Tech Transfer Central
ARTICLE REPRINT
Express-style agreement brings “dramatic increase” in start-ups

CU Boulder paves the way for start-ups using ‘Licensing with EASE®’ model

This article appeared in the November 2022 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

Don't forget to sign up for Tech Transfer eNews, our free email newsletter filled with helpful tips, industry news, special reports, and key legal and regulatory updates, sent to your inbox every Wednesday!

You'll also receive info on upcoming webinars and other related products.

Since launching its Licensing with EASE® express agreement for start-up entrepreneurs in 2018, CU Boulder has seen its number of startups “increase dramatically,” according to Brynmor Rees, associate vice chancellor for research & innovation and managing director of Venture Partners.

Prior to the creation of the express agreement, what existed “was case-by-case negotiation, often going through a term sheet, looking at comparable licenses on our own and in national databases and trying to figure out what a fair deal would be,” Rees recalls. “There was a lot of posturing; they’d come in low, we’d come in high.”

Depending on who was in the negotiation, he continues, it could be quite a long process. “Licenses could take one month, or they could take six months,” Rees says. “Now it can take anywhere from a week to two months.”

The university does not require that Licensing with EASE® be used for all start-up licensing, he emphasizes. “If you want to start from scratch and negotiate [you can], but this program is much faster, simpler, easier, and better for the relationship. And it frees our staff to work with the company on other things that are just as — if not more — important.”

What drove Rees and his team to develop such an agreement? “We knew what a fair deal looked like, what an investable deal looks like, and the common terms to use,” he explains. “To go over the same process and negotiate terms over and over is not very efficient. Second, founders often don’t have training in this area; there’s a real power and education imbalance that can strain the relationship and create a feeling of inequality — and leave someone open to getting bad advice or creating conflict of interest issues. Lastly, and maybe most important, as our group started to put more research and efforts into helping founders in many other ways — i.e., creating and growing companies for the accelerator, forming teams for investment capital — spending so much time on negotiations seemed to have lower value, especially when we know what the final deal should look like and so do investors. This a shortcut.”

Rees says his team benefitted from a lot of research on what other universities were doing with express licenses for start-ups. “We looked at probably a dozen or more,” he shares. “We asked if people were actually using their sites. We also worked with a local law firm that often represents our start-ups, and probably five different VC firms, and got everyone’s feedback on what a fair and investable deal was.”

Philosophically, he continues, “we wanted to create and launch a lot of start-up companies. We knew when we started that if we wanted to increase our start-ups by five-fold, it would be overly burdensome in terms personnel time [to use traditional negotiations] and that we’d rather do five times as many start-ups and spend a little less time on deal terms than be stuck on a small number of companies that potentially do not have as a good prospect of being successful.”

And what about the contention that the university does not get deal terms that are as good with express licenses? “If that’s true, I think [the bottom line impact] is very modest,” Rees asserts. “It can be done in a way that’s startup-friendly, investable, and fair to the university.”

Advantageous terms

In order to qualify for participation in this new program, there does not necessarily have to be a university person on the founding team, notes Rees. “Essentially, you have to be licensing IP from the university into a new venture created just for that purpose,” he explains. (Complete eligibility requirements can be found here.)

The website asserts that the terms of the agreement are more than fair. It states: “Venture Partners has ensured that the financial terms are significantly more favorable than national average university-startup licenses.”

“Basically, we looked at aggregated data from over 500 start-up licenses to find the average for equity, royalties, and fees, and in every case we wanted to be under average,” Rees reports. “We were already positioning the university as offering terms at or below average, so that was not a big concession. I think we are significantly below on equity and more modestly on royalties, and significantly below on fees and milestone payments.”

The website also notes that start-up accelerator Y Combinator “has advised university spinout founders to seek a royalty rate of <5% and 3-5% equity position to the university. Our license terms are considerably more favorable to the start-up than even these founder guidelines.”

