LICENSING FROM UNIVERSITIES

This section focuses on licensing IP from a university technology licensing office (TLO). The chapter on Business Development addresses licensing arrangements between companies.

Universities are obligated by the Bayh-Dole Act to transfer technology to industry through patent licensing to permit development and commercialization of government-funded discoveries that may eventually benefit the public. However, the universities' TLOs decide who gets the right to commercialize a particular technology. The right to use a patented invention may be transferred either to a single company through an exclusive license or to multiple companies via nonexclusive licenses. When a technology has more than one application (e.g. an antibiotic with human and veterinary use), a company may acquire exclusive rights to one or multiple markets through a field-limited license.

Companies bid for licenses and, when demand is low, universities may ask for a license fee that merely recovers the cost of filing the patent. When patents are valuable, the TLO may negotiate complex and expensive agreements involving up-front cash payments, milestone payments contingent upon additional development of the licensed technology, and royalties as a percentage of product sales. TLOs may be flexible in allowing a company to pay more up-front and less in royalties (front-loaded license) or less up-front with some milestones and larger royalties (back-loaded license). The TLO may even accept or demand equity in the company. The university considers both the value of the license agreement and the likelihood that the company will be able to meet all the milestones and generate sales. If only the inventor is qualified to shepherd the invention through development, then doing a deal with the inventor's startup may be a better option than doing a deal with an established company with which the inventor will not be involved.

LICENSING TO STARTUPS: UNIVERSITY ATTITUDES AND POLICIES

TLOs have different policies and attitudes on licensing technology to startups versus established companies. Not all TLOs have the experience or desire to work with a startup. A licensing office which has mostly worked with established companies in exchange for up-front payments may not feel comfortable structuring a back-loaded license with milestones and equity. An inexperienced TLO may over-value a technology and try to extract an unreasonable price, possibly making the venture unattractive to the entrepreneur and investors. In such cases, talk to people at other institutions or companies to assess licensing terms for comparable technologies and try to convince your TLO to agree to similar terms.

Some TLOs do not mind startup deals or are even proactive in helping their research investigators with the startup process. Boston University, for example, has worked with investigators to write a business plan, put together a management team, and secure financing. Some universities even have their own venture funds (e.g. BU and Vanderbilt) and/or may incubate startups in university-run facilities that offer access to shared equipment.

Before you invest time and energy into forming a company, figure out what your TLO's attitude is regarding startups and whether it will even consider exclusively licensing the technology to a startup. The TLO will most likely tell you that they are open to the idea but first want to see a written proposal or business plan. Harvard University, for example, has a policy that requires the TLO to shop a technology around to establish its fair market value before giving an option (see below) to a startup.

With few exceptions, you will not be able to attract investors without exclusive rights or an option to develop the technology into a product addressing with a significant market. If the TLO will not consider such an arrangement, your chances of success are slim.

GETTING AN OPTION

If the technology licensing office is open-minded about granting an exclusive license to a startup, the next step is to obtain an option to exclusively license the patent from the university. If you have a 6-month option to license the technology for $50,000 and 4% royalty, then you have 6 months to decide whether you actually want to sign a contract on these terms. During these 6 months, you can try to form the company, raise money, find laboratory space, and recruit a management team. Having the option allows you to assure potential investors that the university will actually grant the startup an exclusive license on the specified terms. It also assures you that the university will not license the technology to another company while you are trying to form the startup and raise money.

Conveniently, there is no obligation to exercise the option in case you fail to start the company or chose to focus on a different technology. Because the university risks wasting time if you do not exercise the option, you may be asked to pay for the option as a token of your seriousness. This payment may only be a few thousand dollars. Not all universities grant options with prespecified terms and not all of them charge for options, so you should get to know your TLO's way of handling such matters.

A university TLO may consider it a conflict of interest to discuss option or license terms with an employee of the university and may insist on speaking with another member of the management team or an attorney representing the startup. Unless there is experienced management, a good corporate attorney is probably the most qualified to formally discuss option and license terms with the TLO. Even if the TLO is willing to negotiate with the scientific founders directly, be aware that mistakes in license agreements have legal implications best appreciated by an attorney.

BALLPARK LICENSING TERMS

Licenses are very case-specific and terms may vary substantially from the numbers mentioned here. A typical licensing agreement may involve <5% equity with anti-dilution protection through a reasonable level of funding. For example, the TLO may stipulate that it must own 5% of the company at the point when the company has $2M of financing, following which the TLO's stake will be subject to dilution by additional financing (see Equity section for an explanation of dilution). Furthermore, the TLO may demand up-front payment, possibly deferrable, of $25K-$100K (exceptional technologies can command far more) in addition to incurred patent fees (usually $3K - $15K), and annual maintenance fees of $25K - $50K.

Royalties tend to vary according to the type of product the startup will be commercializing. If the licensed patent is only peripheral to the product, the royalty may be ~0.5% of sales. If the patent covers the product itself, chemical composition of a drug candidate, the royalty may be ~5%. If the company will sell a medical diagnostic, the royalty will usually be <5%. A common rule-of-thumb TLOs try to use to estimate royalties is that the university should receive about 25% of the profits. In the simplest of cases, if the profit margin for a product is 20% of sales, then the TLO will demand 5% of sales.

A company will often have to license multiple patents before it can market a product, resulting in stacking of royalty obligations that can significantly cut into a company's profit margin. To offset the effects of royalty stacking, a university license may allow up to a 50% reduction of its royalty if the company negotiates additional royalty-bearing licenses.