The Yale Office of Cooperative Research is continuing to expand programs and support for Yale entrepreneurs aiming to start companies based upon intellectual property coming from Yale research. As part of this effort, Yale is pleased to offer a Startup Guide and a pre-negotiated Startup License. This license is intended to greatly speed up and streamline the licensing process.
View Yale OCR's guide to start-ups.
The Yale Office of Cooperative Research is continuing to expand programs and support for Yale entrepreneurs aiming to start companies based upon intellectual property coming from Yale research. As part of this effort, Yale is pleased to offer a pre-negotiated Startup License. This license is intended to greatly speed up and streamline the licensing process.
The Startup License is based on transparency and fairness, offering the exact same, very favorable terms to all Yale startups. It has been designed in consultation with attorneys that represent startups, seasoned entrepreneurs, and investors to be a “no negotiation” license that any of them can encourage Yale entrepreneurs to sign without reservation. By reducing the time and legal expense to get a license done, entrepreneurs can focus their efforts on developing their businesses. Further, by reducing all uncertainty as to the terms of the license, startups can comfortably take an option to license the technology, thus deferring the need to sign the license until such time that they feel ready to assume the responsibilities of a licensee.
While Yale’s primary mission in licensing technology to startups is to promote the development of products or services that benefit society based upon Yale research, Yale does seek a reasonable financial return from its licensees so that it can reinvest in its education and research missions. Understanding that startups need to carefully ration their precious equity and cash in its early phases, Yale has adopted a new approach: the typical upfront “payment” for the license has been replaced with a “liquidity event” payment, due only if, and when, the company achieves an IPO or becomes acquired. No cash or equity is due to the university upon signing the license. The “liquidity event” payment is 1% of the company’s value upon sale or IPO, but can be significantly reduced if companies have paid patent expenses and other bills on time.
Attractive Licensing Terms to Startups:
- No Upfront fee (customary upfront fee in cash, stock, or debt is waived)
- No equity or debt issued to Yale (further reducing a startup’s legal fees)
- Diligence obligations limited to reasonable commercial efforts
- No Milestone Payments.
- Deferment of past patent expense reimbursement for 2-4 years
- Minimum Royalty Payments creditable towards Royalty and Sublicensing Fees
- Liquidity event payment of 1%, reducible to 0.5% for companies that pay bills on time; capped at $1 million prior to deductions for on-time payments, making it effectively lower than uncapped rate of 0.75-0.95% offered by other universities in their “express licenses”.
“Startup License” Process:
For Yale entrepreneurs demonstrating a diligent effort to start a company based on Yale technology that includes one or more Principal Investigators as founders of the company, the process of getting a Startup license is very simple. Entrepreneurs receive an option to the technology while they develop their ideas for a business. The option is a promise by Yale not to license the technology to anyone else for a period of time. The entrepreneur or team is required to work through an OCR/YEI program to develop a mutually agreed upon business plan. The business plan development and review process is intended to partially substitute for the more rigorous commercial due diligence obligations in typical license agreements. The process also provides entrepreneurs with the opportunity to access assistance from YEI and one of the many other entrepreneurial initiatives on campus. Throughout this process, the team will receive access to YEI resources such as the Corporate Partners, Venture Mentor Network, Entrepreneurs in Residence, Venture Creation Consultants and Advisors to support the development of the new venture. Once a mutually agreed upon plan is in place, the option will be updated to include a promise to provide the license under the Startup License terms. Entrepreneurs may then execute the Startup License immediately, or, if still in the formative stage, extend their option as they seek to raise financing or other sources of cash that will allow them to make the payments required once the license is executed. The more detailed steps of the process are thus:
- Identify and encourage applicants that might qualify for Startup Licensing
- Introduce team to the Yale Entrepreneurial Institute, and engage researchers in one or more programs
- Identify Field(s) that team aims to commercialize in the startup and offer team a 6-month Exclusive Option to license technology, under the terms of the Startup License and upon approval of a business plan. Confirm that technology and team are eligible for Startup License (therapeutics that will require FDA approval are excluded from Startup License eligibility)
- Support team in development of the team’s business plan and/or pitch deck indicating team’s strategies to develop and commercialize the technology for one or more Fields
- Support team through Startup License application process, which includes review of conflict of interest and other Yale policies that may apply
- It is the expectation that any startup with a reasonable plan and a diligent commitment of personal effort by one or more founders will be deemed approvable. Startups may choose to either extend their Exclusive Option by another 6-months (if not ready to assume ongoing patent expenses), or to proceed with executing the Startup License. Further renewal of the Exclusive Option may be negotiated with Yale if startups are making diligent efforts and require more time to find investors.
