Tech Transfer eNews Blog

Negotiating VC terms doesn’t have to be a long, contentious affair

By Jesse Schwartz
Published: February 24th, 2021

A detailed article on new guidelines for university-VC term sheets and negotiations for life science start-ups appears in the January issue of Technology Transfer Tactics. To subscribe and access the full article, along with the complete guidelines – and gain access to more than 14 years of archived success strategies for TTOs — click here.

Venture capitalists and tech transfer programs should be closely aligned, since their goals are so complimentary, but that is not always the case when it comes to drafting agreements for life science start-ups. That process can lead to negotiations that are longer and more complicated than necessary, and it sometimes even gets testy between parties who should be eager to work cooperatively.

The result is often higher “transaction costs” stemming from legal bills, more person-hours devoted to the negotiation, and lost time getting a life-saving therapy to market. And there is a real chance of damaging an important relationship when things get too testy.

It doesn’t have to be that way, says Orin Herskowitz, executive director of Columbia Technology Ventures at Columbia University in New York City. If both parties can agree to certain stipulations about commonly accepted requirements, clauses, and definitions, the process can proceed in a much more efficient way that leaves everyone happier in the end, he says.

Herskowitz and his colleagues at Columbia worked with their counterparts at six other university tech transfer offices (MIT, Stanford, Yale, Duke, Johns Hopkins, and Penn) and VCs from six groups (Polaris, Atlas, 5AM, Venrock, RA Capital, and Osage University Partners) to develop a set of common principles that they say can guide negotiations to better outcomes.

“Recommendations for VC/TTO Term Sheet Structuring” provides an overview of the key issues in university life science start-up term sheets, addressing best practices for structuring certain sections such as equity, royalties, and milestones. It also covers some common points of friction around sublicensing, know-how royalties, and diligence.

A companion document, “Recommendations for VC/TTO Negotiation Process Improvements,” addresses how VCs and TTOs can structure the negotiation process to “avoid unnecessary friction, gain buy-in early, and avoid overly long and painful negotiations.” The recommendations are intended to help create “win-win outcomes” when VCs and TTOs negotiate, Herskowitz says.

The universities that worked together on these recommendations each do dozens of start-ups a year, so collectively they have quite a lot of experience in how to complete a successful agreement, Herskowitz notes. But they also have been through the negotiating process enough times to realize that, when working with venture capitalists, they were having the same conversations over and over again.

“Even if we had worked together and knew each other well over dozens of deals, there was almost this theatrical performance we had to go through in the negotiation — as if no one had ever raised the topic of equity before, or anti-dilution, or sublicensing,” Herskowitz explains. “We’d all seen this movie, but we were all pretending we hadn’t seen it before. Instead of just acknowledging that there is a common approach that worked for things in the past and saving our energy for things that don’t work, we were repeating the same conversation from the last time and ending up in the same place.”

On the other hand, when a TTO was working with investors that did not have the depth of experience found in large firms — relatively small VC funds or new investors — Herskowitz says the process of getting the start-up funded could be “torturously difficult.” Unlike the former scenario in which everyone knew the right answer but were dancing around it, funders without experience working with universities really did not have a sense of what is standard and commonly accepted, he says.

That meant every issue in the agreement was up for discussion, Herskowitz says, which greatly prolonged the process and delayed getting the life science inventions to market.

VCs reported that they experienced a similar problem when they worked with a university that did not have a lot of experience in start-up funding negotiations.

“The objective behind this was not just making our own lives easier by establishing some best practices around getting collaborative VC-funded start-ups off the ground, but also to make it easier for smaller universities and less experienced VC to get their deals done as well,” Herskowitz says.

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Posted under: Tech Transfer e-News

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