In arranging a licence agreement a larger company may wish to invest in a smaller company's R&D but is uncertain as to whether the technology will succeed or not and thus whether to commit itself to a large investment. At the same time smaller company may possess highly valuable but as yet undeveloped technology which it is difficult to raise finance to develop.

One solution to this is for the smaller company to grant an "early day licence".
Such licenses include options on licensing the technology in return for an initial investment. If the technology continues to be developed successfully by the smaller company and reaches certain specified milestones by certain time limits then the larger company will have the option (but not the obligation) to invest further, take a full licence, or possibly even acquire the company depending on the agreement.

If when the time limits are reached the larger company chooses not to exercise the options its initial investment has bought, then the options lapse, together with the exclusive relationship with the larger company that the initial investment bought. The smaller company is then again free to exploit the technology as it sees fit.

The inclusion of options in any licence agreement is in itself valuable. The value is often significant and not to be underestimated. Techniques are available to value such options though at present their main use is in the early stage dvelopment of pharmaceuticals.