Member Eric McAfee Speaks: Consider the Conveniences of Licensing

The Challenge:

The case at hand was brought by an executive invited to lead an early-stage company, with promising technology, owned by a group of close-knit individuals. They were not willing to give him even minority ownership of the company – they simply wanted a hired gun.

If you were in this situation, what would you do?

If I were in your position, I would establish an entirely different company of which you’d be CEO. Negotiate yourself as the licensee of this new technology so you can market it and sell it – all the while not diluting ownership of the founders.

I understand your reticence to get involved, no matter how good the technology, if you can’t get a piece of the action. You’re dealing with a typical control-oriented private company that will stunt their own growth because they are unwilling to give up control to get the capital they need to grow. To get around this, I would offer to license the technology from them and promise them fat profits when you’re successful. You can negotiate substantial benefits like exclusive rights, a protected period, or protected geography because, unlike them, you are willing to raise money and suffer dilution.

In this deal, be sure the terms of the licensing exclude other licensees from competing with you. Negotiate so you are in the position of owning access – or better yet exclusive access – to the technology. In my career, I have also employed this tactic with large, highly capitalized multi-national companies. You may ask: why would these companies not fund their own product development? The answer, for example, could be that the new product competes with an existing product. So licensing can also help escape these conflicts of interest while still generating value from new technology. It’s a tactic worth exploring.