Description
On this illustration in regard to northwestern investigators guide to starting a company fundamentals of startups.
1
Northwestern Invest|gator's
Gu|de to Start|ng a Company:
lundamenLals of SLarLups
2
Acknow|edgments
We would llke Lo glve graLeful acknowledgmenL Lo Lhe unlverslLy of Ceorgla for permlsslon Lo
use maLerlal from ºSLarL-ups for SmarLles: A Þrlmer for Lhe uCA lnvesLlgaLor on lormlng a
new Company 8ased on ?our 8esearch ulscovery." We have drawn heavlly on Lhelr well-
consLrucLed and effecLlve handbook, and lL served as an lnvaluable gulde for Lhls publlcaLlon.
Innovat|on and New Ventures Cff|ce
norLhwesLern lnvesLlgaLor's Culde Lo SLarLlng a Company: lundamenLals of SLarLups
norLhwesLern unlverslLy
lnnovaLlon and new venLures Cfflce (lnvC)
www.lnvo.norLhwesLern.edu
CopyrlghL ©2011 norLhwesLern unlverslLy
All rlghLs reserved. All uses, ln any form and any quanLlLy, or by any means-elecLronlc,
mechanlcal, phoLocopylng, recordlng or oLherwlse-musL lnclude Lhe followlng aLLrlbuLlon:
lrom norLhwesLern lnvesLlgaLor's Culde Lo SLarLlng a Company: lundamenLals of SLarLups
no oLher copyrlghL, byllne, or appearance of muLual ownershlp may appear on Lhe
copyrlghLed maLerlals. under no clrcumsLances can maLerlals be dlsLrlbuLed for commerclal
use wlLhouL speclflc wrlLLen permlsslon.
3
Northwestern Iacu|ty's Gu|de to Start|ng a Company:
Iundamenta|s of Startups
1ab|e of Contents
8as|cs on Startups ......................................................................................... 4
Why sLarL a company? ............................................................................... 4
Are all sLarLups Lhe same? ......................................................................... 6
lor-proflL or non-proflL? ............................................................................ 7
vlrLual or brlcks and morLar? ..................................................................... 7
lncorporaLlng Lhe company ....................................................................... 8
Chooslng Lhe sLarLup legal enLlLy ............................................................... 8
8equlremenLs for a sLarLup ...................................................................... 10
1|ps for Northwestern Lntrepreneurs ........................................................ 13
Worklng wlLh norLhwesLern .................................................................... 13
When ls lL Llme Lo sLarL a company? ........................................................ 13
SLeps Lowards a sLarLup ........................................................................... 16
8ulldlng Lhe sLarLup ................................................................................. 17
ueflnlng Lhe markeL ................................................................................. 18
ldenLlfylng Lhe rlghL CLC .......................................................................... 20
lundralslng .............................................................................................. 21
1he role(s)of Lhe founders ln Lhe sLarLup company ................................. 23
SelecLlng Lhe co-founders of a sLarLup .................................................... 26
neLworklng and flndlng Lhe rlghL menLors .............................................. 27
ulscloslng lnformaLlon ............................................................................. 28
Can l do research ln my academlc laboraLory for my sLarLup? ................ 29
uo l need an opLlon or llcense for Lhe sLarLup? ....................................... 29
WhaL Lo expecL wlLh Lhe sLarLup llcense .................................................. 30
Leadlng sources of frusLraLlon for Lhe academlc enLrepreneur ............... 31
Northwestern Lntrepreneur|a| kesources ................................................. 34
4
8as|cs on Startups
norLhwesLern's lnnovaLlons are flowlng aL an acceleraLed raLe. Cur faculLy and sLudenLs are
Lransformlng Lhelr lnvenLlons lnLo sLarLups LhaL lnfuse and drlve economlc developmenL. 1hls
gulde aLLempLs Lo provlde a roadmap for faculLy and sLudenLs who are Lhlnklng abouL sLarLlng
a Lechnology company, hlghllghLlng Lhe common plLfalls Lo be expecLed along Lhe way.
SLarLlng a company ls a llfe-changlng evenL LhaL brlngs LogeLher a breadLh of experlences and
exLreme emoLlons: from Lhe allure of anLlclpaLed wealLh and socleLal lmpacL Lo Lhe
frusLraLlons of conLlnuous seL-backs and worklng wlLh a LlghL budgeL. 1he besL enLrepreneurs
are moLlvaLed by Lhe challenges and Lhrlve from Lhe ups and downs. lnsLead of feellng
defeaLed by a falled aLLempL, Lhey are eager Lo geL back ln Lhe game and sLarL agaln.
WheLher you are a new academlc enLrepreneur or a serlal enLrepreneur, Lhe lnnovaLlon and
new venLures Cfflce (lnvC) wlll help you navlgaLe Lhe process.
!"# %&'(& ' )*+,'-#.
Whlle Lhere are many moLlvaLlons Lo sLarL a company, from Lhe commerclal polnL of vlew
Lhere ls only one reason: Lo make proflLs by selllng producLs or servlces.
ln general, academlc enLrepreneurs are ºLechnology-drlven," whereas lnvesLors are ºmarkeL-
drlven." WlLh Lhese dlfferences, Lhere exlsLs a dlchoLomy beLween academlc and corporaLe
culLures, Lhe former focused on cuLLlng-edge Lechnologles whlch drlve Lhe markeL versus Lhe
oLher focused on how Lechnologles respond Lo exlsLlng markeL needs. 1hls dlfference reflecLs
Lhe mosL essenLlal dlsconnecL beLween Lhe academlc and corporaLe culLures.
Þerhaps Lhe mosL lmporLanL lesson Lo be learned from Lhls gulde ls LhaL enLrepreneurs should
ensure LhaL Lhelr Lechnology saLlsfles a need ln Lhe markeL. lnvesLors would prefer Lo deal
wlLh researchers who espouse one of Lhe flve bo|d-faced moLlvaLlons shown ln 1ab|e 1. Such
moLlvaLlons lndlcaLe LhaL Lhe researcher ls sLarLlng a company Lo saLlsfy a markeL need raLher
Lhan Lo beneflL Lhelr academlc research.
5
1A8LL 1: Why Academ|c kesearchers Say 1hey Want to Iorm New Compan|es
Mot|vat|ons keason|ng Lxpectat|ons
A fr|end's suggest|on Pe or she heard abouL my research and
suggesLed LhaL l should look lnLo sLarLlng a
company.
lormlng a company musL be
easy.
Io||ow|ng others My research ls every blL as good as LhaL of
a colleague who has been successful ln
sLarLlng and runnlng a company.
lf LhaL person can do lL, l
should be able Lo do lL Loo.
Add|t|ona| grant
fund|ng
l slL on a panel LhaL revlews federal S8l8
[Small 8uslness lnnovaLlon 8esearch]
granL appllcaLlons, and my unfunded
regular proposals are beLLer Lhan Lhose
LhaL geL funded under S8l8. A company
mlghL be an easy source of money Lo
supporL my research, so why noL form
one?
We'll be able Lo do a loL more
research by Lapplng lnLo Lhls
new source of granL money.
Lasy money CeLLlng lnvesLors Lo pay for my research
may be a beLLer prospecL Lhan wrlLlng
federal granLs.
lnvesLors are happy Lo fund
good research.
1he rest |s easy All Lhe hard work has already been done ln
my laboraLory, so now lL's Llme Lo Lurn Lhe
pro[ecL over Lo a company for producL
developmenL.
Þeople wlll wanL Lo lnvesL ln
my company because Lhe
remalnlng
work ls relaLlvely Lrlvlal.
1he capt|ve company A sLarLup wlll be able Lo pursue Lhe ldeas
from my lab Lhrough Lo
commerclallzaLlon.
AlLernaLlvely: 1he company wlll augmenL
my research by dolng Lhlngs LhaL l don'L
have Lhe Llme or money for, such as
runnlng rouLlne analyses and consLrucLlng
proLoLypes.
l'll have Lhls ouLslde company
LhaL does whaLever l Lell lL Lo.
8ecom|ng r|ch A sLarLup ls a relaLlvely qulck way Lo
become rlch.
ln flve Lo Len years, l'll be
really wealLhy.
I'm the boss SLarLlng a new company sounds beLLer
Lhan geLLlng a [ob aL an exlsLlng one.
l can be chlef execuLlve of my
own company and noL have Lo
work for oLhers.
Þers|stence
no exlsLlng company has wanLed Lo
llcense my Lechnology and l am
commlLLed Lo geLLlng lL Lo Lhe
markeLplace, so lL's Llme Lo sLarL my own
company.
We'll do whaL lL Lakes Lo form
a company Lo geL Lhls
Lechnology
ouL Lhere.
Market demand
l have been approached by people asklng,
ºPow can l geL one of Lhose Lhlngs?"
1here appears Lo be a markeL
for my producL.
6
N|che opportun|ty,
underserved market
1hls would be an opporLunlLy Lo have a
small operaLlon LhaL sells producLs ln a
nlche markeL.
1here's enough of a markeL
Lhere for me Lo have a nlce
supplemenL Lo my academlc
salary.
Max|ma| |mpact
Selllng commerclal producLs, as opposed
Lo [usL publlshlng ln a [ournal, lncreases
Lhe chance LhaL my ldeas wlll have a ma[or
effecL.
We'll be able Lo hlL a much
wlder audlence Lhrough Lhe
commerclal secLor.
Seasoned veteran
l dldn'L geL lL rlghL wlLh my flrsL Lwo
companles, buL Lhls Llme l have a beLLer
handle on Lhe markeL reallLles.
Clven our experlence, we
should be able Lo ralse
adequaLe
lnvesLmenL funds and uses
Lhem Lo beLLer advanLage.
/(0 '11 %&'(&2,% &"0 %'+0.
1here are many Lypes of sLarLups. Some of Lhem are servlce companles LhaL requlre very llLLle
lncubaLlon, whlle oLhers, usually producL companles, requlre years before proflLs.
Many norLhwesLern faculLy have creaLed successful consulLlng flrms surroundlng a number of
areas, lncludlng englneerlng, markeLlng, and sLraLegy. 8ecause revenue ls generaLed from Lhe
sale of ºLlme," Lhe buslness can geL meanlngful LracLlon wlLhln Lhe span of a few monLhs.
1echnology companles, however, Lyplcally requlre many years of 8&u before revenue can be
generaLed. uurlng Lhelr producL developmenL perlod, sLarLups need a conLlnuous lnfuslon of
caplLal. Any prolonged lnLerrupLlon can deal a deaLh blow Lo Lhe enLerprlse.
1echnology sLarLups generally belong Lo Lwo fundamenLal caLegorles:
(l) LqulLy-lnvesLmenL companles, whlch requlre large sums of caplLal, usually ln Lhe form of
equlLy lnvesLmenL and,
(ll) ModesL-lnvesLmenL companles, whose caplLal requlremenLs are subsLanLlally lower.
ln reallLy, a buslness can fall under boLh caLegorles-for example, a modesL-lnvesLmenL
company may provlde equlLy shares Lo lnvesLors-buL Lhls one-or-Lhe-oLher model allows us
Lo make some baslc generallzaLlons LhaL are useful for Lhe would-be enLrepreneur.
7
3*(4,(*56& *( -*-4,(*56&.
norLhwesLern's researchers have developed boLh for-proflL and non-proflL companles. 1he
declslon of wheLher Lo bulld one over Lhe oLher ls usually drlven by Lhe mlsslon of Lhe flrm.
1he mlsslons of non-proflLs usually cenLer on "socleLal good" of Lhe communlLy, naLlon, or Lhe
world. non-proflLs do noL pay Laxes, buL Lhey also cannoL use Lhelr funds for anyLhlng oLher
Lhan Lhe mlsslon for whlch lL was formed. lL ls lmporLanL Lo remember LhaL non-proflL
organlzaLlons may make a proflL, buL lL musL be used solely for Lhe operaLlon of Lhe
organlzaLlon or, ln Lhe case of a foundaLlon, granLed Lo oLher nonproflL organlzaLlons. When a
nonproflL goes ouL of buslness, lLs remalnlng asseLs musL be glven Lo anoLher nonproflL. 1he
norLhwesLern Clobal PealLh loundaLlon (www.nwghf.org) ls an example of a norLhwesLern
nonproflL splnouL.
1he mosL common splnouLs aL norLhwesLern are for-proflL Lechnology based splnouLs. 1he
mlsslon of for proflL sLarLups ls Lo brlng proflLs Lo Lhe shareholders. ÞroflL ls Lhe goal and Lhe
buslness pays Laxes on LhaL proflL. When a for-proflL organlzaLlon goes ouL of buslness, lLs
asseLs can be llquldaLed and Lhe proceeds dlsLrlbuLed Lo Lhe owners or Lhe shareholders.
Lstab||sh|ng a non-prof|t was a way to de||ver dev|ces to the greatest number of peop|e |n
the deve|op|ng wor|d at the |owest poss|b|e cost.
uovlJ kelso, lbu
cllolcol ltofessot of 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
76(&2'1 *( 8(6)9% '-: +*(&'(.
vlrLual companles perform Lhelr buslness LransacLlons Lhrough Lhe lnLerneL. 1hey Lyplcally do
noL have headquarLers or an offlce space and run wlLh a very small sLaff. MosL aspecLs of Lhelr
buslness, lncludlng research and developmenL, markeLlng, and sales, are Lyplcally ouLsourced.
1he prlmary role of Lhe vlrLual company ls Lo monlLor and manage Lhe ouLsourced acLlvlLles.
8y obvlaLlng Lhe need for creaLlng lLs own lnfrasLrucLure (ºbrlcks and morLar"), Lhe vlrLual
company keeps lLs cosLs Lo a bare mlnlmum.
8
ln general, a vlrLual company ls formed lf Lhe company ls ln lLs early sLages. 1here are
numerous examples of sLarLups LhaL never graduaLed from Lhe vlrLual mode and ulLlmaLely
wlLhered and dled. Success ln Lhe vlrLual mode requlres a well LhoughL-ouL buslness plan wlLh
achlevable Lechnlcal mllesLones wlLhln a reallsLlc Llmellne. When Lhe mllesLones are achleved,
Lhe enLrepreneurs should be able, ln Lheory, Lo sell Lhelr sLarLup ldea Lo lnvesLors. Powever,
Lechnlcal mllesLones can be dlfflculL Lo achleve ln a Llmely fashlon wlLhln Lhe academlc
envlronmenL. 1hls ls one of Lhe reasons why vlrLual companles ofLen fall.
;-)*(,*('&6-< &"0 )*+,'-#
lrom Lhe momenL of lLs lncepLlon, a new company Lakes on lLs own ldenLlLy, buL for legal
purposes a buslness ls noL ºreal" unLll lL ls formally lncorporaLed ln a parLlcular sLaLe. 1here are
numerous how-Lo manuals on lncorporaLlon, and lL ls posslble Lo lncorporaLe on your own for
a relaLlvely small flllng fee. Whlle Lhls opLlon saves money ln Lhe near Lerm, lL ls lmporLanL LhaL
you geL quallfled advlce from an aLLorney. 1he money wlll be well worLh lL and wlll llkely save
frusLraLlons ln Lhe long run. 1he laLLer ls someLhlng Lo be avolded, as one of Lhe prlmary
moLlvaLlons for lncorporaLlng ls Lo proLecL Lhe prlnclpals from belng held personally llable for
Lhe company's debLs. A good aLLorney wlll ensure LhaL accuraLe flllngs are fulfllled. .
Þlease conLacL Lhe lnnovaLlon and new venLures Cfflce for referrals of aLLorneys wlLh
experlence ln Lhe area. AlLernaLlvely, enLrepreneurs are encouraged Lo consulL wlLh Lhe
LnLrepreneurlal Law CenLer aL norLhwesLern Law School
hLLp://www.law.norLhwesLern.edu/legalcllnlc/sboc/abouL/lndex.hLml for advlce on Lhls Loplc.
="**%6-< &"0 %&'(&2, 10<'1 0-&6&#
Chooslng a sLarLup legal enLlLy can be confuslng. Cenerally, Lhere are four conslderaLlons as
ouLllned on 1ab|e 2. usually, sole proprleLorshlp ls noL approprlaLe for Lechnology companles
due Lo llablllLy concerns and Lhe llmlLaLlons wlLh ralslng caplLal. 1he C CorporaLlon ls Lhe flrsL
cholce for mosL venLure caplLallsLs. When Lhe Lo-be-venLure-funded sLarLup ls a C CorporaLlon,
varlous admlnlsLraLlve and oLher burdens are mlnlmlzed for Lhe venLure flrm, allowlng Lhem Lo
Lransfer caplLal more easlly and focus on developlng Lhe sLarLup.
