Universities own the IP that arises from employees and students. However, the inventor who came up with the idea can negotiate to license permission to start a business using their invention. The negotiations typically involve the university having some control over the business and compensation in exchange for granting the license for your business to use the IP, as described below.
University researchers and students who want to commercialize their research interact with the university via an office often called the University Technology Transfer Office, or TTO. TTOs support potential entrepreneurs and the formation of startups through services, training, and mentoring. They help in finding funding, securing research space, creating a leadership team, and finding other resources. Regarding the business, they help with patent registration, licensing agreements, consulting contracts, and obtaining funding for proof of concept and venture capital.
Research and other innovations developed by faculty or students at a university are the university’s intellectual property (IP). TTOs manage the university’s IP interests, so they are interested in determining if a startup is the best means of commercializing a university’s intellectual property (IP). Alternatives to startups include selling the technology to industry. For a startup, TTOs want to make sure the market justifies investment by the university. Some favorable factors include the following:
- The technology is novel.
- The business is likely to produce more IP.
- The technology has more than one market.
(Oxford Brookes, 2018)
The licensing agreement is between the university’s TTO and the business. Faculty members do not negotiate their own licensing agreement with the university as it would be a conflict of interest due to the dual relationship of also being a university employee. Similarly, they cannot seek legal counsel as faculty members if their business also has legal counsel because you cannot be represented by two legal entities.
Timing of Licensing to the University
The sooner you do it, the more IP protection you have. However, the bills will start coming, so you may have to postpone obtaining a patent until you can raise the money required.
Terms of a University Licensing Agreement
Terms include whether or not there are upfront payments, royalties on the product, equity, diligence requirements, and the scope of the license.
Final Desired Outcome
Most startup companies would like to either achieve a stock market listing through an initial public offering or an acquisition by an industry partner.
More on Terms of University Licensing Agreements
- Upfront payments – There are fewer upfront payments for startup companies, especially the more promising ones. Ideally, you want no upfront fees. However, universities often require some cash as part of the licensing agreement to minimize the risk that the business may not succeed and they will not recoup their costs. Upfront fees can be reduced by using a template license (“express license”).
- Patent fees – If the university takes title of your invention from the federal government (if they funded your invention), they must file patent applications. You have to pay the university at least some and sometimes all of the past and future costs however. You pay the fees to the university who gets the patent using outside agents. Patent costs are very expensive. If the technology is promising, a university might give you a payment plan, such as $10,000 for ten months.
- Royalties on product – Universities are required by the Bayh-Dole Act to share royalties with the inventors (Code of Federal Regulations, 2013). Royalties range from 1% to 5% depending on if it is an FDA-approved product. You may be paid when you reach milestones.
- Equity – The amount of equity the university acquires can range from around 5% to 20% depending on whether or not it is diluted. It is higher if it is diluted. For example, equity may be 10% diluted but 5% non-diluted. There may be limits. After full dilution, you may only own a small percent of the company.
- What is dilution? Dilutive vs. non-dilutive funding describes whether or not the investor in your project gets the right to some of your business equity and profits (called dilutive because your individual equity and profit is diluted by their investment) or does not get any of your equity or current or future profits (called non-dilutive because your individual equity does not get diluted by their investment). You can set aside some shares to not be diluted by a dilutive investment so that you do not lose ownership of your company.
- Diligence requirements – To ensure you are making progress, you may be obligated to achieve certain milestones, such as having a management team or business plan in place by a certain date. You may be obligated to stay in touch with the university. For example, they may require. . .
- A monthly update that describes the challenges you are having, progress made, or the reason why there hasn’t been progress.
- A certain amount of equity investments within a specified time period.
- A commercial sale by a certain date.
- FDA approval within a specified number of years.
- Exclusivity – For a successful startup, you want exclusive rights to the intellectual property, ideally worldwide. It would be difficult to raise funds without it.
- Licensed field – You want wide breadth for the license field of how you can use the IP. For example, if it’s a medical device that has multiple potential applications, you would want the license to apply to all applications.
- Licensed territory – Ideally, you would like the license to be worldwide.
- Right to sublicense – Ideally, you would be able to sublicense the invention to somebody else if you wanted.
- Post-licensing – Interactions continue after signing a licensing agreement. Communications continue, and there may be renegotiation.
Resources on University Licenses
Manbachi A, Kreamer-Tonin K, Walch P, et al. Starting a Medical Technology Venture as a Young Academic Innovator or Student Entrepreneur. Ann Biomed Eng. January 1, 2018;46(1):1–13. doi:10.1007/s10439-017-1938-x.
Marcus J. Think universities are making lots of money from inventions? Think again. The Hechinger Report. January 17, 2020.