University Spin-off Company Term Sheet

PURPOSE: This document outlines the terms normally contained in University licenses and the conditions under which licenses are granted to companies being created around University technology (“Spin-off company”).

FACULTY INVOLVEMENT: In most instances, a faculty member will want to be involved with the new company, but also retain their full position at the University. Following discussion of the options, the University requires an employee to disclose his/her potential relationship, and responsibilities to the corporation and explain why it is suitable in the circumstances.

Industrial Liaison Office (ILO) staff will help provide a written Management Plan to oversee any potential Conflicts of Interest or Conflicts of Commitment. A suitable relationship will be approved in a timely manner and reviewed on an annual basis.

The ILO will undertake a formal process of assessing the commercial potential of intellectual property. This process evaluates both technical and market factors and results in a decision on the most appropriate route to commercialisation (maximum value add) and the development of a commercialisation plan. This process is carried out in consultation with the inventors and the Departments in which the intellectual property originated. The ongoing involvement of the inventors is often very important.

INTELLECTUAL PROPERTY (IP): In all cases, the company is interested in acquiring rights to University intellectual property. The IP can take many forms—patentable or copyrightable material, know-how, trademarks, etc. A License Agreement is the usual legal instrument, defining the relationship between the University and the new company and providing the rights to undertake commercialisation. By signing a License or Option Agreement that defines the rights to the technology and the intellectual property that it contains, a company has clear access to the technology and the team of researchers who can assist with commercialisation.

Patent activity — If the technology is covered by University patents, these will be licensed to the company, with ongoing maintenance costs and all foreign costs paid by the company. The company may seek additional patent coverage, and the University will participate in all aspects of the application. If there is evidence of a patent infringement, the University will collaborate with the company but expects the company to lead and pay for any necessary action.

The IP must be unencumbered. All inventors including students must be included in the Records of Invention. Students are asked to assign their IP to the University as part of the patenting process and this is particularly important for spin-offs. The university will conduct an IP audit as part of the process.

Student involvement is a particularly sensitive issue. Students working on industry projects including those with University spin-offs are usually required to sign confidentiality and IP agreements. Researchers must be aware that students who have not signed such agreements must be excluded from access to the information. University staff must also be advised of their obligations to maintain confidentiality as employees when they are involved in certain projects.

OPTION AGREEMENTS: Sometimes an exclusive Option Agreement precedes a full License. In this manner, the company does not need to commit to the license and related performance terms until it has a chance to convince itself of the market potential. Upon payment of an option fee, the company is granted a time-limited option to acquire a license under negotiated terms. During the option period, the company has an exclusive opportunity to understand the technology and its market potential as well as work with the University to create a product. At any time during the option period, a formal license can be signed.

LICENSE AGREEMENT TERMS

License Agreement — the University and its researchers will provide rights to use a selected technology for product development, manufacture, use and sale.

Degree of Exclusivity — The company can acquire exclusive or non-exclusive rights to the technology to use in defined markets. In the former case, one license is granted in specified markets. In the latter case, the University may license a number of companies.

Field of Use — Rights are restricted to market applications where the company has the resources to launch new products or services based on the technology. Rights to grant sublicenses to others can be provided under mutually agreeable terms.

Improvements and New Discoveries — As commercialisation proceeds, the University researchers may make improvements to the technology. Normally, these are made known to the company which finances the work and are included in a license for no additional compensation. However, rights to improvements to the technology and new technologies derived from the licensed research must be specified in the original license agreement between the University and the company.

Performance Milestones — Depending upon the level of exclusivity negotiated, the University will require commitments from the company in the form of performance milestones defined in terms of measurable events within the company's own commercialisation plans or cash payments to the University.

Compensation to IP Owners— By policy and precedent, the University expects to share in the proceeds of eventual commercialisation, commensurate with its lack of participation in any business risk. Compensation will be a function of the performance milestones, the degree of company commitment and the degree of exclusivity granted. There will be a:

License sign-up fee,

Stated cash payments to the University prior to market sales, and

A royalty set on the basis of industry standards.

Royalty rates are expressed as a percentage of sales of the company or its sub-licensees in stated markets.
Frequently, as part of the long-term compensation, negotiations provide the University with a minority equity position in the company. In some cases the University may request a Board seat and involvement in the management of the company.

The University's IP Rule allows for inventors to receive one third of the net revenue from commercialisation of University IP. If a spin-off company is formed, the inventors may have a choice to take these benefits up-front as equity (shares) in the company (equivalent to one third of the equity allocated to the University for its IP contribution adjusted to reflect a contribution to the University's costs) or to wait until the University receives cash returns from the investment, usually by selling its shares and the inventors receiving their entitled share of this revenue. In some cases the company may pay a dividend to its shareholders and the inventors will benefit directly if they are shareholders, or share the University's returns of they are not. Tax liabilities may be an impediment to taking equity up-front.

Collaborative activities — Continuing collaborations between the company and the University researchers are encouraged during the commercialisation phase and usually take the form of a research contract to perform work at the University as part of the corporation's commercial plans. Such a contract includes allowances for both direct and indirect costs.

Indemnification and Warranties — the University expects the company to indemnify the University from any negative repercussion of the company's activities or products in the marketplace and may request that product liability insurance be in place. The University is unable to provide any warranties with respect to suitability for the markets, freedom from infringement of third party patents, etc.

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