Columbia University

Technology Ventures

Recommended Process Improvements for Launching University Life Science Startups (VC / TTO Roundtable, Spring 2020)

In the Spring of 2020, members from seven university tech transfer offices met with partners from six venture capital firms to discuss challenges both parties routinely face when working on life science deals together. Below is the resulting set of best practices, meant to benefit universities and VCs more broadly. Individuals interested in sharing feedback on the below guidelines should contact [email protected] and include their name, organization, and work email. Please note that not all of these recommendations may be appropriate for startups outside of the life sciences. Comments and feedback will be posted at the bottom of this page. 

Participating universities: Columbia (Orin Herskowitz, Ofra Weinberger), Duke (Robin Rasor, Rob Hallford), Johns Hopkins (Christy Wyskiel, Steve Kousouris), MIT (Lauren Foster), Penn (John Swartley), Stanford (Karin Immergluck), Yale (Jon Soderstrom)

Participating VCs: 5AM (Deborah Palestrant), Atlas (Kevin Bitterman), OUP (Bill Harrington), Polaris (Amy Schulman, Alexandra Cantley), RA Capital (Josh Resnick, Sarah Reed, Jamie Kasuboski), Venrock (Cami Samuels)

For context: at first glance, one would think that VCs and university tech transfer offices should be fully aligned.  The tech transfer office’s mission is typically to move promising early-stage science-based innovation out of the lab and into the market, while generating reasonable returns which then further the basic research mission of the university and its scientists.  The VCs’ mission, meanwhile, is to invest in early-stage innovations that can generate both significant societal benefits as well as economic returns to their limited partner investors.  In general, this alignment does in fact exist in reality.  Many university TTOs work closely and collaboratively with their venture capital partners, especially when the same VC has invested in multiple startups out of a given institution.  Over time, these partners establish strong relationships built on trust; shorten negotiation time by resolving thorny issues once and repeating those outcomes for future deals; and avoid abusive behavior on either side via the promise of positive future interactions. 

However, despite this alignment, these discussions often end up being more prolonged, more antagonistic, and more complicated than necessary.  This results not only in higher “transaction costs” of getting the deal done (in terms of increased legal bills, more person-hours invested in pointless negotiations, and sometimes scarred relationships), but also in delays around getting the deal done or failure to do so at all. When one considers that many of these innovations could result in saved or extended patient lives, it is easy to see that the costs of the delays go far beyond the economic. 

It is easy for both VCs and university tech transfer offices to point fingers at the other side, and in truth in rare occasions there really are “bad actors” to blame.  But in our collective experience, most of the friction arises from more systemic issues: disorganized negotiating processes; lack of understanding about the norms for biotech startup deals; misunderstanding of each parties’ core objectives; overcompensating for fear of “making a mistake”.  Not surprisingly, when a university tech transfer office and their VC counterparty both have a long track record of startups, and even better when the parties have done deals together previously, many of these issues can be avoided.  However, when either or both parties are new to biotech company creation and funding, or haven’t worked together previously, these misunderstanding can quickly devolve into real problems.

Unfortunately, the ramifications from these difficult negotiations can echo far more broadly, with negative implications for the whole VC / TTO industry.  Tech transfer offices who feel taken advantage of by a venture investor one time are likely to adapt their practices to protect themselves in the future with other investors, for instance by expanding their license agreements with ever more complex defensive provisions; taking a more aggressive position on their economic “asks” with an expectation of having a long and difficult negotiation; involving even more conservative counsel to ensure that no tricks are being played in the legal terms.  Meanwhile, the effected VCs may come to the conclusion that all TTOs (not only the initial one) are simply aggressive and irrational, and hence may either do fewer university-based deals, or else take more aggressive positions and have less trust of reasonable handling in their future deals.  Furthermore, both the university and VC communities are quite small and close-knit, and hence these reputational issues can spread beyond even the negotiating parties to the whole profession. Thus, like a mild allergy that worsens with exposure, even some isolated bad experiences can lead to a vicious circle of increasingly negative interactions beyond the initial interaction. 

