Anatomy of a tech-transfer startup

You can’t live and work in a college town without hearing the term “tech transfer” quite a bit. Yes, we understand it has something to do with making money from the technology that comes out of the labs of research universities, but what does that really mean? And how do universities and inventors share the profits?

The modern era of technology transfer started back in 1980 when Congress passed the Bayh-Dole Act, which gave ownership of technologies created as a result of government-funded research to the universities and other institutions conducting the research. The magazine The Economist evaluated the act as “the most inspired piece of legislation to be enacted in America over the past half-century. … More than anything, this single policy measure helped to reverse America’s precipitous slide into industrial irrelevance.”

According to the Association of University Technology Managers, there were about 250 patents issued to American universities each year before 1980. In contrast, fiscal year 2004 saw more than 11,000 new patent applications from universities.

Success stories include Gatorade (University of Florida), the nicotine patch (UCLA) and, yes, even Google (Stanford). We’re talking about over a billion dollars in royalties and literally thousands of startup companies, with all the new jobs and downstream economic benefits new companies – especially technology companies – create.

Think Figure 4

While “tech-transfer” sounds complex, it is easy to understand the basic structure of these deals. Just think of the number 4.

A diagram of a typical technology transfer deal looks like a “figure 4” (see page 9). It starts with a university employee, a professor or other researcher, coming up with a new, probably patentable technology. As with most employee-created intellectual property, the invention’s researchers create while working within the scope of their employment is owned by the employer – in this case the university.

You might think this is unfair or that this would make it hard to recruit smart people, and you would be partially correct, given that almost everyone who pursues a serious academic career chose his or her path for something other than money. They want to help solve problems by, for example, creating a new vaccine to fight TB in Africa.

Of course, it might become difficult to recruit and retain even the most altruistic research professionals if they didn’t get a chance to benefit from profits resulting from their work. Accordingly, most universities automatically give back a standard percentage of any profits generated by patentable technology to the inventor. If there is more than one inventor listed on the patent, the group splits the pot, evenly or based on the level of contribution made by each member.

For its part of the deal, the university pays the cost of “prosecuting” (jargon for the application process) the patent. This expense can range between $5,000 and $15,000, but can be much more depending on the complexity of the technology and whether or not international coverage/protection is desired.

In some cases the university can directly license the technology to an existing company, which then develops the technology into marketable products. If this kind of direct license happens, the revenue stream flows from the consumer to the industry partner or licensee. The licensee typically pays a predetermined set of fees, percentage of sales ( “royalty”), or some combination of the two back to the university. In some cases, ownership equity is also provided in exchange for the rights to the technology. Simple.

However, many new technologies that develop from university research do not fit into existing markets or products. They may require some form of validation or proof of principle, and often require more extensive business development and technology maturation.

Some of these technologies may be suitable for a “university startup” and we get to form the “figure 4” of the transaction. In this case the university might ask the inventors, or the inventors might approach the university, to discuss formation of a new company specifically to commercialize the technology.

Commercialization happens

Let’s say this happens and let’s call the new company “NewCo.”

After NewCo is formed, the university licenses the technology to NewCo and works closely with NewCo to help make the business a success. NewCo further refines the technology, develops a market assessment and potential customer database for products and services derived from the technology, and sells these products and services in the marketplace.

Sometimes the founders of NewCo will quit their university jobs and devote their full-time energy to the new venture, especially if the inventor was a graduate student or untenured faculty. Other times, the inventors will keep their day jobs and bring in outside management professionals to run the company.

The inventors take an equity interest in NewCo, and many times the university receives an equity stake in the new company as part of the exclusive license of the patent. Many times other outside investors may add some cash or expertise to the project in return for stock in NewCo.

When NewCo has commercialized the product and taken it to market, the university shares royalties with the inventors, which is a required part of the Bayh-Dole legislation, and practiced by U.S. and most international universities as well. Not bad.

Of course there are as many different details and nuances to these agreements as there are people and patents, but most technology transfer will follow the basic anatomy of my “figure 4” diagram.

Kevin Houchin is an attorney specializing in intellectual property law and marketing for entrepreneurs based in Fort Collins. He will be covering the legal world for the Business Report each quarter, and can be reached at kevin.houchin@houchinlaw.com.

on Facebook on LinkedIn