Participation rates are an automatic emission of the model and once the parties have entered into the licensing agreement, these rates are a direct consequence. The model also indicates that the licensing agreement is useful to the licensee if the value of the project calculated in the model – here $1 million – is greater than the value of the alternative. The licensee acquires all of NewCo`s shares until the end of the life cycle, with the exception of the portion it then owes in royalties. Therefore, the full price is paid to the licensee. This model therefore clearly shows whether a license is useful or not. In addition, there is also the IRR for the licensee: it is the discount rate that is used within the model. When the parties enter into a licensing agreement, the overall system of the agreement is simple: the donor grants the licensee the right to sell or otherwise use his technology which can be patented or otherwise protected as a trade secret, and the licensee pays royalties to the licensee. What is not so simple is the setting of a fair royalty rate. Trying to compile a licensing proposal for an existing patent with a sales history, it is easier to quantify royalties. Most licenses use previous sales as a royalty base – usually net sales; a smaller one is based on units sold. That`s why Universal Licensing often encourages its customers to manufacture and sell their product, even on a very limited basis.
This provides some statistical data that we can rely on to prepare for a licensing negotiation. Both companies may also agree that B cross will receive royalties on North American sales and that Company A may in return increase other licensing conditions. This takes into account Company B`s contribution to NewCo North America`s value as a trial sponsor and also reduces its financial setback if it does not obtain authorization in ROW. Although this licensing structure is quite complicated to justify by the value-added principle, the virtual business model easily explains the magnitude of the conditions for obtaining fair business. In the model discussed above, Company A owns 60 percent of NewCo before splitting into NewCo North America and NewCo ROW. NewCo North America, which represents 47% of NewCo, Company A, remained at NewCo ROW with 13 percent of 53 percent (up 25 percent). It is also possible that Company B owns some of NewCo North America, say that 10 percent of its shares in NewCo newCo should be allocated to NewCo North America (10 percent of 47 percent-21 percent).