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Policy No: 2054
Responsible Office: Commercialization and Industry Collaboration
Last Review Date: 04/28/2022
Next Required Review: 04/28/2027
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Founder Equity in Technology Licensing
1. Purpose
The purpose of this Equity Policy is to eliminate the unmanageable financial conflict of interest that arises when a licensee company (start-up) issues founders’ equity to an inventor who is also eligible to participate in revenue sharing under the Net Income Distribution pursuant to USA's Patent and Invention policy. Accordingly, this Policy hereby supersedes and replaces any and all other prior policies and understandings with respect to equity.
2. Applicability
This policy applies to Academic Affairs, Research & Economic Development and Medical Affairs Division employees, particularly inventors.
3. Definitions
Not Applicable.
4. Policy Guidelines
4.1 Introduction
4.1.1 In the course of fulfilling the University’s research and educational missions, a University Affiliated Individual (as defined in the USA Patent and Invention Policy) may become an inventor of valuable intangible property that may have the potential to benefit society and further the University’s educational goals. This property may include patentable inventions, copyrightable works, and unpublished know-how (hereafter referred to as “University-owned intellectual property assets”, or “IP assets”). As these IP assets emerge from the University’s inventors, many of these IP assets are considered early stage. Accordingly, financial resources and management expertise outside of the University may be required to move these assets to the marketplace in the form of licensed products and/or services. The University seeks to avail itself of these external resources and expertise by enabling the formation of new business entities, commonly known as start-up companies, based on these assets.
4.1.2 During the course of managing, protecting, and commercializing University-owned IP assets, the University’s Office of Commercialization and Industry Collaboration (OCIC) will occasionally find that an existing company does not have the interest, capability, or financial resources to move these IP assets from their current technology readiness level to marketplace market-ready product or service. There are times when the market truly dictates that a start-up company should be formed around a collection of University-owned IP assets.
4.1.3 There are circumstances involving start-ups that can result in unmanageable financial conflicts of interest for both the inventor and the University. For each party the potential for such conflicts arise from the issuance of equity by the start-up (licensee) company. Specifically, the start-up issues founders’ equity to the inventor in exchange for him or her serving as a management partner in the venture. Founders’ equity is generally issued as common stock, and although there may be different vesting parameters for various founders, all have similar shareholders rights. The amount of founders’ equity issued is generally outlined in an agreement between the inventor and other founders. This founders’ agreement also delineates the various roles of each founding member. Founders' equity is sometimes confused with another instance in which equity in a start-up company is issued to the University in consideration for rights to University-owned IP assets licensed to the start-up company. This type of equity can be in the form of stock, options, or warrants. Although equity-only licenses are usually not contemplated, frequently upfront fees are reduced when equity consideration is part of a license package (which may include minimum payments, milestones payments, and royalties on net sales). This equity provided to the University, in lieu of licensing fees, is commonly viewed as a reasonable business solution to enhance the overall financial package acceptability to the University and other potential investors. (Note: An unmanageable conflict of interest may also arise when an inventor is appointed as an officer of an existing licensee company. Although this Policy deals with issuance of equity, it is also relevant to such an appointment.)
4.1.4 In the instance of founders’ equity, the inventor finds him or herself in an unmanageable conflict of interest because, on one end, he or she seeks to represent the start-up company and negotiate as low an equity distribution as possible with the University, while in the role of University Affiliated Individual the inventor seeks to negotiate as high an equity distribution as possible to the University in order to maximize the inventor's share of equity generated under the Distribution of Net Income section as provide for in USA's Patent and Invention policy.
4.1.5 Under this policy, any inventor receiving equity from the University has the right to manage such equity as he or she deems fit. All proceeds of equity shares, including any waived Inventor Share, that are liquidated by the USA Foundation for Research and Commercialization (USA FRC) shall be distributed according to the tier structure defined in USA's Patent and Invention policy.
4.2 Guidelines
4.2.1 An inventor may accept founders’ equity in a start-up company in exchange for providing professional services to said company, for example, serving as its chief technology officer or chief research officer. The University may accept equity in a start-up company in lieu of licensing fees for University-owned IP assets through an OCIC transaction. This shall only occur with the prior written approval of the Office of the Vice President for Research.
4.2.2 In the event of 4.2.1 above, an inventor must elect, in writing, to either:
4.2.2.1 Accept founders’ equity and execute the attached EXHIBIT thereby waiving his or her right to participate in the Distribution of Net Income as provided for in USA's Patent and Invention policy and acknowledging that he or she is an agent of the start-up company and will not be privy to any internal deliberations regarding said transaction; or,
4.2.2.2 Forego his or her right to receive founders’ equity thereby affirming his or her decision to participate in the Distribution of Net Income provided for in USA's Patent and Invention policy. The distribution of the inventor’s share of equity will occur simultaneously with the distribution to the University.
4.2.3 In the event of 4.2.2.1 above, the inventor’s forfeited share in any University equity and the University’s shares received from the start-up shall automatically transfer to the USA Foundation for Research and Commercialization (USA FRC). USA FRC has the right to manage such equity as a USA FRC asset, to advance commercialization and partnership development without any other implied consideration for either the University or the inventor.
4.2.4 All equity received by the University under 4.2.2.2 will be transferred to the USA FRC to manage as an asset without any implied consideration for either the University or inventor.
4.2.5 Neither the University nor USA FRC shall either seek or accept voting representation with respect to equity received pursuant to technology-related licensing transactions involving University-owned IP assets. Neither University nor USA FRC shall exercise any voting rights on start-up company board actions, regardless of the level of the equity interest received. USA FRC shall make decisions regarding the management and disposition of any and all equity received by it under this Policy based upon sound business judgment with the objective of maximizing commercialization and partnership development regardless of the impact on all remaining shares.
5. Procedures
Not Applicable.
6. Enforcement
The Office of Commercialization and Industry Collaboration is responsible for this policy, and for assuring the necessary members of the University of South Alabama community are aware of the policy guidelines. Noncompliance with this policy will be addressed by the Office of Commercialization and Industry Collaboration.