The Decision to Sell University-Owned IP: How? When? and Under What Model?

Canadian Universities, and particularly their technology transfer offices are often placed in an awkward position of deciding how and when IP assets should be commercialized. On one hand, they must promote education, the advancement of learning and research (per their Charters and statutes) with significant use of public funds (e.g., taxpayer dollars), and, on the other hand, ensure that University IP is commercialized, often at an early stage of technology development where significant uncertainties remain as to its long-term value. The tech transfer process can be complex (see here), involving different types of tech transfer models (and business models) and agreements (i.e., tiered or milestones based licensing and/or assignment arrangements, etc.) and has been often placed under the microscope of policy makers, such as the Canadian House of Commons Standing Committee on Science and Research (see here) who seek to respond to the questions like: 

1. Why are we not getting better results from the amount of funding public institutions are receiving? 

2. What can be done to better support the commercialization of intellectual property?  

Canada is not alone in asking these questions. Indeed, the United Kingdom Department for Science, Innovation and Technology (UK DSIT) and His Majesty’s Treasury (HMT) have studied similar questions in the past, as appears in their Independent review of university spin-out companies pursuant to the Terms of Reference, which outlined the scope of the review. In this review, they sought to: 

“a) Compare the role universities play in the establishment and subsequent development of spin-outs across the UK and other leading jurisdictions such as the US, acknowledging that institutions that operate in different environments may vary their approach to commercialisation.

b) Consider differences in the process involved and the time it takes to spin-out companies and agree licensing deals with institutions.

c) Examine approaches to intellectual property and equity, assessing the relationship between equity retained by universities and on-going support provided by institutions to companies that are spun-out.

d) Evaluate the role of angel and venture investment in supporting early stage growth of spin-outs.

e) Assess any barriers academics experience in pursuing commercial interests alongside their academic work.”

Demystifying the “Decision to Sell”

In cases where the path to commercialization of a technology portfolio is through a university-based spin-off company, it is generally desirable for all parties involved to map a clear path to transfer of the ownership of the IP to that spin-off.  The how and when of the “decision to sell” University-owned IP to spin-offs are complex (e.g., determining the parameters under which University owned IP can be licensed and/or assigned to a spin-off, as well as equity stakes, if any) and may be psychological (see here) as humans are involved. To assist with demystification, the process can be subject to guiding principles (or the AUTM best practices) as established, for example by the University and/or the interested parties of a transaction by mutual agreement. Adding a layer of complexity to the tech transfer model adopted and IP transfer (or assignment, if any) is the issue of whether the University should or can receive equity in the spin-off when supporting the commercialization of IP, and under what conditions, as this raises issues of governance, both of the IP in question and the economic motivations of publicly-funded institutions generally. 

Assignment versus Licensing Model: A Proposed Guidance Matrix

At first, the interested parties are often confronted with an issue of tech transfer and IP governance models: do they opt for a license, or assignment of the IP portfolio? While some universities prefer a tiered approach (e.g., licensing ⇒ assignment, licensing before assigning IP rights to the spin-off until various criterion have been met), others might adopt an assignment model so as to provide the assignee (e.g., the spin-off, and possibly its investors) full control of the IP for any commercial purposes, reducing administrative overheads and assisting the startup in its search for financing, but giving up control of an IP portfolio in the case that the startup ultimately fails to deliver. 

To assist the parties in their negotiations, we have created a matrix of factors (akin to MVIP™’s proprietary risk matrix) that may guide the parties in understanding the rationale to the “decision to sell” (assign) versus licensing. We have identified several key factors that should be taken into consideration when balancing different tech transfer and IP governance models, along with a set of suggested actions akin to due diligence done in support of identifying in which direction (licensing versus assignment) each item pushes that decision.

