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University-Industry Engagement Advisor

Start-up board positions must be filled carefully and used appropriately

By Jesse Schwartz
Published: November 17th, 2021

An in-depth article on the proper use of university board seats for faculty start-ups appears in the November issue of Technology Transfer Tactics. To subscribe access the complete article, or for further subscription details, click here.

University leaders have long debated whether it is a good idea to have representation on the board of faculty start-up companies, but for those that favor taking a seat, there are still questions about how to structure that position. Some may want the board seat to be a full voting member, while others may go with an observer seat in which the person does not actively participate.

There are pros and cons to either position, as well as considerations for legal exposure and fiduciary obligations. The most important factor to consider, some say, is how to choose the right person for whichever type of board position you take.

The issue of how to structure a board seat was posed to AUTM members recently by Robin Rasor, MS, CLP, RTTP, associate vice president for translation and commercialization at Duke University. In an informal survey, she received responses from 19 universities, including two outside of the U.S. Including Duke in the numbers, 10 of the schools are private.

Rasor found that 35% take board seats sometimes or all the time, and 60% take observer rights sometimes or all of the time. Most board seats are filled by someone from the licensing office, but others used the CIO or a representative from a venture group with ties to the university.

Universities that prefer observer rights usually retain those until the equity holding is less than 4%, Rasor says. Some use a cutoff of a certain number of years or the completion of Series A as the termination point.

The goal behind having the board seat can dictate how it is structured, Rasor says. If the university wants to monitor progress by the company but also to provide help if needed, it might take observer status. A program that wants to more closely monitor and actively protect the university’s investment and equity value may opt for a full board seat, she explains.

“It’s fairly rare for the tech transfer office to take board of director seats, and one of the main reasons is the question of insurance and fiduciary responsibility,” she says. However, she adds, “I did have a few universities that said they take board of director seats because there is insurance that protects them in that role, whereas any other position wouldn’t have insurance. There is the liability aspect and the conflict question to consider.”

The board observer status was reported more commonly, though there was no apparent consistency in who takes these positions to watch out for the university’s interests, Rasor says. Some suggested an executive-in-residence or mentor. Most did indicate that they don’t intend for such a position to be permanent, she notes.

“By the time our [shares are] diluted down to nothing or they’re in Series A or B funding, hopefully they’re better off with more professional management. They don’t need as much help, and we don’t need to be watching over them as much,” Rasor says.

The Duke TTO has been struggling with how to handle board participation, partly because they spin off about 10 start-ups a year and have hundreds of active companies.

“Who has the time to listen in on all these board meetings? It becomes a time sink and struggle to decide where you put your focus,” Rasor says. “We’ve had some vibrant debates in the office, because for a number of years we routinely put board observer rights in our licenses. But we didn’t do a very good job of tracking and making sure we were getting invites, so we had the rights but weren’t pursuing the majority of them.”

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