Navigating University Technology Licensing for Startups: Key Considerations | Orrick, Herrington & Sutcliffe LLP

Starting a business by licensing technology from a university is a complex process, bringing with it unique challenges and opportunities. Here are the most important points founders should consider when licensing university technologies.

Cooperation with the University Technology Licensing Office

The first step for any founder interested in university technology licensing is to establish open and consistent communication with the university’s technology licensing office. Thanks to this, the university is aware of the founder’s intentions, which prevents the technology from being licensed to another person.

Anticipate the financial components of licensing

Licensing university technology involves negotiating various financial elements, including licensing fees, upfront payments, and milestone payments. These terms typically vary by industry.

• Milestone and royalty payments will likely vary depending on whether the technology relates to a medical device, pharmaceutical product, software, or other products.
• It may be helpful for a proposed university technology licensee to provide market context for the proposed product. Sharing information about a potential sale may impact the type and amount of payments a university can expect to receive.

In the case of exclusive licenses, founders should expect to be reimbursed for patent expenses to the university. Founders should factor this into their startup budget.

In the event of an acquisition of a licensed company, universities may require transfer fees in addition to equity capital. Minimizing these fees can make your company more attractive to potential buyers and investors.

Equality towards universities

Universities are increasingly demanding equity in the companies to which they license technology, usually in the form of common stock. Universities sometimes also seek dilution protection, which means they receive more shares to maintain their percentage of ownership as the company raises additional funds. This dilution protection is different from the price-based protection that investors typically receive, so it is critical to understand the impact of dilution protection on founder equity ownership. Universities can also apply for the right to participate in future funding rounds.

Participation in the Management Board and investor rights

Although membership on university boards is rare, universities may sometimes request observer rights on boards, especially in the early stages of company development. This is often unobjectionable, especially in the case of a built-in provision to terminate observer rights in the university council, although some founders may have doubts.

Royalties and Royalties Regulations

Given the early stage of development of most university technologies, patent portfolios and the landscape may change over time. To protect their interests, founders should include a royalty pooling provision in the agreement. This allows the company to reduce its royalty payments to the university if it also has to pay royalties to other parties. This will ensure that if you need to license additional technologies from other parties, your overall royalty burden will be manageable.

Diligence and milestones

Universities often require diligence milestones related to the development of products using licensed technology. These milestones ensure that the technology is advancing at a reasonable pace. However, universities are usually more flexible than private entities and generally accept reasonable time frames. When negotiating these milestones, founders should prepare for worst-case scenarios, as universities understand that technical difficulties may arise.

Sublicense rights and sublicense fees

Founders should provide themselves with the flexibility to sublicense the technology to other companies while meeting the university’s approval and reporting requirements. Universities also typically ask for a cut of any revenue the company makes from sublicensing the technology. It is important to create reserves carefully to exclude certain types of payments, such as reimbursement of expenses and purchases of equity. To avoid excessive financial obligations, it is also important to exclude certain sublicensees, e.g. distributors and wholesalers, from sublicense fees.

Considerations regarding expertise

Know-how refers to the technical knowledge related to the licensed technology. This can be a complex aspect of licensing agreements. Universities often try to include know-how in the contract, ensuring that they receive royalties even if patents are not issued or applied for in some jurisdictions. Defining what exactly constitutes know-how can be a challenge. In some cases, founders may find it beneficial to exclude it from the contract.

Application

Licensing technology from a university to start a business involves dealing with a number of complex legal and financial issues. By understanding the key issues, founders can better prepare for successful negotiations and long-term success. For those embarking on this journey, working closely with experienced legal counsel is essential to ensure that all aspects of the contract are aligned with the company’s strategic goals.