9
1ab|e 2: Common Lega| Lnt|t|es for Corporat|ons
So|e
Þropr|etorsh|p
C-Corp S-Corp L|m|ted L|ab|||ty
(LLC)
kequ|rements none MusL llle wlLh SLaLe, small
fee requlred
MusL llle wlLh SLaLe,
small fee requlred
MusL llle wlLh
SLaLe,
small fee requlred
Þersona|
L|ab|||ty
unllmlLed llablllLy Shareholders are noL
held llable
Shareholders are noL
held llable
Members are noL
held llable
Governance 8elaLlvely few
requlremenLs
LlecLlon of board of
dlrecLors/offlcers,
annual meeLlngs, and
annual reporL flllng
requlremenLs
LlecLlon of board of
dlrecLors/offlcers,
annual meeLlngs, and
annual reporL flllng
requlremenLs.
lew
8equlremenLs.
Management lull conLrol Shareholders elecL
dlrecLors who
manage buslness
acLlvlLles
Shareholders elecL
dlrecLors who
manage buslness
acLlvlLles
Members can seL
up sLrucLure as
Lhey
choose
1erm 1ermlnaLed when
proprleLor ceases
dolng buslness or
upon deaLh
ÞerpeLual: can exLend
pasL deaLh or
wlLhdrawal of
shareholders
ÞerpeLual: can exLend
pasL deaLh or
wlLhdrawal of
shareholders
ÞerpeLual, unless
sLaLe requlres
flxed
amounL of Llme
1axat|on LnLlLy noL Laxable.
Sole proprleLor pays
Laxes.
1axed aL corporaLe
raLe
no Lax aL Lhe enLlLy
level. lncome passed
Lhrough Lo Lhe
shareholders.
no Lax aL Lhe
enLlLy level.
lncome passed
Lhough Lo
members
1ransferab|||ty of
Assets
no Shares of sLock are
easlly Lransferred.
?es, observlng l8S
regulaLlons
uepends on
resLrlcLlons
ouLllned ln
operaLlng
agreemenL
Iundra|s|ng
lndlvldual provldes
caplLal.
Shares of sLock are
sold Lo ralse caplLal
(SecurlLles laws
apply)
Shares of sLock are
sold Lo ralse caplLal.
LlmlLaLlons prevenL S
corp sLock ownershlp
by corporaLlons
Sub[ecL Lo
operaLlng
agreemenL
(SecurlLles laws
apply)
10
Many f|rst t|me entrepreneurs underest|mate the |mportance of cons|der|ng |ega| |ssues and
gett|ng good |ega| adv|ce ear|y |n the process. Sett|ng up a new venture w|th a so||d |ega|
foundat|on structured to meet the founders' own goa|s and expectat|ons saves t|me, money
and potent|a| headaches down the road.
ístbet 8ottoo, Iu
ultectot
íottepteoeotlol low ceotet
Nottbwesteto uolvetslty
>0?26(0+0-&% 5*( ' %&'(&2,
A good ldea does noL necessarlly resulL ln a good producL. A good producL does noL necessarlly
resulL ln a company.
1o succeed, a company needs more Lhan a good ldea. lLs success ls largely due Lo how Lhe ldea
ls execuLed and wheLher lL addresses a real markeL need. A LalenLed sLaff and managemenL
Leam wlll ensure LhaL Lhe rlghL declslons are made along Lhe way. CaplLal ls also essenLlal Lo
make everyLhlng come LogeLher and push Lhe venLure ahead. ln order for a buslness Lo
succeed ln Lhe long Lerm, lL should be able Lo scale up. Cne way Lo scale ls Lo deslgn noL one
buL a plpellne of producLs. 8elow, some of Lhe essenLlal crlLerla LhaL lead Lo a successful
buslness are llsLed.
INNCVA1IVL ÞkCDUC1S, INNCVA1IVL SLkVICLS. SLarLups should be based on lnnovaLlve
servlces or producLs LhaL brlng unlque value Lo Lhe cusLomer. Academlc dlscoverles, however,
are usually embryonlc concepLs and noL full-blown producLs, maklng lL ls ofLen dlfflculL Lo
deLermlne Lhe real value ln Lhe markeLplace. unLll LhaL value ls deLermlned, lL ls ofLen
necessary Lo proLecL Lhe lnvenLlon. lnLellecLual properLy becomes essenLlal for
commerclallzaLlon as a way Lo guaranLee Lhe monopoly needed Lo [usLlfy Lhe cosL of
developmenL.
IN1LLLLC1UAL ÞkCÞLk1¥. 1here ls no need Lo have rlghLs Lo lnLellecLual properLy (lÞ) Lo sLarL
up a company. Powever, lf Lhe execuLlve Leam ls seeklng slgnlflcanL exLernal flnanclng, lL
should be aware LhaL Lhe ma[orlLy of lnvesLors usually requlre LhaL Lhe anLlclpaLed Lechnology
11
backed by lÞ. lÞ serves as a barrler Lo enLry agalnsL compeLlng companles LhaL mlghL wanL Lo
repllcaLe Lhe producL. 1he managemenL Leam wlll have Lo declde wheLher Lhe markeL for Lhelr
producL requlres Lhls klnd of proLecLlon.
ÞaLenLs also allow for easler LransacLlons as Lhe sLarLups enLer parLnershlps, collaboraLlons
and mulLlple fundlng clrcles. Cf course, lL ls Lhe naLure of Lhe paLenL rlghLs conLrolled by Lhe
company LhaL ls slgnlflcanL, noL [usL Lhe facL LhaL Lhe company has paLenLs. neverLheless, a
buslness plan wlLh a secLlon llsLlng Lhe company's lÞ asseLs ls llkely Lo be more compelllng Lo
an lnvesLor Lhan one LhaL does noL.
Some academlc companles are founded on lnLellecLual maLerlal LhaL lles wlLhln Lhe publlc
domaln and for whlch no lÞ proLecLlon ls avallable. Crdlnarlly, wlLh no proLecLable lÞ, Lhere
should be no need Lo secure a llcense from Lhe academlc employer. Companles wlLhouL lÞ
asseLs ordlnarlly do noL aLLracL large amounLs of ouLslde lnvesLmenL caplLal.
ModesL-lnvesLmenL companles do noL need lÞ ln order Lo geL off Lhe ground. MosL ofLen, Lhe
lmporLance of lÞ Lo becomes apparenL laLer on, when Lhe company sells Lhe producL or servlce
and knock-off compeLlLors arlse. 1o prevenL such a slLuaLlon, young companles should revlew
Lhelr lnvenLlons for aspecLs LhaL could lmparL a slgnlflcanL proLecLlon down Lhe road.
ÞkCDUC1 ÞIÞLLINL. ulscoverles LhaL could lead Lo mulLlple producLs or producL llnes, or
ºplaLform Lechnologles," are whaL many lnvesLors look for when fundlng a sLarLup. CfLen,
lnvesLors ask, ºls lL a producL or a company?" - lmplylng LhaL slngle-producL ldeas (also
referred as ºone-pony shows") are noL sulLable for Lhe formaLlon of an equlLy-lnvesLmenL
company. Cne can cerLalnly sLarL a new buslness around a slngle producL, buL lL ls unllkely LhaL
Lhe company wlll be aLLracLlve Lo lnsLlLuLlonal lnvesLors unless Lhe producL represenLs a very
large markeL opporLunlLy. lor Lhese cases, Lhe lnvenLor mlghL wanL Lo conslder llcenslng Lhe
producL for furLher developmenL Lo one or more esLabllshed companles, raLher Lhan creaLlng a
sLarLup.
MAkkL1 NLLD. uecldlng on Lhe company's flrsL producL ls ofLen very dlfflculL-especlally for
plaLform Lechnologles, whlch may have many dlfferenL appllcaLlons. An lmporLanL crlLerlon ls
LhaL lL serves real-world needs. lndlvlduals sLarLlng companles musL provlde compelllng
answers Lo quesLlons such as: WhaL markeL does Lhls producL serve? WhaL producLs are
already ln Lhls markeL? Pow ls Lhls producL dlfferenL from Lhem? Who are Lhe compeLlLors,
and how are Lhelr producLs beLLer or weaker Lhan yours?
12
SÞLCIALI2LD ÞLkSCNNLL. Þerhaps Lhe mosL common reason for a sLarLup Lo fall ls lack of
adequaLe managemenL. Larly sLage Lechnologles wlll lnvarlably encounLer many hurdles
before Lhey reach commerclallzaLlon. 8elng able Lo manage Lhe hurdles, ralse caplLal whlle
bulldlng a moLlvaLed Leam requlres experlence, a sophlsLlcaLed neLwork and unlque buslness
LalenLs.
SÞLCIALI2LD IACILI1ILS. Academlc sLarLups ofLen have llmlLed access Lo space and faclllLles.
norLhwesLern researchers ofLen flnd space ouLslde Lhe LvansLon campus ln such places as Lhe
llllnols Sclence and 1echnology Þark ln Skokle. Þlease consulL wlLh Lhe lnnovaLlon and new
venLures Cfflce lf you need space ln Lhe Chlcago area.
CAÞI1AL. A sLarLup's demand for cash depends on Lhe cosLs Lo Lake Lhe producL Lo markeL. 1he
faculLy member creaLlng a modesL-lnvesLmenL company ln hls or her garage, funded by
personal savlngs, does noL need Lo seek lnvesLmenL caplLal from buslness ºangels" (wealLhy
prlvaLe lnvesLors) and venLure caplLallsLs. ln conLrasL, Lhe researcher who plans Lo sLarL a new
pharmaceuLlcal company wlll spend counLless hours Lrylng Lo secure large amounLs of
lnvesLmenL caplLal. Cnce Lhe company ls sLarLed and Lhe lnlLlal caplLal ls secured, founders
wlll lmmedlaLely sLarL plannlng when and how Lo secure Lhe nexL ºround" of flnanclng. Such
flrms are voraclous ln Lhelr appeLlLe for cash, as ralslng money ls a never-endlng process, and
Lhey are aL Lhe mercy of Lhe lnvesLmenL communlLy.
1he declslon on wheLher Lo form a moJest-lovestmeot company or an epolty-lovestmeot
company ls largely dependenL on Lhe Llmellne Lo launch and Lhe naLure of Lhe producL, whlch
remalns Lo be compleLed ln lLs developmenL and manufacLurlng. Whlle Lhe deslre Lo preserve
ownershlp and conLrol of Lhe venLure Lhrough a modesL-lnvesLmenL company ls
undersLandable, many commerclal opporLunlLles requlre exLenslve parLnerlng, boLh ln
lnvesLmenL and sLraLegy, lf Lhey are Lo be successful.
A cont|nua| f|ow of |nnovat|ve |deas |s abso|ute|y essent|a| for
stay|ng ahead of the pack.
cboJ Mltklo, lbu
Ceotqe 8. kotbmooo ltofessot of cbemlstty
Nottbwesteto uolvetslty
13
I see hundreds of bus|ness p|ans and |deas each year. In order
to have a chance at gett|ng funded you must have a very c|ear
and |arge market need.
Motk 5. colello, Mu
ltloclpol
5AM veototes
1|ps for Northwestern Lntrepreneurs
An lmporLanL sLep ln sLarLlng a company ls Lo clarlfy Lhe role LhaL Lhe academlc enLrepreneur
wlll be able Lo play and Lhe sLeps Lo move Lhe lnvenLlons Lo Lhe company. 1hese lssues can
vary wldely dependlng on Lhe naLure of your sLarLup and your own background, deslres and
lnLeresLs. Powever, Lhere are a few Lhlngs Lo keep ln mlnd as you conslder sLarLlng Lhls new
venLure.
!*(96-< @6&" A*(&"@0%&0(-
unllke corporaLlons where employees are unable Lo sLarL a company wlLh lnformaLlon galned
whlle employed, academla ls markedly dlfferenL. unlverslLy employees who wanL Lo found
new companles based on Lhelr research are noL percelved by Lhelr employers as poLenLlal
compeLlLors. 1hus, unlverslLy employees are Lyplcally noL requlred Lo leave Lhelr academlc
employmenL ln order Lo found a company.
norLhwesLern, llke all academlc lnsLlLuLlons, has a varleLy of rules LhaL may be appllcable Lo a
researcher's plans Lo sLarL a company, lncludlng pollcles on lnLellecLual properLy, confllcL of
lnLeresL, confllcL of commlLmenL, sponsored research, and ouLslde consulLlng. All
norLhwesLern pollcles are llsLed aL hLLp://pollcles.norLhwesLern.edu/. Calnlng approval Lo
sLarL a new company ls based on Lhe full dlsclosure of proposed acLlvlLles as Lhey may perLaln
Lo Lhese pollcles. Cnce Lhe sLarLup acLlvlLy ls approved, Lhe lnnovaLlon and new venLures
Cfflce (lnvC) has a number of resources relevanL ln formlng Lhe company.
14
1he flrsL Lhree sLeps for Lhe academlc employees conLemplaLlng Lhe formaLlon of a new
company based on Lhelr research are Lo: (1) dlsclose Lhe lnvenLlon: (2) dlsclose for poLenLlal
confllcLs of lnLeresL/efforL, and (3) famlllarlze Lhemselves wlLh norLhwesLern's llcenslng
agreemenLs.
INVLN1ICN DISCLCSUkL. lf Lhe basls for sLarLlng Lhe company ls a dlscovery made ln Lhe
laboraLory, an lnvenLlon dlsclosure needs Lo be submlLLed Lo lnvC. lf Lhls ls your flrsL
lnLeracLlon wlLh lnvC, lL may be helpful Lo consulL wlLh an lnvC lnvenLlon manager who
handles slmllar Lechnologles ln advance of submlLLlng Lhe dlsclosure. Þlease call our offlce so
LhaL an lnvenLlon manager can be asslgned Lo you lnvC wlll deLermlne wheLher Lhere ls
proLecLable lnLellecLual properLy (lÞ) assoclaLed wlLh Lhe dlscovery. lnvenLlon dlsclosure forms
can be downloaded aL: hLLp://www.lnvo.norLhwesLern.edu/forms
norLhwesLern wlll declde wheLher Lo pursue lnLellecLual properLy proLecLlon or noL. lf
norLhwesLern decldes noL Lo pursue lÞ proLecLlon, Lhe lnvenLlon wlll be released Lo Lhe
lnvenLor, and Lhe lnvenLor wlll be free Lo pursue lL on hls /her own. 1he lnvenLor wlll also be
responslble for Lhe legal cosLs assoclaLed wlLh Lhe lÞ and sLarLup. lf norLhwesLern decldes Lo
proLecL Lhe lnvenLlon, lL wlll flle a paLenL appllcaLlon and cover Lhe legal cosLs assoclaLed wlLh
Lhe appllcaLlon. Cnce Lhe paLenL ls lssued, Lhe sLarLup wlll need Lo llcense Lhe Lechnology from
norLhwesLern Lo galn Lhe rlghLs Lo develop and commerclallze lL. 1hls process ls broadly
descrlbed as ºLechnology Lransfer."
CCNILIC1S DISCLCSUkL. 1he second dlsclosure relaLes Lo Lhe lnvenLor's compllance wlLh
lnsLlLuLlonal confllcL-of-lnLeresL and confllcL-of-commlLmenL pollcles. Such confllcLs are a hoL
Loplc ln Lhe naLlonal medla, professlonal organlzaLlons, and [ournals, as well as ln hallway
gosslp. 8elng accused of havlng a confllcL can severely damage one's repuLaLlon and fuLure
prospecLs. 1he federal agencles and academlc enLlLles have become qulLe aLLenLlve ln
enforclng Lhelr confllcLs pollcles. norLhwesLern's pollcles ln Lhls area can be accessed aL
www.|nvo.northwestern.edu]po||c|es.
