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Strategy Advice on Technology Licensing (Part 6)

On Behalf of | Jun 8, 2011 | Uncategorized

If you’re new to this series, you may want to begin by reading the previously-published Parts 1-5. The purpose of this series is to help entrepreneurs consider technology licensing strategy from a university’s perspective, so that you can be more successful in planning the future of your business. The series is 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.

Keeping the Innovators Involved and Ownership of Future Inventions

It is rare to find an idea created at a research university that is immediately ready to be licensed, packaged, and sold to consumers. Since significant further research and product development will surely follow most early-stage licenses, entrepreneurs are likely to realize great benefits if they can keep the innovators involved in any spin-off. The challenge here is that your inventor is likely a University employee, and it’s very likely that both she and the University want to keep it that way.

This problem really has two sides, the first being: Can your start-up hire the inventor without violating the inventor’s university contract? Many university contracts allow their researchers to spend 10% to 20% of their time on “outside” projects, including spin-offs and independent businesses, so this might not be a huge hurdle to clear. At least at the beginning, you may nonetheless need to treat the inventor as an outside consultant, so if your inventor doesn’t already have a legal entity set up to do consulting work, you may want to be prepared to answer questions about creating an LLC and paying self-employment tax. The second side to the problem is that a significant portion of the inventor’s academic career could be wrapped up in the invention. Entrepreneurs should recognize that a license that ties an invention too tightly to the start-up might do real damage to an inventor’s ability to continue academic work in her area of expertise.

One licensing solution is to include a grant-back provision for future company inventions that advance the licensed technology, so innovators may continue to use things they invent while doing work for the company in the context of their university research. The grant-back could involve a monetary fee paid from the university to the startup for future inventions, or a setoff against future royalties the startup will owe the university, or even a simple acknowledgement that the grant-back is part of the consideration for the license itself. It might also be reasonable to negotiate a delay in academic publication of novel results until the company has secured its IP rights.

The conversation about future rights and grant-backs should happen at a very early stage. Entrepreneurs should go out of their way to determine what innovators want out of any commercialization effort, and try to work those goals into the license. This is an early opportunity to demonstrate to your inventor that you are “on their side” and looking out for their interests. Common motivators for inventors often include: money, fame, control, academic recognition, and aversion to risk. As an entrepreneur and CEO of the start-up, it’s your responsibility to understand your inventor’s motivations and help them to get what they want out of the deal. Your inventor’s needs may vary significantly based on such factors as career and degree status, age and family status, or an inventor’s need to carve out his or her own niche in the academic world.

You can smooth the path for your licensing negotiation if you take the time to anticipate how the interests of your inventor might diverge from the interests of the university itself. Identify all stakeholders and their individual motivations, and then keep these in mind during license negotiations. If you can find the simplest common denominator that will persuade the research group to commit to work with your startup, solicit agreement from members of the group to forego other interests in licensing negotiations to help ensure that all parties stay on board as the venture goes forward.