Anyone who has ever received training in negotiation has heard that it is advisable to take the time to learn about your negotiating partner, to understand his or her perspective, and to take his or her incentives and obligations into account when trying to find a mutually acceptable agreement. This is particularly true when dealing with research universities because their motivations, constraints, and rewards are frequently very different from those encountered when dealing with for-profit businesses. This posting is intended to serve as an introduction to the motivations and constraints one typically encounters when negotiating with universities and hopefully will lead to better and faster deal making.
In the thirty years since the passage of the Bayh Dole Act universities have broadened their mission to include transferring the technologies developed on their campuses out into broader society. There are numerous reasons why they do this: sometimes to serve as the final stage of research, taking discoveries out of the lab and into common use; sometimes to provide an institutionally-approved outlet for entrepreneurial faculty, staff, and students; sometimes to help with economic development; and sometimes to make money (although if revenue generation is the ultimate criterion for success then most universities are spectacular failures). Knowing the specific goals of the university from which an entrepreneur wishes to license a technology enables the negotiators to craft a better deal for all those concerned.
When an entrepreneur knows the university’s goals then he or she is in a better position to offer appropriate consideration for a license. For instance, if one of the university’s goals is local economic development then an agreement that the entrepreneur’s company will not locate more than, say, five miles from the university for the first ten years that the license is in effect may be a term which the university would want to include and which may cost the licensee very little. If the university sees spin-out companies as potential sources of research funding, an agreement that the university would be the company’s preferred partner for any SBIR, STTR, or other types of grants could be mutually beneficial. If the university sees spin-out companies as a source of employment for alumni, then including a university researcher who has direct experience developing the technology being licensed as a founder of the company could make a substantial impact on the terms of the license – many universities (such as UNC Chapel Hill, Carnegie Mellon, and many others) have special terms that are available for start-ups formed by “university personnel” – often including soon-to-be graduates and post-docs – that are not made available to other companies. An entrepreneur may well find that if he or she is willing to include terms such as those described in this paragraph in a licensing agreement then the university will be willing to decrease the royalties and/or equity stake that it will receive under the license.
Virtually every license agreement involves some transfer of money and perhaps equity to the university, but a well prepared negotiator who understands the other side’s perspective can frequently find ways to adjust the size of those transfers to a level that all the parties will find acceptable. Savvy universities have learned that bleeding cash from new companies is not in the best interest of anyone, so requiring a start-up company to pay large up-front fees is counterproductive. However the university does need to ensure that it covers its costs, so at a bare minimum the start-up should be prepared to repay the university all costs incurred for patent and other IP protection on the technologies being licensed and to pay all future costs incurred for that IP protection – after all, it is the company, not the university, that receives most of the benefits from IP rights. In most cases some additional payments will be required to cover the technology transfer office’s expenses and to demonstrate that the new company has finances available to commercialize the licensed technology. In many cases the university will want to have a mix of both royalties on sales of products embodying its technology and some equity stake in the company; providing realistic projections of sales and of company valuation at various stages of its growth will help both sides craft a realistic and appropriate mix of royalties and equity.
Universities have an obligation to ensure that their technology benefits society, so due diligence provisions should be a part of every license. Depending on the type of technology being licensed these provisions can take the form of minimum annual royalty payments which act as a prod to make the licensee either develop a product or terminate the license, “success payments” to the universities when certain milestones are reached (this is quite common for biomedical technologies, especially as products move closer to regulatory approval), fundraising goals, and achievement of a certain level of sales by a specified date along with payment of royalties to the university based on those sales. Failure to meet these obligations may result in termination of the license, but if the licensee keeps the university informed of its efforts to move forward, advance notice if it appears that a milestone may not be met on time, and the reason for delays in meeting milestones then the university will frequently be willing to adjust the terms of the license or grant a waiver for failure to meet specific license terms.
Universities generally try to be businesslike in their licensing agreements, but the fact is that research universities are not for-profit businesses and for a variety of reasons they cannot agree to terms that are typically included in agreements between businesses. For example, virtually all companies understand that doing business involves taking risks and so companies keep reserves of money to cover the cost of risks that go bad. Universities receive money to perform research and educate students; they simply do not have funds available to cover risks that are typically taken by business ventures. For this reason universities virtually never agree to indemnify licensees or provide warranties of any type.
Another term typical in agreements between businesses is that the licensor will provide the licensee with rights to improvements that the licensor may make to the licensed technology in the future. Universities do not do this for a number of reasons. First, virtually no one will fund research if another party, such as the licensee, will reap most of the benefits of that research. Second, being non-profit institutions the university can only transfer rights for fair market value and it is not possible to determine fair market value of an invention or improvement that has not yet been made. Finally, university researchers usually work independently of one another so it is fundamentally unfair to Professor X for the university to obligate rights to results that might arise in Professor X’s lab solely because a license has been granted to technology previously developed in Professor Y’s lab. If a company wants to obtain rights in future research results, its best course of action is to fund the research that might lead to those results.Although universities are not like for-profit businesses, the knowledgeable entrepreneur will find that the same advice applies when dealing with them as when dealing with companies – the better you know your negotiating partner, the better the deal you are likely to end up with. Find the motivations, goals, and constraints that the university places on the technology transfer office and you may well find that the final agreement includes more favorable terms than you initially expected.
A note from Taffy Williams:
Carl Mahler is a licensing professional with many years of experience. He graciously prepared this article to help entrepreneurs understand better the issues with licensing technology via Universities. I am grateful for his input and enlightenment. Thank you Carl!
You can follow Taffy Williams on Twitter by @twilli2861 and you can email me with questions at firstname.lastname@example.org and my company website is at http://www.ColonialTDC.com .