The road to market is long, and StartUpCo will probably enter into multiple licenses with multiple parties for complementary technologies. The initial license with MediSchool for the founding core technology will attach a royalty payable to MediSchool as the institutional licensor on each licensed product sold.
Given that market entry and freedom to market can typically require additional licenses and royalty fees stacked on the licensees initial royalty obligations, the initial royalty rate has implications for every future license, as well as future partnerships and rounds of venture financing.
For example, StartUpCo may first license a core drug discovery tool, and then a drug delivery system and various compounds. If the royalty demands of that first license are too rich, StartUpCo will be paddling upstream for years, perhaps trading off equity shares or cash milestone payments to minimize royalty rates in subsequent licenses, or perhaps losing new venture funding because the profit outlook is grim.
If, however, that first license and each subsequent license contain royalty-stacking provisions, StartUpCos royalty burden could be less troublesome.
One type of royalty-stacking relief permits StartUpCo to credit a portion of its payments for future licensed technologies included in the product against the product royalty payments due to MediSchool. The institutional licensor generally will require some minimum royalty rate (such as 50% of the original rate) to protect itself against unfair erosion of its royalty stream.
Another version of a royalty-stacking provision protects the licensor from disproportionate royalty loss by only permitting such a credit if total stacked royalties exceed some ceiling.
A similar stacking issue can arise when multiple milestone payments are due to multiple licensors, such as upon a filing with the FDA. Ultimately, licensors should understand that cumulative royalty payments by StartUpCo could become so prohibitive that the licensee will be forced to abandon the product. That is an opportunity lost for all involved.