Benefits to Startups and to Yale Community:
- Reduces the time and legal expense to get a license done, freeing time and resources to focus on developing business
- Offers predictable, consistent, and fair license terms to all startups
- Raises visibility and attractiveness of partnering with Yale researchers to entrepreneurs and investors
- Frees OCR staff time to spend even more time supporting Yale researchers developing inventions
- Provides reasonable chance for Yale to recoup its investment in patents and generate revenue to reinvest in Yale’s educational and research missions
STARTUP LICENSE TERM SHEET- Terms are non-negotiable
Grant. Exclusive to patent(s) for relevant Field(s) as identified in Business Plan, worldwide, with the right to sublicense, limited by and subject to the rights and requirements of the United States Government. Yale reserves the rights to practice the intellectual property rights for research and teaching, for itself and other non-profit institutions.
Upfront Fee. None.
Past Patent Expenses. Licensee will reimburse Yale for past patent expenses (amount to be provided) incurred prior to the Effective Date on the following schedule:
- One third due upon the second anniversary
- One third due upon the third anniversary
- One third due upon the fourth anniversary
Ongoing Patent Expenses. Licensee will reimburse Yale for patent expenses incurred after the Effective Date within 30 days of receiving a monthly invoice for such patent expenses.
Minimum Royalty Payment. $5000 on second anniversary; $10,000 on third, $15,000 on fourth, $20,000 on fifth; and $40,000 on sixth anniversary and each year thereafter, fully creditable to Royalties and Sublicensing Revenue Payments due in same calendar year.
Royalty. 3%* of Net Sales made by Licensee or Affiliates, with stacking provisions that may reduce royalty to 1.5%.
Sublicensing Revenue Payments. 20% of sublicensing revenue and royalties (no fixed “pass through” obligations imposed on sales made by sublicensees), reduced to 10% on earlier of (a) 4 years, or (b) documented expenditure of $10 million or more by licensee to develop licensed products
Liquidation Event Payment and On-time Payment Incentive. Licensee shall make a cash payment to Yale coincident with any liquidation event (e.g. IPO, asset sale, merger or acquisition) in the amount equal to 1.0% of the Licensee’s fair market value at the time of the Liquidation Event, not to exceed $1 million. The amount due shall be reduced by the sum of all payments that have been made under the license on time (within 30 days of their due date, or, if patent expenses, their invoice date). Such reduction will not exceed 50% of the amount due. In no case shall the amount due, after reduction for on-time payments, be less than $25,000.
Participation in Future Private Equity Offerings. During the term of the license, if licensee proposes to sell any equity securities, including preferred stock, in a financing round of greater than $3 million led by a U.S. or European-based venture capital firm or corporate investor, then Yale and/or its Assignee will have the right to purchase up to 10% of the securities issued in the first such financing round. In each subsequent round of venture capital, Yale and/or its Assignee will have the right to purchase a percentage that is equal to 50% of Yale’s percentage from the immediately preceding round of financing. The rights herein are not additive to rights secured by Yale and/or its Assignee upon purchase of securities.
Yale’s Startup License: Frequently Asked Questions
1. What technologies may be licensed with the Startup License?
Any Yale technology that is not a drug or therapeutic is eligible for the Startup License.
2. Why are therapeutics ineligible for the Startup License?
To ensure that Yale discoveries for new medicines get to patients in need, Yale requires that licensees to therapeutic technologies commit to significant financial and non-financial milestones that are highly tailored to the drug discovery and clinical development programs required. These typically require the commitment of tens of millions of dollars to very high-risk ventures, and our licenses are tailored to meet both the investors and Yale’s needs.
3. Who qualifies for the Startup License?
If you are a Yale employee, a founder of a Startup based on a patented (solely owned) Yale intellectual property (Yale IP) and an inventor on the Yale IP. The entrepreneur or team is required to work through an appropriate OCR/YEI program to develop a reasonable business plan.
4. I am a Yale employee and a co-founder but not an inventor on the Yale IP. Will my company qualify for this license?
No, you will not qualify
5. I am a Yale employee, an inventor and a co-founder but the Yale IP is jointly owned with another university. Will my company qualify for this license?
Maybe – it will depend on discussions with the other university.
6. I am a Yale employee and an inventor but not a co-founder. Will the company qualify for this license?
7. I am a Yale employee, an inventor and a co-founder of a company that has executed a license with Yale previously. Can I re-negotiate the terms of the previous license?
No, you will not be able to re-negotiate the terms of the previous license.
8. What happens if an inventor wants to start a company but his fellow Yale co-inventor(s) do not?
The Yale inventors will need to resolve this issue independent of OCR. The formation of a Yale start up should be agreed upon by all inventors.
9. Who do I contact to discuss the Startup License?
Please call OCR at (203) 436-8096 and you will be connected to the appropriate licensing executive. If you already work with an OCR licensing executive, you can contact him/her directly.
10. Is the Startup License negotiable?
No, the terms of the Startup License are fixed and if not acceptable, a more detailed and exclusive license agreement will be negotiated. Note, however, that Yale will only negotiate a license with an executive or manager of the startup who is not an employee of Yale. Because of their conflicting roles and relationships, Yale employees cannot be involved in negotiating licenses on behalf of companies they are helping found. Standard licenses typically take 3-6 months to negotiate at any university, and it is common for startups to incur legal fees with their outside counsel of $10-20,000 or more on a license negotiation, depending upon the extent of the language changes requested by the startup.
