shedding light on little known and costly blind spots for university start-ups presents: 1 -...

Shedding Light on Little Known Shedding Light on Little Known and Costly Blind Spots and Costly Blind Spots for University Start-Upsfor University Start-Ups

Presents:

1www.technologytransfertactics.com - 877-729-0959

GERARD ELDERING, Founder and President, InnovateTech Ventures Mr. Eldering specializes in venture creation based on inventions licensed from universities and research institutions. Gerard has been working in the technology transfer community for more than a decade and is passionate about the creation of professionally managed and funded start-up companies. Prior to launching InnovateTech, he founded and served as Director of the Technology Transfer Office at The MITRE Corporation.

BURTON B. GOLDSTEIN, University Entrepreneur-in-Residence and Professor, Department of Economics, University of North Carolina, Chapel HillMr. Goldstein has been involved in entrepreneurship most of his professional life. After six years as a practicing attorney, in 1982 he co-founded Information America. In 1998, Goldstein founded NetWorth Partners. NetWorth combined with Mellon Ventures in 2000 and Goldstein became a Mellon Ventures Partner. He served on the Board of Directors of both private and public companies during his tenure at Mellon Ventures. In the spring of 2004, Goldstein was appointed University Entrepreneur in Residence at the University of North Carolina at Chapel Hill. Subsequently he was named Professor in the Department of Economics. In these positions Goldstein is intimately involved in numerous activities aimed at making UNC a more entrepreneurial university, including teaching and development work.

Your Panel of PresentersYour Panel of Presenters

www.technologytransfertactics.com - 877-729-0959 2

Your Panel of PresentersYour Panel of Presenters


EMILY E. HARRIS, Shareholder Attorney, Davis Brown Law Firm Ms. Harris is a member of the firm's Intellectual Property Department. Her practice focuses on obtaining patent, trademark, and copyright protection for firm clients and providing litigation support to the intellectual property litigators. She is a registered patent attorney, able to practice in front of the United States Patent and Trademark Office. She has a passion for technology and advocates for start-up businesses, especially in relation to intellectual property and cyberlaw matters. Harris is the co-founder of Davis Brown's own start-up business, The Start-Up Launchpad.

DR. JONATHAN YORK, Co-Founder, Cal Poly Center for Innovation & Entrepreneurship, Associate Professor, Orfalea College of Business Dr. York is an entrepreneur and educator who has dedicated his career to helping companies succeed and teaching students about entrepreneurship. He recently joined the faculty of the Orfalea College of Business at Cal Poly in San Luis Obispo as the first professor dedicated to entrepreneurship, where he is focused on helping students understand and experience the challenges of management and decision-making in growth companies. As a CEO and consultant, he has worked for years in entrepreneurial companies facing key strategic and operational issues: readiness to raise capital; marketing and sales development; people and team issues; board and investor relations; and product development. He has long been involved in assisting his clients in everything from business planning and raising capital to managing rapid growth and seeking exit opportunities.

Today’s AgendaToday’s Agenda

• Forming a corporate entity• Management team missteps • IP ownership and protection• Funding• Competitor issues• Supply chain and distribution• Market challenges• Case Study: hard lessons learned from iContact


Potential License Blind SpotsPotential License Blind Spots

• Patent expenses– Due at license signing– Maintenance cost– Foreign filing fees– Infringement legal action– Other legal actions

• Auditing cost • Legal review – government rights, export• Insurance


Potential License Blind SpotsPotential License Blind Spots

Little known costs in license agreements:– Many license agreements require the company/startup to

pay a royalty or fee for use of the IP• These royalties/fees may begin immediately, regardless of

whether the company has any money

– Many license agreements require the company to pay the patent prosecution costs

• These costs may be $20,000 + (just for a U.S. Application)• Foreign applications are also very expensive• The license may allow the TTO to pick patent counsel (without

paying attention to cost)


Unplanned Startup CostUnplanned Startup Cost

• Legal cost– Typically in the business plan, but often exceed plans

• Proposal development cost– SBIR, STTR, State Agency

• New IP protection– Patents, trademarks

• Licensing additional technology• Time delays


Forming A Corporate EntityForming A Corporate Entity


• When to form a legal entity

• How to protect for people losing interest, leaving

Management Team Missteps to Management Team Missteps to Avoid Avoid

• Ensuring the right mix of skills and expertise

• Student teams - friends and business partners may not mix

• How ego battles can doom the new business


Management Team Missteps to Management Team Missteps to Avoid Avoid

Avoiding the traps of “vanity” start-ups

• Researchers as start-up execs – can it ever work?

• When inventors are less than fully on board and cooperative

• Avoiding the “great science without great business and marketing” trap


IP Ownership and Protection Issues IP Ownership and Protection Issues

FIRST:

If you are a university professor, employee, grad student orstudent you should read the university’s intellectual propertypolicy!

The policy will likely provide information about ownership, theinvention disclosure process and general licensing information.



