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University of Houston: How to spin out university research into a startup as faculty

There are several things faculty need to think about before even considering spinning out their research. Graphic byMiguel Tovar/University of Houston

Most inventors, whether they are university faculty or not, want to eventually start a company and capitalize on their inventions and research. For university faculty, this could be, or at least seems like a much more difficult thing to do. Why? Well, they already have a full-time job as a professor.

There are several things faculty need to think about before even considering spinning out their research. In his blog post on Y Combinator, Jared Friedman, the Managing Director, Software and Group Partner at Y Combinator and co-founder of Scribd, suggests to first decide if you should spin out and when.

“In a typical spin-out situation, there are several people who worked on the research, including a mix of students, post docs and faculty. The first thing you need to decide is who is going to work on the company and who is going to stay at the university,” Friedman said.

Friedman suggests that the “ideal situation” is for one or more people, who were originally involved in the research and lab work, to leave and start the company as co-founders. “One full-time founder is also ok. One of the people who leave to start the company should be the CEO.”

The others who stay behind at the university usually still want to be involved. Friedman said that this is fine. They are often call “academic cofounders” or “scientific cofounders”.

Leaving something you’re comfortable with, like your university position, can be scary but Friedman says, don’t wait too long, eventually being at a university will start to slow your progress down.

“In the early stages of developing a new technology, you’ll make faster progress still at the university, taking advantage of university resources. It’s the ideal place to do the initial experiments to prove that your idea could work. There’s a temptation to make the technology perfect before spinning out, and there’s always ‘one more experiment’ you could do. If you don’t stop this cycle, you’ll never leave,” Friedman said.

So, after you’ve decided you want to spin your research out and when, what do you do next?

Split the equity

Friedman offers two rules on how you should do this.

1) Founders who will be working on the company full-time should get equal or nearly equal amounts of equity.
2) Founders who will be leaving their job to work at the company full-time should get much more equity than founders who are going to remain in academia. Academic cofounders should typically own no more than 10% unless they are going to continue to be hands-on.
Jared Friedman, “How to spin your scientific research out of a university and into a startup”

The point of allocating equity is not to reward past contributors from the university but instead to anticipate new ones. It’s going to take an exceptionally long time to make a new company successful. The academic founders may have been helpful at first, but it’s those full-time founders that will take the company all the way. “The equity split between founders has to reflect the expected contributions over time.”

Sometimes, this means “the founders who leave will end up with much more equity than their former boss. This can be an awkward conversation, but it’s entirely sensible.”

Connect with your transfer office

If you want to commercialize the research that you started at your university, you will need to negotiate the right to the intellectual property with the university’s office of technology transfer.

Friedman mentions FOUR “key terms” in these types of agreements.

Equity

“Typically, the university will get equity in the company. This is ok as long as it is not too much. 3-5% is typical. Above 10% will cause problems.”

Royalty

“This means that you pay a percentage of revenue or profits to the university. If this is too high, it can affect the viability of the company to raise money and operate. Ideally you would make this zero. If you can’t do that, try to keep it < 5%, and to have it terminate after a certain number of years and/or a certain level of payments.”

Milestone Payments

“I.e., ‘You owe us $250K when the company raises its first $10M,’ or ‘You owe us $500K when you reach Phase II clinical trials.’ Because cash is scarce in the early days of a startup, you want to keep these as low as possible. You should never need to spend more than a few percent of the money you raise.”

Exclusivity

“If a license is not exclusive, the university could theoretically turn around and license the same IP to a big company to go compete with you. This sounds like a real problem, but often it’s not. For many inventions, in practice other companies won’t know how to use the IP and won’t value it until you’ve done years of work further developing it (at which point the university-owned IP isn’t sufficient). It may be optimal to have a non-exclusive license initially with an option to make it exclusive later, or a right of first refusal clause.”

Friedman also offers some advice on how to negotiate these agreements. First, start talking with these offices ASAP. This will give you more time to work out an agreement that you like, and you can learn how the tech transfer office works.

Also, “don’t wait for the agreement to start the company. Getting an agreement can take 6 months or longer. Many investors will fund companies before they have an agreement in place. The more progress you make on the company, the more leverage you have in the negotiation,” Friedman said.

Most importantly, get advice from other founders that have agreements with the same office to see what worked for them. You can also ask inventors, lawyers and other advisors what your best course of action is.

After spinning out

Friedman said, the first thing to do, once you’ve spun out, is to incorporate your company. He also said that it would probably make sense to keep collaborating with your university.

