Initial license offering
Initial license offerings, also known as ILOs are a revenue-based form of raising money for seed stage and startup stage firms.
Different from Equity Crowdfunding in that the transaction is not considered an investment, but a license sale, ILOs are available to companies in every country.
How an ILO works
The ILO is a straightforward intellectual property and distribution rights license that expires after 2 years and 9 months.
Any firm interested in creating an ILO first needs to provide the sale parameters for the licensees to review before they purchase.
Common parameters include:
- Length of time the sale will last
- Royalty percentage that represents the percentage of net sales that the company will set aside after the product is released and the contract has entered its second year
- Buyback percentage- which represents the total percentage of equity that the company will set aside to compensate the pool of licensees at contract's end should the company opt to pay the licensees back in equity
Once the firm has created the sale parameters, they merely need to create a portfolio or listing that explains the product or service that they are creating or want to create. The portfolio should include:
- A description of the technology or process that makes the product or service unique
- An overview of what the firm is seeking to accomplish with the offering
- An analysis of the competitive environment
- Some form of media presentation to augment the sales pitch
- The total amount of money that is expected to be raised via an Initial License Offering
The next step is to create a standard license contract that contains all of the elements that are to be promised to the licensees. In most commercial iterations of an ILO contract, the intellectual property rights do not include patent or copyright credit or allow the licensees to assign their rights or manufacture unless the company creating the co-creator license fails to fulfill the terms of the agreement.
After the portfolio is created, the firm can choose to list the offering on its own website or find an ILO Market.
When a purchaser chooses to license the technology or product, there are several set price options for the signup fee normally available. Each signup fee level generally corresponds to an increased stake as a co-creator. After selecting a sign-up fee, the purchaser then completes the transaction by paying, typically online.
The seller then signs a copy of the contract and sends it off to the buyer for their signature.
The Contract Period
The length of an ILO contract is set at a maximum of 2 years and 9 months.
During this time, the seller can use the money that was deposited as a signup fee to expand the company and fund operations. During the first year of the contract, the seller has no obligations to the buyer other than maintaining the contract.
After the first year, the seller will start to set-aside royalty money from net sales if they have specified that there are to be royalties. The money will be sent on to the buyer on a quarterly basis.
Near the close of the second year, the seller is required to set a date for buyback within the next 9 months. On that date, the seller will pay the buyer back their sign-up fee in either cash or equity.
Advantages for the seller
- The transaction is a license sale, not an investment contract- therefore no SEC regulation
- The ability to receive funds every two months as they come in, not at the end of the seller's fundraising efforts, and not contingent upon whether or not you reach your target
Advantages for the buyer
- The ability to promote themselves as a co-creator of the technology
- The ability to become a distributor of the product
- The ability to start accruing royalties
- The right to sell the license back to the licensor in exchange for cash or company stock
History
The ILO was conceived in 2011 by David Gass of Imaginot LLC as a means of allowing startup firms to gain funding from a revenue standpoint at an earlier stage than was traditionally the case.