| You want to start a company so you can commercialize a
technology, get rich, be on the cover of the Rolling Stone or Forbes,
drive fast cars, and change the world. But before you do, you need
to obtain the legal right to make, use and sell the technology..a
license.
Your start-up company must meet the needs of the market by providing a
product or service with distinct advantages over the competition, i.e.,
cheaper, better, and faster. Since the technological advantage of a
startup's product is usually the basis for entry into the market, your
company may want to have exclusive control or rights to protect your
competitive position. In addition, exclusive control is usually necessary
to attract investors. When technology is licensed to meet this need, the
agreement is called an exclusive license.
Licenses can also be non-exclusive, allowing multiple companies to
utilize the technology. The non-exclusive nature permits wider
dissemination of the technology and reduces risk, since the technology isn't
tied up with one company. Since several companies are licensing the
technology, often in different fields of use, the licensing requirements
for a non-exclusive may be less stringent than for an exclusive license.
Factors which can affect the decision to license a technology
exclusively or non-exclusively include:
- The nature of the technology
- The business interest generated by the technology
- The length of time the technology has been patented
- Other competing technologies
- The capital investment required
- The "window of opportunity" for potential products
- The characteristics of the market such as: Fragmentation,
Distributions, Point of Entry, Market Size, Dominant Players, etc.
- The capabilities and track records of the companies
Some of the Basic Criteria for evaluating Licensees
include:
- A realistic business plan with "hard" numbers for
marketing the invention.
- Proven marketing skills in commercializing products or services in
the field of the invention.
- A long term plan for developing and marketing the product in defined
technical and geographic areas.
- Experience in the field of the invention or with colleagues of the
inventor, or with the inventor.
- An in-house champion who has a personal career interest in seeing
the invention through from initial prototype to the introduction of
the final product to marketing the product aggressively.
- The need for additional research funding to further develop the
invention in-house or to fund additional research in the laboratory of
the principal inventor.
- Availability of consulting contracts for UM researchers.
- Desire for a long term relationship with the sponsoring academic
institution.
Most start ups do not meet all of these criteria. For
example, "hard numbers" for marketing may be difficult if not
impossible to obtain for cutting edge or revolutionary technologies. Many
start up founders will be technically capable but may lack marketing,
management, and financial skills and experience. Nearly every start up
will need to obtain additional funding to further develop and
commercialize the technology.
The following is a guide intended to provide a framework
for you in preparing to start a company and negotiate a license agreement
with UM. Highlighted terms indicate links to supporting information. This
is not a legal document or University policy. It is only a guide. Please
note that since every licensing deal is a negotiation, each agreement may
include some features unique to that particular deal.
Check list for Start Up Companies
Here are some things you'll need as part of negotiating
a license.
Business Plan
A business plan covers the market, the technology, key
personnel, and financial and sales projections. You will need a business
plan if you intend to raise money from outside investors, and we need it
to negotiate a reasonable deal and complete due diligence. In you have
venture investors, they will complete a very through due diligence process
which will include checking that you have clear rights to the ownership or
use of the technology. The process of developing a business plan requires
that the entrepreneur address all the facets of running their company. For
this reason, we encourage you to develop your own business plan. There are
templates for business plans on the Internet.
Due Diligence Milestones
Due diligence milestones are specific, time dependent
activities that are logical steps in the development and commercialization
of the technology. These milestones should be linked to your business
plan, and as a measure of progress, provide decision points for investors.
We need milestones in the license agreement as a measure of the company's
progress in commercializing the technology. Failure to meet milestones is
one basis for terminating the license agreement. Some examples of
milestones are as follows:
- Finish prototype development
- Finish pre-production prototype
- Beta test prototype with potential customers
- Write and submit SBIR/STTR/ATP etc.
- Present product at trade shows and conferences
- Field test at customer sites
- Achieve sales of X units by time Y
- Projected sales for 3-5 years (dollars and units)
Conflict of Interest (University Employees)
Starting and running a company is a large undertaking.
