Why are equity stakes policies so complicated?

Why are equity stakes policies so complicated?

Alice Frost report webBy Alice Frost, Director of Knowledge Exchange at Research England.

A report from IP Pragmatics (IPP) on a key feature of technology transfer good practice – policies in equity stakes for university spinouts, is published on the KE Concordat today, Alice Frost provides her thoughts on this. 

This report was commissioned by Research England as reference material for the Knowledge Exchange Concordat. Universities have until 8 January 2021 to decide to participate in the KE Concordat development year. Intellectual property (IP) policies are likely to continue as a hot topic in 2021 in implementation of the Government’s R&D roadmap, and the Concordat process will be an invaluable opportunity for universities to share their insights on IP across HE and with policy makers and funders.

The IPP report highlights considerable variation between institutional policies. This is not unexpected. Our close working with overseas counterparts, such as through our partnership with the US National Institute for Technology and Standards and TenU grouping suggests this would be true in most developed nations. Utah and Purdue are much respected in US technology transfer practice, but their approaches are very different from those of, say, MIT and Stanford. 

Why are policies potentially so complicated? The report highlights that universities will be looking at a number of key dimensions in determining the right approach for them:

  • the maturity and scale of the university’s IP pipeline and technology transfer experience,
  • the strength of the surrounding ecosystem (the wider conditions of place) including the maturity of the investor base,
  • the key drivers of exploitation implied by the particular technology’s exploitation pathway,
  • and the characteristics and expectations of the academics and other founders and inventors (with many researchers likely having claims to the IP).

Policies then get complicated as they try to juggle getting the incentives right for venture success across institutional, ecosystem, technology and entrepreneur dimensions.

The report does suggest two broad predominant models in the UK, which fit with our understanding of scale and maturity of tech transfer activity and of the ecosystem:

  • A complex model with incentives and rewards in two dimensions: royalties from the licensing of the IP and equity in the start-up company. In this model the equity stake to the university tends to be lower, with higher share for the researchers and investors.
  • A simple model with one dimension: equity for the interest in the company and for the licence for the IP, and hence where the equity stake tends to be higher.

Again UK and US experience is similar. Scale and maturity in the IP pipeline and in the surrounding ecosystem mean that drivers for success of the venture can be driven out of the wider external environment (as at MIT and Stanford). The university’s reward is cash for its established brand IP, not risk equity to bind it into the venture. But start-ups in an area with a less developed ecosystem – such as in Utah or near Purdue – would be unlikely to raise investment to pay cash fees up front. In these less developed ecosystems, universities will need incentives to bind them into driving success of the venture, through their roles as local anchors and enterprise animateurs. 

Another complexity is getting the policies right for different technologies. Success of a biotech start-up may be driven out of immersion in the university’s research laboratory with appropriate incentives needed in the department. Success of a tech start-up may be best driven by early commercial experience, with the incentives needed for the researchers and entrepreneurial management team joining the company.

IPP also give warning on the need to look at the fine print in comparing policies[1]. Anti-dilution is one example of this. Initial shareholdings in a company will be reduced as other shareholders join, unless shares are protected by anti-dilution provision. This means that a university 5% stake may lead to a greater share of the proceeds at exit (when shares are sold) than a 50% stake, if the former is not diluted throughout the growth of the company. A curiosity of equity stakes then is that 5 may be a larger number than 50!).

The IPP report suggests two key factors for universities to consider in their Concordat action planning related to IP:

  • Are the institution’s strategic objectives for spinning out clear, and do IP policies fit with these objectives?
  • Do IP policies meet the test of the minimum complexity commensurate with attaining the institution’s objectives? 

And two sector wide issues that should be considered in development of the KE Concordat for the longer run:

  • How can we draw up a lexicon to enable consistency of terms in setting out IP policies so that these can be better understood?
  • And how can we move beyond explanation - to focus more on our success and our innovations in IP?

Date published: 18 December 2020

[1] Some details of IP Policies may need to be confidential to stakeholders within the university and hence are not examined in the IPP study which looked only at published materials.

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