Behind the scenes of getting to a tech transfer agreement with your university (1/4)
Main elements, examples and resources
This is part of a four-part series: This first post is about the main elements of what is called a tech transfer agreement, including some concrete examples and sources for reference values and terms. In part two I will discuss essential questions to keep in mind when negotiating your specific terms. In a third post I will take a closer look at the underlying incentives and organizational structures at both universities and startups - to help you understand each other better as negotiation partners. A final post will help to look at some typical arguments you might be faced with in the negotiation and where they are coming from (and how to respond).
Have you made an invention1 that you think can be brought to market via a startup? And has this invention been part of your research at a university or research institution?
Then most likely you will need to work with your university’s tech transfer office to (1) get your invention patented and (2) determine the appropriate terms for transferring the rights to your invention to your startup. You’ll negotiate a so-called tech transfer agreement2.
Why is that the case?
Generally3, Intellectual Property (IP) that was generated through the means of publicly funded research projects is owned by the research institution - not by you as an employee. That means, if you have invented something as part of your research, it will require a tech transfer agreement if you want to use the invention in your startup.
A fantastic resource on this topic that we at Positron Ventures like to point founders to is the Spinout Playbook from US venture capital fund Fifty Years. They have done a great job at putting together an elaborate document on critical factors to consider before/during/after spinning out from a research institution (partially with a focus on US institutions but mostly very applicable for any scientist)4. Additionally, some other VCs (in Europe) have shared their opinions and perspectives on this matter, e.g. Extantia’s partner Yair Reem.
Adding to these already existing resources, in this as well as the next blog posts, I would like to:
Give you a high-level overview of terms and good resources to look at. (post 1)
Challenge you with some questions to consider when it comes to what a ‘good’ tech transfer agreement is. (post 2)
Provide you with some context on the parties involved in a tech transfer agreement and how that might help you better prepare the negotiation with your university. (post 3)
Share some observations around typical topics that might arise in these negotiations. (post 4)
My thoughts are based on observing (and, on a few occasions, participating) in negotiations from all sides: as a startup, within a research institution, from a VC bystander’s perspective. By all means this is no legal advice. But hopefully a helpful pointer to ask the right questions and be prepared for the situations you might encounter.
Let’s get started.
Precondition: Patenting your invention
Negotiating a tech transfer agreement obviously requires some intellectual property to ‘transfer’. Most likely, these are filed patents with regard to your invention. This post won’t go into the details of patenting itself (maybe a topic for the future) - regarding questions like what to consider when filing a patent, when to do so, how to seek support around this - but it assumes that you have already taken these steps. If you haven’t, your university’s tech transfer office (TTO) is a good first contact point for advice on this matter.
Instead, we’ll dive deeper into the agreement itself:
Elements of a tech transfer agreement
In general there are three components that a tech transfer agreement will roughly consist of:
🧠 - The exact IP you want to get access to:
Most likely this will come in the form of a patent or patent family, but might also consist of e.g. access to certain proprietary data or trade secrets. Sometimes this can also include preferred access or an option to future IP that is still to be generated in the same research group.
🤝 - How you get access to the IP (the structure of the agreement):
Is it a full transfer of the rights/patents or a license to use the invention (the more common option)?
Do you have exclusive or non-exclusive access (i.e. can the university also license the same IP to other parties)?
Is it limited to certain time frames, application fields, or preconditions?
💰 - And what the university or research institution gets in return for providing access to the IP. This usually comes in the form of:
an equity stake (i.e. the university becoming a shareholder in your company)
fixed upfront and/or milestone payments
possible ‘exit kickers’ (i.e. bonus payments in case of your startup’s success) and/or
royalty payments (i.e. a percentage of your revenues, often capped either in duration or maximum cumulative amount).
Additional clauses of a tech transfer agreement might govern certain scenarios, such as what happens in case of an exit (e.g. in the event of a sale of your company the tech transfer agreement should transfer to the potential buyer), if you reach certain milestones or if you would like to sub-license your technology.
Tech transfer agreements & offices getting a bad rap
While points 1 and 2 are mostly straightforward, the third part (“What do universities get in return”) is usually where the most discussions arise. This has even lead to tech transfer agreements in Europe getting quite some public scrutiny in the last couple of years.