A confllcL-of-commlLmenL occurs when ouLslde acLlvlLles lnLerfere wlLh an lndlvldual's
responslblllLles under hls or her academlc poslLlon. 1yplcally, lnsLlLuLlonal consulLlng pollcles
allow academlc personnel Lo spend a seL amounL of Llme per week or monLh dolng ouLslde
professlonal work, whlch may lnclude helplng Lo launch a new company.
A confllcL-of-lnLeresL exlsLs when an lndlvldual's personal lnLeresLs (e.g., equlLy holdlngs ln a
sLarLup company) are perce|ved Lo lnfluence LhaL person's [udgmenL when exerclslng hls or
her academlc employmenL duLles. lnsLlLuLlons requlre LhaL Lhe lndlvldual dlscloses and
15
manages such poLenLlal confllcLs. 8ecause confllcL-of-lnLeresL managemenL can be a
compllcaLed buslness, especlally lf a researcher conLemplaLes a sLarLup company whlle
remalnlng an academlc employee, lL ls essenLlal LhaL Lhe consLralnLs on permlsslble acLlvlLles
are well-undersLood. ConfllcL-of-lnLeresL managemenL plans are above all concerned wlLh
proLecLlng vulnerable parLles, such as graduaLe sLudenLs and human sub[ecLs parLlclpaLlng ln
Lhe research, who are under Lhe charge of Lhe academlc enLrepreneur.
lnvenLors should consulL wlLh Lhelr deparLmenL chalr and dean, as soon as Lhey are ready Lo
geL serlous abouL formlng a new company, Lo lay ouL plans and recelve feedback . wbot ls
most lmpottoot ls tbot lt ls oot oboot wbetbet yoo tblok tbete ls o coofllct ot oot, bot wbetbet
someooe else mlqbt petcelve ooe. wbeo lo Joobt, Jlsclose. lt coo sove yoo o lot of beottocbe
lotet oo.
!"0- 6% 6& &6+0 &* %&'(& ' )*+,'-#.
8esearchers geL so exclLed abouL Lhe ldea of formlng a company LhaL Lhey ofLen lose slghL of
Lhe hard road ahead. lL ls easy Lo overlook Lhe fundamenLals of bulldlng a successful buslness,
such as favorable Llmlng. Whlle Lhere ls no formula for deLermlnlng Lhe proper Llme Lo sLarL a
new company, ralslng enough caplLal Lo cover Lwo Lo Lhree years of operaLlons may be a good
rule of Lhumb. 1he ºrlghL" Llme has less Lo do wlLh Lhe sLage of research Lhan wlLh Lhe caplLal
markeLs. Academlc research dlscoverles are generally qulLe far from belng producLs and have
lncreased chances of dylng durlng developmenL. 1herefore, Lhe paLhway from dlscovery Lo
producL enLalls rlsk, whlch presenLs a slgnlflcanL hurdle when lL comes Lo ralslng funds. 1he
more embryonlc Lhe dlscovery, Lhe hlgher Lhe rlsk.
ln Lhe 90's, lL was easler Lo sLarL up a company, even wlLh very early sLage research. CurrenLly,
lnvesLors prefer lnvesLlng ln companles LhaL are much farLher along ln producL developmenL-
for example, Lhose wlLh drugs ln mld-sLage human cllnlcal Lrlals, or Lhose wlLh successful beLa
LesLs of Lhelr sofLware.
lnvesLors can be sLraLlfled accordlng Lo Lhelr comforL levels wlLh Lhe assoclaLed rlsks aL each of
Lhe sLages of Lhe producL developmenL sequence. 1hose aL Lhe early (hlgh-rlsk) end are ofLen
called ºseed" lnvesLors, and Lhose aL Lhe laLer (lower-rlsk) sLages are called ºmezzanlne"
lnvesLors. lL ls lmporLanL LhaL Lhe researcher beLLer undersLand Lhe rlsks assoclaLed wlLh
geLLlng Lhelr pro[ecL Lo Lhe markeLplace because lL wlll enable hlm/her Lo assess Lhe currenL
lnvesLmenL cllmaLe Lhrough exlsLlng neLworklng conLacLs. Lven wlLh a poslLlve lnvesLmenL
markeL, much efforL should be devoLed Lo fundralslng.
16
An |dea about geckos |s [ust an |nterest|ng pro[ect un|ess |t fu|f|||s a
press|ng need |n the market p|ace, can be manufactured on a re|evant
sca|e, and pr|ced compet|t|ve|y.
lbllllp Messetsmltb, lbu
ltofessot of 8lomeJlcol íoqloeetloq ooJ Motetlols 5cleoce ooJ íoqloeetloq
Nottbwesteto uolvetslty
B&0,% &*@'
% ' %&'(&2,
WlLh so many sLeps lnvolved ln Lhe formaLlon of a new company, academlc enLrepreneurs
ofLen lnqulre abouL Lhe proper sequence. 1here ls noL a seL sequence ln whlch Lhese Lasks
should be accompllshed, as every new company has lLs own unlque clrcumsLances and needs.
neverLheless, as a gulde, a generallzed chronology ls shown below for sLarLlng an academlc
spln-off company. 1he llsL emphaslzes compllance wlLh an academlc employer's pollcles and
pracLlces regardlng Lhe lnvenLor's parLlclpaLlon ln a sLarLup. lL aLLempLs Lo mlnlmlze early
caplLal expendlLures. Þlease noLe, however, LhaL ln reallLy many of Lhese evenLs do noL unfold
one aL a Llme buL Lyplcally occur ln parallel or may occur ouL of Lhe sequence below.
1a|k to INVC 1alk wlLh your lnvenLlon manager Lo deLermlne whaL Lype
of lnLellecLual ÞroperLy proLecLlon you wlll need and for
suggesLlons regardlng nexL sLeps. Make sure Lo undersLand
Lhe lnLellecLual ÞroperLy and confllcL-of-lnLeresL pollcles.
Þrotect
Inte||ectua|
Þroperty
lor mosL sLarLups, Lhe lnLellecLual properLy ls Lhe only
caplLal. lL ls Lhe only Lool for aLLracLlng lnvesLmenL (usually
one or more paLenLs and/or subsLanLlal sofLware code). A
paLenL appllcaLlon should be flled any publlc dlsclosure ls
made.
Network]I|nd a
Mentor
ConLacL lnvC for suggesLlons on how Lo neLwork or
recommendaLlons for poLenLlal parLlclpaLlon ln unlverslLy
programs. 1hese may lnclude: Chlcago lnnovaLlon MenLors
Þrogram, CommerclallzaLlon Cllnlcs, lnvC semlnars, eLc. ln
addlLlon, Lhe larley CenLer for LnLrepreneurshlp aL Lhe
17
McCormlck School of Lnglneerlng, Lhe Levy lnsLlLuLe for
LnLrepreneurshlp aL Lhe kellogg SLudenL of ManagemenL
and Lhe knlghL lnnovaLlon LaboraLory provlde access Lo
managemenL, sLudenLs and/or buslness plan wrlLlng as well.
Þ|an the 8us|ness A buslness plan should be drafLed Lo be able Lo
communlcaLe Lhe markeL opporLunlLy and vlslon of Lhe
company. 1he plan should lnclude a markeL plan and a
flnanclal plan.
D|sc|ose to INVC AL Lhls polnL you should communlcaLe wlLh your lndlvldual
School on how you wlll be managlng any poLenLlal confllcL-
of-lnLeresL/confllcL of efforL LhaL mlghL resulL from Lhe
sLarLup.
Ass|gn a 8us|ness
Þerson
A buslness manager (or CLC) should be selecLed Lo lnlLlaLe
negoLlaLlons wlLh Lhe unlverslLy and fundralslng.
Incorporate 1he company needs Lo become a legal enLlLy ln a parLlcular
sLaLe.
Negot|ate the
L|cense or Cpt|on
Agreement W|th
INVC
1he buslnessperson leadlng Lhe sLarLup wlll negoLlaLe a
llcense for Lhe sLarLup wlLh lnvC. ln some cases, a shorL-
Lerm opLlon agreemenL may precede a llcense Lo
demonsLraLe Lo poLenLlal funders LhaL lL has secured Lhe
rlghLs Lo negoLlaLe for a llcense Lo Lhe Lechnology.
Iundra|se Commerclallzlng Lechnology ls Lyplcally a caplLal-lnLenslve
process. lundralslng becomes a non-sLop acLlvlLy unLll Lhe
company exlL (elLher sold or lÞC).
C261:6-< &"0 %&'(&2,
1here are many lssues LhaL commonly arlse when splnnlng-ouL a sLarLup from academla. lL ls
wlse Lo sLarL Lhlnklng abouL Lhem early on ln Lhe process. 1hese lssues range from sLraLeglc
plannlng Lo fundralslng Lo anLlclpaLlng sources of frusLraLlon.
1here are Lwo relaLed quesLlons LhaL lnvesLors wlll ofLen ask: Ate yoo bollJloq o ooe-ptoJoct
compooy ot o plotfotm compooy and wbot ls yoot exlt sttoteqy?
lnvesLors ln equlLy-lnvesLmenL companles llke Lo see markeLs peneLraLlon ln a varleLy of ways.
1haL's why Lhey prefer ºplaLform Lechnologles," whlch are amenable Lo Lhe developmenL of
18
mulLlple producLs. When revlewlng a dlscovery proposed Lo be Lhe nucleus of a sLarLup, one of
Lhe flrsL quesLlons an lnvesLor mlghL ask ls: ºls Lhls a producL or a company?" lmplled ln Lhls
query ls a second quesLlon: ºWhaL happens lf Lhe flrsL producL falls?" WlLhouL a clear answer
Lo Lhls quesLlon, lL's unllkely LhaL Lhe company wlll aLLracL lnsLlLuLlonal lnvesLors.
1he producL-or-company quesLlon also applles Lo Lhe modesL-lnvesLmenL company, Lhough on
a more modesL scale. lf you conLemplaLe bulldlng a ºgarage-based" company Lo sell a producL
lnLo a nlche markeL, you should ask yourself, ºlf Lhe sales of my lead producL slowly ramp up
Lo, say, $73,000 per year and Lhen flaLLen ouL, am l golng Lo be saLlsfled wlLh all Lhe Llme and
money l spenL Lo geL Lo LhaL poslLlon?" lf Lhe answer ls no, you musL conslder how Lhe
company may brlng ln addlLlonal revenues Lo [usLlfy your lnvesLmenL.
lL ls also lmporLanL Lo Lhlnk abouL exlL sLraLegles. lf you are plannlng Lo brlng Lhe company all
Lhe way Lo an lÞC, you wlll need Lo develop a developmenL plan LhaL wlll Lake you all Lhe way
Lo Lhe markeLlng and sales of Lhe Lechnology. ?ou wlll need Lo anLlclpaLe poLenLlal parLners
LhaL wlll help you reach LhaL polnL, flnanclng sLraLegy, eLc.
lf your plan ls Lo sell Lhe company afLer a mllesLone ls reached (say afLer Þhase ll ln
developmenL), you mlghL wanL Lo sLarL checklng poLenLlal acqulrers' appeLlLe for your
Lechnology aL an early sLage.
D056-6-< &"0 +'(90&
ln order Lo wrlLe your buslness plan and effecLlvely neLwork wlLh oLhers, you wlll need Lo have
an ºelevaLor plLch" of your company. 1hls means LhaL you should be able Lo explaln wlLhln one
mlnuLe Lhe tolsoo J'ette for your company. 1he descrlpLlon should be compelllng enough for
an lnvesLor Lo wanL Lo conLlnue Lhe conversaLlon abouL Lhe opporLunlLy.
1he flrsL sLep ln deslgnlng your elevaLor plLch ls Lo have a well-deflned markeL. 8e careful,
however, noL Lo exaggeraLe Lhe slze of Lhe markeL or gloss over Lhe crlLlcal deLalls. lnvesLors
Lend Lo laugh aL academlc enLrepreneurs LhaL Lend Lo Lalk abouL a sLarLup wlLh a blockbusLer
markeL slze of mulLlple bllllon dollars.
ÞroducLs should address unmeL needs, as Lo creaLe a compelllng argumenL for a poLenLlal new
producL. 1he elevaLor plLch musL descrlbe Lhe unmeL need, Lhe cusLomers and why Lhey wlll
be lnLeresLed ln purchaslng Lhe producL.
19
ln acqulrlng such an undersLandlng, reallsLlc answers Lo Lhe followlng quesLlons should be
developed:
• WhaL ls Lhe unmeL need?
• Pow many people, companles, or oLher enLlLles currenLly have Lhls problem? ln Lhe
unlLed SLaLes? Worldwlde?
• ls Lhe lncldence of Lhe problem growlng or decllnlng? AL whaL raLe?
• Pow ls Lhls problem currenLly solved or avolded?
• Who sells producLs LhaL address Lhls problem? WhaL are Lhelr annual sales? WhaL ls
Lhelr esLlmaLed share of Lhe markeL?
• WhaL producLs for solvlng Lhls problem are ln oLher companles' developmenL
plpellnes?
• WhaL are Lhe sLrengLhs and weaknesses of exlsLlng producLs ln Lhls markeL?
• Pow do people make buylng declslons ln Lhls markeL?
• Why would a buyer choose your producL over Lhe oLhers?
CbLalnlng Lhls lnformaLlon, however, ls noL easy. ?ou should plan Lo devoLe Llme Lo do
research from boLh prlmary and secondary sources. ?ou wlll need Lo spend slgnlflcanL Llme
Lalklng wlLh lndusLry leaders, searchlng daLabases, eLc. lorLunaLely, norLhwesLern has Lhe
advanLage of havlng Lhe kellogg School of ManagemenL, one of Lhe besL schools ln markeLlng.
kellogg has hundreds of sLudenLs wlLh Lhe experLlse Lo do hlgh quallLy markeLlng research
analyses. Many of Lhese sLudenLs are wllllng Lo volunLeer Lhelr servlces ln exchange for Lhe
opporLunlLy Lo be parL of a sLarLup.
Cne of the |essons that I've |earned |s that hav|ng an
|nnovat|ve techno|ogy |s not enough to create a successfu|
bus|ness. It |s cr|t|ca| that you as an entrepreneur understand
and address the needs that ex|st |n the marketp|ace.
íJ colqote, lbu
ltofessot, Mecboolcol íoqloeetloq
Nottbwesteto uolvetslty
20
nav|ng an e|evator p|tch forces you to deve|op a c|ear and
conc|se statement of your company's m|ss|on and va|ue
propos|t|on. 8e|ng ab|e to convey th|s |n two m|nutes
demonstrates that you have true c|ar|ty on your bus|ness.
lblllppe looqokl
cíO, lolyeto
;:0-&65#6-< &"0 (6<"& =EF
llndlng Lhe rlghL CLC mlghL be Lhe mosL lmporLanL declslon LhaL Lhe academlc founders wlll
make for Lhe sLarLup. lounders are ofLen LempLed Lo play LhaL role. 1he LruLh ls LhaL lL almosL
never works. 1he sklll seL LhaL makes you a good researcher or lnvenLor rarely LranslaLes Lo
runnlng a buslness effecLlvely. lundralslng, wrlLlng buslness plans, negoLlaLlng leases for
faclllLles, and seLLlng up and managlng human-resources, purchaslng, accounLlng, regulaLory-
affalrs, manufacLurlng, and sales and markeLlng funcLlons are generally noL wlLhln Lhe realm of
Lhe researcher's experlence or lnLeresL. Lxperlence ln bulldlng sLarLups ls crlLlcal Lo be able Lo
ralse caplLal.
1here ls a Lendency ln academla Lo underesLlmaLe Lhe value LhaL Lhe buslness parLner brlngs
Lo Lhe Lable. Avold hlrlng Lhe flrsL poLenLlal CLC you conslder. lL ls lmporLanL Lo check
references and check how credlble Lhey are wlLh lnvesLors and compeLlLors. lnlLlal condlLlons
ln a sLarLup deLermlne Lhe fuLure paLh of Lhe company. lew sLarLups ever survlve a second-
raLe buslness parLner. Also, when lL comes Lo granLlng Lhe CLC equlLy ln Lhe company, you
may wanL Lo make lL sLrlcLly performance-based.