In 3 different Zoom meetings in March to May 2020, we gathered to identify some of the most common pain points encountered by both sides; to discuss the underlying fears and objectives of both sides that might lead to these pain points; and ways these challenges might best be avoided.  The collective learnings from these discussions can be found here:

  • A “Recommendations for VC / TTO Term Sheet Structuring” document, link here. This document provides an overview of the key issues in university startup term sheets; some best practices for structuring certain sections such as equity, royalties, and milestones; some common points of friction around sublicensing, know-how royalties, and diligence; and other recommendations for how to create win-win outcomes when VCs and TTOs negotiate.

  • A “Recommendations for VC / TTO Negotiation Process Improvements” document, see below for text. This document provides some recommendations on ways the VCs and TTOs can structure the negotiation process itself to avoid unnecessary friction, gain buy-in early, and avoid overly long and painful negotiations.

These documents were discussed by the participants at AUTM 2021 (recording here) and in a webinar hosted by OUP (recording here).

We hope that these can be useful to the profession, and will lead to more university innovations becoming stronger startups, even faster than they do today!

Our recommendations are as follows:

 

  1. Starting the conversation

 

    1. For most VC / TTO discussions about a new startup, the recommendation is for the first significant business conversation that involves the funder (before any terms have been discussed, but after the initial scientific diligence) to include the full team on both sides: for the VC, the Partner as well as the Principal or Associate; for the TTO, the Executive Director or Licensing Director as well as the Licensing Officer, plus the scientific founder if allowed under University rules.  That way, interests can be aligned, the core deal structure and economics can be framed together as a group, and the parties can establish trust and a good working relationship.  The associates can then push the term sheet forward (which allows them good professional development opportunities), while bringing challenging issues back to the Partners / Directors for early resolution when they arise.
       
    2. A suggested agenda for that first significant discussion might be as follows:
      1. 2 – 3 hours, in person (or virtual but on video) vastly preferred
      2. Begin with a presentation from the VC or the company leadership on their vision for the startup: what the market opportunity is; how the University science / IP and scientist will contribute to addressing that opportunity; the fields the startup will focus on, in what order (if known); an operational plan for what key milestones need to be achieved as well as timing, and what resources / funding might be required to meet each milestone; and what other external collaborations or IP would likely be needed along the way
      3. Thereafter, transition to a conversation about deal structures, to set expectations on ranges of outcomes for some of the most important issues (see the Term Sheet document for these). These ranges may not end up being binding, but rather an attempt at creating “norms” for both sides to smooth the ensuing negotiations.  Any large differences of opinion can therefore be surfaced early, with all of the decision-makers in the room, rather than become a subject of posturing between the parties later.
      4. Set a realistic timeline for agreement execution and reasonable intermediate dates for milestones such as agreeing on business terms and exchanging drafts.  Failing to meet intermediate milestones may trigger a leadership meeting to either resolve the cause of delay or extend the target signing date. Determine and clearly identify which stakeholders will be the primary points of contact at each stage, as well as which external parties (such as the University conflicts committee, or any investment committees) will need to review and approve outcomes.
         
    3. Both the VCs and TTOs recognized the tradeoff that this approach entails for professional development. Naturally, having the Partner & Director participate in these first discussions will mean less autonomy for their teams, at least initially. However, hopefully the opportunity to work closely alongside their office’s leadership will provide offsetting benefits.  Furthermore, the teams can lead the ensuing conversation after this first meeting, involving the Partners and Directors only periodically or as needed to solve problems.
       
    4.  It was also noted that not including in-house or outside counsel in these first discussions can cause problems down the road. When not involved from the beginning, there is a risk that counsel will either look for ways to bias towards their own client’s interests during the drafting process, rather than looking for ways to adhere to the spirit of collaboration.  At a minimum, this can cause delays and run up billable hours.  Even worse, without full context, counsel’s re-drafting to use their own “standardized clauses” can undermine the trust established during this first meeting. Hence, simply “throwing the notes over the fence” to counsel to draft a term sheet was recognized as a bad idea. However, it was also acknowledged that having too many people in this first meeting may make the conversation unwieldy. Accordingly, the consensus recommendation was to involve counsel as early as practical, case by case, though at a minimum providing clear instructions to each side’s counsel if they aren’t actually in the room. 
       
