A licensing agreement lets someone else use your intellectual property on defined terms while you keep ownership. The terms that matter most are scope (exclusive or not, field of use, territory, sublicensing), payment, term and termination, and who is responsible if the IP infringes someone else’s rights. Most software startups don’t license their code at all. They sell subscriptions under SaaS terms, which is a different document.
Key takeaways
- A license grants permission to use IP. An assignment transfers ownership. Investors expect the company to own its core IP, not license it.
- Scope is the heart of the deal: exclusive or non-exclusive, which field of use, which territory, and whether the licensee can sublicense.
- Payment is usually an upfront fee, a running royalty, or both, often with a minimum annual royalty and audit rights.
- Bankruptcy law limits clauses that end a license because a party becomes insolvent. Don’t rely on them.
- When IP moves from an old entity into a new startup, assign it to the startup and, if needed, license it back.
What is a license, and how is it different from an assignment or a SaaS agreement?
Intellectual property is the legal protection given to creations and inventions: copyrights in code and content, patents on inventions, trademarks on brands, and trade secrets. Ideas alone aren’t protected. What’s protected is the expression of an idea, the invention, or the brand. See Trademark vs Copyright vs Patent.
The owner of IP (the licensor) can do two different things with it. A license gives another party (the licensee) permission to use the IP on stated terms, while the licensor keeps ownership. An assignment transfers ownership outright. Once you assign IP, you no longer own it.
A SaaS agreement is different again. When customers subscribe to your software, they access it on your servers. They don’t receive a copy of your code, and the agreement is mostly about service levels, data and payment rather than IP rights. If you sell a hosted product, you probably want SaaS terms or a master services agreement, not a traditional license. Traditional licenses fit when the other party will run, embed, sell or build on your technology, content, brand, patent or data.
Should a license be exclusive or non-exclusive?
A non-exclusive license lets you license the same IP to as many parties as you like. This is the default for software, content and data. An exclusive license promises that only the licensee can use the IP within its scope, and that includes you, the licensor. A sole license sits in between: you promise not to license anyone else, but you keep the right to use the IP yourself.
Exclusivity is valuable, so price it accordingly and narrow it. Exclusivity can be limited by field of use (for example, veterinary applications only), by territory (for example, North America), and by time. Ask for performance requirements, such as minimum sales or royalties, so the exclusivity falls away if the licensee doesn’t use it.
The license should also say whether the licensee can sublicense to others, whether it can transfer the license if it is acquired, who owns improvements and derivative works, and any restrictions on use, such as no reverse engineering.
How do I get paid under a license?
Most licenses use some combination of an upfront fee paid at signing, a running royalty (a percentage of the licensee’s revenue from the licensed product, or a fixed amount per unit), and milestone payments tied to events such as regulatory approval or a product launch. Exclusive licenses usually add a minimum annual royalty, so the licensee pays something even if sales lag.
Royalty rates vary widely by industry and by how central the IP is to the product, so benchmark against your own sector rather than a general rule. Whatever the structure, include reporting obligations, a payment schedule, and the right to audit the licensee’s books.
How does a license end?
The license should state its term and how it can be ended early. Common termination rights include material breach that isn’t cured within a set period (such as unpaid royalties or use outside the licensed scope), failure to meet performance requirements under an exclusive license, and termination for convenience on notice.
Be careful with clauses that end the license automatically if a party becomes insolvent or files for bankruptcy. These are generally unenforceable in US bankruptcy. And under Section 365(n) of the Bankruptcy Code, a licensee can usually keep using licensed IP even if the licensor goes bankrupt. If insolvency risk matters to your deal, work through it with counsel.
Also decide what happens at the end: whether the licensee can sell off remaining inventory, how long it has to stop using the IP, and which obligations (confidentiality, payment of accrued royalties) survive.
Who is liable if the licensed IP infringes someone else’s rights?
This is negotiated, not fixed. The licensor typically warrants that it owns the IP and has the right to license it, and the licensee typically asks the licensor to indemnify it against third-party infringement claims. Licensors push back by capping that indemnity (often at fees received), excluding claims caused by the licensee’s modifications or combinations, and reserving the right to modify the IP or end the license to avoid infringement.
The licensee, in turn, usually indemnifies the licensor for claims arising from the licensee’s own products and its use of the IP outside the license. Both sides should agree on a limitation of liability, confidentiality obligations, and how disputes are resolved (court or arbitration, and where).
What is a license-back, and when do I need one?
A license-back comes up when IP moves into a new company. Say a founder built software inside an existing consulting business, clinic or LLC, and now forms a startup to commercialize it. The clean approach is for the old entity to assign the IP to the startup, so the startup owns it outright, and for the startup to grant the old entity a license back to keep using the IP for its existing business.
The license-back should be non-exclusive, limited to the old entity’s current field (so it can’t compete with the startup), non-transferable, and usually royalty-free. The reverse structure, where the old entity keeps ownership and licenses the IP to the startup, is a problem for investors, who expect the company to own its core IP. See Who Owns Startup IP?.
What if I’m licensing IP in, from a university or another company?
Founders spinning out of a university lab usually license the underlying patents from the university’s technology transfer office. Expect an exclusive license in a defined field, an upfront fee, royalties, milestones, sometimes a small equity stake for the university, and diligence obligations that let the university end the exclusivity if the company doesn’t develop the technology. The same terms covered above matter, just from the other side of the table.
Can I license data or AI outputs?
Yes, and for some startups it’s a growing revenue line. Licensing a dataset to a company that trains AI models, or licensing model outputs, raises its own questions. Define the permitted use precisely (for example, training a specific model, internal research only, or no training at all), whether the licensee can keep models trained on your data after the license ends, attribution, restrictions on reselling or re-identifying the data, and your warranties about where the data came from and whether you had the rights to it. Privacy law also applies if the data includes personal information. See US Data Privacy Laws. The law around AI training and AI-generated material is new and likely to shift, so revisit these terms as it develops.
For more on protecting what you’re licensing, see Startup Intellectual Property. If you’d like help drafting or reviewing a license, see our contract review service or contact us.
