When the university participates: structuring the university’s licensor and shareholder rights

As a lawyer advising startups and venture capital funds, I am often tasked with making sure that the rights offered to various stakeholders work together, and that the resulting documents clearly (or, as clearly as high legalese will allow) describe the obligations imposed on the funded company. The goal is always to ensure that the next person to review the various agreements – whether investor, acquirer, or underwriter – understands the relationships among the parties, including the rights held by various stakeholders, and the restrictions to which the company is subject.
In a recent deal, I represented a university participating in a preferred equity financing of a spinout that had licensed university intellectual property. While most patent licences include a grant of equity and a right to participate in future financings, it is the exceptional case when a university actually makes an investment of cash in a licensee. This was an exceptional case, featuring a target company in a hot industry backed by top tier investors in Europe and the United States. As part of the financing, the intellectual property licence was amended, which effectively provided the university with a blocking right over the whole deal. While the financing transaction closed on schedule (more or less), there was fairly significant pushback against the university as it sought unique rights in the company’s shareholders agreement. The licence negotiations were halted more than once as a means of applying pressure on the company. It was a much more difficult negotiation than it could have been.
For both universities and companies licensing university technology, the takeaway is to ensure that the university’s rights are clear and consistent across the agreements to which the university is party. Tech transfer offices are wise to plan for the rights that should (or must) apply when and if university funds are invested, and whenever possible, to include these rights in the university’s standard form of licence agreement. In the case of the transaction above, the university had negotiating leverage because the licence was being amended, but would have had much less sway were that not the case. Between the relatively small cheque being written by the university, and the company’s unwillingness to yield to a small investor with unknown desire or ability to follow-on in subsequent rounds, it was only the licence amendment that resulted in an open ear from company management.
At a minimum, universities and licensees should be prepared to discuss the following matters when negotiating the initial intellectual property licence:

• participation in future financings and transferability of participation rights;
• information rights, including delivery of financial statements, inspection of company records and regular access to management;
• rights to appoint an observer to the board of directors;
• operational covenants, including prohibitions from engaging in certain industries or activities, or with certain counterparties;
• conditions on the use of the licensor’s name and compliance with university regulations; and
• anti-dilution in connection with certain equity issuances.

When appropriate, certain of these rights may “spring to life” upon the happening of specified events, such as the investment of university funds. Rather than negotiating for additional rights at the time of investment, when the university’s bargaining position may be relatively weak, incorporating these items into the standard university licence form provides a better opportunity for success for the university, and allows the company to set investor expectations at the time of diligence, rather than at the time of financing document negotiation in the lead-up to closing.
Michael Cohen is a partner in the Corporate and Capital Markets Department of Brown Rudnick, a global boutique business law firm serving clients worldwide from eight offices in the United States, the United Kingdom and mainland Europe. Learn more by visiting brownrudnick.com.