Commercializing an Invention
A license agreement is a contract between MIT and a third party in which MIT’s rights to a technology are transferred to the licensee company (without relinquishing ownership) for financial and other benefits. Our main goals in any license agreement are to ensure that the technology will be developed by the licensee for public benefit, complying with federal and MIT policies, and, if successful, providing a reasonable financial return to MIT and the inventors of the technology. License agreements are used with both new, startup businesses and established companies.
Key starting points for customizing a licensing approach for each entity include knowing:
- the product benefits relative to existing products
- the expected customers
- market channels
- potential sales and margins
- additional aspects of the proposed or existing business
An option agreement is sometimes used to enable a third party to evaluate the technology and its market potential for a limited time before licensing. An option agreement provides companies with a non-commercial, internal-use license for a fee. The option holder is responsible for payment of patent costs during the option period.
Standard features of a license will typically include negotiated financial terms, such as annual fees, milestone fees, a royalty on product sales, and reimbursement of patent costs. They may also include a minority share of equity, if a startup. The non-financial terms of the license are equally important and will include:
- Degree of exclusivity: nonexclusive, exclusive, or restricted by field of use
- Reservation of rights for the Federal government (if the invention is derived from Federally-funded research), and for MIT and other non-profit organizations for their research and educational activities
- Performance (or “diligence”) requirements to assure that the company has the resources to develop the technology and is committed to doing so. These diligence terms allow for tracking the progress of the technology toward commercialization
All licensing negotiations are handled directly between the TLO and a non-inventor representative of the company in order to avoid potential conflicts of interest.
The licensee company continues the advancement of the technology and makes other business investments to develop the product or service. This step may entail further development, regulatory approvals, training, and other activities. Your role in product development can vary depending on your interest and involvement (within the limits of MIT policies), the interest of the licensee in utilizing your services for various assignments and any sponsored research related to the license or any personal agreements. We maintain an ongoing working relationship with each licensee over the term of the license agreement to monitor progress and ensure product development.
Revenue, Reinvestment and Relationships
Revenues received by MIT from licensees are distributed to inventors and to departments, centers and the MIT General Fund to fund additional research and education. Every year, we, working with MIT inventors and licensees:
- Receive over 700 invention disclosures
- Negotiate approximately 100 new option and license agreements
- Assist in forming 15-25 start-ups
The revenues received are shared with inventors and among MIT departments, centers, Lincoln Laboratory and the MIT General Fund. Revenues going to MIT entities are reinvested in additional research and education, thus fostering the creation of the next generation of research, researchers and entrepreneurs.
Our new technology transferred to industry enhances industrial competitiveness, brings new products and therapies to the public, and fosters economic development and new jobs through our startup companies.
In addition, the creation and deepening of company relationships through these activities support MIT’s mission. They result in additional research projects, broader educational opportunities and collaborative investments, and an enhanced ability to create, retain and share valuable resources that contribute to our mission.
For more detailed information on these and other aspects of the Tech Transfer process, please refer to An Inventor's Guide to Tech Transfer.
A license is permission granted by the owner of intellectual property that allows another party to act under all or some of the owner’s rights, usually under a written license agreement.
License agreements are typically in writing and describe the rights and responsibilities related to the use and exploitation of intellectual property. MIT license agreements usually stipulate that the licensee must diligently seek to bring the MIT intellectual property into commercial use for the public good. The agreement also seeks to provide a reasonable return to MIT.
A licensee is chosen based on its ability to commercialize the technology for the benefit of the general public. Sometimes an established business with experience in similar technologies and markets is the best choice. In other cases, the focus and intensity of a start-up company is a better option. Typically, MIT does not have multiple potential licensees bidding on an invention.
Inventors enjoy the satisfaction of knowing their inventions are being deployed for the benefit of the general public. Additionally, per MIT policy, a share of any financial return from a license is provided to the inventor(s). New and enhanced relationships with businesses are another outcome that can augment one’s teaching, research and consulting.
