Since university based research, which after the Bayh-Dole act of 1980 is almost universally the property of the University, constitutes the intellectual backbone of the spinouts, such companies are required to strike a licensing deal with the university's Technology Transfer Office (TTO). When granting the license the TTO aims to retain some of the value of the technology for the university. The terms of the licensing deal include royalty fees and equity stakes. Both royalty payments, which are a return for each unit sold, and equity stakes, which are a share of the (future) profits on sale of the company, are contingent how well the company does in the future.
The university owns any invention (IP) discovered through government backed research. Under the University of Iowa and The Research Foundation protocols, the inventors of record (those that appear on the patent) are paid royalties whenever that IP is licensed and results in royalty income. The actual split between multiple inventors is decided by the inventors.
Sponsored research, that is, research paid for by private industry, seldom result in patentable IP. The sponsoring company usually retains rights to the IP, so UIRF licensing is not an issue.
Who licenses university IP?
IP is licensed either to:
- Established companies
- University spinout ventures
In either case, the inventors receive their share of any royalties negotiated by the UIRF in the licensing agreement. This continues until the license agreement expires. The license agreement usually expires when the last patent expires. This in turn is usually 20 years for date of patent issue. (these are only "usual" cases).
Equity is a share in the ownership of a company. For an LLC these are called Membership Units, in a corporation these are call Shares. Early investors and founders, however, usually talk in terms of Percent Ownership. Here we will only consider new ventures. Equity holders will often include:
- One or more inventors (If an inventor is not active in the venture going forward, they may receive no equity).
- The University may take an equity position in lieu of fees and expenses.
- Investors (offering cash at various stages - friends, family, angels, VCs, banks)
- Board members, and employees
Equity can be based on cash, skills brought to the company, time (sweat equity), or to attract an employee. Equity can be immediate and/or partly deferred (options).
Non-Equity Investment (non-dilutive)
As more equity is given out (shares issued), current owners equity is diluted. (this is for another topic). Ventures can also receive investment that does not dilute equity. These include:
- Research grants
- SBIRS and STTRs
- Economic grants and loans (usually city or state based)
Two Separate Streams
Royalty and equity streams are two entire separate processes. Inventors receive royalties regardless of who licenses the IP - a large corporation, or their own startup venture. Equity holders profit when the venture is acquired or sold (and loose their investment is the venture fails). If the IP is re-licensed or licensed to multiple companies, the inventors continue to receive royalties.
Another way to understand this process is by looking at it from the lifecycle of the Intellectual Property. IP persists regardless of the types or number of licensees. The UIRF manages the IP through it's entire life.