Tech Transfer eNews Blog

Why universities should stop making standard equity deals when licensing to start-ups

By David Schwartz
Published: August 24th, 2016

In his recent article for Entrepreneur, Case Western Reserve University professor Scott Shane questions whether universities are making the right move establishing a standard equity deal with a set percentage when licensing to start-ups.

Since startups are generally strapped for cash to begin with, it’s common for schools to offer a standard equity deal granting the license for 5% percent to 10% of the company. These deals are typically used to avoid negotiating the amount of equity separately for each deal, which can be both time-consuming and politically difficult.

By making the same deal with every start-up, however, TTOs “ignore what happens when you set a common price for things that vary in value,” writes Shane. “The problem is that some of the spinoffs are worth more than the others,” he adds. “Some are exploiting stronger patents with broader claims, targeting bigger markets that are easier to reach, with technologies that are cheaper to build, and are run by people with more entrepreneurial talent.”

While weaker start-ups may find the standard price appealing, since the university is probably over-valuing them, the stronger and more experienced companies will find it unappealing and might prefer to pay cash and royalties than be valued at less than they’re worth.

“As a result,” says Shane, “by offering a standard equity deal to spinoff companies, universities could end up investing in their weakest spinoffs and miss out owning a share of the strongest ones.”

Source: Entrepreneur

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