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Saturday, April 9, 2011

Don’t Forget You May Have a Partner(s)

In case you hoped to settle into the NewCo alone and start to work now, sorry to burst your bubble!  You have developed a few partners along the way and you will continuously need to keep them in mind as you progress.  The NewCo which was just formed is likely a C-Corp, S-Corp, LLC, LLP or some other configuration.  The NewCo may have just completed acquisition of the necessary IP rights all of the diligence on the technology and the IP is completed.  You can get started but you might have forgotten a thing or two in the process.  You need to develop a few relationships or at least enhance the ones you just made.  You should have or soon will have a Board of Directors and hopefully you have a start on the trusted advisors I mentioned.  Did you remember the Inventor and the licensing Institution?  

Most inventors in Universities work off of Grants from the Government.  These scientists make their living by conducting research and writing papers for publication. Yes they also teach, but publications and grant funding are the leading criteria for them getting promotions and tenure.  They file for patents, but sometimes they are not interested in the business aspects at all; they are encouraged to file for patents by the Technology Transfer Office and the University.  Often after the patent is filed, the scientist is off on some other project that is grant funded.  So, you may not get much inventor support for your new technology.  This is a common scenario which I have encountered many times.

Most institutions have some sort of sharing arrangement with the inventors.  When the university does the licensing deal, the arrangements are that the inventors shares in the proceeds received by the university.  This includes any cash from milestones and royalties and any equity.  In addition, you may have added arrangements with the university for some research to be done.  This may even include an arrangement with the laboratory of the inventor. If your agreement provided equity to the university, the inventor get some and they are now shareholders as well.

Having a patent from an institution is great, but often the technology is very early in the development stage and not ready for primetime.  This makes additional developmental research essential for pursuing funding or partnering opportunities.  If the inventor is not working on the technology and you have no money, what next?  Many early startups make business arrangements with the inventors via the university to have continued research on the company projects; i.e., the inventor remains at the university and does work on a company sponsored grant or a paid for research project.  Unfortunately for NewCo., this means the University owns rights to new inventions and not the company.  Keep in mind that when you finalized your initial license, you negotiated for the IP that was available at the time; many institutions will pre-license  future inventions, but a few will.  Now you can expect to have continuing license discussions to get the new inventions coming from the research you are paying the university to conduct.  

 A second consideration is that most scientists have a strong attachment to their technology; i.e., “it is their baby.”  Depending on the business or personal relationships you may have with the inventor, this can result in conflict where business takes precedence over the science.  More experienced entrepreneurs know to look out for this at the start and plan appropriately.  In any regard, you have three issues you may have to consider: 1) the inventor may be doing research and you continually will be licensing new inventions required for NewCo, 2) inventors have strong attachments to the science and need extra care in moving forward with business issues that may not fit with the science, and 3) it is possible that once you license the technology you will not have any science support until you hire researchers in the company or contract it out. 

I wanted to go through these thoughts with you as I have run into countless issues relating the institutions and the inventors in my prior experiences.  These include; adverse discussions, arguments, legal actions, finding out new technology had been licensed to a different company, attempts to take the technology back, trying to re-negotiate the deal to get something better, and many other things.  You really need to remember that you must manage expectations and relationship with the scientific inventor and with the university. You may need their continuing help or concessions to get a partnering deal done; the help will ultimately cost you more, either in money or percentage ownership of the NewCo.  One or both parties may even be participating as a Board of Director meaning they are your boss also.  So do not forget, you have multiple relationships to manage and sometimes the parties do not agree.  Expect to have continual discussions and day to day negotiations!  Keep your temper, remain business like in all discussions, make your decisions based on business and you will eventually get through everything OK.

 Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon