Some years ago, we were asked, why not just take a set %–like 5%–of equity in research startups, and make it a standard patent license without any running royalties on sales? Wouldn’t that be even simpler? At the time, it was not easy for a lot of public universities to hold equity directly. And it’s not necessarily the best of things for them to do now, given institutional conflict of interest, problems in managing early stage equity portfolios, and issues related to registration rights, board seats, public disclosure, and the like. Now some of the equity rules have moderated for universities. Is it a good thing? Is it simpler?
Let’s say one wanted to go this direction. Why make it a set percentage of equity? Why not let the faculty founders set the percentage? After all, whatever the % that is set upfront, it can always be diluted in rounds of investment, assets can be transferred to another organization via sublicense, and other things that could shift value away from the university’s position. If the university is not going to be an active investor, this is just too easy to do. So one might reach the idea that one may as well just let faculty founders donate equity, or cash, as they see fit, when they see fit.
A couple of things come up. First, universities can’t pay patenting costs with equity in start ups. They need to see cash somewhere along the line. As soon as one adds in patent cost reimbursement, things start to get a lot less simple. There needs to be coordination of patent prosecution–what claims, what countries, what law firm, what oversight on billing, what supervision of inventor time?
Second, the thing about donation is, without consideration, there’s a license to the rights, but no contract that makes the license enforceable. So there needs to be something in the way of consideration.
We can take the cascade further. Why should the university hold the invention? Why control the prosecution? Why not let the company own the patent and control the prosecution directly? Wouldn’t that remove a layer of bureaucracy that doesn’t add any immediate value? At best, university ownership of the patent rights makes the university operate as a start up bank, fronting the money for patenting, hoping for repayment sometime downstream. If patenting goes to foreign national phase, the cost can run well into the hundreds of thousands.
Thus, one asks, why not *assign* the patent rights to the company? There are a couple of come-backs. Some states make it impossible by law to assign patent rights. And some folks believe that Bayh-Dole doesn’t allow it. To the first, there are ways to do this. To the second, Bayh-Dole allows assignment to any organization that has a primary function in managing inventions. So if the start up establishes such a function, then it can receive an assignment. One might also ask whether Bayh-Dole supersedes state law. If Bayh-Dole says that a patent right in a subject invention can be assigned, then perhaps it can, under federal law.
We can take it even further. Why worry about licenses, assignment, or stock subscription agreements? Why not let faculty inventor-founders to assign their rights directly to their start ups? Just skip the whole technology transfer crowd, administrative overhead, expenses, risks, spin, and bitterness?
Again, under Bayh-Dole, this can happen. Inventors can be delegated with the authority to elect to retain title on behalf of the university. The inventor can then on behalf of the university assign that election of title to the start up, on the condition that the start up has a primary function to manage the invention. The company then undertakes to follow the requirements of Bayh-Dole. It may companies wouldn’t want to follow those requirements–but then in leaving those obligations with the university, one can construe payments from the company in addition to consideration for the license, and repayment of patenting expenses, to be for the services associated with Bayh-Dole compliance. To my knowledge, no university charges its licensees for Bayh-Dole compliance services, nor prices out the cost of these services, nor recovers those costs as real expenses incidental to managing subject inventions. Something for university auditors to look into. What a money bag full of holes!
Where do we get to, other than that things are complicated in the general situation, and that one standard *license* doesn’t necessarily show up as effective as an assignment, or foregoing assignment altogether and letting inventors do this? First, that even if one university can put together an “express” license for their faculty start ups, it doesn’t necessarily translate into advantage for the next university or its inventors or its collaborators. Second, that there are even more direct ways to do things than taking ownership, filing patents, then licensing to someone who repays and accepts the standard requirements. Third, that there are reasons why a start up might want the relationship with the university–as a bank, for access to additional resources, for name recognition, for raising funds.
But through all of this, the discussion ignores the distinctive reasons why inventions arise in university research. That is, sponsored research intends beneficiaries other than the university. The leaders of this research are the faculty investigators, who may not be the inventors. The purpose of a start up is to further the goals of the research, not simply to make money for inventors or investors or the university. Why shouldn’t the faculty investigators have a role in what happens with IP? And who, if the investigators don’t care, ought to care next? Why shouldn’t that be the sponsors rather than the university? And if the university, why the technology transfer office rather deans or local community leaders?
Just thoughts here, trying to lay out the issues rather than simply rationalize one approach.