1he most |mportant th|ng you can do for you techno|ogy |s to f|nd the r|ght management.
ktlstloo nommooJ, lbu
ltofessot, ílecttlcol íoqloeetloq ooJ compotet 5cleoce
Nottbwesteto uolvetslty
21
32-
'6%6-<
1he Lype of lnvesLors LhaL you wlll seek for Lhe company wlll depend on Lhe Lype of company
LhaL ls belng bullL, Lhe sLage of developmenL and Lhe caplLal needs. 1he mosL common are:
Sweat Lqu|ty, Ir|ends and Iam||y
usually, Lhe founders each puL some of Lhelr personal funds lnLo Lhe enLerprlse durlng lLs early
days Lo help wlLh expenses such as Lravel and lncorporaLlon. More commlLLed enLrepreneurs,
especlally Lhose wlLhouL co-founders, may puL a conslderable amounL of Lhelr own money lnLo
Lhe company, frequenLly uslng credlL-card and home-equlLy debL as an ad[uncL.
CfLen, enLrepreneurs wlll Lap Lhelr frlends and famllles as mlnl-angels Lo provlde lnlLlal
fundlng. Asklng for money from famlly and frlends can be a dlfflculL. lL ls wlse Lo be clear and
upfronL abouL your goals and lnLenLlons. Some sorL of a wrlLLen agreemenL or conLracL wlll be
useful.
Non-Þrof|t Grants
non-proflL foundaLlons are ofLen good places Lo seek fundlng lf Lhe mlsslon and goals of your
company allgns wlLh Lhe mlsslons and goals of a non-proflL foundaLlon. Cccurrlng more
frequenLly ln healLhcare and soclal lssues, foundaLlons such as Lhe CysLlc llbrosls loundaLlon
has funded cysLlc flbrosls research ln boLh lndusLry and academla. Accordlng Lo Lhe 8osLon
Clobe, uS foundaLlons dedlcaLed Lo flghLlng dlseases lnvesLed abouL $73 mllllon ln research
and dlscovery of drugs ln 2007, 10 Llmes more Lhan Lhe $7 mllllon LhaL was lnvesLed ln 2000.
S8Iks & S11ks
Small 8uslness lnnovaLlon 8esearch (S8l8) and Small 8uslness 1echnology 1ransfer 8esearch
(S118) are federal granL programs LhaL fund research ln companles wlLh fewer Lhan 300
employees. 1hese programs recognlze LhaL much of Lhe unlLed SLaLes' lnnovaLlon occurs
wlLhln Lhe small-buslness secLor, and Lhey seek Lo sLlmulaLe furLher lnnovaLlon ln selecL areas
of research. Cver Lwo bllllon dollars ln granLs are provlded each year by agencles of Lhe federal
governmenL under publlshed sollclLaLlons. Awards have Lhree phases: Þhase l (up Lo
$130,000), ln whlch new concepLs are explored, Þhase ll (up Lo $1 mllllon), ln whlch successful
Þhase l pro[ecLs are developed lnLo producLs, and Þhase llb (up Lo $3 mllllon) ln whlch Lhe
Þhase ll pro[ecLs are moved close Lo commerclallzaLlon.
22
S8l8/S118 awards are made Lo Lhe small buslness, buL a porLlon of Lhe funds may be
subconLracLed Lo a unlverslLy laboraLory, whlch can be a greaL source for managlng proof-of-
concepL pro[ecLs wlLhouL havlng Lo pay for expenslve lnfrasLrucLure such as lnsLrumenLaLlon ln
a prlvaLe secLor laboraLory (up Lo 33 percenL for S8l8 and 60 percenL for S118 durlng Þhase l).
S8l8/S118 awards are aLLracLlve Lo academlc sLarLups for Lwo reasons: Lhey play Lo Lhe granL-
wrlLlng sLrengLhs of academlc researchers, and Lhey are ouLrlghL granLs, noL equlLy
lnvesLmenLs (e.g., you don'L have Lo glve a plece of Lhe company away Lo geL Lhe money). 1he
ma[or downslde Lo Lhe awards ls LhaL Lhere can be a slgnlflcanL lag beLween Þhase l and Þhase
ll awards, and lL may be dlfflculL Lo keep research Leams LogeLher (l.e. meeL payroll) whlle Lhe
Þhase ll appllcaLlon ls pendlng.
Many academlcs have been LempLed Lo use Lhe S8l8/S118 programs Lo exLend Lhelr academlc
research lnsLead of uslng Lhe funds Lo bulld a company and develop producLs. LxperL panels
are uLlllzed Lo revlew Lhe granL appllcaLlons boLh for Lechnlcal and commerclal merlL.
AppllcaLlons LhaL are academlcally focused are generally academlcally focused are generally
noL accepLed. 8uL used ln Lhelr lnLended manner, S8l8/S118 awards are excellenL ways Lo fund
early research ln a new company, and Lhe Þhase ll awards are robusL. SLlll, a company Lrylng Lo
bulld lLs enLlre llne of producLs from S8l8/S118 granLs wlLhouL oLher lnvesLmenL ls noL llkely Lo
secure sufflclenL resources.
lor a LuLorlal on S8l8 granL wrlLlng, please check hLLp://www.dodsblr.neL/LuLorlal/Lour.hLm.
Ange| Investors
Angel lnvesLors are lndlvlduals who lnvesL Lhelr own personal money. An angel lnvesLor ls
usually someone who has led Lhe launch and developmenL of successful companles, followed
by a successful exlL. Angel lnvesLors ofLen form groups so poLenLlal lnvesLmenLs can be beLLer
evaluaLed. Lach angel Lyplcally lnvesLs beLween $23k- $100k.lf a group pools Lhelr money,
Lhe LoLal amounL of lnvesLmenL can reach over $1 mllllon dollars. Angel lnvesLors usually
come ln aL an earller sLage Lhan venLure caplLal flnanclng.
AcLlve Chlcago area angel groups lnclude:
WlldcaL Angels www.wlldcaLangels.com
Pyde Þark Angels www.hydeparkangels.com
PearLland Angels www.hearLlandangels.com
CornersLone Angels www.cornersLoneangels.com
23
LqulLy lnvesLors recelve sLock ln Lhe company, wlLh Lhe amounL dependenL on Lhe value
(ºvaluaLlon") of Lhe company ln proporLlon Lo how much Lhey have lnvesLed. 1he cash value
placed on a new company (ºpre-money valuaLlon") ls arblLrary and sub[ecL Lo negoLlaLlon, wlLh
enLrepreneurs usually Lhlnklng hlgh and lnvesLors low. lL ls lnevlLable LhaL afLer mulLlple
rounds of equlLy lnvesLmenL, Lhe lnvesLors wlll own a ma[orlLy of Lhe shares of Lhe company.
Academlcs ofLen vlew Lhls ouLcome as ºloslng conLrol" of Lhe company (ofLen called
ºfounder's syndrome"), buL wlLhouL exLernal lnvesLmenL, Lhe company would noL be able Lo
move forward.
Industry Þartnersh|ps
A sLarLup may also develop a sLraLeglc parLnershlp wlLh a larger company under whlch Lhls
parLner helps Lhe young company wlLh producL developmenL, generally ln Lhe form of cash or
collaboraLlve asslsLance. ÞarLnershlps are an excellenL source of non-dlluLed caplLal and also
usually have an lmpacL on Lhe company's valuaLlon because Lhey are used Lo valldaLe Lhe
Lechnologles. ÞarLnershlps are dependenL on producL sLage of developmenL and mllesLones.
Care musL be Laken LhaL Lhese relaLlonshlps do noL alLer Lhe core company focus and are noL
sLrucLured ln a way LhaL wlll hamper fuLure fundralslng or sale of Lhe company.
Venture Cap|ta| I|rms
venLure caplLallsLs (vCs) are professlonal lnvesLors and money managers who manage and
lnvesL a pool of money from hlgh neL worLh lndlvlduals and lnsLlLuLlonal lnvesLors who are
looklng for hlgher reLurns on Lhelr lnvesLmenLs Lhan Lhe average sLock markeL reLurns. 1here
are Lhousands of venLure flrms ouL Lhere, and each flrm usually speclallzes ln a parLlcular
lndusLry. 1here are more vCs focused on hlgh Lech Lhan llfe sclences, slmply because an exlL ln
a llfe sclence ls usually much longer.
vCs provlde slgnlflcanL values Lo a sLarLup company LhaL ls much more Lhan [usL money. Many
vCs were former execuLlves who launched and managed successful companles and Lhey can
provlde valuable advlce and guldance. ln addlLlon, when a vC slgns up Lo lnvesL, you are
geLLlng Lhelr enLlre neLwork of frlends. vCs have enormous neLworks of frlends LhaL can help
sLarLups solve problems.
24
vCs make money by charglng a managemenL fee of Lhe managed funds Lhey ralsed from
wealLhy lndlvlduals and lnsLlLuLlonal lnvesLors. lL ls ln a vC flrm's besL lnLeresL Lo make money
for Lhelr lnvesLors because Lhelr repuLaLlon ls on Lhe llne. 1helr repuLaLlon ls based on Lhelr
lnvesLmenL Lrack records. lf managers have below average success raLes, lnvesLors are llkely
Lo choose dlfferenL money managers.
Lqually lmporLanL as selecLlng Lhe rlghL CLC, ls Lhe selecLlon of Lhe rlghL lnvesLors. lnvesLors
play a crlLlcal role ln shaplng Lhe company, provldlng neLwork, managemenL, eLc. 1he quallLy
of your seed lnvesLors wlll play a key role ln aLLracLlng fuLure lnvesLmenLs. SomeLlmes, Lhe
enLrepreneur ls ln such desperaLe need for fundlng LhaL he/she accepLs lnvesLmenLs from
lnexperlenced lnvesLors. 1hese lnvesLors ofLen have unreallsLlc expecLaLlons, llLLle lndusLry-
speclflc neLwork and llLLle credlblllLy wlLh follow-on lnvesLors. lew sLarLups can survlve an
lnexperlenced seed lnvesLor.
Iundra|s|ng |s an a||-consum|ng process. It requ|res constant effort,
ded|cat|on, focus and a re|ent|ess pursu|t.
Collletmo Ameet, lbu
ltofessot, 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
S8Iks and S11ks have been of tremendous va|ue to the startup we created a
number of years ago. I|rst, and foremost th|s type of fund|ng |s non-d||ut|ve.
In add|t|on, |t |s m||estone-based wh|ch serves as a cont|nua| rem|nder of the
d|sc|p||ne necessary to successfu||y commerc|a||ze the techno|ogy. I
recommend that a|| facu|ty-|n|t|ated startups g|ve cons|derat|on to th|s type of
fund|ng.
Cteqoty Olsoo, 5cu
woltet l. Motpby ltofessot of Motetlols 5cleoce ooJ íoqloeetloq
Nottbwesteto uolvetslty
25
Þartner|ng w|th a |arge p|ayer |n the |ndustry can |ncrease your
startup's cred|b|||ty among potent|a| |nvestors. A |arger company can
a|so offer fac|||t|es and other resources requ|red to move a product
from the |aboratory to the |ndustry.
voJlm 8ockmoo, lbu
ltofessot of 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
G"0 (*10H%I *5 &"0 5*2-:0(% 6- &"0 %&'(&2, )*+,'-#
MosL flrsL-Llme academlc enLrepreneurs are uncerLaln abouL whaL role Lhey should play ln Lhe
formaLlon and operaLlon of a new company, Lhough cerLaln relaLlonshlps are falrly predlcLable.
laculLy Lyplcally prefer Lo reLaln Lhelr academlc poslLlon whlle worklng wlLh Lhe new company,
whlle sLaff, posLdocs, and graduaLe sLudenLs ordlnarlly leave academla Lo become company
employees. A faculLy member's role ln Lhe sLarLup ls llkely Lo be proscrlbed by a number of
unlverslLy pollcles, lncludlng Lhose on confllcL-of-lnLeresL, confllcL-of-commlLmenL, sponsored
research, and ouLslde consulLlng. 1he Lyplcal range of roles LhaL faculLy play ln con[uncLlon
wlLh sLarLups lncludes:
- lounder/equlLy holder
- ConsulLanL
- Member of Lhe sclenLlflc advlsory board
- Member of Lhe board of dlrecLors
- 8eclplenL of sponsored research fundlng
- Lmployee of Lhe sLarLup, on|y whlle on leave from Lhe unlverslLy
norLhwesLern, llke mosL academlc lnsLlLuLlons, has pollcles regardlng how faculLy may
parLlclpaLe ln new companles. 1he faculLy member should consulL Lhe confllcL of lnLeresL
pollcy hLLp://www.research.norLhwesLern.edu/pollcles/faculLy-confllcL-of-lnLeresL.hLml and
dlscuss wlLh hls/her school/deparLmenL before sLarLlng a company.
1he academlc researchers provlde Lhe Lechnlcal vlslon Lo gulde Lhe company's lnlLlal research
and developmenL. 1hey are lnLegrally lnvolved ln mulLlple aspecLs of bulldlng a buslness whlch
lncludes: developlng and wrlLlng Lhe buslness plan, recrulLlng an lndlvldual Lo lead Lhe
26
buslness slde of Lhe company, maklng presenLaLlons Lo poLenLlal lnvesLors, hlrlng lnlLlal
sclenLlflc sLaff, and launchlng Lhe company ln lLs own faclllLles. 1hese acLlvlLles requlre a large
Llme commlLmenL. A chlef execuLlve offlcer (CLC) may handle Lhe ma[orlLy of Lhe early work of
bulldlng Lhe company, buL lnevlLably Lhe researchers wlll be pulled lnLo Lhe process. lL ls
lmporLanL Lo noLe LhaL one of Lhe measures used by poLenLlal parLners and lnvesLors ln
assesslng Lhelr lnLeresL ln worklng wlLh a new venLure ls Lhe amounL of Llme LhaL Lhe academlc
founders devoLe Lo Lhe endeavor.
Cnce Lhe sLarLup ls launched, Lhe lnvolvemenL of Lhe founder ls ofLen lnversely relaLed Lo Lhe
number of employees aL Lhe company: as Lhe slze of lLs sLaff lncreases, Lhe day-Lo-day
parLlclpaLlon of Lhe founder decreases. ln esLabllshed companles, Lhe founder usually remalns
on Lhe company's sclenLlflc advlsory board and offers sLraLeglc consulLlng advlce.
B010)&6-< &"0 )*45*2-:0(% *5 ' %&'(&2,
laculLy members are ofLen LempLed Lo lnclude Lhelr research collaboraLors and graduaLe
sLudenLs as parLners of Lhe sLarLup, Lhough Lhls declslon can usually brlng headaches aL a laLer
Llme. 8ecause parLners usually share ln Lhe fuLure value of Lhe company- wheLher ln Lhe
form of proflLs, sLock holdlngs, or oLher arrangemenLs-declslons as Lo who wlll be a founder
should be made accordlng Lo Lhe expecLed conLrlbuLlon of each lndlvldual Lo Lhe enLerprlse. lL
ls much easler Lo look back aL a sclenLlflc sLudy and deLermlne who made Lhe conLrlbuLlons
necessary for lncluslon as a reporL's coauLhor Lhan lL ls Lo look lnLo Lhe fuLure Lo deLermlne
who should share, and ln whaL proporLlon, ln Lhe value creaLed by Lhe company.
Þlcklng your buslness parLners ls a blL llke plcklng a spouse. ?ou wanL Lo form relaLlonshlps
wlLh people who you know and LrusL and who share your values and asplraLlons. ?ou wanL
people LhaL had experlence as enLrepreneurs and are respecLed by Lhe lnvesLor communlLy. Cf
course, Lhey also need Lo be honesL, communlcaLe ln a sLralghLforward manner, and follow
Lhrough on whaL Lhey say. lnvC can help ldenLlfylng poLenLlal managers for Lhe sLarLups.
1he founders of a buslness nearly always reLaln equlLy rlghLs. 1here are Lwo forms of equlLy:
sLock and opLlons. 1he purchase of sLock by founders should happen early prlor Lo an exLernal
company valuaLlon. Cnce a value ls placed - Lhrough a Lerm sheeL, for example - Lhere are Lax
lmpllcaLlons. lounders' sLock can be resLrlcLed wlLh regard Lo Lransfer and reverse vesLlng. lor
example, lf a founder ends hls buslness relaLlonshlp wlLh Lhe company, Lhe company has Lhe
rlghL Lo repurchase hls/her sLock aL Lhe founder's orlglnal purchase prlce.
