University License Agreements: Tips for Start-up Companies

Universities develop and license innovative technologies, patents and cutting edge research, and often transfer the benefit of such innovations to the public through licensing agreements with start-up companies. By licensing technology to companies that can develop and commercialize it, a university ensures broad practical applications of its research programs while generating income to support further research and education.

Entering into a license agreement with a university allows a start-up to gain early access to new technologies and provides the start-up company with the right to use and commercialize new discoveries and innovations. The goals and motivations of universities, however, differ from those of for-profit businesses that start-ups typically face in negotiations, and for a variety of reasons, universities often cannot agree to terms that are included in comparable agreements between businesses. Understanding what a university will license to a company, and on what terms, can help prepare a start-up for the negotiation process.

The following is a list of points to consider when negotiating a university license:

Exclusive versus non-exclusive licenses: Exclusive licenses (usually to a specific “field of use”) prohibit others from using the licensed technology for the duration of the license, whereas non-exclusive licenses allow the technology to be licensed to multiple users at once. In practice, a non-exclusive license is not much more than a promise that the university will not sue you for infringement. If, however, the university grants an exclusive license, it will typically want some guaranteed commitment from the start-up—for example, milestones for commercialization of the technology or minimum royalty payments.
Sublicense Rights: By default, a patent license extends immunity only to its licensee. Sublicense rights allow the licensee to further extend this immunity to other third parties. Licenses that provide for exclusive rights generally allow the licensee to sublicense the licensed technology to third parties. A university typically requires that all sublicense agreements contain some of the same language as the original license (such as the use of the university name, maintenance of university rights, product liability disclaimer of warranties, confidentiality, and termination).
Future Improvements: University licenses generally only cover existing university-owned technology and not future technology created at the university (which, assuming an exclusive license in an adequately wide field of use, may not be disadvantageous to the start-up), but licenses do usually allow the start-up to own any derivative intellectual property created by the startup (though the royalty obligations usually apply to derivative technology too).
No Warranties; Limitation of Liability: Typically the university will not make any warranties as to the fitness, merchantability or validity of patent rights, and the licensee assumes all risk associated with the licensed technology. At the same time universities often will require that you reimburse the university for any costs it incurs from claims against the university that arise out of the license it granted you. In the context of sublicenses or exit transactions, this means the risk of these liabilities falls on the company without recourse to the university. Universities may also require you to obtain minimum amounts of liability insurance to cover any damages that might arise in connection with the license rights granted to you (e.g., product liability insurance prior to your commercial sale of a product.)
Restrictions on Transfer: As a starting point in university license agreements, many universities won’t allow you to transfer your university license to another company or person without the university’s consent. Depending on how a deal (an acquisition, for instance) is structured, this means that you may not be able to conduct a transaction without the university’s consent, and the deal timetable needs to take the university’s consent process into account.
Equity in the Start-up: Many university licenses involve some equity in the licensee, usually common stock, to give the university a share of potential upside in the start-up above and beyond the potential royalty stream. Further, this equity often has protections around it for dilution; for instance, if the company does any equity fundraising up to a ceiling amount agreed to in the license, the company is required to issue to the university additional shares (that the university does not pay cash for) to maintain the university’s percentage ownership. The license may also address other “investor rights” such as registration rights, etc., so startups need to remember when drafting agreements for equity investors to make sure they align with the license.