  1. Managing the ensuing negotiation process
    1. Once the first meeting occurs, the Partners and Directors can step back and let their teams (business and legal) push the agreement forward under their own authority.  However, it was observed that, despite the best intentions of all parties, unintended delays often end up creeping into negotiation on both sides. Some of these are unavoidable (long diligence processes; awaiting data from the research team; actual working time to develop contract documents; the fact that universities often have a higher “deals-to-staff” ratio than most VCs do).  However, many delays come from avoidable problems such as:
       
      1. With many stakeholders involved in the negotiation on each side (Partners; Associates; Attorneys; Scientists), simple sequentiality can become lethal. For instance, the TTO Associate may take 3 days to read and edit a term sheet draft, then pass it to the TTO Director who may wait 3 days to open it and then 1 day to review it, then pass it back to the TTO Associate who waits 3 days to open it and 1 day to review it, then passes it to the TTO Attorney who waits 1 week to open it and 1 day to review it, then passes it back to the TTO Associate who waits 3 days to open it and 1 day to review it. By which point, ~3 weeks will have passed for one “turn of the crank”.  The same ritual then ensues on the VC side, meaning 6 weeks will have passed before the draft gets back to the TTO for the first meaningful discussion. 
         
      2. To avoid this sequentiality problem, it is often helpful to bring together all parties (business, legal) for a multi-hour discussion.  However, simply finding open calendar slots for such a discussion can often take weeks if only done as needed.  Accordingly, a few best practices were suggested:
        1. For deals where speed is critical, use the first significant discussion to discuss as a group the expectations around each next step.  Then pre-book standing bi-weekly phone calls involving decisionmakers on both sides to resolve open issues.  Each team member may not be able to make every meeting, but at least some members will join. This has the dual benefit of providing interim deadlines and also avoiding additional delays from finding time on schedules last minute. Furthermore, it ensures that the senior members of each team (who can resolve disputes) get involved faster, rather than letting disagreements fester.
        2. If the decision makers on either side choose to not be involved at least at the intervals above, then they should be comfortable fully delegating authority to whomever they put in their place. But whoever in the team is meeting bi-weekly should have the ability to make binding decisions.
        3. Similarly, both sides could perhaps pre-book standing deal review meetings between the internal stakeholders (business and legal, but perhaps also the inventors if involved) to avoid the sequentiality problem described above.  This is also helpful to avoid any internal lack of alignment within each side, which otherwise can result in having to backtrack from negotiated outcomes later.
           
  2. Guidelines for counsel to help maintain trust
    1. As mentioned above, attorneys are critically important members of both teams.  Clearly, there are many outstanding in-house and outside counsel that support startup negotiations for both sides.  However, it is the responsibility of the principals to ensure that the strategies and tactics of their respective attorneys align with the objectives of the business people.  If counsel hasn’t been part of every discussion, they may lack proper context, which can in some cases lead to their inadvertently undermining the trust established by the business teams. In particular, both parties to the transaction should discourage the following strategies and tactics:
       
      1. Presenting only selective benchmarks on both economics and agreement language from their internal databases, intended to argue solely for their own client’s benefit. 
      1. Cherry-picking “Frankenstein” benchmarks: the lowest upfront from one deal, the lowest equity from another, and the lowest royalties from a third.  Both parties should be encouraged to present a full set of deal terms from any available databases, to ensure that there is full data transparency. 
         
      2. Even when the businesspeople come to agreement on deal terms in a term sheet, counsel must take care (especially if they weren’t present for the initial negotiations) not to subsequently insert terms that undermine the business intentions – e.g., non-market carve-outs from net sales definitions. There needs to be better communication between counsel for both parties so that what may be legitimate attempts at clarification are not perceived as attempts to undermine previously agreed-upon terms.  This can lead to an erosion of trust on both sides, both for that deal and for future interactions. Accordingly, for any substantive redlines to the agreements, the editing party should include a comment box that explains why the change is necessary or helpful. Trading redlines without contextual comments can easily result in misunderstandings.
         
