Originally published in EIR for NYC

This question is really two separate questions: (1) When should the company begin the process of licensing the intellectual property (IP) the company needs out of the academic lab? and (2) (When) Should I, the founder, leave my position at the academic lab? ("Academic lab" can mean a number of things, such as a university or a research and/or teaching hospital. For the rest of this blog post, we'll use the phrase "university" to refer to such an academic lab, or, in reality, any other institution that may have a claim to the IP that the company needs by virtue of the institution being a founder's employer at the time that IP was developed.)

1. When should the company begin the process of licensing the IP that it needs out of the university?

The short answer is: when you are comfortable that the research has yielded strong results, you have secured a strong IP position and ideally, when you have some interest from investors.

On the research and IP side, founders typically begin thinking about getting the IP they need for their company out of the university when the research is in the pre-clinical stage. Licensing the IP from the university at such an early stage is helpful to the bioscience startup because it ends the period of time during which IP developed would be owned by the university—any IP that the company develops in the company's own lab space, as opposed to the university's facilities, will be owned by the company—not the university (barring something unusual in the agreement between the university and the company). This is an argument to get the IP the company needs out of the university and leave the university lab sooner rather than later. However, if you try to license the IP out too early, before you have identified a promising application of that IP to a real-world problem (in other words, an unmet need for patients), you will have a hard time pitching your business to potential investors.

Another point to keep in mind with respect to timing of the licensing process: we do not often see founders attempting to license out from the university IP related to research that has gone beyond low-cost animal studies (such as mouse studies). Larger animal studies and clinical trials require significant funding, and unless your research at the university is being sponsored by another entity with deep pockets, you will need to license the IP out of the university and secure outside investment before you can take it beyond the small animal studies to clinical trials and ultimately to market.

On the investment side, founders tend to struggle with the perceived "chicken and egg" problem associated with obtaining venture capital (VC) funding. You typically need the funds from the VCs to pay the university for the license. But you also need to show the VCs that you have rights to the necessary IP before they will start signing checks. Luckily, there are ways to deal with this dilemma.

We recommend that you meet VCs before you license the IP out of the university. If you find VCs who express sufficient interest in your business, ask for their input about matters such as the licensing of the technology. While VCs may not literally sit beside you at the negotiating table, they may be interested in reviewing a term sheet or a draft license agreement provided by the university. Alternately, they may describe to you what they consider to be favorable license terms, which you can take into account and discuss with the university as part of your negotiations. Lawyers can also help to bridge the gap for founders who are not as far along in their relationships with potential VCs, by advising the founders of the terms the lawyers have seen in comparable agreements, the terms that are important for the company to focus on, and the terms VC's in the bioscience space are typically looking to see.

There are several advantages to obtaining input from potential investors prior to their investment in your company:

  1. VCs will usually have a lot more experience than a founder with licensing transactions, and will have a better sense than the founder (and often the university, if the university doesn't do a lot of out-licensing) of what terms are "market" for companies like yours; this makes it far more likely that you will receive reasonable terms for the grant of the license to your company, including the initial cash outlay from the company to the university, the equity stake that the university will receive in your company, and any milestone and/or royalty payment obligations down the road.
  2. If you negotiate the license without the input of your potential investors, you may not end up with terms that your investors are comfortable with. In the best case, this will lead to a time-consuming renegotiation of the license agreement, with potential costs to your company in getting more favorable terms as part of the renegotiation. In the worst case, the investors may believe that the license you have previously negotiated is not workable and will not invest in the company.
  3. Even if you manage to negotiate a license that your potential investors are generally comfortable with, without obtaining input from those potential investors first, this still leaves you in the sub-optimal position of having to pitch the negotiated license to those potential investors. There could be something that they would prefer to change.

Getting VCs involved early on is a good way to get sophisticated guidance for your company, which is especially useful for a first-time founder. Not only will your company benefit from the counsel of people who have worked with a lot of companies very similar to yours, which can help you negotiate a more reasonable license agreement with "market" terms, but if you choose not to leave the university to work at the company full-time (see question #2 below), you will get to know the people into whose experienced hands you are entrusting your startup. And then sit back, do science, and allow them to make your equity in the startup valuable.

2. (When) Should I, the founder, leave my position at the university?

Most founders do not leave their position at the university to run the company they started. In other words, they do not become full-time employees of the new startup company. Some founders make this decision because they enjoy their jobs at the university and have no interest in leaving the university environment. They specifically might like teaching and doing academic research and not want to switch gears to work on the business itself, which involves the pursuit of commercializing the technology that has been developed through research. Others may determine that they do not have the requisite skill set and experience to be the CEO or chief scientific officer (CSO) of a company.

Unlike startup software or other "tech" companies—which generally require less capital to get the company off the ground and bring a product to market—bioscience companies typically require significant funding to take a product candidate from the pre-clinical stage to the clinical stage, and then to get the product through the approval process and onto the market. Investors in bioscience companies, such as VC firms, carefully evaluate the experience of founders in operating a business and have their own view as to whether a particular founder has the requisite skill and experience to run the company that the investor is investing in. The investors will focus on having an experienced management team, which could involve hiring a new CEO, and having the founder or founders serve in another capacity, such as CSO, or not as a full-time employee, but rather as a consultant and/or scientific advisor to the company.

In cases where a founder has decided not to leave her position at the university and an investor is comfortable investing in a bioscience startup with the founder serving in a part-time role, the interests of the parties are well aligned and the relationship is stronger from the start. Even where the decision is made at the outset to have the founder join the company in some capacity, it is often the case that the investors and founders have divergent views over time as to the continuing match between the needs of the company and the skill set of the founder; so it is not unusual for a founder to be transitioned to a different, less active role.

While most founders do not leave their position at the university to run the company they started, this is not to suggest that you, the founder, cannot or should not leave your position at the university to run or work full-time at the startup. If it is your dream to devote 100% of your time to building this company and you want to be involved at every juncture, by all means, do it. However, you'll have to be realistic about what investors will want and take their views into consideration when you decide whether to move forward with a particular investment transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.