Daily headlines boast of the advances made by industry moguls like Apple and crowdfunding start-ups like Scott Wilson and his MINIMAL design studio. What many Americans don’t know is that the next big idea may currently be in development at a local university. The Oregon University System (go Ducks!) and many other universities have tech transfer offices (UOregon, OSU) that are assigned to identify inventions, assess their commercial potential, and offer licenses that could allow companies to deliver innovations to the public. Entrepreneurs often launch a start-up company specifically to take a license and then bring the invention to market.
Over the last year, I helped to survey technology license agreements issued by public and private universities in the United States. Our aim was to develop a better understanding of what the market for university technology looks like from the perspective of a start-up company. Our observations about the diversity of specific terms have been organized into the following categories: Getting Skin in the Game, Taking (and Disposing of) Equity, Royalties vs. Upfront Fees, Options and Contingent Licenses, Keeping the Innovators Involved, and Owning Future Inventions. I will discuss each of these topics in this blog series, my aim being to help entrepreneurs see things from the university’s perspective, so that you can be more successful in planning the future of your business
You may already be quite familiar with licensing agreements, whether it is for a patented invention, or copyrighted software, or an unpatented process, or some other form of technical know-how. Unfortunately, most license agreements are far from simple. And as with most contracts, there is more than one way to accomplish the basic transaction – so in a typical licensing negotiation, universities and entrepreneurs have many opportunities to choose between two or more competing goals. Since universities are repeat players in the licensing game, they tend to develop standard approaches to licensing their inventions.
Before you negotiate a technology license for your start-up company, you should take time to evaluate where your goals best align with those of the university, and have a pre-determined fallback position on points where you will face pushback. In developing a plan of attack, it helps to understand the different interests that a university may be trying to satisfy, and anticipate points of disagreement so that speed bumps don’t become roadblock
What Challenges Do Universities Face In Licensing Negotiations?
Universities (and investors!) often have competing goals that exert conflicting pressures on a license negotiation. For one example, the goal of maximized revenue for the university can be in tension with the goal of stimulating economic development. Consider: the fastest mechanism for universities to realize revenue from a license is to require a large up-front license fee. However, small start-up companies are unlikely to have enough cash on hand to satisfy this goal.
Although a license negotiation is nominally between just two entities – the university and a single licensee company – there are often at least two other groups whose interests must be taken into account. In almost all cases, the university and the licensee both wish to continue a relationship with key persons (probably university employees at the licensing stage) responsible for the research and development of the new technology. And since most start-ups will need additional funding before they generate enough cash flow to support their own operations, start-up licensees will need to consider how the terms of a license might impact future funding rounds or liquidity events.
Entrepreneurs should try to avoid agreeing to license terms that will limit the start-up’s flexibility in future negotiations. For example, when universities take equity as consideration for a license, the university may seek to reduce its risk by contracting for the right to close out the investment at the earliest opportunity. Even though such provisions probably won’t make operational problems for the start-up, creating a class of equity with superior rights might discourage future investors or hurt the start-up’s future valuation. An unwary entrepreneur might take a license and then not know they have a problem until the next time they try to raise money- and by then it’s too late.
Another example of divergent interests comes from the fact that universities as institutions operate on a much longer timescale than an individual investor. Individuals typically have investment planning time horizons that are only ten or twenty years long. A university’s willingness to take an unmarketable equity position or delay royalty payments for five years might put it at odds with the interests of a researcher who would prefer to have cash in hand today, even if that cash comes at a substantial discount. Adding to the risk, many researchers lack awareness of this particular issue, and rely entirely on the university to protect their interests in license negotiations involving their research. Entrepreneurs can take advantage of this opportunity: you’re going to want the inventor on board with your start-up, so here’s a chance to show them you’ve got their interests in mind.
In part two of this blog series, I will discuss the state of the licensing market and the concept I mentioned briefly above: Getting Skin in the Game
Steve Glista’s practice is focused on helping clients understand the risks — and rewards — that come with doing business on the internet. He’s also representing defendants and John Doe targets in the current series of online file sharing lawsuits.
Prior to law school, Steve worked in biotech, finance, and professional services for several large companies in the SF Bay area. Steve earned his JD from the University of Oregon and his bachelor’s in biology from the California Institute of Technology.