HAVE DIGITAL SHARES, WANT INTELLECTUAL PROPERTY RIGHTS
Interview on IP Transfer 3.0 with Barbara Diehl
When researchers want to spin off from a university, institute or research facility, they are often faced with a lengthy and complication process. This is because the property rights on which the start-up is based usually belong to the institution and not to the founding team. So how can the intellectual property transfer from universities to founders be organized in an effective manner? In this interview, Barbara Diehl, whoheads the SPRIND IP Transfer 3.0 initiative, explains how SPRIND aims to support both founding teams and institutions.
WHY DOES THE PROCESS OF TRANSFERRING INTELLECTUAL PROPERTY (IP) TO FOUNDING TEAMS TEND TO BE SO COMPLICATED?
BARBARA DIEHL: The conventional common practice has always been for an institution to choose a license model when transferring intellectual property rights to a spin-off. This means that the facility says to the start-up, You can use the property rights and you’ll get a license to do so, but you’ll have to pay a fee.
These license payments and the associated cash flows often pose a problem for start-ups since, at that point, they do not yet have any income. Any outflow of funds at this early stage acts like poison for the young company.
WHAT COULD BE THE SOLUTION?
BD: Instead of a license model, the institution could also take shares in the spin-offs. However, company shares are associated with many obligations. This model is therefore usually out of the question, as universities often do not have the personnel or know-how to take on such shareholder responsibilities professionally. Virtual shares are an interesting solution. In essence, these are normal company shares with the special feature that they do not include voting rights. Unlike silent partnerships, they do not have to be registered with a notary. If the company is sold, the institution – like any other shareholder – receives a corresponding payment based on its percentage share. Theoretically, it would also be possible to sell the virtual shares earlier if this was contractually agreed in advance.
WHAT ADVANTAGES DO VIRTUAL SHARES HAVE FOR THE FOUNDING TEAM?
BD: Getting rid of license payments is, of course, a major advantage, but there are others as well. With a license model, the property rights remain with the university. Virtual shares, on the other hand, are ideally granted in exchange for the complete transfer of property rights. This gives the founding team and investors security, and changes the dynamics between the innovators and the university. In this model, the university takes the risk together with the founding team and all other investors – everyone is in the same boat.
BUT DON’T VIRTUAL SHARES MAKE UNIVERSITIES WORSE OFF? LICENSE PAYMENTS MEAN THEY RECEIVE A CONTINUOUS FLOW OF FUNDS, THROUGH LICENSE PAYMENTS, BUT ONLY AT SOME POINT IN THE FUTURE THROUGH VIRTUAL SHARES.
BD: If the start-up is successful, the value of the company increases and with it, the value of the university’s virtual shares. It can therefore be financially very attractive for universities not to bleed the company dry from the outset, but rather to share in the risk.
HOW DO YOU GET THE FOUNDING TEAM AND UNIVERSITY TO AGREE ON THE AMOUNT OF VIRTUAL SHARES?
BD: Before negotiating investment amounts, the value of the IP must first be assessed. So the key question is how important and central the property rights are for the business model and the success of the company. To answer this, we have developed a tool that can support both the founding team and the institution in the IP assessment. Known as the IP scorecard, it can help to simplify and objectify the evaluation. We also developed the IP Wahl-O-Meter as part of the project. This is basically a questionnaire that the founding team and ideally also the university’s transfer office fill out to gain a better understanding of the IP situation. Ideally, the result of the IP Wahl-O-Meter should provide an indication of which transfer model might be most suitable for the scenario in question.
WHAT HAPPENS NEXT?
BD: After this, the aforementioned IP scorecard is used. Both parties sit down together and evaluate a number of factors. The result will be between 1 and 10. A ten means that the IP is essential for the business model and thus the success of the spin-off. A top score like this is probable in the pharmaceutical sector, for example, if a drug candidate has been discovered at a university and the founding team now wants to develop and market it as a medicine.
HOW HIGH COULD VIRTUAL SHARES BE IN THIS SCENARIO?
BD: Ultimately, this is and remains a matter of negotiation between the founding team and the institution. However, because we were also interested in this question, we conducted a survey in the investment community. The result was that the maximum participation that an institution can realistically negotiate is ten percent.
HOW WELL HAS THE PRINCIPLE OF VIRTUAL SHARES AND THE SPRIND TOOLS WORKED SO FAR?
BD: We are currently testing this. We have a pilot group made up of 17 institutions from Germany. These include universities, research associations and non-university institutions. The idea of exchanging virtual shares for property rights was originally developed at the Technical University of Darmstadt. We have picked up the idea and want to use our tools to support IP transfer. So far, the response has been positive; the discussion about property rights is becoming more objective and this results in huge improvements in relations between founding teams and their alma mater.
WHAT IS SPRIND’S GOAL CONCERNING IP TRANSFER?
BD: Our primary concern is to achieve more transparency. To the outside world, transfer offices can often look like monopolies of power. The founding teams are usually negotiating property rights and a spin-off for the first time in their lives. For many founders, the whole process is very much a black box. We want to change that. In addition to the IP Wahl-O-Meter and the IP scorecard, we therefore also provide contract templates. Most institutions already have standard contracts, but the contract templates can give the founding team a first impression of what to expect. This enables the founding teams to negotiate with the transfer office on an equal footing. We see our role as both a driver and broker in the discussion on improving and simplifying IP transfer.
WHAT DOES THIS MEAN?
BD: We are drivers in the sense that we push institutions to critically scrutinize their own processes and models and try out new approaches. At the same time, we act as a broker or intermediary between the institutions and politicians. Politicians are demanding more transfer activities from universities, while universities are forced to generate short-term income due to insufficient funding. We promote political dialog in order to bring all stakeholders – politicians and university management – to the table. We push the universities, but we also protect them in order to enable greater sustainability together.
All information on IP-Transfer 3.0, the pilot program of SPRIND, the Stifterverband and the Fraunhofer Institute for Systems and Innovation Research, can be found on the project page.
