Editor’s Note: Steve Jones was recently the CEO of Synthematix, an RTP-based provider of enterprise scientific software for the pharmaceutical and biotechnology industry. Synthematix was recently acquired by Symyx Inc., a public company based in Santa Clara CA. Jones will discuss the software industry during a panel discussion at the Council for Entrepreneurial Development’s (CED) next Tech Forum, set for April 13 from 5:30-7:30 p.m. at MCNC in the RTP. This column is the latest in The Entrepreneurial Spirit series for LTW from the membership of CED.
_______________________________________________________________________________________Emerging companies introducing new software products or services need to carefully consider how they will sell and deliver their product.

Too often, the software license is thought of as an after thought – the legal document protecting your intellectual property that you need the day after your first sale!

While this is probably true, your license agreement is also critical to the implementation of your business model. It will determine how your company will earn and recognize revenue and it formalizes how certain interactions will occur with your customer.

As such, your license agreement needs to be carefully designed and capture how you want to do business with your customers. In fact, your lawyers will ask you to summarize your business model and licensing strategy when they craft the formal legal documents (likely to still be the day after your first sale).

Consider the following questions that should be asked and answered as part of designing your licensing strategy:

How Does the Customer Buy?

The ability to reach the customer and make it easy to say “yes” is fundamental to a successful sale.

Make it as easy as possible for the customer to get started. If the customer can start small and then scale up without concerns about license management slowing the process then they may be more willing to try your product. For certain categories of software, an evaluation license that can convert to a full license may be necessary and a powerful sales tool.

The timeframe that purchase decisions are made by your customers can heavily influence the license design. Consider the implications if the purchase decision is made every day (e.g. a web service) or if it is made every 10 years (e.g. a core piece of enterprise software).

Can I Gain a Competitive Advantage?

Can you come up with a better licensing strategy than your competitors? An innovative licensing model may be enough to break into a competitive market. If it is easier to do business with you, if it is easier to match license fees to actual use, if the license better serves certain markets, then you have a competitive advantage.

Find an opportunity to discuss good and bad licensing practices with your customers to see which models are better appreciated.

How Do I Protect My Intellectual Property? Or Do I?

Most products licensed today are proprietary and carry restrictive licenses. However your business may prosper from an open source model, especially if the fee you can command from the actual license is small as compared to other sources of revenue such as integration services, training, advertising, etc. Negotiating a license may actually get in the way of closing a lucrative professional services deal in which you provide your own software.

What About Maintenance?

Maintenance fees can be perceived negatively by your customer if they are not backed up with tangible service and technology value.

Fees should be charged in cases where your product is sold under a perpetual license and expert or immediate support is required in the event of a question or an issue.

Charging maintenance separately allows you to keep the initial license fee lower which will be useful in the sales process. It may also allow you to up-sell maintenance to customers by offering different service level agreements (such as 24X7 service level agreements) to different customers.

If your product is evolving rapidly, a maintenance fee that provides rights to upgrades and new functionality will be well received by your customers. In such cases, you may want to look at the alternative of a subscription based license fee which provides the software license and maintenance service for the subscription period. This model, which we successfully used at Synthematix Inc., helps keep the initial sales price low, the product development cycle high and made it easier to serve smaller customers that our competitors had trouble serving.

How Will My Licenses Be Enforced?

If you look at software in the market, you will see a wide variety of products that enforce their licenses in varying degrees. Typically the right solution depends on how controlled the customer environment is. For example, your product should probably require more license enforcement if it is intended for public desktops (e.g. computer games) than if it is installed on a server at corporate headquarters. In enterprise environments, you may even be required not to programmatically enforce your license to avoid outages in the event of a dispute or administrative oversight.

In all cases, it is important to make sure that the cost of managing the licenses is as low as possible for you and your customers

Is My Licensing Model Simple and Easy to Understand?

Whenever possible, avoid overly complex licensing and pricing schemes since it can lead to miscommunications between you and your sales representatives, and you and your customers.

If your software license design is simple to manage, flexible, and easy to communicate while commanding value as it is enjoyed, then you have a winning design. While not impossible, it can be difficult to change a licensing model for a product. Taking the time up front to make sure your software licensing design fully supports and implements your business model, will serve you well.

Over his career, Steve Jones has purchased, developed or marketed a wide range of software products and related services to a number of industries. Most recently, Steve Jones was CEO of Synthematix, a provider of enterprise scientific software for the pharmaceutical and biotechnology industry. Synthematix has been recently acquired by Symyx Inc., a public company based in Santa Clara, California.

Jones will participate in a panel discussion at CED’s Tech Form, “Software Economics – Is Software a Product Anymore?” set for April 13 from 5:30-7:30 p.m. at MCNC in the RTP. For more information on this and other upcoming CED programs, visit: www.cednc.org/calendar