27
1he oLher form of equlLy, opLlons, are Lhe rlghL Lo purchase shares of a company's sLock ln Lhe
fuLure aL a very low prlce. 1hese are Lyplcally granLed Lo new employees and consulLanLs and
vesL over Llme. SomeLlmes, however, shares from Lhe opLlon pool are glven Lo founders as a
way Lo reward noLable conLrlbuLlons by [unlor Leam members.
vesLlng ls a process by whlch sLock or opLlons become avallable Lo Lhe employee over Llme
accordlng Lo a predeLermlned schedule. vesLlng ls meanL Lo ensure long-Lerm commlLmenL Lo
Lhe company. 1he lengLh of a vesLlng schedule ls Lyplcally Lhree Lo flve years. vesLlng
schedules Lend Lo be fasLer on Lhe WesL CoasL Lhan on Lhe LasL CoasL. 1here are dlfferenL
Lypes of vesLlng. lor lnsLance, cllff vesLlng ls when a person's buslness relaLlonshlp wlLh a
company has Lo conLlnue for a seL perlod of Llme (e.g. one year) before LhaL person has a rlghL
Lo purchase sLock ln Lhe company. vesLlng can occur on a monLhly, quarLerly, or yearly basls.
When a company ls sold, vesLlng usually acceleraLes, and Lhe rlghLs of founders and employees
- whose opLlons also acceleraLe - need Lo be balanced.
ldenLlfylng founders and seLLlng up sLock plans ls someLhlng wlLh whlch an experlenced
aLLorney, who ls knowledgeable abouL sLarLup companles and sLock-ownershlp norms ln your
lndusLry, can help you durlng lncorporaLlon. Þlease conLacL lnvC aL lnvo[norLhwesLern.edu
for referrals Lo aLLorneys who speclallze ln sLarLups.
A0&@*(96-< '-: 56-:6-< &"0 (6<"& +0-&*(%
1here ls much Lo learn abouL organlzlng, fundlng, and launchlng a new company from Lhe
experlence of oLhers. 1he besL way Lo access Lhe know-how and wlsdom of oLhers ls Lhrough
ºneLworklng." ldeally, a researcher should alm Lo flnd a menLor (or a group of menLors) LhaL
wlll be able Lo offer quallfled advlce and help open Lhe doors. lnvC offers a formal menLorshlp
program called ºChlcago lnnovaLlon MenLors (ClM)" program Lo maLch enLrepreneurs wlLh
menLors (www.chlcagolnnovaLlonmenLors.org)
1here are many oLher opporLunlLles for neLworklng ln Lhe Chlcago area. A llsL of some
neLworklng resources ls llsLed aL www.lnvo.norLhwesLern.edu/resources. 1hese lnclude: speclflc
venues for enLrepreneurs Lo geL LogeLher Lo presenL Lhelr concepLs for new companles,
regular meeLlngs of local lndusLry groups, small companles maklng presenLaLlons aL
professlonal conferences, and regular meeLlngs of ºangel neLworks" aL whlch leaders of new
companles ofLen presenL Lhelr buslness plans.
1he concepL and pracLlce of neLworklng ls essenLlal for enLrepreneurs. lL ls Lhrough
neLworklng LhaL CLC and CSC (Chlef Sclence Cfflcer) candldaLes, consulLanLs, corporaLe
28
aLLorneys, lnsurance carrlers, and poLenLlal lnvesLors may be ldenLlfled. 1lps on wrlLlng a
buslness plan or applylng for S8l8 and S118 fundlng may also be gleaned from Lhese
lnLeracLlons. lurLher, neLworklng wlLh fellow enLrepreneurs, provlded LhaL Lhey are noL dlrecL
compeLlLors, ls an addlLlonal resource, as Lhey share Lhelr own experlences.
A varleLy of semlnars are regularly offered Lo help enLrepreneurs develop skllls and confldence
ln neLworklng - vlslL lnvC's web slLe - www.lnvo.norLhwesLern.edu for a llsL of upcomlng on-
campus and local semlnars.
Mentorsh|p from Ch|cago Innovat|on Mentors
(hLLp://www.chlcagolnnovaLlonmenLors.org/) has been |nstrumenta| |n shap|ng the
focus and d|rect|on of our commerc|a||zat|on p|ans.
keeJ Omoty, Mu
ltofessot, koJloloqy
lelobetq 5cbool of MeJlcloe
D6%)1*%6-< 6-5*(+'&6*-
Cnce you declde Lo sLarL a buslness, lL ls lmporLanL Lo be careful on how much lnformaLlon ls
belng dlsclosed Lo Lhe publlc. Þubllc dlsclosures could llmlL your ablllLy Lo obLaln paLenL rlghLs.
ln addlLlon, lL mlghL creaLe Lhe rlsk LhaL somebody wlll copy your ldeas.
lf you are ln a sLarLup buL have noL llcensed Lhe lnvenLlon, please consulL your lnvenLlon
manager aL lnvC before maklng any publlc dlsclosures. 1he manager wlll leL you know lf
slgnlng a ConfldenLlallLy ulsclosure AgreemenL (CuA) ls necessary. Samples of CuAs are found
aL: www.lnvo.norLhwesLern.edu/forms/guldellnes-confldenLlallLy-agreemenLs.
ln general, lL ls wlse noL Lo provlde Loo many deLalls of Lhe lnvenLlon when communlcaLlng
wlLh an exLernal parLy. Lven when common lnLeresLs are clear and furLher and more serlous
dlscusslon ls lndlcaLed, lL ls noL necessary Lo provlde all Lhe deLalls abouL Lhe lnvenLlon or Lhe
company. MosL lnvesLors ofLen do noL wanL Lo learn confldenLlal lnformaLlon unLll Lhey have
moved onLo Lhe sLage of ºdue dlllgence" and are serlously conLemplaLlng an lnvesLmenL. AL
LhaL polnL, lf Lhe sLarLup has already opLloned or llcensed Lhe Lechnology, Lhey should already
have a LemplaLe confldenLlallLy (nondlsclosure) agreemenL.
29
(See hLLp://conLracLs.corporaLe.flndlaw.com/corporaLe/nondlsclose/343.hLml for an example
of a confldenLlallLy agreemenL.) noLe LhaL unLll your company has opLloned or llcensed
underlylng lÞ from norLhwesLern , or any oLher llcensor, confldenLlallLy agreemenLs wlll need
Lo lnclude such parLles, as Lhey hold Lhe rlghLs Lo Lhe lÞ.
='- ; :* (0%0'()" 6- +# ')':0+6) 1'8*('&*(# 5*( +# %&'(&2,.
Cnce Lhe company ls lncorporaLed, all research relaLed Lo Lhe sLarLup needs Lo be conducLed
wlLhln Lhe sLarLup. 1here are sLrlcL regulaLlons why sLarLup companles are noL allowed Lo
conducL company's work wlLhln Lhe walls of Lhe academlc lnsLlLuLlon. uslng Lhe unlverslLy's
faclllLles can resulL ln grave penalLles for Lhe lnsLlLuLlon and Lhe researcher. Powever,
someLlmes Lhe academlc lab pursues baslc research LhaL ls complemenLary Lo Lhe company's
producL developmenL work. ln oLher lnsLances, lf proof-of-concepL or reducLlon-Lo-pracLlce
experlmenLaLlon sLlll needs Lo be done, Lhe academlc laboraLory may be besL equlpped Lo
perform Lhe work. ln Lhese cases, Lhe sLarLup can enLer a sponsored research agreemenL wlLh
Lhe founder of Lhe sLarLup. lundlng from sLarLups Lo Lhe founder's academlc laboraLory needs
Lo be cleared by Lhe Cfflce of Sponsored 8esearch and Lhe School's confllcL-of-lnLeresL
admlnlsLraLor. CfLen Lhe founder ls noL allowed Lo recelve Lhe funds lf he or she has a
slgnlflcanL flnanclal lnLeresL (l.e., sLock or oLher ownershlp lnLeresL).
8egardless, Lhe faculLy member wlll need Lo develop a plan for golng forward wlLh Lhe
research ln such a manner LhaL poLenLlal confllcLs have been mlLlgaLed. Such plans generally
pay speclal aLLenLlon Lo graduaLe sLudenL and human sub[ecL lnvolvemenL ln Lhe research and
Lo publlc dlsclosure ln publlcaLlons resulLlng from Lhe sponsored research, and Lo corporaLe
Lles. ulLlmaLely, a research conLracL wlll be negoLlaLed beLween Lhe company and
norLhwesLern Lhrough whlch Lhe company wlll galn prospecLlve llcenslng rlghLs Lo Lhe resulLs
of Lhe research and any assoclaLed lnLellecLual properLy. ConLracL negoLlaLlon ls handled by
Lhe Cfflce for Sponsored 8esearch (hLLp://www.research.norLhwesLern.edu/osr/).
D* ; -00: '- *,&6*- *( 16)0-%0 5*( &"0 %&'(&2,.
lnvC encourages Lhe founder Lo conslder an opLlon raLher Lhan a llcense. An opLlon ls fasL and
less expenslve and, furLher, lL glves Lhe enLrepreneur more Llme Lo ralse funds. lf Lhe
enLrepreneur ls noL successful, Lhe Lechnology has been Lled up only for Lhe duraLlon of Lhe
opLlon.
30
1yplcally, an opLlon fee varles dependlng on Lhe number of lnvenLlons, demand for Lhe
lnvenLlons, eLc. 1he opLlon perlod ls normally 6-12 monLhs, buL exLenslons are usually
posslble. 1he opLlonee has Lhe rlghL Lo exerclse Lhe opLlon upon ralslng funds, usually a
mlnlmum of $300k. A Lerm sheeL, whlch seLs forLh all Lhe buslness Lerms, ls aLLached Lo Lhe
opLlon. Converslon Lo a llcense musL be done wlLhln Lhe perlod seL forLh ln Lhe opLlon.
!"'& &* 0J,0)& @6&" &"0 %&'(&2, 16)0-%0
1he lnvenLor lnpuL ls lmporLanL ln llcenslng declslons. Powever, because of Lhe lnvenLor's
poLenLlal confllcLs-of-lnLeresL, he needs Lo negoLlaLe wlLh norLhwesLern from an "arms-
lengLh" relaLlonshlp. AgreemenLs wlLh faculLy-lnlLlaLed companles need Lo be revlewed
carefully Lo ensure LhaL norLhwesLern ls [usLlfled ln granLlng rlghLs Lo Lhe Lechnology Lo Lhe
sLarLup (as opposed Lo a larger company). 1he sLarLup needs Lo demonsLraLe LhaL Lhey are
beLLer poslLloned Lo commerclallze Lhe lnvenLlon Lhan exlsLlng companles. ln general,
norLhwesLern glves prlorlLy Lo sLarLups founded by norLhwesLern researchers.
lL ls lmporLanL for Lhe founder and Lhe buslnessperson from Lhe sLarLup Lo be famlllarlzed wlLh
Lhe general llcense LemplaLe and flnanclal Lerms for sLarLups aL norLhwesLern. Þlease conLacL
your lnvenLlon manager for a LemplaLe. Llcense negoLlaLlons can be very fasL or Lake several
monLhs. ln general, Lhe lengLh of Lhe negoLlaLlon depends on Lhe experlence of Lhe
managemenL Leam ln Lransferrlng Lechnology ouL of Lhe unlverslLy envlronmenL lnLo a sLarLup.
unlverslLles are requlred Lo lnclude dlllgence Lerms Lo ensure LhaL slgnlflcanL progress ls belng
made Lowards commerclallzaLlon of Lhe lnvenLlon. 8uslness and developmenL plans are
requlred. 1he plans need Lo lnclude baslc lnformaLlon such as: Lhe company's purpose, a
descrlpLlon of Lhe Lechnology, a markeL analysls, opporLunlLy, sLages for developmenL,
Llmellnes, mllesLones, and a flnanclng plan. 1he buslness plan ls noL a procedural manual buL
more of a hlgh-level vlew of Lhe sLarLup's lnLended sLrucLure and funcLlon. 8ecause buslness
plans are sub[ecL Lo frequenL revlslon as dlrecLlons change, Lhey are a snapshoL of Lhe
company aL a parLlcular polnL ln Llme. 1he exerclse of wrlLlng Lhe plan ls lLself lnvaluable ln
LhaL lL makes Lhe enLrepreneur confronL Lhe key aspecLs of bulldlng a new buslness and form
reallsLlc raLlonales for why he or she belleves Lhe company wlll be successful. lnvenLlon
managers aL lnvC can provlde a general LemplaLe of a buslness plan.
Cnce Lhe llcense ls execuLed, Lhe llcensee wlll relmburse norLhwesLern for Lhe legal cosLs
assoclaLed wlLh Lhe prosecuLlon of Lhe lÞ. lf, for some reason, exLraordlnary legal expenses
31
have been accrued durlng Lhe prosecuLlon of Lhe lnLellecLual properLy, a relmbursemenL plan
wlll be esLabllshed Lo help Lhe sLarLup.
Some general Lerms Lo expecL ln Lhe llcense:
• lleld of use resLrlcLlons, slnce a sLarLup company ofLen cannoL develop all Lhe
appllcaLlons of an lnvenLlon.
• LqulLy, mllesLone paymenLs and royalLles Lo Lhe unlverslLy because norLhwesLern
lnvesLed resources, salarles, and space
• MalnLenance fees Lo ensure LhaL Lhe company ls serlous abouL developlng Lhe
lnvenLlon. ln order Lo help Lhe sLarLup, Lhe malnLenance fees may be delayed/walved
Lhe flrsL year.
• 8equlremenL of sufflclenL lnsurance as speclfled by norLhwesLern unlverslLy.
K0':6-< %*2()0% *5 5(2%&('&6*- 5*( &"0 ')':0+6) 0-&(0,(0-02(
A sLarLup moves aL varylng speeds, alLernaLlng beLween dlzzylngly fasL perlods aL hlgh energy
Lo oLher perlods when Lhe process seems sLalled. 1hese laLLer perlods are Lhe ones LhaL Lhe
enLrepreneur seems Lo flnd Lhe mosL frusLraLlng. Much of Lhe frusLraLlon ls based upon a
mlsmaLch of expecLaLlons. We llsL some of Lhe leadlng sources of frusLraLlon among academlc
enLrepreneurs below.
1. ka|s|ng Cap|ta|. A company wlLhouL a clearly arLlculaLed and credlble buslness opporLunlLy
(Lhe so-called ºvalue proposlLlon") wlll noL be able Lo ralse money. Lven federal granL
programs such as S8l8 and S118 requlre a vlable producL-commerclallzaLlon plan for Þhase
ll awards. Academlc enLrepreneurs musL make sure LhaL Lhe company ls pursulng markeLs,
noL Lechnology.
2. Irustrat|ons w|th the Un|vers|ty - IÞ ass|gnment: ?ou LhoughL LhaL you owned Lhe lÞ on
whlch your company ls Lo be based. unless your research flndlngs are already ln Lhe publlc
domaln, Lhe company wlll mosL llkely need Lo negoLlaLe an lÞ llcense wlLh norLhwesLern.
Þlease remember LhaL your paLenL wlll be mosL llkely wlll be lnvalldaLed lf lL ls noL
approprlaLely asslgned Lo norLhwesLern. lL ls lmporLanL Lo make full dlsclosures of your
32
plans Lo Lhe lnsLlLuLlon's Lechnology Lransfer offlce before golng Loo far down Lhe road ln
sLarLlng Lhe company-especlally before deallng wlLh poLenLlal lnvesLors.
3. Irustrat|ons w|th the Un|vers|ty - CCI: ConfllcLs-of-lnLeresL revlew and approval enLall
more Lhan checklng a few boxes on a form. lull dlsclosure, ofLen ln face-Lo-face meeLlngs,
ls necessary.
4. ke|at|onsh|ps w|th bus|ness partners d|sso|ve. 8elng parLners wlLh people ln a buslness ls
noL Lhe same as belng ln research collaboraLlon wlLh Lhem. 1he pressures assoclaLed wlLh a
buslness may brlng ouL behavlors ln frlends and colleagues LhaL you wlsh you had never
seen. A frayed personal relaLlonshlp can be one of Lhe mosL dlfflculL Lhlngs Lo endure ln a
sLarLup, especlally when you are legally sLlll parLners wlLh Lhe lndlvldual (e.g. Lhrough sLock
ownershlp). lL ls Lhus essenLlal LhaL you undersLand Lhe moLlvaLlons, vlslons, and goals of
your co-founders, boLh on Lhe sclence and Lhe buslness sldes, before you enLer lnLo
parLnershlp wlLh Lhem.
