As this playbook is geared towards the first-time, scientist founder, there’s a strong chance readers will be spinning a technology out of a university or research institute. To do so invites questions regarding, 1) intellectual property (IP) and 2) equity/role in the startup company.
Let’s tackle the IP issues first. IP includes trade secrets and unique know-how, patents, copyrights, etc. In biotech, patents are by far the dominant IP that matters most from a business perspective. Patents do not grant permission to do anything, but they do allow you to block others from commercializing the work that you already invested time and money in for a set period of time. The concept of “pre-defined commercial exclusivity” lies at the heart of the biopharmaceutical industry, and we explain more in Section 2.4 when we introduce the Biotech Social Contract. The value of the IP that you are negotiating for will depend on how advanced the technology is and how much IP the institute holds. It’s common for universities/institutes to use Technology Readiness Levels as a metric for this.
Like most aspects of early-stage startups - value is derived from understanding how much work is left to do until the product can enter human clinical trials. And the answer will generally fall into two buckets; either a molecule/device/etc is close to its final form, and therefore is already covered under a patent, or there is still fundamental discovery work to be done that builds on the existing background IP that will generate something novel (and better). Either way, you and your investors will want an unrestricted and exclusive license to the IP that the University holds, and you will deal with an Office of Technology License (OTL) or Innovation Office to obtain it.
Like most aspects of early-stage startups - value is derived from understanding how much work is left to do until the product can enter human clinical trials. And the answer will generally fall into two buckets; either a molecule/device/etc is close to its final form, and therefore is already covered under a patent, or there is still fundamental discovery work to be done that builds on the existing background IP that will generate something novel (and better). Either way, you and your investors will want an unrestricted and exclusive license to the IP that the University holds, and you will deal with an Office of Technology License (OTL) or Innovation Office to obtain it.
Global access considerations with licensing: MCI is committed to ensuring novel contraceptive products are available for everyone, in all markets around the world. Downstream license deals that carve out regional markets with commercial partners/SMOs/nonprofits etc. can be a powerful way to ensure that products are launched globally. When you are initially obtaining any necessary background IP for your startup, we recommend keeping the terms as simple and unrestrictive as possible. The more flexibility and freedom to operate you have in downstream business development, the more attractive your company will be to early-stage investors.
You should consult with an experienced advisor and legal counsel when navigating OTL discussions. Generally speaking, we recommend that you obtain IP licenses for cash payments, keeping royalties to a minimum, and avoid giving away equity. Royalty terms can be a sticking point for your company later, if you have agreed to a fixed amount that goes back to the university, since downstream partners will want to limit the amount of royalties that they give up to help commercialize the product. A common way around this is to negotiate that the university receives an upfront cash payment (the amount determined by how close to the final product the existing IP covers) and a percentage of any future milestone-based payments/royalties that your company negotiates for. This allows future royalty payments to be capped at an acceptable level without stacking fixed amounts from earlier obligations. In some cases even the upfront cash payment can be deferred over time (e.g., license is immediate but payment begins once x revenue is reached) - another potential option for avoiding the equity route when not much cash is available early on.
Giving up equity for IP can also be a difficult negotiating term, as it could be associated with equity expectations of the professor or principal investigator (PI) running the laboratory that discovered the IP (which may be your current or former boss!). Equity obviously doesn’t cost you money upfront, but you only have so much of it, and it is crucial that you preserve as much of it as possible when raising venture capital. Again, ask the question of how much value is added to the company moving forward. In product development (unlike in the academic world), you’ll hear it said that success is 10% down to the idea and 90% down to execution (along with all the pivoting and creativity required along the way). With that in mind, the university and PI should need to justify to the startup why they deserve to get any equity at all. If they are providing lab space for future work, serving as key advisors, or aiding the company in tangible ways then an equity stake is justified, but expectations should be reasonable. Recent data across all private company sectors should help level-set expectations for advisors. In biotech, advisors that truly roll up their sleeves and help can be worth higher equity compensation.
Giving up equity for IP can also be a difficult negotiating term, as it could be associated with equity expectations of the professor or principal investigator (PI) running the laboratory that discovered the IP (which may be your current or former boss!). Equity obviously doesn’t cost you money upfront, but you only have so much of it, and it is crucial that you preserve as much of it as possible when raising venture capital. Again, ask the question of how much value is added to the company moving forward. In product development (unlike in the academic world), you’ll hear it said that success is 10% down to the idea and 90% down to execution (along with all the pivoting and creativity required along the way). With that in mind, the university and PI should need to justify to the startup why they deserve to get any equity at all. If they are providing lab space for future work, serving as key advisors, or aiding the company in tangible ways then an equity stake is justified, but expectations should be reasonable. Recent data across all private company sectors should help level-set expectations for advisors. In biotech, advisors that truly roll up their sleeves and help can be worth higher equity compensation.
Published by Peter Walker of Carta on LinkedIn