Universities in Australia and New Zealand typically take a higher portion of ownership in spinout companies. Founders are calling for more standardised deal terms.
When Jonathan Ring, an engineering postgraduate researcher at the University of Canterbury in New Zealand, was looking to commercialise his business idea, the first hurdle he faced was negotiating ownership stakes with the university’s technology transfer office. The head of research and innovation suggested the university take two-thirds of the equity in the company.
Ring knew that this would make it difficult for the company to raise further investment, as venture capital investors will most likely not commit capital to spinouts in which universities own a majority of shares. “I said, I am having conversations with venture capitalists. There is no way this is going to work. This is just not going to get investment,” says Ring.
The university hired a legal expert to negotiate with Ring, the CEO of Zincovery, which has developed a method of decarbonising the zinc recycling industry. Ring had no money for his own legal representation. The parties agreed on a licence agreement for the intellectual property that would give the university ownership in the company if it were sold.
After doing market research, Ring found that his company would have to switch the technology that was developed at the university to a new technology that was more marketable. This switch made the intellectual property licenced by the university in the original technology worthless. Ring tried to exit the licence agreement but found there was no way to do this. It ended up taking 15 months of negotiations to come to a resolution.
“That is a lifetime in startup years. This whole time for me was just stress – that burden of uncertainty of not being able to get that deal done. And then you have investors asking why it is taking so long,” says Ring. The University of Canterbury did not respond to a request for comment by the time of publication.
No unified approach
Ring’s experience isn’t unique. It is part of a broader friction that exists between founders, investors and technology transfer offices, whose expectations for taking equity in spinouts that they have helped to commercialise are often at odds with the realities of venture capital investment. VC investors expect founders to have at least 50% ownership in their companies by the series A fundraising stage. This is based on the assumption that founders need to have majority ownership to incentivise them to make their businesses successful.
Investing in spinouts is complicated by the fact that universities have different approaches to taking equity in spinouts. Some take as low as 2% ownership while others take at least 50%. In contrast to the University of Canterbury, the University of Auckland, for example, takes on average 10% share in a startup. It will also invest in the startup at early stages.
In Australia and New Zealand, the portion of ownership that universities take is high compared with other regions.
University of Queensland: No equity for founders
In Australia, at one end of the extreme is the University of Queensland, which does not allow founders to have any equity in the companies it spins out. This is because of a perceived conflict of interest that founder’s equity allows students or academics to use taxpayer funds for their own financial gain.
Dean Moss, CEO of UniQuest, the commercialisation arm of the University of Queensland, says the policy has not negatively impacted its ability to draw on external investors. “We’re working with willing investors. We’ve got offshore investment multiple times,” says Moss. He disagrees with the notion that academic founders need to have skin in the company. “If the founder or researcher is deeply engaged, then they drive the company. They’re happy because the milestones are achieved.”
It is only when founders relinquish their positions at the University of Queensland that they can they gain shares in companies through an employee stock ownership plan. “In our environment we manage conflict of interest seriously, because we’ve had some notable successes. And the last thing we want is to damage the reputation of the university where there is a perception that the founder was in a position where they exploited taxpayers’ money for personal gain,” says Moss.
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UniQuest is a large technology transfer office compared with its peers. Over time it has created 130 startups and has a staff of 75. It also has a A$30m ($20m) internal investment fund. It takes a maximum of 38% equity in startups, with the rest reserved for investors. It does not have a specific methodology for taking equity positions. “It is all negotiation,” he says.
“Whether it is a quantum technology or drug discovery or social sciences, there isn’t a preconceived idea that software is 5% or a device is 10%,” says Moss. “We’re very hands-on with our startups and this aids the negotiation. But we want stickiness. I want repeat investing. I am not going to do a deal where we believe the investor feels that they have been gouged.”
But not all Australian — or even Queensland — universities subscribe to the idea founders needing no ownership stakes. The Queensland University of Technology, for example, has a more typical approach to equity. At the start of an early-stage technology it will typically grant 60% of equity to the founder and keep 40% for the university, still high by other countries’ standards. But the portion of ownership varies by technology, with those that require research and development and solid intellectual property leading to higher equity and lighter IP resulting in a smaller share.
“The conversation here in Australia, too, is making sure that founders continue to be incentivised along the journey,” says Kate Taylor, director in the division of business development at Queensland University of Technology. “It is really important to us as a university to make sure that whatever that initial cap table looks like, we’ve planned for dilution over time for all stakeholders, and that there continues to be benefit for the founders at the end.”
Lack of established startup investing ecosystem
Finding the right portion of equity to take is a fine balancing act, says Alastair Hick, chief commercialisation officer at Monash University, Australia’s largest university by student population. Australian universities have to do a lot of heavy lifting in commercialising new companies. Universities often have to fund proof of concept for spinouts, for example. “It’s something that we have to do quite a lot of in Australia is to put a lot of support into forming our companies because we don’t have a very mature ecosystem yet,” says Hick. This makes owning a higher share of the equity more justifiable.
For deals where Monash University can’t come to an agreement with founders on the equity side, it will do more of an arm’s length transaction by licensing the technology in return for royalties. “If we can’t come to an agreement on what a reasonable equity split is, we would do that as a last resort,” says Hick. “Because what we wouldn’t want is for the technology to sit in the university.”
Australian investors mostly are just interested in doing equity-only deals with the universities, says Hick. International investors, on the other hand, tend to want to do deals that are a mix of equity and royalties. “We’re starting to see a few more mixed equity and royalty deals and we will take less equity in those situations,” he says.
The call to standardise
The friction between founders, investors and university technology transfer offices over ownership stakes has led to efforts in some countries to create guidelines for universities to follow. Recently, TenU, a collaboration of 10 mostly UK and US universities, released recommendations that technology transfer offices take a maximum 10% of equity in software spinouts.
Hick welcomes discussions about introducing standard terms in Australia. This would help streamline the commercialisation process, he says. “One of our biggest problems is that we have too many deals to do. If we start to standardise some things at any stage that will help,” says Hick.
Back in New Zealand, startup CEO Ring at Zincovery recommends universities should own at most 25% in companies that they help spin out. He also welcomes the efforts to standardise terms. “If there are guidelines and it says this is what works for these types of sectors, then it puts you in a better position to know what is going to work, and ultimately have a better chance of success for you and the university,” he says.