Most licensees need some active assistance by the inventor to facilitate their commercialization efforts. This can range from infrequent, informal contacts to a more formal consulting relationship. Working with a new business start-up can require substantially more time, depending on your role in or with the company and your continuing role within MIT. Your participation with a start-up is governed by MIT conflict of interest policies.
- Non-Disclosure Agreements (NDAs) are often used to protect the confidentiality of an invention during evaluation by potential licensees. NDAs also protect proprietary information of third parties that MIT researchers need to review in order to conduct research or evaluate research opportunities. The Office of Sponsored Programs manages NDAs related to research contracts and potential research relationships. The TLO manages NDAs related to inventions that are already on file with our office.
- Material Transfer Agreements (MTAs), used for incoming and outgoing materials at MIT, are administered by the Technology Licensing Office. These agreements describe the terms under which MIT researchers and outside researchers may share materials, typically for research or evaluation purposes. Intellectual property rights can be endangered if materials are used without a proper MTA.
- Inter-Institutional Agreements describe the terms under which two or more institutions (e.g., two universities) will collaborate to assess, protect, market, license, and share in the revenues received from licensing jointly-owned intellectual property.
- Option Agreements, or Option Clauses within research agreements, describe the conditions under which MIT pre-serves the opportunity for a third party to negotiate a license for intellectual property. Option clauses are often provided in a Sponsored Research Agreement to corporate research sponsors at MIT; option agreements are entered into with potential licensees wishing to evaluate the technology prior to entering into a full license agreement.
- Research Agreements describe the terms under which sponsors provide research support to MIT. These are negotiated by the Office of Sponsored Programs.
Most licensees continue to develop an invention to enhance the technology, reduce risk, prove reliability, and satisfy the market requirements for adoption by customers. This can involve additional testing, prototyping for manufacturability, durability and integrity, and further development to improve performance and other characteristics. Documentation for training, installation and marketing is often created during this phase. Benchmarking tests are often required to demonstrate the product/service advantages and to position the product in the market.
Your role can vary depending on your interest and involvement, the interest of the licensee in utilizing your services for various assignments, and any sponsored research related to the license or any personal agreements.
Most licenses have annual licensing fees that can vary greatly depending on the technology. Royalties on the eventual sales of licensed products can generate revenues that may be significant, although this can take years to occur. Equity, if included in a license, can also yield similar returns, but only if a successful equity liquidation event (public equity offering or a sale of the company) occurs. Most licenses do not yield substantial revenues. A recent study of licenses at U.S. universities demonstrated that only 1% of all licenses yield over $1 million. The TLO believes that the rewards of an invention reaching the market are often more significant than the financial considerations alone.
Licenses typically include performance milestones that, if unmet, can result in termination. This allows for subsequent licensing to another business. However, time delays and other considerations can hinder this relicensing.
Revenue, Reinvestment and Relationships
The Technology Licensing Office is responsible for managing the expenses and revenues associated with technology agreements. Per MIT Policy, revenues from license fees, royalties and equity— minus any unreimbursed patenting expenses—are shared with the inventors. See Section 4.7 of the “Guide to the Ownership, Distribution and Commercial Development of MIT Technology” which can be found here. For purposes of revenue distribution, “inventors” are defined as named inventors on patents or authors of copyrighted materials.
If an inventor has received or will receive equity directly from a licensee of technology, MIT policy states that the inventor will not receive any of the equity received by MIT in connection with that license. Equity includes stock and/or stock option or stock warrants.
License revenues paid to inventors are generally taxable and are reported as Form 1099 income. Consult a tax advisor for specific advice.
The “inventors’ share” of royalties is divided equally among all inventors unless all inventors agree in writing to another distribution formula of their collective choice.
The equity that MIT receives under a license agreement is distributed to inventors that are not receiving equity directly from the licensee, in accordance with the same policy that governs the distribution of cash royalties. The prescribed shares are issued by the company to these inventors in the inventors’ names.