Friday Jan 21, 2011 by Micah Rosenbloom - Founding Partner, Founder Collective
Universities are TechStars on steroids. Some of the most influential companies in the US can be traced back to university roots. (e.g. HP, Sun Microsystems, Bose, etc) As I wrote in my blog entitled Trolling for Technologies (and a good beer), I don’t suggest hanging out at the student union hoping that a good technology will drop like manna from above. That said, universities are increasingly paying attention to entrepreneurship (they know who the big donors are!). Many have appointed individuals to focus on bringing an entrepreneurial vibe across the campus. For example, David Lerner (at Columbia) or John Jaquette (at Cornell) are among the many great entrepreneurial torch-bearers that can help shorten the path to identify promising researchers and technologies within a university.
Once you’ve identified a technology that you’re considering licensing from a university, here are my suggestions for the negotiation with the licensing office:
Start with the option
The delta between a lab technology and a commercial product is huge. Given that, spend the time upfront to scope out the business plan and timeline. Start by simply optioning the technology. Options are cheap and generally quick. Also, most deals require the company to re-pay previous IP expenditures by the university (which can be pricey). By taking the option, you put off that expense until you’re certain the venture is a go.
Talk to other ventures, as well as VCs, who have recently licensed technology from that particular university (and others). Track key terms – field of use, cash, equity, and royalty payments. This will give you context for what to expect and what a good/bad deal looks like. License only the IP for the fields you need.
Use the inventors and VCs … wisely
Licensing offices want to keep their faculty happy. Make sure the professor or key inventor is on board and encouraging the licensing office to get the deal done. This may be your single biggest point of leverage. The venture guys can provide a bit of leverage since they often won’t fund without the license. The bottom line is to align interests with the licensing office – they need to understand that you’re a start-up and the goal isn’t to squeeze every penny before the business is even launched.
Cash or equity – the age-old debate
There are two sides here – pre-financing equity is cheap in that it will likely be heavily diluted. In the short run, cash is the company’s air supply. On the other hand, cash can be raised but equity maxes out at 100%. I’ve tended to prefer cash deals because I’ve often found that licensing offices seek unrealistic amounts of equity. However, if your cost of capital is high and the office is asking for a reasonable equity %, you may want to consider an equity deal.
The key is to make the licensor trade off cash for equity, and vice versa. I’ve seen too many deals where entrepreneurs pay exorbitant cash, equity and royalty payments that will only hinder the company long-term, which is bad both for the university and entrepreneur.
University research is often the catalyst, but not the basis of a business. Pay accordingly.
Micah Rosenbloom is a Founder Partner of Founder Collective. This blog post, as well as additional content may be found on his blog titled Serendipitous Entrepreneurship. You can follow Micah (@micahjay1)on Twitter by clicking here.