In most instances, the university will own the IP if:• It was created by a university employee• It was created under a sponsored research agreement• University funds, facilities, or resources were used to develop the

intellectual property• The university instructed or directed the inventor to do the research

leading to the invention

Regardless of the inventor’s position (professor, grad student, student), if itfalls under one of these, the university probably owns it



The policy will describe any timing requirements forsubmitting an invention disclosure to the tech transferoffice

– Timing may be based on anticipated publication for statutory bar reasons



So if the university owns it, how can a startup be basedon the IP?• Licensing is the most typical arrangement

– University is the owner, and the company is granted the right to use it as defined in a license agreement

– License agreements may be exclusive (company is the only group that can use it) or non-exclusive (university may grant rights to the company and to others)


IP Ownership and Protection Issues IP Ownership and Protection Issues Startups should try to negotiate these points with the TTO• Examples:

– university take equity instead of immediate $ due– $ due only after a certain period of time– Licensee picks patent counsel– Licensee gets to review all patent prosecution documents and provide

comments• Startup may desire different scope than university for commercialization

purposes• University must use best efforts to get patents issues• Startup must be notified in advance if university intends to abandon



Be aware, though, that TTOs may not want to negotiate– TTOs are more likely to negotiate if company includes

professor-inventors



What if the university declines to file a patent application on an invention disclosure that is important to the company?

– Intellectual Property Policy will likely provide that the TTO must review an invention disclosure and inform inventors of decision not to pursue

– Policy may then provide that the invention be assigned to the inventors• Inventors can then pursue however they want• May be hidden costs (such as paying back university for costs already incurred)



Once ownership and license rights are understood, what about freedom to operate?– Is there existing technology that will prevent a patent from being

granted? • Prior art issues• Technology already exists in substantively the same form• Issued patents that put company or university at risk for infringement claims• TTO may be able to provide information about related technologies



If the company has a patent, then there’s freedom to operate, right?– Ownership of a patent is a different issue than freedom to operate– Company needs to understand the difference!



Does the university own IP in related technologies that are necessary to practice the company’s inventions? If so,

– Is the university willing to license the needed rights?– At what cost?– New improvements in the same technology and licensing

to competitor



Assessing patent strength• Strength is measured in a variety of ways:

– Monetary value• May be necessary to engage a valuation firm

– Validity of the patent• What is the state of the prior art?• Were there publications/sales before statutory bar dates?• Was all necessary information submitted to the patent office (e.g.,

evidence of inequitable conduct)?



Company should always have exit strategy in mind from

day 1:• Must create an IP strategy to satisfy investors• Must dot i’s and cross t’s to put the company in a good

position for investors or to be acquired



Infringement risks and withstanding challenges from deep-pocketed competitors

• Infringement litigation is expensive and risky for all parties– Again, understand what freedom to operate means– If the company’s tech isn’t commercially more competitive than the

deep-pocketed competitors, won’t have to worry about the competitors (and business won’t likely succeed)

– If the tech is more competitive, company needs to secure a strong portfolio to have leverage; company should be in a position so that deep-pocketed competitors want to buy you


Funding IssuesFunding Issues

• Ensuring lean practices and avoiding high cash burn rates

• Underestimating capital requirements

• Setting and achieving milestones to attract follow-on funding

• Avoiding dilution traps


Competitor issuesCompetitor issues

• Understanding your advantages, disadvantages, and accurately assessing competition risks


Supply chain and distribution issuesSupply chain and distribution issues

• Careful partner selection

• Anticipating scale-up dilemmas


Market issuesMarket issues

• Adequately assessing market size and predicting penetration

• Defining customer needs

• Creating and executing business and marketing plans


Student Entrepreneur MentoringStudent Entrepreneur Mentoring

• MUST create a "green zone" for students to get mentored/coached without getting preyed upon


Case StudyCase Study

• iContact : A real-world start-up that had great success, but not without hitting some bumps in the road


The Carolina Express License

•Standard license agreements for startups.•Can be executed in 2 weeks.•Optional royalties – 1% on products requiring FDA approval based upon human clinical trials and 2% on all other products.•Payout to UNC in the event of a merger, stock sale, asset sale or IPO--0.75% of FMV.•Process has resulted in 15 companies to date. More are in the pipeline.•Our companies are 50 weeks ahead of companies from other universities.

• Founded in 2003 by Ryan Allis during his freshman year at the University of North Carolina-Chapel Hill.

• Added Professional Management in 2006 when it achieved $1.5 million in Revenue.

• Ultimately raised $35 million in outside capital.

• In February 2012, had revenue of $48 million, 275 employees and transmitted 17 billion emails annually.

LESSONS LEARNEDLESSONS LEARNED

Successful Student Entrepreneurs are Successful Student Entrepreneurs are Extremely RareExtremely Rare

• Very few students are equipped to create sustainable enterprises while in school

• If they do, there is a high chance they will drop out

• The best strategy is to create an environment that makes it safe to fail

Partnering with an experienced operator Partnering with an experienced operator is criticalis critical

• Critical Mass Must Be Achieved Before This Can Happen

• Chemistry is Critical• The Young Entrepreneur Must be

Coachable

Control Issue Must Be Resolved EarlyControl Issue Must Be Resolved Early

• Necessary Resources Cannot be Obtained if Entrepreneur is Determined to Remain in “Control”

• Lifestyle v. High Growth

Perfect the Idea on a Shoe StringPerfect the Idea on a Shoe String

• Increasingly Ideas Can Be Tested with Very Little Capital

• University is a Great Place to Develop Ideas in a Supportive Environment

• Hard to Attract Needed Resources Until Traction Has Been Established

Exit is the hardest decision of allExit is the hardest decision of all

• Young entrepreneurs often don’t know what they don’t know

• Success involves a very fast track

• Once a decision has been made that the business has outgrown the entrepreneur a critical hire or sell decision must be made

• Planning for such an eventuality is difficult

Questions?

Utilize the public chat at the bottom left of your screen to submit

your question. The panel will address them in the order they are received.

Thank You!


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