Commercialization of software in practice

Commercialization of the results of research by academic institutions is more and more common and it is useful to know how it is carried out. This is important both for institutions and for entrepreneurs investing in these types of innovation.

Various Polish public research institutions (universities, research institutes, Polish Academy of Sciences centres) conduct research resulting in important discoveries, new inventions and technologies. It invites that such innovative activities implemented not only in laboratories, but also in the reality of the market. These activities are called the commercialization of knowledge.

Below – by the example of software – we discuss the most common ways (models) of commercialization, but these tips in many respects will also apply to other intellectual property works.

From the beginning you should always check that the commercialization will be allowed “as such”. This requires an analysis of the rules of commercialization, which may be indicated in specific rules and procedures of the institution. Then, the commercialization must be carried out in accordance with such rules. In addition to this, in the case of certain transactions and entities the validity of commercialization is subject to the consent of the Minister of the Treasury – this is the case, for example, in the sale of fixed assets of a research institute, if the transaction value exceeds EUR 250,000.

Overall, the commercialization of software, as well as other subjects of copyright, can be done in three main ways:

I. By licensing to third parties

It is possible to offer third parties a license to use software. Granting of a license means granting “permission” to its use within a certain scope (e.g. on one workstation for a period of 5 years). Licenses can be exclusive or non-exclusive. Granting of an exclusive license means that the true owner of the rights to the software do not lose them, but may not grant licenses to other parties. In the case of a non-exclusive license, no such restriction exists.

A license agreement may provide the licensee the right to grant subsequent licences to third parties (so called sub-license). Under such model, it is possible also make an arrangement with an external entity which would deal with searching for partners and the software’s distribution.

In the licensing model we should bear in mind the following aspects of commercialization:

1. remuneration of the licensor – may take a form of a lump sum (one-time fee for a specified time), may be payable at specified intervals, e.g. monthly;
2. in the case of cooperation with an external distributor (which would grant subsequent licenses), it can be arranged that the remuneration was a percentage of the turnover, or profits of the distributor. Profit-based settlement (i.e. after deduction of costs) raises the risk that the distributor artificially generate costs for the reduction of the amount to be shared. Therefore, you should precisely determine in the agreement what can and what can not be regarded as a cost. In turn, the profit-based settlement (i.e. the amount “before” deducting expenses) from the perspective of the Institute is safer, but it probably involves the smaller (in terms of percentage) sums to be shared. In each case, however, you need to take care of the relevant provisions, to ensure that the distributor makes settlement in a correct way. In this context it is particularly important to reserve the so called right to audit – the possibility to analyze documents being the basis for settlement. In addition, it is important to be able to verify whether or not the distributor understates their profits (e.g. by artificially underpricing licensing fees). You can also arrange with the distributor a mixed remuneration, where a part of it is a a lump sum and a part a turnover-based or profit-based settlement. This lump sum can also have the nature of an advance payment (it shall be deducted from subsequent profits);
3. in the agreement with the distributor the principles governing the termination of cooperation should also be established. It should especially be pointed out that when the distributor fails to act (will not proceed with the commercialization, e.g. does not reach a certain threshold of turnover in a given time), the licensor has the right to terminate the relationship, and the rights granted to the distributor expire;
4. license agreements give a lot of room for the parties to a transaction in terms of the scope of rights granted. Agreements may be concluded for an indefinite or limited time, applicable in a particular country / countries or worldwide. Finally, they may include various levels of authority and forms (i.e. fields) of use of the program (e.g. may include – or not – the right of the licensee to modify it on their own, stipulate the use of software for a specific number of workstations etc.). It should be noted that it is possible to divide the rights in such a way that in the field of X the license was exclusive, and in Y – non-exclusive, which opens wide possibilities of matching a directory of granted rights to specific situations;
5. irrespective of strictly licensing, granting of a license may also involve other benefits of the parties to each other’s service e.g. software implementation services, and technical support service. This can be an important and interesting source of revenue for artists or software commercializing centre;
6. the agreement should stipulate if it covers only the original version; which means – if so, to what extent – its subsequent updates (they can also be made available for an additional charge).

Generally, the licensing model allows for easy construction of the transaction so that it suits all concerned.

II. By transferring the copyright to the software to third parties

Instead of licensing, which can be compared to a rental agreement, e.g. of a house, a final transfer of copyrights to an external entity is also possible (a right similar to the sales agreement). Transfer of rights causes getting rid of them by the authorized party to the extent provided by the agreement. Since the transfer of rights is usually final, this kind of commercialization requires the authorized to be more careful – because the software after the transfer of rights is no longer “their” software. This should be reflected in the remuneration – significantly higher for the transfer of rights, than for licensing.

Like a license, the transfer of rights agreement can be very diverse in nature and contain many nuances. They can regulate matters already described in points 1, 2, 4, 5 and 6 above. Because of the final nature of the transfer of rights (“one-off” transaction) the comments related to the scope of the temporary license will not be applicable here.

III. By establishing a so-called spin-off – a separate entity (usually a company) involved in the commercialization of software, to which the rights will be brought, e.g. in the form of a contribution

A separate, often used method of commercialization is to commercialize through spin-off companies (subsidiaries). This method involves creating a separate entity to which assets the rights will be brought (in this case – the copyright to the software). A spin-off may be a joint venture with third parties (investors) and enables the joint commercialization project based on the principles arranged with them. The advantage of this solution is relatively high flexibility. Both the amount of the contributions of investors, as well as managerial rights to the project (or the principle of the division of future profits) can be freely shaped as desired. With such a company, it is possible to maintain control over the project and its further development already within the company.

When the commercialization of the project is a financially risky undertaking, separating it into a spin-off is a form of limitation of liability. The new company takes over the risk.

As part of its operation, the spin-off can deal with both software distribution and other issues, e.g. provision of technical support to users.

These principles of course are only an outline of the broader issue, as this subject is extremely extensive. There are also other, though less popular forms of commercialization of knowledge in scientific institutions – business relations, for example a spin-out company (where – as in the model of spin-off – a separate company emerges, not with the participation of the scientific institution, but specific scientists, who “bought” the rights from it and bring them to the company as “theirs”, independent of the institution) or a joint venture. Selecting the proper form always requires a careful analysis of the specific project.