The public debate centered around the question: Are universities demanding too much for the IP they give access to (mostly in the form of too high equity stakes), thus limiting the startups’ future growth (i.e. making startups uninvestable for other parties)? And: Are at the same time are they taking too long to come to a final agreement? These concerns were triggered in individual countries, e.g. in the UK by the collection of actual spinout data which has led to a detailed review of the country’s spinout system or individual cases that made it to the public eye, e.g. from Fraunhofer society in Germany.
The discussion has then in some countries transformed into: Can we create standard templates and agreeable corridors for specific terms? This could help to find a common ground between tech transfer offices, startups and investors, but also to speed up the process and assist universities, especially those with limited experience in this area and few reference cases.
Some of the larger universities or research institutes already have standard processes or templates (the likes of TU Munich, EPFL, TU Darmstadt (German)). On the other hand some countries have created working groups that produced templates for their universities to use (e.g. the Dutch universities, a pilot group of German universities supported by SPRIND - lots of valuable content but unfortunately in German only, the UK).
What’s a good deal? Getting a feeling for the order of magnitude on terms
The question you are asking yourself is of course: So, what is a good deal then? As you can imagine there’s no standard answer, other than ‘it depends’. In the second post, I’ll dive into a bunch of questions to help you consider what is most important in your specific case.
But, with all these discussions around standards going on, let me try to at least give you an overview or an order of magnitude of possible terms and numbers with regard to the third part, i.e. what the university gets. Remember: mostly likely it will be a combination or an either/or of these elements. Some universities won’t take equity stakes and prefer upfront and royalty payments, others might waive certain cash payments and instead prefer equity stakes. Also, I’m trying to summarize some of the most widely agreed upon standards or terms I see - but do your own research and gather more opinions and information!
Looking at equity stakes:
The easy answer: the lower, the better.5
Realistically, if an equity stake is in question, anything below 10% is usually considered reasonable and won’t raise too many question marks.
If you end up with an equity stake of the university of 10-25% (a wide range I admit), be ready for discussions with investors (or ideally have these discussions before you sign with the university). In some cases this may still be warranted (especially on the lower end) and in some countries this range is even considered standard practice6.
Above 25%, this will definitely raise many red flags in a discussion. You will find data of UK universities splitting equity between founders and universities 50-50 and in some cases (esp. life sciences) higher percentages might still be more common. But these ranges are exactly what caused the above controversies.
With regard to royalties:
The normal order of magnitude for royalties lies in the range of 1-5%.
The lower percentages for products in lower margin industries and/or a technology that still has a lot of technology risk to eliminate. The higher percentages for more market-ready technologies and/or higher margin industries.
In either case: Make sure you cap the overall amount or duration of royalty payments (and/or decrease the percentage of royalties payed as your sales increase).
And finally, fixed fees or milestone payments. These can come in three different forms:
Patent costs: typical, a lot of times these costs are transferred to the startup (either including past filing fees or only continuing payments). This might come down to low 5-figure amounts.
Upfront payments: A range from low 5-figure to low 6-figure amounts is possible here. In general, it’s probably good to push these to later payments if you can (you’ll always be short on cash initially).
Milestone payments: These might be a way to push certain upfront payments to a later stage and/or let the university participate in the success of your startup (e.g. when a certain investment round is raised). Ideally this is an either/or to royalties and similarly to those: make sure they are capped at reasonable amounts.
This is it for today - look out for the upcoming posts going deeper into these three elements of a tech transfer agreement, what to consider in your specific case and how to better understand each other as university and startup.
And as always: Let me know if you have comments, questions or additional insights!
If you think your science is pretty cool but you are not sure yet if you are cut out to be an entrepreneur: let’s talk. E-mail me or join an upcoming 1:1 office hour for scientists.
If you know someone who you think has the potential to be a great scientist-entrepreneur (although they might not realize so yet themselves), reach out to me at scientists@positron.vc.
A novel product, e.g. device or material, or process solving a problem.
Sometimes also referred to as licensing agreement.
Unless you are based at a university in Sweden - where ‘professor’s privilege’ grants all IP (= intellectual property) access rights to the researchers.
Maybe at some point we can help bring a European version to the world :)
Why? I’ll discuss this more in the upcoming posts.
See e.g. the Dutch standard terms.