Tech Transfer University Reporter
Industry-Sponsored Research Management

Aligning Start-Up Equity Negotiations with University Objectives


By Debi Melillo
Published: June 9th, 2014

When your TTO commercializes a technology through an early-stage company, there are a number of different ways — and a lot of complexities — to the way that you structure both economic and management rights.  Whether you choose an equity stake or an ownership stake in the company, these terms must be negotiated and we have some strategies for getting the result that’s right for your university.

Benjamin D. Kern, Partner, Winston & Strawn LLP recently presented a highly rated distance learning program titled: Negotiating Your University’s Equity Stake in Start-Ups for Technology Transfer Tactics that not only reveals the objectives of each player in the negotiating game but  provides solid negotiating tactics as well.

However, before you dive headfirst in to a negotiation, you must first understand who you are negotiating with and what their end-objective is. So, let’s look at the different players in the ecosystem around university technology transfer:

Alignment-of-Start-up-Investments

When structuring equity rights, the start-up needs to take into consideration that the company is also going to be dealing with some sort of outside funding.  So obtaining funding and resources — and resources also includes attracting personnel, the people who are actually going to carry the start-up from point A to point B or farther.  The second goal that is worth talking about is bringing a product to market.  So a founder of a company, whether a faculty founder or someone who comes from the business world typically is interested in seeing the idea or the product that’s been developed make it into the marketplace and become a great success. 

Start-up founders are typically interested in their own professional careers, and in achievements as a CTO, or a technical founder, or a CEO of a young company, which can provide, obviously, great personal benefits to someone separate and distinct from all the other objectives.  When someone has developed what they believe is a new technology that needs to be out in the marketplace, it’s also often the case that they want some level of control over how the technology gets into the marketplace, what kind of products are developed using it, and how that product is used, because that will reflect, obviously, on the way that the technology and the founder are regarded personally.  Finally, economic returns. It’s an unavoidable topic, and it’s also a good segue into the next category of players in the ecosystem, and that’s investors.

Looking at the investor bubble, you can see that their key role is helping the company to achieve its number-one bullet point at the top: obtain funding and resources.  An investment fund or a venture capital fund typically has limited partners investors, and the primary mission of the venture capitalist is to make a good return for those investors.  Most venture capital funds, have a ten-year life and broadly speaking, most investment funds have a five-year period where they deploy the funding that they’ve raised, and then a five-year period when they harvest the proceeds from that funding.  So investors have objectives that involve not only achieving a return, but also achieving that return in a defined period of time.  Investors are also typically interested in growing exciting companies and then being part of companies that achieve prominence or great success.

The university has a much broader constituency.  If the fundamental mission of the university is to further the growth of human knowledge and to disseminate that and make the world a better place by virtue of the technology that’s discovered in the university setting, there is a much grander goal than the dollars and cents that we focused on in the overlap between start-ups and investors.  That being said, when a university licenses its technology into a start-up, it’s often the case that that objective is not as prominent as the commercial objectives of the venture.  Universities also, like investors and like individuals who start young companies benefit greatly from having visibility and from having prominence to their achievements. When a university is able to grow prominent companies, and prominent brand names, and labels, and is able to taut those, it’s great for the university’s visibility and can enhance a university’s household name.  That’s why choosing a type of equity to take in a company, figuring out how much of that equity the university should hold, and figuring out how that equity interest might change over time are all key considerations during negotiations. Based on the technology, market and funding opportunities, universities often take one of a number of different positions in the amount of control or management influence that they want to exercise. 

Just because each party is interested in getting a good return from their investment in the start-up doesn’t mean that everybody’s going to agree.  In fact, it often means the opposite. 

Look at the major categories of equity rights in the table below for a snapshot of each party’s main concerns to consider when preparing your equity negotiations.  The university perspective is a particularly interesting one, because there are elements of the university’s perspective that can be common to the perspective of a company founder.  Obviously, if a company founder is an academic and has academic objectives, there can be a lot of commonality between they (faculty company founder) want and what the university tech transfer office wants to see happen from a start-up.  It is also the case that the university is often a key portion of the efforts that go into making a company possible at all, and then university technology is absolutely fundamental to pursue a start-up. 

Implications-for-Equity-Rights

The university and the founder are often united in many ways as the first groups on the ground with a stake in the success of the venture.  And in many ways, this can lead you to the conclusion that a university’s equity position and a university’s equity rights should look very much like a founder’s equity rights and equity position.  On the other hand, investors who come in and support a business typically take a more measured approach.  Where a founder may put all of his or her eggs in a single basket in a start-up and devote all of their work and time into making the start-up successful, an investor typically has a portfolio of investments and this is only a portion of what the investor is doing.  And an investor is able to spread his or her time across a number of investments, is able to diversify risk, is able to draw from experiences in other situations that are happening concurrently or have had them before.  In all of these ways, the university bears some similarity to an investor.  It’s also the case that both investors and universities may have more limited time frames when they want to see success come out of a young company.  The university often sits somewhere on the spectrum between founder and investor, and this can make for interesting combinations of equity rights. When an investor comes in, they will often say that the university should be treated like a founder, which is shorthand for saying that the investor should have superior rights. 

Even though each player’s interests differ, and those interests directly what they seek in terms of equity interest and equity rights in the company, one common goal remains: the success of the company. Keeping that goal front and center, along with the university’s objectives is paramount to a successful negotiation.

To hear specific negotiation strategies, click here for the DVD, OnDemand Video or PDF version of the distance learning program: Negotiating Your University’s Equity Stake in Start-Ups Presented by Benjamin D. Kern, Partner, Winston & Strawn LLP. 

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Visit www.TechTransferCentral.com for more unique, practical, and advanced strategies, case studies, best practices, and expert guidance on a broad range of challenges and opportunities for technology transfer offices and professionals.

Posted under: Tech Transfer University Reporter

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