Normally, key personnel in a start up can expect to work 70-80 hours per
week for the first two to three years. Thus the plan should address how
you will meet the time commitments of your University position and your
start up company. Here is a brief list of some of the issues that need to
be addressed:
- University Intellectual Property
- Conflict of Commitment and Conflict of Interest Issues
- Use of University Resources and Facilities
- Use of Students/Post docs
- Other University Research
- Management Oversight Committee
- Sample Conflict of Interest/Commitment Management Plan
- Sample letter to student/Post Doc regarding involvement in faculty
start up
The primary mission of the University is to educate and
perform research. Thus, use of University facilities for the purposes of a
private company must not interfere with this mission and must also be
defined in a contractual agreement between the company and the
University. This contractual agreement will define the space to be
used, the equipment to be used, the period of time, and the cost to access
the space. Approval to use University space must first be obtained from
the Department Chair and the College. Final approval will be provide by
the Office of Research and Legal. Other issues to be addressed include
liability and approval to operate equipment.
To review the University's Conflict of Interest Policy, please go to:
https://www.umsystem.edu/ums/departments/hr/manual/507.shtml
If you have any questions regarding a potential conflict of interest, contact either your campus technology transfer office or research office.
The License Deal
If you want to license University Intellectual Property
to start your company here are the basic deal terms that need to be
addressed:
- Type of License - exclusive or non-exclusive: Usually start-up
companies prefer an exclusive license since this provides them with
some market edge.
- Fields of Use - Some technologies have application is several
technical fields of use. Licenses may be negotiate exclusively by
field of use.
- Up Front Fee - Most licenses require some sort of up front cash
payment.
- Repayment of Patent Costs - The University usually requires
reimbursement for all existing and future patent costs and fees for an
exclusive license.
- Royalty Rate Structure - Royalty rates can vary considerably from
industry to industry. Royalty is usually calculated as a percentage of
gross sales of patented products less certain allowable costs which
are defined.
- Annual Minimum Royalty - This is the minimum amount which must be
paid whether or not the licensee is making sales.
- Equity - Some start ups may want to offer an equity position or a
combination of equity and royalty. When equity is proposed, Stock
Restriction and Registration Rights Agreement and the Stock Purchase
Agreement.
- Sublicensing Rights
- Diligence Milestones
A sample licensing term sheet can be used to
format the basis terms.
In general, the requirements for an exclusive license
will be higher than for a non-exclusive since the technology is
"locked up" with one company.
Other Licensing Items to consider:
Government Rights: If an intention was supported
by Government sponsored funding, the Government retains certain rights
that carry through in the license and sublicense. Specifically, if the
Inventions covered by Licensed Patents were developed with partial Federal
sponsorship, UM must grant the U.S. Government a non-exclusive,
non-transferable, paid-up license to practice or have practiced,
for or on behalf of the United States the subject invention throughout the
world. In most cases, the Government will not be a competitor to the
private sector. However, there are exceptions, in particular for
technologies related to the National defense.
University Rights: The University will retain
rights to use the technology for research and educational purposes.
Sublicensing Rights: A license is an agreement
between the entity who owns the intellectual property and another entity
(usually a company). In some instances, companies who have licensed a
technology may wish to license those rights to another company. This
second tier license is called a sublicense.
- If you wish to sublicense, UM usually requires approval
- Some license terms in your agreement with UM must "pass
through" to the sub licensee. One example, is Government rights.
- If UM terminates your exclusive license due to default of terms in
the license, it does not automatically revert to a non-exclusive
license
- UM will require sharing of Sublicense up front fees and royalties.
Assignment: Assignment is the transfer of the
license agreement and its obligations to a third party. UM does not permit
assignment of a license since this could lead to "brokering". In
addition, we want to know with whom we are dealing.
Payment of Patent Costs and Maintenance Fees: The
cost to file a U.S. patent, including fees and legal expenses, usually
ranges from $10,000-20,000 dollars. Filing in foreign countries can be
significantly more expensive. Once a patent is issued, there are period
maintenance fees to be paid. Usually the licensee is required to pay for
patent costs and continuing maintenance fees, particularly for exclusive
licenses. |