3. ¥ou have to rep|ace the CLC ---aga|n and aga|n. uo noL plck your CLC merely by Lhe facL
LhaL he or she has had ºbuslness experlence." All Loo ofLen, Lhe buslness person ln a
nascenL company lacks Lhe rlghL experlence or skllls Lo run a sLarLup ln Lhe company's
parLlcular lndusLry. 8eplaclng Lhe CLC noL only Lakes a greaL deal of Llme, bus also may
dlsslpaLe any momenLum Lhe company has bullL as well as depress sLaff morale.
6. ¥our and the CLC's v|s|ons for the company are at odds. no maLLer who ls rlghL ln such a
slLuaLlon, lf Lhe lnvesLors declde Lo back Lhe CLC your vlslon ls unllkely Lo prevall. 1hus, you
may have Lo compromlse ºfor Lhe good of Lhe company" ln order Lo remaln a key player.
1he fundamenLal role of compromlse ln a young company's success ls a deparLure from Lhe
academlc culLure, whlch Lyplcally rewards lndependence. lf Lhe buslness ls Lo be successful,
you musL be wllllng Lo llsLen, communlcaLe effecLlvely, and LrusL Lhe experLlse and buslness
acumen of your parLners.
7. ke|at|onsh|ps w|th |nvestors sour. SomeLlmes lnvesLors, Lhlnk LhaL academlc dlscoverles
are much closer Lo Lhe markeL Lhan Lhey acLually are. 1hey may noL have Lhe paLlence for
Lhe ups and downs of an exLended perlod of 8&u. 1hls dlsconnecL may resulL from Lhe
lnvesLors' lack of famlllarlLy wlLh Lhe lndusLry (so-called ºdumb money") or Lhelr havlng
been glven an unreallsLlcally opLlmlsLlc plan for producL developmenL. lL ls, Lherefore, very
much ln Lhe academlc enLrepreneur's lnLeresL Lo be as reallsLlc as posslble abouL 8&u
Llmellnes when courLlng lnvesLors.
33
8. Verba| prom|ses have not been kept. ln Lhe heady days of formlng a new company, when
everyone ls exclLed abouL growlng a new venLure, a pleLhora of lLems are dlscussed and
many promlses are made. All Loo ofLen, however, promlses are noL documenLed. A year or
Lwo laLer, Lhose who made Lhem elLher clalm Lhey do noL remember dolng so or are
dlslncllned Lo make good on Lhem. Pandshakes are nlce, buL you should geL such maLLers ln
wrlLlng, especlally when relaLed Lo money or sLock.
9. Start|ng and grow|ng the company are consum|ng too much t|me. uo noL underesLlmaLe
how much Llme lL wlll Lake Lo form a new company. WlLh Lhe lnlLlal vlslon for Lhe company,
Lhe founder wlll be called on Lo lmparL LhaL vlslon Lo CLC candldaLes, poLenLlal lnvesLors,
and numerous oLher people durlng neLworklng acLlvlLles. 8ecause of Lhe hosL of
responslblllLles LhaL founders have, lL would be wlse Lo Lalk wlLh founders of oLher
companles regardlng Lhe amounL of Llme ls needed Lo devoLe Lo Lhe enLerprlse.
10. ¥ou fear |os|ng contro| of the company. CaplLal lnfuslons from ouLslde lnvesLors are a
double-edged sword. Cn Lhe one hand, Lhey are Lhe llfeblood LhaL allows Lhe company Lo
move forward, buL on Lhe oLher, Lhey resulL ln Lhe Lransfer of ownershlp lnLeresLs. ln an
equlLy-lnvesLmenL company, lL ls vlrLually lnevlLable LhaL Lhe enLlLy's founders wlll one day
become mlnorlLy shareholders. A modesL-lnvesLmenL company, however, has a much
greaLer chance of remalnlng under Lhe founders' conLrol. AL numerous Llmes ln Lhe llfe of a
company, cholces wlll have Lo be made wlLh regard Lo accepLlng Lhe money of oLhers. Pow
lmporLanL ls Lhe lnvesLmenL caplLal? ls lL worLh Lhe lnvesLors' lnpuL and posslble conLrol of
Lhe venLure?
Grow|ng a company requ|res strong res|||ence. 1emporary
setbacks are part of the startup process. ¥ou need to be
ab|e to bounce back.
1bomos MeoJe, lbu
ltofessot, cbemlstty
Nottbwesteto uolvetslty
34
Þers|stence |s probab|y the most |mportant part of entrepreneursh|p.
¥ou must be prepared to pers|st |n ach|ev|ng your goa| unt|| you
||tera||y can not phys|ca||y or menta||y do |t anymore. It |s a way of
||fe not a character tra|t. If your goa| has va|ue, you w||| reach |t
eventua||y.
Iosepb Moskol, lbu
loooJet
Nootex, loc.
Northwestern Lntrepreneur|a| kesources
norLhwesLern ls growlng a vlbranL communlLy of faculLy, sLudenLs and alumnl enLrepreneurs.
lor an up Lo daLe llsL of avallable commerclallzaLlon resources, please refer Lo
hLLp://www.lnvo.norLhwesLern.edu
About the Innovat|on and New Ventures Cff|ce
lounded ln 2010, 1he lnnovaLlon and new venLures Cfflce lnsplres and nurLures a
culLure of lnnovaLlon, brldglng norLhwesLern research wlLh lLs pracLlcal use for publlc
beneflL.
lor more lnformaLlon conLacL:
Ieff Coney, M8A
D|rector, Lconom|c Deve|opment
(e) [-coney[norLhwesLern.edu
(p) 847-491-4732
www.|nvo.northwestern.edu
doc_131347926.pdf
On this illustration in regard to northwestern investigators guide to starting a company fundamentals of startups.
1
Northwestern Invest|gator's
Gu|de to Start|ng a Company:
lundamenLals of SLarLups
2
Acknow|edgments
We would llke Lo glve graLeful acknowledgmenL Lo Lhe unlverslLy of Ceorgla for permlsslon Lo
use maLerlal from ºSLarL-ups for SmarLles: A Þrlmer for Lhe uCA lnvesLlgaLor on lormlng a
new Company 8ased on ?our 8esearch ulscovery." We have drawn heavlly on Lhelr well-
consLrucLed and effecLlve handbook, and lL served as an lnvaluable gulde for Lhls publlcaLlon.
Innovat|on and New Ventures Cff|ce
norLhwesLern lnvesLlgaLor's Culde Lo SLarLlng a Company: lundamenLals of SLarLups
norLhwesLern unlverslLy
lnnovaLlon and new venLures Cfflce (lnvC)
www.lnvo.norLhwesLern.edu
CopyrlghL ©2011 norLhwesLern unlverslLy
All rlghLs reserved. All uses, ln any form and any quanLlLy, or by any means-elecLronlc,
mechanlcal, phoLocopylng, recordlng or oLherwlse-musL lnclude Lhe followlng aLLrlbuLlon:
lrom norLhwesLern lnvesLlgaLor's Culde Lo SLarLlng a Company: lundamenLals of SLarLups
no oLher copyrlghL, byllne, or appearance of muLual ownershlp may appear on Lhe
copyrlghLed maLerlals. under no clrcumsLances can maLerlals be dlsLrlbuLed for commerclal
use wlLhouL speclflc wrlLLen permlsslon.
3
Northwestern Iacu|ty's Gu|de to Start|ng a Company:
Iundamenta|s of Startups
1ab|e of Contents
8as|cs on Startups ......................................................................................... 4
Why sLarL a company? ............................................................................... 4
Are all sLarLups Lhe same? ......................................................................... 6
lor-proflL or non-proflL? ............................................................................ 7
vlrLual or brlcks and morLar? ..................................................................... 7
lncorporaLlng Lhe company ....................................................................... 8
Chooslng Lhe sLarLup legal enLlLy ............................................................... 8
8equlremenLs for a sLarLup ...................................................................... 10
1|ps for Northwestern Lntrepreneurs ........................................................ 13
Worklng wlLh norLhwesLern .................................................................... 13
When ls lL Llme Lo sLarL a company? ........................................................ 13
SLeps Lowards a sLarLup ........................................................................... 16
8ulldlng Lhe sLarLup ................................................................................. 17
ueflnlng Lhe markeL ................................................................................. 18
ldenLlfylng Lhe rlghL CLC .......................................................................... 20
lundralslng .............................................................................................. 21
1he role(s)of Lhe founders ln Lhe sLarLup company ................................. 23
SelecLlng Lhe co-founders of a sLarLup .................................................... 26
neLworklng and flndlng Lhe rlghL menLors .............................................. 27
ulscloslng lnformaLlon ............................................................................. 28
Can l do research ln my academlc laboraLory for my sLarLup? ................ 29
uo l need an opLlon or llcense for Lhe sLarLup? ....................................... 29
WhaL Lo expecL wlLh Lhe sLarLup llcense .................................................. 30
Leadlng sources of frusLraLlon for Lhe academlc enLrepreneur ............... 31
Northwestern Lntrepreneur|a| kesources ................................................. 34
4
8as|cs on Startups
norLhwesLern's lnnovaLlons are flowlng aL an acceleraLed raLe. Cur faculLy and sLudenLs are
Lransformlng Lhelr lnvenLlons lnLo sLarLups LhaL lnfuse and drlve economlc developmenL. 1hls
gulde aLLempLs Lo provlde a roadmap for faculLy and sLudenLs who are Lhlnklng abouL sLarLlng
a Lechnology company, hlghllghLlng Lhe common plLfalls Lo be expecLed along Lhe way.
SLarLlng a company ls a llfe-changlng evenL LhaL brlngs LogeLher a breadLh of experlences and
exLreme emoLlons: from Lhe allure of anLlclpaLed wealLh and socleLal lmpacL Lo Lhe
frusLraLlons of conLlnuous seL-backs and worklng wlLh a LlghL budgeL. 1he besL enLrepreneurs
are moLlvaLed by Lhe challenges and Lhrlve from Lhe ups and downs. lnsLead of feellng
defeaLed by a falled aLLempL, Lhey are eager Lo geL back ln Lhe game and sLarL agaln.
WheLher you are a new academlc enLrepreneur or a serlal enLrepreneur, Lhe lnnovaLlon and
new venLures Cfflce (lnvC) wlll help you navlgaLe Lhe process.
!"# %&'(& ' )*+,'-#.
Whlle Lhere are many moLlvaLlons Lo sLarL a company, from Lhe commerclal polnL of vlew
Lhere ls only one reason: Lo make proflLs by selllng producLs or servlces.
ln general, academlc enLrepreneurs are ºLechnology-drlven," whereas lnvesLors are ºmarkeL-
drlven." WlLh Lhese dlfferences, Lhere exlsLs a dlchoLomy beLween academlc and corporaLe
culLures, Lhe former focused on cuLLlng-edge Lechnologles whlch drlve Lhe markeL versus Lhe
oLher focused on how Lechnologles respond Lo exlsLlng markeL needs. 1hls dlfference reflecLs
Lhe mosL essenLlal dlsconnecL beLween Lhe academlc and corporaLe culLures.
Þerhaps Lhe mosL lmporLanL lesson Lo be learned from Lhls gulde ls LhaL enLrepreneurs should
ensure LhaL Lhelr Lechnology saLlsfles a need ln Lhe markeL. lnvesLors would prefer Lo deal
wlLh researchers who espouse one of Lhe flve bo|d-faced moLlvaLlons shown ln 1ab|e 1. Such
moLlvaLlons lndlcaLe LhaL Lhe researcher ls sLarLlng a company Lo saLlsfy a markeL need raLher
Lhan Lo beneflL Lhelr academlc research.
5
1A8LL 1: Why Academ|c kesearchers Say 1hey Want to Iorm New Compan|es
Mot|vat|ons keason|ng Lxpectat|ons
A fr|end's suggest|on Pe or she heard abouL my research and
suggesLed LhaL l should look lnLo sLarLlng a
company.
lormlng a company musL be
easy.
Io||ow|ng others My research ls every blL as good as LhaL of
a colleague who has been successful ln
sLarLlng and runnlng a company.
lf LhaL person can do lL, l
should be able Lo do lL Loo.
Add|t|ona| grant
fund|ng
l slL on a panel LhaL revlews federal S8l8
[Small 8uslness lnnovaLlon 8esearch]
granL appllcaLlons, and my unfunded
regular proposals are beLLer Lhan Lhose
LhaL geL funded under S8l8. A company
mlghL be an easy source of money Lo
supporL my research, so why noL form
one?
We'll be able Lo do a loL more
research by Lapplng lnLo Lhls
new source of granL money.
Lasy money CeLLlng lnvesLors Lo pay for my research
may be a beLLer prospecL Lhan wrlLlng
federal granLs.
lnvesLors are happy Lo fund
good research.
1he rest |s easy All Lhe hard work has already been done ln
my laboraLory, so now lL's Llme Lo Lurn Lhe
pro[ecL over Lo a company for producL
developmenL.
Þeople wlll wanL Lo lnvesL ln
my company because Lhe
remalnlng
work ls relaLlvely Lrlvlal.
1he capt|ve company A sLarLup wlll be able Lo pursue Lhe ldeas
from my lab Lhrough Lo
commerclallzaLlon.
AlLernaLlvely: 1he company wlll augmenL
my research by dolng Lhlngs LhaL l don'L
have Lhe Llme or money for, such as
runnlng rouLlne analyses and consLrucLlng
proLoLypes.
l'll have Lhls ouLslde company
LhaL does whaLever l Lell lL Lo.
8ecom|ng r|ch A sLarLup ls a relaLlvely qulck way Lo
become rlch.
ln flve Lo Len years, l'll be
really wealLhy.
I'm the boss SLarLlng a new company sounds beLLer
Lhan geLLlng a [ob aL an exlsLlng one.
l can be chlef execuLlve of my
own company and noL have Lo
work for oLhers.
Þers|stence
no exlsLlng company has wanLed Lo
llcense my Lechnology and l am
commlLLed Lo geLLlng lL Lo Lhe
markeLplace, so lL's Llme Lo sLarL my own
company.
We'll do whaL lL Lakes Lo form
a company Lo geL Lhls
Lechnology
ouL Lhere.
Market demand
l have been approached by people asklng,
ºPow can l geL one of Lhose Lhlngs?"
1here appears Lo be a markeL
for my producL.
6
N|che opportun|ty,
underserved market
1hls would be an opporLunlLy Lo have a
small operaLlon LhaL sells producLs ln a
nlche markeL.
1here's enough of a markeL
Lhere for me Lo have a nlce
supplemenL Lo my academlc
salary.
Max|ma| |mpact
Selllng commerclal producLs, as opposed
Lo [usL publlshlng ln a [ournal, lncreases
Lhe chance LhaL my ldeas wlll have a ma[or
effecL.
We'll be able Lo hlL a much
wlder audlence Lhrough Lhe
commerclal secLor.
Seasoned veteran
l dldn'L geL lL rlghL wlLh my flrsL Lwo
companles, buL Lhls Llme l have a beLLer
handle on Lhe markeL reallLles.
Clven our experlence, we
should be able Lo ralse
adequaLe
lnvesLmenL funds and uses
Lhem Lo beLLer advanLage.
/(0 '11 %&'(&2,% &"0 %'+0.
1here are many Lypes of sLarLups. Some of Lhem are servlce companles LhaL requlre very llLLle
lncubaLlon, whlle oLhers, usually producL companles, requlre years before proflLs.
Many norLhwesLern faculLy have creaLed successful consulLlng flrms surroundlng a number of
areas, lncludlng englneerlng, markeLlng, and sLraLegy. 8ecause revenue ls generaLed from Lhe
sale of ºLlme," Lhe buslness can geL meanlngful LracLlon wlLhln Lhe span of a few monLhs.
1echnology companles, however, Lyplcally requlre many years of 8&u before revenue can be
generaLed. uurlng Lhelr producL developmenL perlod, sLarLups need a conLlnuous lnfuslon of
caplLal. Any prolonged lnLerrupLlon can deal a deaLh blow Lo Lhe enLerprlse.