Bioscience, physical science, and engineering start-ups using the Licensing with EASE® express agreement have three options — aligned, blended, or equity-free. There are no upfront fees for any option, and each includes an annual fee of $10,000. Equity, anti-dilution protection, sales royalty, and sublicense royalty vary with each option (See Figure 1.) For software startups, there are no upfront fees or royalties; the other terms vary between copyrights and patents (See Figure 2.)

The three different options essentially trade higher equity stakes for the university for lower royalty rates and better anti-dilution terms for the company. The highest university equity level, at 10% in the “aligned” option, features a 0.5% royalty rate that only applies after the first $20 million in sales, as well as $5 million in antidilution protection. No royalties are charged for sublicensing income. With the blended option, equity is reduced to 3%, the royalty rate increases to 2%, and antidilution is capped at $3 million, with a 15% sublicence royalty rate. And in the Equity-Free option, the royalty rate is set at 3% and at 20% for sublicensing income.

Software licenses under the express agreement are even simpler — a straight 2% equity share for copyright, or 5% for patented technologies, with zero royalties for both. Antidilution is set a $1 million and $2 million, respectively.

“If someone does a software license those terms are totally different than if they do another type of technology; that’s again something we thought was important,” says Rees. “The software startup community is very aware if the university is trying to model those agreements after a typical biotech or hardware structure. We agree with them, so it’s much less onerous for the company.”

New wrinkles

The other aspect of the agreement that sets it apart, says Rees, is that it is risk-free for equity for one year. “If your start-up decides within the first year that it wants to pivot and does not need the CU Boulder technology anymore, simply walk away — the university takes no equity,” states the website.

“I think this is unique; I have not seen it anywhere else,” says Rees. “It came during the process of working through proposed terms with VCs. It was suggested by one of our investor partners, who had observed that they quite often get their license and wish to pivot, but the equity terms tend to be an anchor. We figured that would be a good faith term to include — a goodwill effort with our founders to avoid us ending up with compensation we do not deserve. Nobody has ever invoked it, though.”

In an interesting additional twist, CU Boulder decided to trademark its licensing agreement model. “There were a number of universities and institutions that reached out to know more about our program and potentially model theirs after it,” Rees explains. “We loved that — that’s great; anyone can use the terms on our website as they like. But we did not want anyone using that name and changing the philosophy and terms. If someone wants to use the name, we can license it to them; we’re not looking to make money from other universities, but we wanted to make sure they use terms and conditions consistent with what we want.”

Jump in number of start-ups

Since the launch of the program the number of start-up launches has gone from an annual average of four to five up to 15-20, says Rees. “It’s most likely due to a variety of factors, but Licensing with EASE® has definitely helped,” he says. “There is less friction in negotiation, and almost all start-ups have used it.”

A small number of start-ups did not want to use the express agreement, he adds, but “sometimes there are good reasons.” For example, he offers, “our aligned model is almost totally equity, but a royalty becomes active after $20 million in sales — a very modest half percent. So essentially, it’s all equity. We had a company ask, ‘What if we want to make it truly all equity?’ and we were able to put an agreement in place to that effect. But over 90% of the start-ups use [Licensing with EASE®],” Rees states.

Is there any reason for other TTOs not to adopt this model? “I think if a university is not doing a high volume of start-up licenses it might not be as important,” says Rees. “Or, if a university has either a history or conviction that license to license there is a lot of variation and uniqueness” it might be a less attractive model, he adds. “For example, if they license both preclinical stage therapeutic assets and clinical stage assets, they may not appropriately capture those on similar terms because there’s such a discrepancy of value.”

The bottom line, says Rees, is that this model “shows investors, founders, and entrepreneurs that the university is doing what it can to simplify and streamline the process and support its founders.”

Contact Rees at 303-735-4474 or brynmor.rees@colorado.edu.


About Technology Transfer Tactics monthly newsletter...

Find more articles like this one when you subscribe to Technology Transfer Tactics monthly newsletter. Sign up today and get immediate access to our Subscriber-Only Online Resource Center, which includes the entire archive of TTT back issues (since 2007), as well as our treasury of industry research reports, legal opinions, sample forms and contracts, government documents and more.