11. I have a few edits to the Startup License; what do I do next?
This agreement has been extensively vetted to be acceptable to any startup, and is being offered “as is” without any redlining whatsoever – it’s non-negotiable. If a startup is unwilling to accept the license as is, it may choose to negotiate a full license agreement. However, in such cases startups should not expect to negotiate licensing terms that are better than those being offered in the Startup License – a cash upfront fee, diligence obligations, and other financial and non-financial obligations should be expected.
12. I do not have a business plan, can I sign the Startup License and submit the business plan later?
No, you will not qualify for the Startup License if you do not have a business plan. However, if you are serious about starting a business and developing a business plan, OCR may provide you with a 6-month Exclusive Option, which is Yale’s promise not to license the technology to anyone else.
13. What if it takes me more than 6 months to develop a business plan or get sufficient funding to assume ongoing patent expenses as required by the license?
If a prospective Startup Licensee has made significant progress towards developing the business during the 6-month option period, the option may be extended for an additional 6 month period. Assuming all other eligibility requirements have been met (see above), completion of the business plan allows the startup to “lock in” to an offer to execute the Startup License.
14. What are the salient features of the Startup License?
In order to expedite and simplify the contract process and lessen the burden on startup companies, the Startup License template has a simple deal structure with a flat royalty rate, a low “Liquidation Event Payment” at the time of liquidation/IPO (initial public offering), no upfront fees, no “pass through” royalties on sales by sublicensees, and no diligence milestones that startups must achieve by certain dates. However, the licensee will be responsible for all ongoing and future patent costs upon execution of the Startup License. Yale will be in control of the patenting process, but with patent attorneys that are reasonably acceptable to the licensee. Licensees are often concerned about choice of patent counsel as it relates to cost and quality. Yale uses over 20 law firms for patent prosecution and has been willing to change law firms in response to a licensee’s concerns. In patent prosecution, the licensee will be copied on all relevant correspondence and have opportunity to comment.
15. Why does Yale reserve the right to participate in future private equity offerings?
Yale has entered into a relationship with Osage University Partners(link is external) to offer the opportunity to for Osage to invest in Yale startups. Osage is a venture capital fund with $315 million in investment capital that invests exclusively in startups that are commercializing university research. Osage has partnered with over 70 of the most entrepreneurial universities and research centers to invest in their startups, and share part of our profits with those institutions to further promote the university entrepreneurial ecosystem. Osage invests across all sectors of university commercialization, including information technology, energy, materials, and life science and across all stages of company development, seed through growth equity, with $5-10 million per investment. Osage has a strong preference to syndicate with top-tier venture capital funds, but will lead in select circumstances.
16. Why are the sublicensing terms so attractive to a startup?
Sublicensing is an important source of income for a startup company. University licenses almost always charge the same royalty on sales made by a sublicensee as made by the licensee. This is called a “pass through” royalty. For example, if a licensee has a 1% royalty and can find a sublicensee to pay a 2% royalty, then the licensee would only be able to net 1% after paying the licensor. In the Yale Startup License there’s no fixed “pass through” rate, but rather only 10% or 20% of sublicensing royalty income is paid to Yale. Applying these attractive terms to the same example, the startup would net a 1.6% or 1.8% royalty with only a 0.2 or 0.4% royalty payable to Yale.
17. Will I be able to license copyrights, software or unpatented technology under this license?
Yes, and the royalty rate for a license to unpatented intellectual property will be half that of patented technology.
18. What is a Liquidation Event Payment?
The Liquidation Event Payment is a cash payment to Yale coincident with any liquidation event (e.g., IPO, asset sale, merger or acquisition) in an amount equal to 1.0% of the licensee’s fair market value at the time of the liquidation event, not to exceed $1 million. The amount due shall be reduced by the sum of all payments that have been made under the license on time (within 30 days of their due date, or, if patent expenses, their invoice date), such reduction not to exceed 50% of the amount due.
19. Is a Liquidation Event Payment normally in a License to a startup?
A “Change of Control Fee” is common in university licenses to startups. The liquidation event Payment is similar except that it is a contractual obligation that survives termination of the license. It has recently come into use at several institutions that have adopted “express licenses” for startups such as University of North Carolina, Purdue, and Washington University in St. Louis. It is intended to serve as consideration to the university in lieu of an upfront in cash or equity.
20. How does Yale’s Liquidation Event Payment compare with other university “express licenses”?
Liquidation event payments in other university express licenses are all 0.75-0.95% of the valuation upon sale or IPO without any limit. Yale’s has been designed to be slightly higher for startups that fail to pay bills to Yale on time (1%), but decline to a rate that is substantially lower for companies that pay their patent expenses and other license bills on time (as low as 0.5%). Further, Yale’s Startup License caps the total Liquidity Event Payment at $1 million prior to deductions for on-time payments.
*[Royalty may be reduced to 1% for industrial manufacturing processes in areas such as chemicals, metals, or semiconductors and other electronic components where gross margins are low]