1echnology sLarLups generally belong Lo Lwo fundamenLal caLegorles:
(l) LqulLy-lnvesLmenL companles, whlch requlre large sums of caplLal, usually ln Lhe form of
equlLy lnvesLmenL and,
(ll) ModesL-lnvesLmenL companles, whose caplLal requlremenLs are subsLanLlally lower.
ln reallLy, a buslness can fall under boLh caLegorles-for example, a modesL-lnvesLmenL
company may provlde equlLy shares Lo lnvesLors-buL Lhls one-or-Lhe-oLher model allows us
Lo make some baslc generallzaLlons LhaL are useful for Lhe would-be enLrepreneur.
7
3*(4,(*56& *( -*-4,(*56&.
norLhwesLern's researchers have developed boLh for-proflL and non-proflL companles. 1he
declslon of wheLher Lo bulld one over Lhe oLher ls usually drlven by Lhe mlsslon of Lhe flrm.
1he mlsslons of non-proflLs usually cenLer on "socleLal good" of Lhe communlLy, naLlon, or Lhe
world. non-proflLs do noL pay Laxes, buL Lhey also cannoL use Lhelr funds for anyLhlng oLher
Lhan Lhe mlsslon for whlch lL was formed. lL ls lmporLanL Lo remember LhaL non-proflL
organlzaLlons may make a proflL, buL lL musL be used solely for Lhe operaLlon of Lhe
organlzaLlon or, ln Lhe case of a foundaLlon, granLed Lo oLher nonproflL organlzaLlons. When a
nonproflL goes ouL of buslness, lLs remalnlng asseLs musL be glven Lo anoLher nonproflL. 1he
norLhwesLern Clobal PealLh loundaLlon (www.nwghf.org) ls an example of a norLhwesLern
nonproflL splnouL.
1he mosL common splnouLs aL norLhwesLern are for-proflL Lechnology based splnouLs. 1he
mlsslon of for proflL sLarLups ls Lo brlng proflLs Lo Lhe shareholders. ÞroflL ls Lhe goal and Lhe
buslness pays Laxes on LhaL proflL. When a for-proflL organlzaLlon goes ouL of buslness, lLs
asseLs can be llquldaLed and Lhe proceeds dlsLrlbuLed Lo Lhe owners or Lhe shareholders.
Lstab||sh|ng a non-prof|t was a way to de||ver dev|ces to the greatest number of peop|e |n
the deve|op|ng wor|d at the |owest poss|b|e cost.
uovlJ kelso, lbu
cllolcol ltofessot of 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
76(&2'1 *( 8(6)9% '-: +*(&'(.
vlrLual companles perform Lhelr buslness LransacLlons Lhrough Lhe lnLerneL. 1hey Lyplcally do
noL have headquarLers or an offlce space and run wlLh a very small sLaff. MosL aspecLs of Lhelr
buslness, lncludlng research and developmenL, markeLlng, and sales, are Lyplcally ouLsourced.
1he prlmary role of Lhe vlrLual company ls Lo monlLor and manage Lhe ouLsourced acLlvlLles.
8y obvlaLlng Lhe need for creaLlng lLs own lnfrasLrucLure (ºbrlcks and morLar"), Lhe vlrLual
company keeps lLs cosLs Lo a bare mlnlmum.
8
ln general, a vlrLual company ls formed lf Lhe company ls ln lLs early sLages. 1here are
numerous examples of sLarLups LhaL never graduaLed from Lhe vlrLual mode and ulLlmaLely
wlLhered and dled. Success ln Lhe vlrLual mode requlres a well LhoughL-ouL buslness plan wlLh
achlevable Lechnlcal mllesLones wlLhln a reallsLlc Llmellne. When Lhe mllesLones are achleved,
Lhe enLrepreneurs should be able, ln Lheory, Lo sell Lhelr sLarLup ldea Lo lnvesLors. Powever,
Lechnlcal mllesLones can be dlfflculL Lo achleve ln a Llmely fashlon wlLhln Lhe academlc
envlronmenL. 1hls ls one of Lhe reasons why vlrLual companles ofLen fall.
;-)*(,*('&6-< &"0 )*+,'-#
lrom Lhe momenL of lLs lncepLlon, a new company Lakes on lLs own ldenLlLy, buL for legal
purposes a buslness ls noL ºreal" unLll lL ls formally lncorporaLed ln a parLlcular sLaLe. 1here are
numerous how-Lo manuals on lncorporaLlon, and lL ls posslble Lo lncorporaLe on your own for
a relaLlvely small flllng fee. Whlle Lhls opLlon saves money ln Lhe near Lerm, lL ls lmporLanL LhaL
you geL quallfled advlce from an aLLorney. 1he money wlll be well worLh lL and wlll llkely save
frusLraLlons ln Lhe long run. 1he laLLer ls someLhlng Lo be avolded, as one of Lhe prlmary
moLlvaLlons for lncorporaLlng ls Lo proLecL Lhe prlnclpals from belng held personally llable for
Lhe company's debLs. A good aLLorney wlll ensure LhaL accuraLe flllngs are fulfllled. .
Þlease conLacL Lhe lnnovaLlon and new venLures Cfflce for referrals of aLLorneys wlLh
experlence ln Lhe area. AlLernaLlvely, enLrepreneurs are encouraged Lo consulL wlLh Lhe
LnLrepreneurlal Law CenLer aL norLhwesLern Law School
hLLp://www.law.norLhwesLern.edu/legalcllnlc/sboc/abouL/lndex.hLml for advlce on Lhls Loplc.
="**%6-< &"0 %&'(&2, 10<'1 0-&6&#
Chooslng a sLarLup legal enLlLy can be confuslng. Cenerally, Lhere are four conslderaLlons as
ouLllned on 1ab|e 2. usually, sole proprleLorshlp ls noL approprlaLe for Lechnology companles
due Lo llablllLy concerns and Lhe llmlLaLlons wlLh ralslng caplLal. 1he C CorporaLlon ls Lhe flrsL
cholce for mosL venLure caplLallsLs. When Lhe Lo-be-venLure-funded sLarLup ls a C CorporaLlon,
varlous admlnlsLraLlve and oLher burdens are mlnlmlzed for Lhe venLure flrm, allowlng Lhem Lo
Lransfer caplLal more easlly and focus on developlng Lhe sLarLup.
9
1ab|e 2: Common Lega| Lnt|t|es for Corporat|ons
So|e
Þropr|etorsh|p
C-Corp S-Corp L|m|ted L|ab|||ty
(LLC)
kequ|rements none MusL llle wlLh SLaLe, small
fee requlred
MusL llle wlLh SLaLe,
small fee requlred
MusL llle wlLh
SLaLe,
small fee requlred
Þersona|
L|ab|||ty
unllmlLed llablllLy Shareholders are noL
held llable
Shareholders are noL
held llable
Members are noL
held llable
Governance 8elaLlvely few
requlremenLs
LlecLlon of board of
dlrecLors/offlcers,
annual meeLlngs, and
annual reporL flllng
requlremenLs
LlecLlon of board of
dlrecLors/offlcers,
annual meeLlngs, and
annual reporL flllng
requlremenLs.
lew
8equlremenLs.
Management lull conLrol Shareholders elecL
dlrecLors who
manage buslness
acLlvlLles
Shareholders elecL
dlrecLors who
manage buslness
acLlvlLles
Members can seL
up sLrucLure as
Lhey
choose
1erm 1ermlnaLed when
proprleLor ceases
dolng buslness or
upon deaLh
ÞerpeLual: can exLend
pasL deaLh or
wlLhdrawal of
shareholders
ÞerpeLual: can exLend
pasL deaLh or
wlLhdrawal of
shareholders
ÞerpeLual, unless
sLaLe requlres
flxed
amounL of Llme
1axat|on LnLlLy noL Laxable.
Sole proprleLor pays
Laxes.
1axed aL corporaLe
raLe
no Lax aL Lhe enLlLy
level. lncome passed
Lhrough Lo Lhe
shareholders.
no Lax aL Lhe
enLlLy level.
lncome passed
Lhough Lo
members
1ransferab|||ty of
Assets
no Shares of sLock are
easlly Lransferred.
?es, observlng l8S
regulaLlons
uepends on
resLrlcLlons
ouLllned ln
operaLlng
agreemenL
Iundra|s|ng
lndlvldual provldes
caplLal.
Shares of sLock are
sold Lo ralse caplLal
(SecurlLles laws
apply)
Shares of sLock are
sold Lo ralse caplLal.
LlmlLaLlons prevenL S
corp sLock ownershlp
by corporaLlons
Sub[ecL Lo
operaLlng
agreemenL
(SecurlLles laws
apply)
10
Many f|rst t|me entrepreneurs underest|mate the |mportance of cons|der|ng |ega| |ssues and
gett|ng good |ega| adv|ce ear|y |n the process. Sett|ng up a new venture w|th a so||d |ega|
foundat|on structured to meet the founders' own goa|s and expectat|ons saves t|me, money
and potent|a| headaches down the road.
ístbet 8ottoo, Iu
ultectot
íottepteoeotlol low ceotet
Nottbwesteto uolvetslty
>0?26(0+0-&% 5*( ' %&'(&2,
A good ldea does noL necessarlly resulL ln a good producL. A good producL does noL necessarlly
resulL ln a company.
1o succeed, a company needs more Lhan a good ldea. lLs success ls largely due Lo how Lhe ldea
ls execuLed and wheLher lL addresses a real markeL need. A LalenLed sLaff and managemenL
Leam wlll ensure LhaL Lhe rlghL declslons are made along Lhe way. CaplLal ls also essenLlal Lo
make everyLhlng come LogeLher and push Lhe venLure ahead. ln order for a buslness Lo
succeed ln Lhe long Lerm, lL should be able Lo scale up. Cne way Lo scale ls Lo deslgn noL one
buL a plpellne of producLs. 8elow, some of Lhe essenLlal crlLerla LhaL lead Lo a successful
buslness are llsLed.
INNCVA1IVL ÞkCDUC1S, INNCVA1IVL SLkVICLS. SLarLups should be based on lnnovaLlve
servlces or producLs LhaL brlng unlque value Lo Lhe cusLomer. Academlc dlscoverles, however,
are usually embryonlc concepLs and noL full-blown producLs, maklng lL ls ofLen dlfflculL Lo
deLermlne Lhe real value ln Lhe markeLplace. unLll LhaL value ls deLermlned, lL ls ofLen
necessary Lo proLecL Lhe lnvenLlon. lnLellecLual properLy becomes essenLlal for
commerclallzaLlon as a way Lo guaranLee Lhe monopoly needed Lo [usLlfy Lhe cosL of
developmenL.
IN1LLLLC1UAL ÞkCÞLk1¥. 1here ls no need Lo have rlghLs Lo lnLellecLual properLy (lÞ) Lo sLarL
up a company. Powever, lf Lhe execuLlve Leam ls seeklng slgnlflcanL exLernal flnanclng, lL
should be aware LhaL Lhe ma[orlLy of lnvesLors usually requlre LhaL Lhe anLlclpaLed Lechnology
11
backed by lÞ. lÞ serves as a barrler Lo enLry agalnsL compeLlng companles LhaL mlghL wanL Lo
repllcaLe Lhe producL. 1he managemenL Leam wlll have Lo declde wheLher Lhe markeL for Lhelr
producL requlres Lhls klnd of proLecLlon.
ÞaLenLs also allow for easler LransacLlons as Lhe sLarLups enLer parLnershlps, collaboraLlons
and mulLlple fundlng clrcles. Cf course, lL ls Lhe naLure of Lhe paLenL rlghLs conLrolled by Lhe
company LhaL ls slgnlflcanL, noL [usL Lhe facL LhaL Lhe company has paLenLs. neverLheless, a
buslness plan wlLh a secLlon llsLlng Lhe company's lÞ asseLs ls llkely Lo be more compelllng Lo
an lnvesLor Lhan one LhaL does noL.
Some academlc companles are founded on lnLellecLual maLerlal LhaL lles wlLhln Lhe publlc
domaln and for whlch no lÞ proLecLlon ls avallable. Crdlnarlly, wlLh no proLecLable lÞ, Lhere
should be no need Lo secure a llcense from Lhe academlc employer. Companles wlLhouL lÞ
asseLs ordlnarlly do noL aLLracL large amounLs of ouLslde lnvesLmenL caplLal.
ModesL-lnvesLmenL companles do noL need lÞ ln order Lo geL off Lhe ground. MosL ofLen, Lhe
lmporLance of lÞ Lo becomes apparenL laLer on, when Lhe company sells Lhe producL or servlce
and knock-off compeLlLors arlse. 1o prevenL such a slLuaLlon, young companles should revlew
Lhelr lnvenLlons for aspecLs LhaL could lmparL a slgnlflcanL proLecLlon down Lhe road.
ÞkCDUC1 ÞIÞLLINL. ulscoverles LhaL could lead Lo mulLlple producLs or producL llnes, or
ºplaLform Lechnologles," are whaL many lnvesLors look for when fundlng a sLarLup. CfLen,
lnvesLors ask, ºls lL a producL or a company?" - lmplylng LhaL slngle-producL ldeas (also
referred as ºone-pony shows") are noL sulLable for Lhe formaLlon of an equlLy-lnvesLmenL
company. Cne can cerLalnly sLarL a new buslness around a slngle producL, buL lL ls unllkely LhaL
Lhe company wlll be aLLracLlve Lo lnsLlLuLlonal lnvesLors unless Lhe producL represenLs a very
large markeL opporLunlLy. lor Lhese cases, Lhe lnvenLor mlghL wanL Lo conslder llcenslng Lhe
producL for furLher developmenL Lo one or more esLabllshed companles, raLher Lhan creaLlng a
sLarLup.
MAkkL1 NLLD. uecldlng on Lhe company's flrsL producL ls ofLen very dlfflculL-especlally for
plaLform Lechnologles, whlch may have many dlfferenL appllcaLlons. An lmporLanL crlLerlon ls
LhaL lL serves real-world needs. lndlvlduals sLarLlng companles musL provlde compelllng
answers Lo quesLlons such as: WhaL markeL does Lhls producL serve? WhaL producLs are
already ln Lhls markeL? Pow ls Lhls producL dlfferenL from Lhem? Who are Lhe compeLlLors,
and how are Lhelr producLs beLLer or weaker Lhan yours?
12
SÞLCIALI2LD ÞLkSCNNLL. Þerhaps Lhe mosL common reason for a sLarLup Lo fall ls lack of
adequaLe managemenL. Larly sLage Lechnologles wlll lnvarlably encounLer many hurdles
before Lhey reach commerclallzaLlon. 8elng able Lo manage Lhe hurdles, ralse caplLal whlle
bulldlng a moLlvaLed Leam requlres experlence, a sophlsLlcaLed neLwork and unlque buslness
LalenLs.
SÞLCIALI2LD IACILI1ILS. Academlc sLarLups ofLen have llmlLed access Lo space and faclllLles.
norLhwesLern researchers ofLen flnd space ouLslde Lhe LvansLon campus ln such places as Lhe
llllnols Sclence and 1echnology Þark ln Skokle. Þlease consulL wlLh Lhe lnnovaLlon and new
venLures Cfflce lf you need space ln Lhe Chlcago area.
CAÞI1AL. A sLarLup's demand for cash depends on Lhe cosLs Lo Lake Lhe producL Lo markeL. 1he
faculLy member creaLlng a modesL-lnvesLmenL company ln hls or her garage, funded by
personal savlngs, does noL need Lo seek lnvesLmenL caplLal from buslness ºangels" (wealLhy
prlvaLe lnvesLors) and venLure caplLallsLs. ln conLrasL, Lhe researcher who plans Lo sLarL a new
pharmaceuLlcal company wlll spend counLless hours Lrylng Lo secure large amounLs of
lnvesLmenL caplLal. Cnce Lhe company ls sLarLed and Lhe lnlLlal caplLal ls secured, founders
wlll lmmedlaLely sLarL plannlng when and how Lo secure Lhe nexL ºround" of flnanclng. Such
flrms are voraclous ln Lhelr appeLlLe for cash, as ralslng money ls a never-endlng process, and
Lhey are aL Lhe mercy of Lhe lnvesLmenL communlLy.
