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Hundreds of billions of dollars are spent on research each year at federal labs, universities and research hospitals. Often this research leads to the creation of valuable intellectual property assets (e.g., patents) that may be licensed to existing companies or new startups to commercialize the underlying technology. The National Science Foundation established the I-Corps program to educate academic researchers on the process of translating their research into commercial products, and universities are increasingly setting up incubators and venture funds to stimulate technology commercialization.

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In addition to providing cachet to attract potential customers, partners, competitors and investors, licensing technology from research institutions offers startups the opportunity to secure non-dilutive funding such as Small Business Innovation Research grants and Small Business Technology Transfer grants. Also, the State of Ohio has a Technology Validation and Start-up Fund, which provides grants to small businesses commercializing technology from Ohio-based research institutions.

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Along with the standard elements required for any startup to be successful, a lucrative university spin-out also requires the right mixture of entrepreneurial talent, technical talent (often, the inventor takes on a technical role at the startup and has a minority ownership) and reasonable license terms. Often there is a “dating” period during which the entrepreneurial team, inventor(s) and university get alignment on how a potential startup would be structured, capitalized and launched.

Research institutions employ technology transfer professionals to review invention disclosures and apply for patents to protect potentially valuable intellectual property. When an entrepreneur identifies a technology she is interested in commercializing, often the first step toward eventually licensing the technology is to enter into a nondisclosure agreement (NDA) with the university. If the entrepreneur is going to disclose confidential information in the preliminary discussions, care should be taken to make sure an adequate NDA is place.

After the entrepreneur has learned more about the technology, she may want to continue pursuing the technology but may not be ready to agree on license terms such as fees and royalties. The parties may then enter into an option agreement, whereby the university agrees to not license the technology to any other party for a given period of time (often in exchange for a one-time payment and/or a future equity interest in the startup company).

Once the entrepreneur and university are ready to move forward, the parties must execute a license agreement (which often contains a patent license but may not in the case of licensed software or data).&nbsp;Following are primary considerations for a startup entering into a license agreement with a research institution:

Identify patents and/or technology to be licensed

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Sublicensing, assignment and change of control

Other agreements often arise in the context of research institution spin-outs, including:

Material transfer agreements,&nbsp;pursuant to which a party secures materials from a university. It’s important to closely analyze intellectual property rights arising out of any research based on or incorporating the acquired materials.

Sponsored research agreements,&nbsp;pursuant to which a company contracts with a university to perform research. Again, it’s critical to consider intellectual property rights arising from such research (and future research).

Facilities use agreements,&nbsp;pursuant to which a company may use a research institution’s facilities and/or equipment. Carefully analyze any intellectual property rights that arise.

Employment contracts,&nbsp;which may limit professors’ time spent on outside professional activities.

For more information, please contact a member of our <a href="/team/">New Ventures</a> group.

Research Institutions and Startups: Basics of Spinning Out New Companies