From Science to Startup by Anil Sethi

Author:Anil Sethi
Language: eng
Format: epub
Publisher: Springer International Publishing, Cham

Incorporating additional technology options in the spin-off agreement also ensures that the technology co-founders have less motivation to walk away when the going gets tough. Remember, the technology guys are not the entrepreneurs; you are. They are far more likely to walk away in the face of uncertainty.

The spin-off agreement normally mandates what you give to the university in exchange for the licence to commercialise a technology. The options range from an up-front fee to ongoing royalty payments to equity.

An up-front payment or fixed future payments agreed upon are difficult to calculate properly since an amount that may be adequate for the university may be far too much, given the financial resources of the startup. The business model of the startup may also change resulting in the original licence not being as relevant as originally foreseen. A percentage of royalty on revenue or profits seems easy, but runs the risk of making the end solution much more expensive if the market subsequently evolves to becoming price competitive.

A percentage of equity or stock options is a reasonable alternative since it does not impact the limited funding that the startup has. However, since the startup gets diluted to that extent, a future consideration should include the first right of refusal on all new IP generated by the research in the area of focus of the startup.

For investors, it is important to know that even if the startup goes bust, they can still hold the patents for the perceived value. This conflicts with the interest of the research university since the university normally requires the patents to revert back in case of insolvency of the startup. This can and should be addressed during the formulation of the spin-off agreement.

The reason that research universities want the patent to revert back to them is because their focus is to ensure that the knowledge created in the university is used. If the patent does not revert to them, it will probably end up in the drawer of the insolvency court never to see the light of day. On the other hand, investors want the option to use the patent even if the startup goes bust.

A good compromise is to agree with the university that in case the startup goes bust, the investors will have the first right to use the patent. In such case, it may also be possible to ensure that the investors pay a certain sum, which may be shared between the university and the founders. Thus, if all else fails, the founders walk away with enough to consider starting the next thing. Going by the valuation and acquisition of patents in several large transactions by companies like Google and Apple, each patent may well be worth over USD 0.5 million. Thus, in a worst-case scenario where the only value of the startup is in the patents, you can ensure some upside for the founders if the investor walks away with this asset.

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