Factor(s)	License (Y/N) - score	Assignment (Y/N) - score	Supporting action(s)
Does compliance to various mandates provided by the Government to support the commercialization of R&D and IP (see here, here and here) indicate a preference for a particular model? (and the balance of risks and benefits, if any).	-	-	Review of guidance provided by agencies that funded the research that resulted in the IP portfolio, if any.
Is the startup/spin-off sufficiently well funded to (e.g., becoming investment ready) to be confident that it has a runway commensurate with estimated timelines for technology development?	+1 if no	+1 if yes	Proof of funding and supporting documentation (e.g., SAIL, SAFE, KISS, Convertible notes, grants and incentives, and other types of grants - NSERC, NRC, ElevateIP, etc.). Supporting financial documentation (e.g., cash flow statements, multi-year projections and budgets, burn-rate, cost of customer acquisition, etc.).
Do the  founders and management team of the startup/spinoff have previous entrepreneurial experience and/or involvement in the development of the technology itself, or access to relevant mentorship and expertise?	+1 if no	+1 if yes	Review of founder pedigree/history. In cases where experience is low, insist on involvement with entrepreneurship training programs, business accelerators and/or incubators,  etc.
Are the founders coachable?	+1 if no	+1 if yes	Challenge founders on their business plan and model; and push them outside their comfort zone. Defensive reactions to criticism may be a red flag for operational ability.
Are the development timelines realistic, and are they in line with regulatory delays (i.e., IP strategy and statutory deadlines to undergo national phase entry, amongst other compliance issues)?	+1 if no	+1 if yes	Verify that founders are aware of regulatory and IP hurdles and have or can get access to related expertise and guidance.
Is the spin-off able to demonstrate that it can commercially exploit the technology?	+1 if no	+1 if yes	Providing updates on the state of negotiations with potential customers, distributors and/or manufacturers of the Licensed Technology
Existence of commercialization plan (e.g., a “trio”, which consists of a business, IP and exportation strategy, if available).	+1 if no	+1 if yes	In cases of deep tech it is often difficult or impossible to fully map out the path forward. Verify that founders are able to acknowledge the risks and are not blinded by optimism.
Has the company demonstrated market traction (e.g., based on predetermined milestones), if available?	+1 if no	+1 if yes	In cases of deep tech, this is not a realistic expectation, and should not be viewed as a dealbreaker. In these cases, take customer interviews/statements of interest in what could result as a proxy for market traction.
Are there any restrictions (e.g., liens, encumbrances, hypothecs, rights of first refusal, co-ownership, or other conflicting clauses) that would hinder further development or commercialisation of the technology?	+1 if no	+1 if yes	By way of example, IP to be assigned should not be essential background IP for commercializing other technologies developed by the University.
Are the IPs concerned at a later stage of their life cycle, i.e., the technology will soon be replaced/obsolete or the patent protection period will soon expire.	+1 if no	+1 if yes	Older technologies require a less rigorous approach to governance. There is probably a reason that it has not been done before. If someone is willing to try, they should be allowed to do so with minimal encumbrance.
Is the technology readiness level (“TRL”) of the portfolio above seven (7)? (see here)?	+1 if no	+1 if yes	Note that in deep tech there are many components/aspects, each of which may be at a different TRL. Assessment should be based on the lowest TRL aspect, i.e. for this to be an economic success in the long term, what aspect is farthest from realization?
Is there a risk that the recipient of the IP shelves the technology for competitive reasons (see here) rather than develop it?	+1 if yes	+1 if no	University tech transfer should not block innovation, and consideration should be given to potential clawback clauses on failure to deliver a good-faith attempt to commercialize the licensed technology regardless of the path chosen.
Does the technology have the potential for utility in multiple fields of use?	+1 if yes	+1 if no	Maximal exploitation of economic potential of IP requires thoughtful approach to the possibility of multiple fields of use: use a license that acknowledges this (e.g. SAIL)
Total:			Nota: This table is to be used purely for discussion purposes.

Conclusion

Together, these decision factors paint a picture that indicates that licensing and retention of IP governance powers with the university should be favored in proportion to the uncertainty involved in the spin-off attempt. Early stage technologies with first-time leadership teams will need significant guidance and resources to achieve their commercialization goal, favoring licensing, while outright assignment should be considered only at a point that the path to long-term economic benefit is clear. In support of this idea, check out MVIP's upcoming blogs on a newly proposed Simple Agreement for Innovation Licensing (SAIL) framework in joint development with CanInnovate.

For further IP advisory services, contact MVIP.

Acknowledgements: Thank you Dr. Kyle Briggs (bio) for your comments to this blog.