      3. It may go without saying, but neither side should make claims about “the way that Stanford / MIT / [insert other high-prestige schools]” do deals, unless both sides are absolutely certain of their claims and willing to have them fact-checked with the named TTO in real time.
      1. The VCs noted that University counsel (and sometimes even the University business team) seems quick to fall back on “this is non-negotiable University policy” as a reason to not explore alternatives.  While it was understood that there truly are some clauses that are inviolable rules for all universities, or sometimes even for a specific university, these “take it or leave it” negotiation tactics should be carefully reserved only for true policy matters.  For instance, most universities do truly have requirements for terms such as freedom of publication, reservation of rights for non-profit use, and others that are legitimate policy issues. However, other practices may indeed be practices, “our normal approach”, or have precedence, but not truly be blocked by policy. More junior members of the negotiating team may be at risk of this confusion, in particular, and it is the responsibility of the leadership of the University TLO to ensure that its staff are clearly versed on which items are the truly non-negotiable ones.  The entire University negotiating team, not just the attorneys, should be careful to avoid invoking policy unless 100% accurate, and even then as rarely as possible and with clear context for the rationale behind the policy.  
      1. The TTOs noted that It is moderately common for the attorneys representing a VC-backed startup to come back to the University upon the raising of their next round (typically at the B round) and say the following: “we have a great group of investors lined up; however, unless the University agrees to lower or remove the following terms (e.g. antidilution; preferential rights; other product royalties; non-royalty sublicensing income; diligence milestones) from the license agreement, the investors will walk away”.  These interactions can quickly destroy trust, since: (a) the original terms were often the result of a detailed negotiation by experienced parties represented by experienced counsel, (b) these are typically presented as “take it or leave it” issues, and (c) it is implied that the University will be to blame for the failure of the startup if it doesn’t acquiesce.  There are a number of good and fair reasons for requesting such subsequent modifications:  e.g., a pivot from the original business model, or a change in the dynamics of the underlying industry.  If the parties all agree that the startup’s fundamental economics have changed since the initial agreement, then the parties should work together to make the necessary modifications.  However, in the absence of such a change, any requested modifications the TTO is asked to make should be offset by compensating positive economic changes elsewhere in the agreement.

 

  1. Ways universities can be helpful to startups following the license execution
    1. As mentioned above, there are often many ways that the TTO can remain helpful to the startup post-license execution.  The specific opportunities may vary based on the University’s practices or the surrounding ecosystem, but some examples include:
      1. Bringing to the VC’s attention IP or sponsored research opportunities in labs of other University faculty members working in related fields, who may not have been part of the initial agreement.
         
      2. Flagging improvements emerging from the PI’s labs as early as possible, where appropriate, if these improvements are not automatically included in the license (as is sometimes the case). Even when not obligated to do so, identifying potentially useful improvements for the startup to consider in-licensing is almost always in the best interests of the technology. 
         
      3. Aiming for as much transparency as possible (within University conflict-of-interest guidelines) between the University and startup labs.  In an ideal world, the University and startups labs would be fully open with each other as progress gets made or problems encountered, in order to ensure rapid progress on both sides.  However, for this to be possible, the terms of the license need to incentivize this.  See the Other Products section of the term sheet document for more ideas on how to achieve such transparency.
         
      4. Providing concierge access to core facilities on campus, in the region, or at peer institutions.  These core facilities often already charge rates for external commercial parties, and sometimes have discounts available for startups. However, the startup may not be aware of the full range of core facilities at the regional campuses, and hence may not take advantage of this option. 
         
      5. Upon request, providing connections to additional funders if the initial investors decide to syndicate in the current or future rounds
         
      6. Upon request, providing opportunities for marketing and promotion, via the University’s connections to the local press, pitch days, alumni events, Federal / State / City government initiatives, etc.

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