In negotiations there is also the cultural preparation that is required. Remember that everyone is on their best behavior during the deal process so make sure that these people are ones you can work with effectively day-to-day. You also want to determine if you can set up and maintain good communications. And finally the negotiations are a test of whether you can effectively resolve differences and constructively solve problems together. If negotiations are difficult from a cultural standpoint these difficulties are likely to spill over into the implementation phase as well.
In negotiation the four things that really count are: First, what do we need? Second, what do they need? Third, what concerns us? Fourth, what concerns them? If you want to negotiation to succeed you must make sure that your issues are clear to yourself and the other side. Secrets and miss understanding rarely create win-win results.
An outline of the negotiation starts with “the introduction”. Elements of this step include: a letter of introduction; brochure introducing the opportunity; calling for a meeting; setting up the meeting agenda; pre-meeting reading; setting pre-meeting expectations; providing needed material; attempting to meet over lunch informally; executing a confidentiality agreement.
The next step can be characterized as “the first date meeting”. Elements of this step include: introduction; announcement that the CDA has been signed; presentation by licensee; presentation by licensor; present expectations; agree on path forward. During this meeting a second person should be present to observe the other side’s responses and to take diligent notes. It’s also important to be realistic and not expect to sign anything at the first meeting.
The following step is usually a “internal meeting of the licensee”. Elements of this step include: review of the introductory meeting by business, R&D and legal; Providing revised elements for the negotiating team comprising the R&D summary, development plan, intellectual property analysis (patentability, infringement analysis, additional licenses needed for commercialization), competitive analysis, market and sales forecasts, financial analysis, and deal structure.
Concurrently there is also usually an “internal meeting of the licensor”. Elements of this step include: review of the introductory meeting by business and R&D; preparation of documents needed by the negotiating team for follow-up to include a development plan, intellectual property analysis (infringement analysis, additional licenses needed to commercialize), competitive analysis, market and sales forecasts, financial analysis; identify deals completed by the licensee for comparison; identification of contact points.
The next meeting is a “due diligence meeting”. Elements of this meeting include: scientific review of the technology; listing of milestones and costs; recitation of draft term sheet to include upfront payments, equity payments, R&D support, milestone payments, royalties, territory, and manufacturing. An example of the elements in a typical term sheet are shown in the “Sample Term Sheet” figure.
The following meeting is one to negotiate the terms presented in the term sheet. Elements of this meeting include: composition, roles, and responsibilities of the joint steering committee; manufacturing; territory; co-marketing; carve-outs; best efforts; milestones; advance against royalty; termination rights.
During the negotiation it’s an excellent time to learn about and resolve issues related to the history and general characteristics of each party. These include: history of the capital structure of the candidate company, including original capital, current classification of shares; current capitalization table, including stock ownership; listing of shares on any public exchanges; list of outside experts engaged by the candidate company such as auditors, attorneys, patent counsel, scientific advisory board, and others; brief overall description of business, including recent developments in general plans for future; description of any critical problems facing the business, including need for additional capital, government restrictions, disputes, loss of key personnel; list of companies key officers and directors, including a general history of their business or scientific career, including whether they have been involved in any criminal, regulatory or significant business related to civil litigation or investigation.
During negotiation it is also a good time to understand the competitive environment of each party. Elements falling into this category include: what other companies or research institutions are engaged in programs in the target area; what types of companies are involved in research or sponsoring research in the area (large, small, government); what companies, if any, have abandoned research in the area and why; what appears to be the strategy of the licensor; what is the strategy of the licensee; if the licensor is to be engaged in making pre-commercial supplies, does it have adequate manufacturing capabilities to do so.
Some financial items to consider during negotiation are: if the collaboration includes research or development activities to be undertaken by the licensee at licensors expense, document the accounting policies to be used; similarly does each company have adequate financial controls and a competent CFO or controller; share the balance sheet, income statement, funds statement, cash flow, registration documents, and current SEC reports; does licensor have arrangements for securing competitive sources of key materials and processes needed for the collaboration; describe and evaluate the laboratory manufacturing facilities are that are available to the licensor to use for the collaboration; list all key suppliers and determine if alternative sources readily exist; determine and evaluate the adequacy of insurance coverage carried by the licensor; list and evaluate any contractual disputes in which either party has been involved with suppliers, research collaborators, or other partners.
Some intellectual property issues to consider during a negotiation are: obtain full schedules of patents and applications for patents worldwide; obtain copies of any relative license agreements, paying particular attention to any restrictions on sublicensing; list and review any patents and applications that are jointly owned with third parties; obtain a statement regarding any claims or threatened claims of patent infringement; what is been the policy of each party with respect to the rights and duties of employees and outside consultants. Are they covered by written agreements with respect to patents and pending applications? Are agreements limited in any way as to the type of research covered? Have all key employees and consultants signed patent agreement assignments; have searches been made of prior art, either infringement search, validity search, or freedom to operate analysis; obtain copies of all relevant opinions of outside counsel for licensee to review; has there been any waiver of, or disputes concerning, confidential disclosure obligations between the licensor and any employee, consultant or other third party; have patent applications be filed in all important foreign markets and, if not, is there still time to make such filings.
Finally during a negotiation it’s also important to learn about any pending litigation. Areas to be ask about are: are there any charges pending against the either company by any Federal or State agency; list any litigation that is threatened or pending; evaluate any litigation that directly relates to the collaborative area of research; has licensor been involved in any significant litigation in the past five years, particularly as it relates to the intellectual property rights or the rights and obligations of third party research arrangements; list all principal contracts that are in place that relate in any way to the area or subject matter of the proposed collaborations.