COMMERCIALISATION OF TECHNOLOGY: THE ESSENTIAL GUIDE TO MAKE THE MOST OF YOUR INNOVATION

The amount of university research being commercialised has been dramatically increased since 1990. Further the Prime Minister launched on the 4th November 2010 a review with the scope to develop proposals on how the UK’s intellectual property framework can promote entrepreneurism, economic growth and innovation. While the results are expected by April 2011, it is good to explore the legal considerations typically involved in transfer of technology transaction. While this guide focuses on Universities spin-outs most of the considerations can be applied to any type of similar arrangement and collaboration. So, how is this done?

1) Method of commercialisation
University research may be exploited in two ways:

• New companies are created which are provided with access to the intellectual property rights (IPR) of the university (and sometimes the facilities and services of the university). This process is known as "spinning-out" and is the focus of this practice note.
  
• Technology may be made available to existing companies. Typically, this would involve the commercial licensing of university research work directly to industry, for example, to large pharmaceutical or medical companies.

2) The parties
There are three key players in a commercialisation deal (also known as transfer of technology):

• The university
  
• The academic founders
  
• The investors

Each of these parties will approach the deal with different experiences, objectives and expectations.

3) Pre-deal concerns
As a result of the combination of differing experience levels and expectations, a commercialisation deal may require time-consuming and complex negotiations at a time when value and fees are often at a reasonably modest level. Proper planning of the deal, timescale for completion and agreement on main key issues is therefore key.

4) Deal structure
Typically, the founders will have approached their respective heads of department within the university before they involve advisers and may have received some form of agreement in principle to proceed. However, where private sector investors are being sought, the founders will not yet have had detailed discussions with investors and may be unaware of investor expectations on matters such as share structure, control, and warranties, and how this will affect any agreement reached with the university.

Timing
The founders' expectations and the transaction timing must be managed very carefully. The founders will usually be keen to proceed as quickly as possible. However, negotiations with the university, identifying appropriate and interested investors and obtaining suitable investment terms can often be a lengthy process.
 
Main documents required
See our articles on transfer of technology part 1 and part 2.

Ancillary documents
A number of other agreements are often put in place at the time of commercialisation:

• Service, consultancy or secondment agreement

The simplest form, requires that once a spin-out company is formed the founders to leave the university and become full time directors or employees of the new company by entering into service agreements with Newco in relation to the terms of their employment. This approach aimed at achieving as much commitment as possible to the spin-out by ensuring that the founders would not be distracted with other interests either within the university or without. In such cases, the founders would enter into.

However, nowadays there is a much greater appreciation of the benefits to the founders and, ultimately, to Newco of the easy, informal connections which come from still being part of the university. Also there are fewer founders who are willing to risk all in joining an early stage company. It is therefore common for the founders to offer some or all of the services to Newco while retaining a connection to the university. A secondment agreement retains the link of employment to the university. This allows the founder to devote a period of time to the spin-out on a full-time basis.

Another possibility is entering into a consultancy agreement, the difference here being that generally the founder will not work full-time for Newco. The main issue to consider in such agreements is ownership of IPR. There is generally no difficulty with Newco seeking to own the output of the time spent by the founder working for Newco. The difficulty comes where there is no clear separation between company and university business. It is therefore important that the practical side of any such arrangements is given as much thought as the drafting of the legal documents.

• Research agreement

Where there will be academic resources left at the university, it can be advantageous to all parties to have continued research done at the university. This can then be accessed by Newco, which should ensure that it owns the output of this research, particularly where this may be sponsored by the company.

The main issue with a research agreement is the tying (or not) of payments to achievement. Whether or not this is acceptable will depend on the nature of the research. If acting for the founders, Newco or investors, it is wise to ensure that the research can be cancelled on reasonable notice. This avoids the situation where payments need to be made even when it is clear that the research is unlikely to produce the desired outcome.

• Facilities agreement and/or access agreement
  

The spin-out company will often want or require continued access to certain laboratories, equipment, or computing facilities in the early days following completion of the spin-out process. It should not be forgotten that facilities that were available free of charge may now need to be paid for. In addition, certain computing facilities may be subject to licence restrictions which will not permit use by the spin-out company, even if the persons using the computer programmes were the same as prior to the set up of the spin-out company. It is therefore wise to spell out any facilities that are needed and to factor them in the contractual negotiations.