“In some cases, you may want to continue doing experimental work using university labs. University core facilities are commonly available to companies, albeit for higher fees. It’s possible to save a lot of money using university resources instead of buying equivalents commercially. That’s fine, as long as it isn’t slowing you down significantly and doesn’t create IP issues. Unfortunately, there is often a tradeoff between speed and cost,” Friedman said.

The big idea

The adjustment from academia to running a company is big and there are plenty of things to consider before even getting to that point. You should determine if you should even spin your research out of the university. If you decide you should, then decide when.

Once you’ve done that, then you must consider how to split the equity, negotiate with your university’s tech transfer office and continue collaborating with your university even after the spin out is successful.

A full understanding of everything that should be done when starting a business is the best way to set yourself up for success.

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This article originally appeared on the University of Houston's The Big Idea. Cory Thaxton is the communications coordinator for The Division of Research.

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Building Houston

 
 

The latest cohort from gBETA Houston has been announced and is currently underway at the Downtown Launchpad. Photo courtesy

A national startup accelerator has announced its fifth local cohort, which includes five Houston companies participating in the spring 2022 class.

Madison, Wisconsin-based gener8tor has announced today the five participating startups in gBETA Houston. The program will be led by Muriel Foster, the newly named director of gBETA Houston, which originally launched in Houston in 2020 thanks to a grant from from the Downtown Redevelopment Authority.

The program, which is designed to help guide early-stage startups find early customer traction, connect with mentors, and more, is based in the Downtown Launchpad, and is free and does not take equity in the participating companies. The cohort kicked off on April 21 and concludes on June 10.

The new cohort includes:

  • Founded by CEO Steffie Thomson a year ago, Getaway Sticks has designed a shoe that gives women the painless support they need using athletic foam to create a shoe that gives women the painless support they need. Getaway Sticks provides the solutions to women’s #1 wardrobe complaint of high heel pain. Since launch, the company has earned over $35,000 in revenue from over 150 customers.
  • Through a combination of software and hardware technology, LocBox is rethinking the shopping experience for online and local purchases. If you shop, ship, or have food delivered to your house, LocBox will make your life easier. Led by CEO Sterling Sansing, LocBox has previously participated in the Texas A&M MBA Venture Challenge.
  • SpeakHaus is focused on equipping young professionals and entrepreneurs with public speaking skills through its on-demand training platform and group coaching program. Since launching in October 2021, SpeakHaus has facilitated 6 corporate trainings and coached 61 business leaders generating over $49,000 in revenue. The company is led by CEO Christa Clarke.
  • Led by CEO LaGina Harris, The Us Space is creating spaces intentionally for women of color, women-led businesses, and women-centric organizations. Since launching in June 2021, The Us Space has created partnerships with more than a dozen community organizations, sustainable businesses, and organizations creating positive economic impact in the City of Houston.
  • Founded in August 2021, Urban Eatz Delivery is a food delivery service app that caters to the overlooked and underrepresented restaurants, food trucks, and home-based food vendors. Urban Eatz Delivery has earned over $88,000 in revenue, delivered to over 2,000 users, and worked with 36 restaurant and food vendors on the app. The company is led by CEO D’Andre Good.

“The five companies selected for the Spring 2022 cohort tackle unique problems that have propelled them to create a business that solves the issues they once faced," Foster says in a news release. "From public speaking, apparel comfort, and food delivery from underrepresented restaurant owners, these founders have found their niche and are ready to continue to make an enormous impact on the Houston ecosystem."

it's Foster's first cohort at the helm of the program. A Houston native, she has her master’s in public administration from Texas Southern University and a bachelor’s in marketing from Oklahoma State University. Her background includes work in the nonprofit sector and international business consulting in Cape Town, South Africa, and she's worked within programming at organizations such as MassChallenge, BLCK VC, and now gener8tor.

The program is housed at the Downtown Launchpad. The five startups will have access to the space to meet with mentors, attend events, and run their companies.

"Creating (the hub) was a little like a moonshot, but it’s paying off and contributing enormous impact to the city’s economy. The five startups selected for the gBETA Houston Spring cohort will continue that legacy,” says Robert Pieroni, director of economic development at Central Houston Inc., in the release. “As these entrepreneurs chase their dreams and create something epic, they will know Downtown Houston is standing behind them. I am so proud of what Downtown Launchpad is already, and what it will become.”

Muriel Foster, a native Houstonian, is the new director of gBETA Houston. Image via LinkedIn

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