
- If the evaluation is successful, you can quickly move into a long-term licensing agreement.
Evaluation licenses are used for all types of IP ranging from biotechnology to medical devices. Some examples include research centers, such as NASA, who often license very complex technologies that require lengthy due diligence and testing. Software is often licensed under an evaluation license so potential licensees can test it out and see if it’s commercially viable to use it in their organization. Universities offer evaluation licenses to review and test out their new technologies.
Evaluation licenses can also be structured as an option agreement. In this case, terms for a long-term licensing agreement are negotiated as part of the evaluation license. It allows the licensee an opportunity to do some R&D and a market study on the IP. If the licensee determines the IP is commercially viable, then they’ll have an option to roll into the long-term licensing agreement.
Here are a couple of the key points to keep in mind when negotiating an evaluation license:
- Typically the license is nonexclusive and gives you a limited period to complete your evaluation and the long-term licensing option.
- They don’t require minimum sales or royalty guarantees, but they do restrict you from commercial sales since the license is only for evaluation.
- There’s usually a minimum evaluation fee and some performance benchmarks, such as a time period for completing the development and evaluation. For example it may need you offer a plan for key milestones such as testing beta testing or market studies.
- There is a time period specifying when and how you must exercise the option such as no later than 30 or 60 days before expiration of the evaluation agreement or period.
If an option is included it will usually specify when the long form license agreement must be executed, such as within 60 days after exercising the option. Be sure to negotiate the business terms of a long form agreement before signing the evaluation option agreement. That way you’ll know what you’re dealing with in long form agreement.
An evaluation license or option agreement is a great strategy when you’re looking at new technologies that haven’t been proven in the marketplace. It gives you an opportunity to form a relationship with larger companies and organizations. It’s a low risk and low-cost way of controlling rights to a new IP before making a long-term commitment. If the IP turns out to be commercially viable, you can use the option license to help you raise financing to commercialize the IP.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes 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 with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.