A common way for startups to get going is by taking technology invented at a university (or federal laboratory or similar public institution) and “transferring” it to the commercial sector by creating a startup company whose main mission is to develop the technology and turn it into a viable business. Frequently the university inventors of the technology are also founders of the startup company.
I’ve met many people pursing this path of forming companies, especially those people who were with me in the National Science Foundation’s Innovation Corps program. There were 21 teams in our class at Stanford University, and those that will now be starting companies, which is most of them, will need to license technology from their associated universities.
I’ve been through this process many times. Like all things, one gets better at it with experience. But the first time I had to license technology I felt very vulnerable because I had no idea what I was doing, nor what my expectations should be, whereas the university had decades of experience, hundreds of transactions to reference and lots of data they could use. Here are some guidelines that may be helpful if you’re doing this for the first time.
When you license technology you are getting a right to use the technology in exchange for payment(s) which can take several forms. In this game, the details matter, a lot.
Exclusive or non-exclusive
The first, and central, item to be determined is whether you will get exclusive rights to practice the technology or others may have similar rights. For example, if you are licensing the right to make a certain pharmaceutical compound, are you the only one who can do it or is the university free to license the technology (again and again) to others? As you can imagine, a big portion of the value of a license, and therefore what you can expect to pay for it, is embodied in whether the license is exclusive or non-exclusive.
Because of federal laws like the Bayh-Dole Act, you can expect a high bar to get over if you want to license your technology exclusively, but it is done all the time. I would say in my experience that if you plan to raise venture capital money, you will need an exclusive license. VCs will not fund your company unless you have a proprietary advantage.
Field of use
In a similar vein, you might have the right to use the technology for anything you can imagine, or your rights may be limited to a certain field of use (or geography or market, for example). I know of several startups based on new materials, and their field-limited licenses were for industrial applications (like energy) whereas other companies received field-limited licenses for the same technology for different fields (like medical applications).
What you will pay
There are many components of how you will pay for a license. Typically a startup provides some stock (i.e., equity) in the new entity to the university as an upfront payment in exchange for the license. This makes the university a shareholder in addition to being the licensor. The university may also, and I’ve seen it, request an upfront cash payment as well. They will also expect you to pay royalties based on a percentage of the sales you ultimately generate. A pitfall to be careful of is that most licenses also mandate that you pay certain minimum royalties (typically they don’t start for several years, however). If your company doesn’t generate sales as fast as planned, which frequently happens, you can find yourself disgorging cash you raised from investors to pay the university for the privilege of maintaining the license. This can become a real problem for some companies, and I encourage you to pay careful attention to it.
The universities typically also want you to repay them for the dollars they have spent to date on the patents. You will be paying the patent costs on into the future if you have an exclusive license. Yes, the universities get reimbursed for all of their sunk costs, and they get equity in your company and they get a portion of your income stream through royalties. This is why its important to make sure your license gets negotiated properly and fairly otherwise you may find that investors (particularly venture capital firms) may not fund you just because you have a lousy license agreement.
Another clause to insist upon is the right to assign your license. This means that if your company gets acquired, does the acquiring company automatically get your license or do they need to negotiate a new license with the university? It doesn’t take much imagination to see how this clause could become a stumbling block if you’re trying to sell your company.
Rights to sublicense
When the university grants you a license to practice the technology it does not automatically grant you the right to permit others (through a sublicense) to practice the technology. Depending on your business model, this may be a clause you will need. The university will insist on sharing in the revenue stream you get from the sublicensees, and their cut will be higher than when you are selling the final product yourself.
The university most definitely wants you to succeed. When you do, their equity will have value and they will have a royalty stream not to mention bragging rights at having spawned a successful startup. But to protect their interests they will also make sure you are making progress. If you fail to build the business, or do nothing, you can expect them to take back the license (this is not as much of a big deal with non-exclusive licenses). Like the other major clauses in a license agreement, you will want to exercise some care in making sure your milestones get crafted properly. A common diligence milestone is the raising of external financing (if your business requires capital).
Some universities have standard agreements and they are very transparent in setting their expectations at the beginning. Others are more obtuse. You will want to spend some time talking to the licensing office as well as previous licensees to get a sense for what their process looks like and how long it will take. Stories abound of licensing negotiations that take a year. In my opinion, you should be able to get it done in 60 days but this is a goal and it certainly doesn’t happen every time. In fact it rarely happens.
There are many other provisions in a license agreement. For example, what happens if someone infringes on the patents? Who leads the prosecution? As importantly, who pays for the prosecution? I’ve just scratched the surface here.
Words of wisdom
If you are forming a company around university technology, chances are high that the terms and conditions of your license agreement will have an immense impact on the ultimate valuation of your company. Getting this right is imperative. And since universities almost always have the upper hand in terms of experience and knowledge of other transactions, it behooves you to get good counsel to make sure your agreement is a good one. Most signfiicantly, the things you should insist upon in your agreement are a function of your business model, whether you’ll be taking outside money and ulitimately how your investors will exit the business. You should have a good idea of all of these points before starting. Most significantly, all of the items in a license (royalty rates, amount of equity, etc.) are strongly correlated to the amount of exclusivity you have.
Despite what I’ve shared, I haven’t given you any indication of what the specific deal terms should be. There is no one-size-fits-all rule of thumb to guide you, but you will want to make sure you get good counsel and talk to people who have seen many license agreements, like investors, before finalizing anything.
Many outstanding companies have gotten formed by licensing university technologies, but for the person doing it for the first time, this is not the area where you want to learn on the job.
This is an expansive topic and although I’ve touched upon the major issues, this is a career for some people. If you want me to a deeper dive on some aspects of this, or if I’ve forgotten anything, please let me know.
- New Standard Licensing Agreement Expedites University Startups, According to Kauffman Foundation Paper (kauffman.org)
- Rambus Rises After Reaching Licensing Agreement With Broadcom (businessweek.com)
- Academic Inventions Generate More Income than Government Ones (smallbiztrends.com)
- Timing is right for technology transfers, DOE official says (knoxnews.com)
- 5 Tips for Venture Investing in University Inventions (techentrepreneurship.com)