2. 1 Legal Issues: Licensing & Startups Peter H. Durant Nixon Peabody LLP pdurant@nixonpeabody.com April 20/21, 2005 Copyright © 2005 Nixon Peabody LLP

3. 2 Clients “We go to market in 10 minutes and we need to copyright/ patent/trademark our drug/software/ surgical technique.”

4. 3 Me

5. 4 Overview Learn more than you wanted to know about: –Ownership/Funding Issues –Exploiting Your Idea – Startups – Licenses

6. 5 Bayh-Dole Act (1980) u Applies to federally-funded projects and resulting patentable inventions u Faculty/staff/employees must disclose IP to University and University must disclose IP to government agency u University may elect to take title u University cannot assign ownership of IP to third parties (other than patent management firm)

7. 6 Bayh-Dole Act (cont’d) u Government receives royalty-free, non-exclusive license (government use rights only) u Preference to small companies as licensees u University must share (no set amount) license fees/royalties with inventors - balance applied to scientific research or education u University cannot agree to royalty rate in advance

8. 7 Government License Rights u Unlimited – can hand out on street corner u Limited/Restricted – cannot be: a.disclosed outside Government b.used by Government for manufacture c.used by non-Government party u Non-standard rights (becoming more popular)

9. 8 Government License Rights (cont’d) u Issues –Is Tech. Data/SW a contract deliverable? –Developed exclusively at “private expense”? If purely private dollars, Government gets limited rights –Developed with mix of Government and private funds? Government gets “Government Purpose Rights” under DFARS but “Unlimited Rights” under FAR

10. 9 CREATE ACT (2004) u Avoids “prior art” problem if different employers collaborate in research u Three key requirements to CREATE –Research must be undertaken pursuant to a joint research agreement –Research agreement must be in effect on or before the date of the claimed invention –Research agreement must be broad enough to capture the invention

11. 10 Exploiting Your Idea u Know what you have (patent? invention disclosure? fundamental idea or improvement? software? trademark? other?) u Understand your ownership rights –institutional policies differ –check employment/affiliation agreements –check funding agreements u Consult with technology transfer office (or reasonable facsimile) on strategic options u Develop a plan

12. 11 Exploiting Your Idea (cont’d) u Simple (?) choice –License –Sell –Use (start-up)

13. 12 Exploiting Your Idea (cont’d) u Roles for: you/your institution/other investors u Director/officer; shareholder/investor u Director/Officer –control –employment contract –exit u Shareholder/Investor –“sweat”/other equity –control percentages –voting issues/rights

14. 13 Business Entity Formation u Sole Proprietor u Partnership u Corporation –C Corp –S Corp u Limited Liability Company

15. 14 Before You Seriously Search for Capital, Know: u Which alternatives are feasible for your business? u How will potential investors evaluate your business? u How much money do you need? u How much money can your business attract? u How long will it take? u Can your company run efficiently while you are on the money trail?

16. 15 Early Stage Financing u Personal Savings u Credit Cards u Family and Friends u Retirement Assets (e.g., investment of 401(K) assets) u Governmental Programs (e.g., SBIR/STTR grant)

17. 16 Small Business Innovation Research (SBIR) Small Business Technology Transfer (STTR) Program Objectives u Using small businesses for innovation u Build small businesses to meet federal research and development objectives u Aid economically disadvantaged small businesses u Aid minority-owned small businesses

18. 17 SBIR/STTR Funding and Structure u Up to $850,000 early-stage funding u Selection criteria –Qualification as a small business –Degree of innovation –Technical merit –Future market potential

19. 18 SBIR and STTR Primary Differences u SBIR Principal Investigator (PI) must be primarily employed by the small business u SBIR permits outsourcing of one-third of Phase I and one-half of Phase II awards u STTR requires formal relationship with non-profit research partner –At least 40% research by small business –At least 30% research by partner non-profit

20. 19 Three Types Later Stage Equity Financing u Private Placement u Venture Capital u Public Offering

21. 20 “Murphy’s Laws” of Capital Formation u It will take longer - much longer - than you think to secure the money u In the end, the amount of money you need will be larger (by multiples) than first anticipated u Prepare yourself: Investors and lenders will not be nearly as impressed with your company, idea or product as you are u Try as you might to avoid it, looking for money will divert senior management from running the business

22. 21 Overlooked Traps u Personal tax planning u Non-compete issues u Conflicts of interest

23. 22 IP Licenses u Work Out the Terms –Term Sheets = Good –Letters of Intent = Not so good License Grant (heart of the agreement) –Most Important Question: a license to whom, to do what, with what, to what extent? –A license is an extremely flexible and sharp tool, and can divide and apportion IP in innumerable ways to achieve parties’ goals

24. 23 IP Licenses (cont’d) u Division of Rights (Joint Ownership discussed at March seminars) –Patents: make (have made), use, offer to sell, sell, import –Copyrights: reproduce, distribute, perform, display, create derivative works Example: right to create and distribute copies of software, but no right to modify

25. 24 IP Licenses (cont’d) u Licenses – exclusive/non-exclusive –Limited field of use (industry, product specific, geographical, etc.) u Scope of license –Use, manufacture, sublicense, distribute, re-seller (VAR) –Limitations, e.g., exclusive, geographic limits, industry limits –Consideration/royalties –Assignment

26. 25 Other Important Licensing Provisions Training, support, etc. Minimums Confidentiality Assignment

27. 26 Termination u “How Do I Get Out of This?” –Carefully drafted termination provisions critical –Must consider impact of termination upon IP rights v. ability to use jointly developed technology –Lawyers aren’t magicians, and can’t always get clients out of bad deals

28. 27 Congress shall... promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive ___ ___ ___ ___ ___ to their respective Writings and Discoveries... Constitution Article 1, Section 8