The Mahele Method
and its (Dis)contents
Lee M. Taylor
JD, LL.M, MBA Candidate
Education
•
University of Kansas - 2000
– BS in Genetics
– BA in English Literature
•
University of San Diego - 2004
– Juris Doctor (JD)
•
The George Washington School of Law - 2006
– Masters of Law (LL.M)
•
University of Hawaii̒ - 2011
– Masters of Business Administration (MBA)
•
Licensed Member of State Bars
– California 2007
– Hawaii̒ 2008
Experience
•
•
•
•
•
•
•
•
Laboratory Technician
Biology Lab Instructor
Field Researcher - Iceland
Legal Clerk - San Diego, London
Intern - IIPI
Intern - ITC OUII
UH Business Plan Competition
UH OTTED
1997
1998
1999
2003
2004
2005
2008
2008
OTTED Licensing pre-Mahele Method
•
Negotiations took 3 to 9 months
•
Performed sui generis (each technology is a unique
entity and each licensee has unique circumstances)
•
Licenses:

No License Issue Fee; Equity due upon Execution;
Production Milestones; Business Plans; and Sales
Milestones
•
Milestones were known solely (wholly) to licensee
The Mahele Method™
Lee Taylor, University of Hawai̕i
1. The License Issue Fee
A.
$6,500 due upon execution if the patent expenses are less than that,
B.
50% of patent fees due upon execution and 50% due six months later if patent
expenses are between $6,500 and $13,000, or
C.
33% of patent fees due upon execution, 33% six months later and the remaining
33% due twelve months after execution if expenses are greater than $13,000.
2. The License Maintenance Fee
A.
$12,000 due Dec 31st of the first full year of the license,
B.
$24,000 due Dec 31st of the second full year of the license, and
C.
$36,000 due Dec 31st of the third full year of the license and thereafter. All
fees are creditable against royalties received during that calendar year.
3. Royalties
5% of net sales, 10% if licensing software. If the licensee wishes to have rates below 5%
then the TTO requires sales projections for the first four years. If royalties in year 3 are
close to $36,000 (+/- 10%) and exceed $48,000 in year four, the lower rate is accepted.
4. Equity “Never more than four”
Equity is something only sought from start-ups. It does not act in lieu of the above but
in addition to it. There, the TTO takes 4% or less to allow enough equity left over for
later rounds of fundraising. Equity is conveyed after the first round of $2M+ financing
or at the fifth anniversary of the license—whichever is first.
The Mahele Philosophy
• Only a minority of licenses make substantial money
• Royalty rates capture the upside of disparate technology
• License maintenance fees capture the base rate / spur commercialization
• TTOs and entrepreneurs time is limited / time is money
• Business needs transparent, predictable terms
• Licenses should have few “moving parts” and be easy to administer by
using objective calendar dates
The License Issue Fee
• People only respect things they give consideration for ($$)
• Some modicum of value is needed upfront
• Money is the best proxy for competence & intent
• Professors/Inventors reasonably expect the first 12 to 24 months of a
license to be spent recouping significant patent expenses
• They look for modest gains in year 3 and more substantial gains in year 4
and thereafter
The License Maintenance Fee
• Technology ages and loses value
• There is substantial value in “locking up,” or having exclusive
rights to a technology
• The fee is the best goad towards commercialization
• $25,000 is the pain point
Royalties
• Royalties capture the upside of disparate technologies
• The sliding scale forces the licensee to seriously consider the money
that will be earned going forward
• And yet . . .
• Soft 3% on most technologies, 9% for software
• Rebuttable presumption as to why it should be less (foolish
consistency)
• Licenses are “naked” research and consultation are not included
Equity
• Its FACT is more important than its Amount
• We ask faculty to waive equity if receiving it directly
from the licensee
• UH does not need it until it has value
• CELA’s liquidation preference may be more elegant
still
Is that it?
• Sublicensing?
– Yes, but flow through and 10x royalty on all lump sum
payments
• Commercial sale are less important with license
maintenance fees but can have first sale at year 3, 4,
or 5
• Standard license is full of non-controversial and/or
non-negotiable terms
• Improvement technology regularly granted
Takeaways
• The “nightmare” of the blockbuster technology is overblown
(will “settle” for $30M instead of $40M in both equity and
royalties)
• The goodwill standard terms provide is real because they:
– Empower professors
– reduce workload
– and provides predictability
• The licenses are “fundable,” fast and fair
– (works for companies of any size)
• This method is “express” but not etched in stone, it is a rapid
way to get to agreed upon terms
Thank You
Lee M. Taylor
Office of Technology Transfer & Economic Development, University of Hawaii̒
ltaylor2@hawaii.edu