1he declslon on wheLher Lo form a moJest-lovestmeot company or an epolty-lovestmeot
company ls largely dependenL on Lhe Llmellne Lo launch and Lhe naLure of Lhe producL, whlch
remalns Lo be compleLed ln lLs developmenL and manufacLurlng. Whlle Lhe deslre Lo preserve
ownershlp and conLrol of Lhe venLure Lhrough a modesL-lnvesLmenL company ls
undersLandable, many commerclal opporLunlLles requlre exLenslve parLnerlng, boLh ln
lnvesLmenL and sLraLegy, lf Lhey are Lo be successful.
A cont|nua| f|ow of |nnovat|ve |deas |s abso|ute|y essent|a| for
stay|ng ahead of the pack.
cboJ Mltklo, lbu
Ceotqe 8. kotbmooo ltofessot of cbemlstty
Nottbwesteto uolvetslty
13
I see hundreds of bus|ness p|ans and |deas each year. In order
to have a chance at gett|ng funded you must have a very c|ear
and |arge market need.
Motk 5. colello, Mu
ltloclpol
5AM veototes
1|ps for Northwestern Lntrepreneurs
An lmporLanL sLep ln sLarLlng a company ls Lo clarlfy Lhe role LhaL Lhe academlc enLrepreneur
wlll be able Lo play and Lhe sLeps Lo move Lhe lnvenLlons Lo Lhe company. 1hese lssues can
vary wldely dependlng on Lhe naLure of your sLarLup and your own background, deslres and
lnLeresLs. Powever, Lhere are a few Lhlngs Lo keep ln mlnd as you conslder sLarLlng Lhls new
venLure.
!*(96-< @6&" A*(&"@0%&0(-
unllke corporaLlons where employees are unable Lo sLarL a company wlLh lnformaLlon galned
whlle employed, academla ls markedly dlfferenL. unlverslLy employees who wanL Lo found
new companles based on Lhelr research are noL percelved by Lhelr employers as poLenLlal
compeLlLors. 1hus, unlverslLy employees are Lyplcally noL requlred Lo leave Lhelr academlc
employmenL ln order Lo found a company.
norLhwesLern, llke all academlc lnsLlLuLlons, has a varleLy of rules LhaL may be appllcable Lo a
researcher's plans Lo sLarL a company, lncludlng pollcles on lnLellecLual properLy, confllcL of
lnLeresL, confllcL of commlLmenL, sponsored research, and ouLslde consulLlng. All
norLhwesLern pollcles are llsLed aL hLLp://pollcles.norLhwesLern.edu/. Calnlng approval Lo
sLarL a new company ls based on Lhe full dlsclosure of proposed acLlvlLles as Lhey may perLaln
Lo Lhese pollcles. Cnce Lhe sLarLup acLlvlLy ls approved, Lhe lnnovaLlon and new venLures
Cfflce (lnvC) has a number of resources relevanL ln formlng Lhe company.
14
1he flrsL Lhree sLeps for Lhe academlc employees conLemplaLlng Lhe formaLlon of a new
company based on Lhelr research are Lo: (1) dlsclose Lhe lnvenLlon: (2) dlsclose for poLenLlal
confllcLs of lnLeresL/efforL, and (3) famlllarlze Lhemselves wlLh norLhwesLern's llcenslng
agreemenLs.
INVLN1ICN DISCLCSUkL. lf Lhe basls for sLarLlng Lhe company ls a dlscovery made ln Lhe
laboraLory, an lnvenLlon dlsclosure needs Lo be submlLLed Lo lnvC. lf Lhls ls your flrsL
lnLeracLlon wlLh lnvC, lL may be helpful Lo consulL wlLh an lnvC lnvenLlon manager who
handles slmllar Lechnologles ln advance of submlLLlng Lhe dlsclosure. Þlease call our offlce so
LhaL an lnvenLlon manager can be asslgned Lo you lnvC wlll deLermlne wheLher Lhere ls
proLecLable lnLellecLual properLy (lÞ) assoclaLed wlLh Lhe dlscovery. lnvenLlon dlsclosure forms
can be downloaded aL: hLLp://www.lnvo.norLhwesLern.edu/forms
norLhwesLern wlll declde wheLher Lo pursue lnLellecLual properLy proLecLlon or noL. lf
norLhwesLern decldes noL Lo pursue lÞ proLecLlon, Lhe lnvenLlon wlll be released Lo Lhe
lnvenLor, and Lhe lnvenLor wlll be free Lo pursue lL on hls /her own. 1he lnvenLor wlll also be
responslble for Lhe legal cosLs assoclaLed wlLh Lhe lÞ and sLarLup. lf norLhwesLern decldes Lo
proLecL Lhe lnvenLlon, lL wlll flle a paLenL appllcaLlon and cover Lhe legal cosLs assoclaLed wlLh
Lhe appllcaLlon. Cnce Lhe paLenL ls lssued, Lhe sLarLup wlll need Lo llcense Lhe Lechnology from
norLhwesLern Lo galn Lhe rlghLs Lo develop and commerclallze lL. 1hls process ls broadly
descrlbed as ºLechnology Lransfer."
CCNILIC1S DISCLCSUkL. 1he second dlsclosure relaLes Lo Lhe lnvenLor's compllance wlLh
lnsLlLuLlonal confllcL-of-lnLeresL and confllcL-of-commlLmenL pollcles. Such confllcLs are a hoL
Loplc ln Lhe naLlonal medla, professlonal organlzaLlons, and [ournals, as well as ln hallway
gosslp. 8elng accused of havlng a confllcL can severely damage one's repuLaLlon and fuLure
prospecLs. 1he federal agencles and academlc enLlLles have become qulLe aLLenLlve ln
enforclng Lhelr confllcLs pollcles. norLhwesLern's pollcles ln Lhls area can be accessed aL
www.|nvo.northwestern.edu]po||c|es.
A confllcL-of-commlLmenL occurs when ouLslde acLlvlLles lnLerfere wlLh an lndlvldual's
responslblllLles under hls or her academlc poslLlon. 1yplcally, lnsLlLuLlonal consulLlng pollcles
allow academlc personnel Lo spend a seL amounL of Llme per week or monLh dolng ouLslde
professlonal work, whlch may lnclude helplng Lo launch a new company.
A confllcL-of-lnLeresL exlsLs when an lndlvldual's personal lnLeresLs (e.g., equlLy holdlngs ln a
sLarLup company) are perce|ved Lo lnfluence LhaL person's [udgmenL when exerclslng hls or
her academlc employmenL duLles. lnsLlLuLlons requlre LhaL Lhe lndlvldual dlscloses and
15
manages such poLenLlal confllcLs. 8ecause confllcL-of-lnLeresL managemenL can be a
compllcaLed buslness, especlally lf a researcher conLemplaLes a sLarLup company whlle
remalnlng an academlc employee, lL ls essenLlal LhaL Lhe consLralnLs on permlsslble acLlvlLles
are well-undersLood. ConfllcL-of-lnLeresL managemenL plans are above all concerned wlLh
proLecLlng vulnerable parLles, such as graduaLe sLudenLs and human sub[ecLs parLlclpaLlng ln
Lhe research, who are under Lhe charge of Lhe academlc enLrepreneur.
lnvenLors should consulL wlLh Lhelr deparLmenL chalr and dean, as soon as Lhey are ready Lo
geL serlous abouL formlng a new company, Lo lay ouL plans and recelve feedback . wbot ls
most lmpottoot ls tbot lt ls oot oboot wbetbet yoo tblok tbete ls o coofllct ot oot, bot wbetbet
someooe else mlqbt petcelve ooe. wbeo lo Joobt, Jlsclose. lt coo sove yoo o lot of beottocbe
lotet oo.
!"0- 6% 6& &6+0 &* %&'(& ' )*+,'-#.
8esearchers geL so exclLed abouL Lhe ldea of formlng a company LhaL Lhey ofLen lose slghL of
Lhe hard road ahead. lL ls easy Lo overlook Lhe fundamenLals of bulldlng a successful buslness,
such as favorable Llmlng. Whlle Lhere ls no formula for deLermlnlng Lhe proper Llme Lo sLarL a
new company, ralslng enough caplLal Lo cover Lwo Lo Lhree years of operaLlons may be a good
rule of Lhumb. 1he ºrlghL" Llme has less Lo do wlLh Lhe sLage of research Lhan wlLh Lhe caplLal
markeLs. Academlc research dlscoverles are generally qulLe far from belng producLs and have
lncreased chances of dylng durlng developmenL. 1herefore, Lhe paLhway from dlscovery Lo
producL enLalls rlsk, whlch presenLs a slgnlflcanL hurdle when lL comes Lo ralslng funds. 1he
more embryonlc Lhe dlscovery, Lhe hlgher Lhe rlsk.
ln Lhe 90's, lL was easler Lo sLarL up a company, even wlLh very early sLage research. CurrenLly,
lnvesLors prefer lnvesLlng ln companles LhaL are much farLher along ln producL developmenL-
for example, Lhose wlLh drugs ln mld-sLage human cllnlcal Lrlals, or Lhose wlLh successful beLa
LesLs of Lhelr sofLware.
lnvesLors can be sLraLlfled accordlng Lo Lhelr comforL levels wlLh Lhe assoclaLed rlsks aL each of
Lhe sLages of Lhe producL developmenL sequence. 1hose aL Lhe early (hlgh-rlsk) end are ofLen
called ºseed" lnvesLors, and Lhose aL Lhe laLer (lower-rlsk) sLages are called ºmezzanlne"
lnvesLors. lL ls lmporLanL LhaL Lhe researcher beLLer undersLand Lhe rlsks assoclaLed wlLh
geLLlng Lhelr pro[ecL Lo Lhe markeLplace because lL wlll enable hlm/her Lo assess Lhe currenL
lnvesLmenL cllmaLe Lhrough exlsLlng neLworklng conLacLs. Lven wlLh a poslLlve lnvesLmenL
markeL, much efforL should be devoLed Lo fundralslng.
16
An |dea about geckos |s [ust an |nterest|ng pro[ect un|ess |t fu|f|||s a
press|ng need |n the market p|ace, can be manufactured on a re|evant
sca|e, and pr|ced compet|t|ve|y.
lbllllp Messetsmltb, lbu
ltofessot of 8lomeJlcol íoqloeetloq ooJ Motetlols 5cleoce ooJ íoqloeetloq
Nottbwesteto uolvetslty
B&0,% &*@'
% ' %&'(&2, WlLh so many sLeps lnvolved ln Lhe formaLlon of a new company, academlc enLrepreneurs
ofLen lnqulre abouL Lhe proper sequence. 1here ls noL a seL sequence ln whlch Lhese Lasks
should be accompllshed, as every new company has lLs own unlque clrcumsLances and needs.
neverLheless, as a gulde, a generallzed chronology ls shown below for sLarLlng an academlc
spln-off company. 1he llsL emphaslzes compllance wlLh an academlc employer's pollcles and
pracLlces regardlng Lhe lnvenLor's parLlclpaLlon ln a sLarLup. lL aLLempLs Lo mlnlmlze early
caplLal expendlLures. Þlease noLe, however, LhaL ln reallLy many of Lhese evenLs do noL unfold
one aL a Llme buL Lyplcally occur ln parallel or may occur ouL of Lhe sequence below.
1a|k to INVC 1alk wlLh your lnvenLlon manager Lo deLermlne whaL Lype
of lnLellecLual ÞroperLy proLecLlon you wlll need and for
suggesLlons regardlng nexL sLeps. Make sure Lo undersLand
Lhe lnLellecLual ÞroperLy and confllcL-of-lnLeresL pollcles.
Þrotect
Inte||ectua|
Þroperty
lor mosL sLarLups, Lhe lnLellecLual properLy ls Lhe only
caplLal. lL ls Lhe only Lool for aLLracLlng lnvesLmenL (usually
one or more paLenLs and/or subsLanLlal sofLware code). A
paLenL appllcaLlon should be flled any publlc dlsclosure ls
made.
Network]I|nd a
Mentor
ConLacL lnvC for suggesLlons on how Lo neLwork or
recommendaLlons for poLenLlal parLlclpaLlon ln unlverslLy
programs. 1hese may lnclude: Chlcago lnnovaLlon MenLors
Þrogram, CommerclallzaLlon Cllnlcs, lnvC semlnars, eLc. ln
addlLlon, Lhe larley CenLer for LnLrepreneurshlp aL Lhe
17
McCormlck School of Lnglneerlng, Lhe Levy lnsLlLuLe for
LnLrepreneurshlp aL Lhe kellogg SLudenL of ManagemenL
and Lhe knlghL lnnovaLlon LaboraLory provlde access Lo
managemenL, sLudenLs and/or buslness plan wrlLlng as well.
Þ|an the 8us|ness A buslness plan should be drafLed Lo be able Lo
communlcaLe Lhe markeL opporLunlLy and vlslon of Lhe
company. 1he plan should lnclude a markeL plan and a
flnanclal plan.
D|sc|ose to INVC AL Lhls polnL you should communlcaLe wlLh your lndlvldual
School on how you wlll be managlng any poLenLlal confllcL-
of-lnLeresL/confllcL of efforL LhaL mlghL resulL from Lhe
sLarLup.
Ass|gn a 8us|ness
Þerson
A buslness manager (or CLC) should be selecLed Lo lnlLlaLe
negoLlaLlons wlLh Lhe unlverslLy and fundralslng.
Incorporate 1he company needs Lo become a legal enLlLy ln a parLlcular
sLaLe.
Negot|ate the
L|cense or Cpt|on
Agreement W|th
INVC
1he buslnessperson leadlng Lhe sLarLup wlll negoLlaLe a
llcense for Lhe sLarLup wlLh lnvC. ln some cases, a shorL-
Lerm opLlon agreemenL may precede a llcense Lo
demonsLraLe Lo poLenLlal funders LhaL lL has secured Lhe
rlghLs Lo negoLlaLe for a llcense Lo Lhe Lechnology.
Iundra|se Commerclallzlng Lechnology ls Lyplcally a caplLal-lnLenslve
process. lundralslng becomes a non-sLop acLlvlLy unLll Lhe
company exlL (elLher sold or lÞC).
C261:6-< &"0 %&'(&2,
1here are many lssues LhaL commonly arlse when splnnlng-ouL a sLarLup from academla. lL ls
wlse Lo sLarL Lhlnklng abouL Lhem early on ln Lhe process. 1hese lssues range from sLraLeglc
plannlng Lo fundralslng Lo anLlclpaLlng sources of frusLraLlon.
1here are Lwo relaLed quesLlons LhaL lnvesLors wlll ofLen ask: Ate yoo bollJloq o ooe-ptoJoct
compooy ot o plotfotm compooy and wbot ls yoot exlt sttoteqy?
lnvesLors ln equlLy-lnvesLmenL companles llke Lo see markeLs peneLraLlon ln a varleLy of ways.
1haL's why Lhey prefer ºplaLform Lechnologles," whlch are amenable Lo Lhe developmenL of
18
mulLlple producLs. When revlewlng a dlscovery proposed Lo be Lhe nucleus of a sLarLup, one of
Lhe flrsL quesLlons an lnvesLor mlghL ask ls: ºls Lhls a producL or a company?" lmplled ln Lhls
query ls a second quesLlon: ºWhaL happens lf Lhe flrsL producL falls?" WlLhouL a clear answer
Lo Lhls quesLlon, lL's unllkely LhaL Lhe company wlll aLLracL lnsLlLuLlonal lnvesLors.
1he producL-or-company quesLlon also applles Lo Lhe modesL-lnvesLmenL company, Lhough on
a more modesL scale. lf you conLemplaLe bulldlng a ºgarage-based" company Lo sell a producL
lnLo a nlche markeL, you should ask yourself, ºlf Lhe sales of my lead producL slowly ramp up
Lo, say, $73,000 per year and Lhen flaLLen ouL, am l golng Lo be saLlsfled wlLh all Lhe Llme and
money l spenL Lo geL Lo LhaL poslLlon?" lf Lhe answer ls no, you musL conslder how Lhe
company may brlng ln addlLlonal revenues Lo [usLlfy your lnvesLmenL.
lL ls also lmporLanL Lo Lhlnk abouL exlL sLraLegles. lf you are plannlng Lo brlng Lhe company all
Lhe way Lo an lÞC, you wlll need Lo develop a developmenL plan LhaL wlll Lake you all Lhe way
Lo Lhe markeLlng and sales of Lhe Lechnology. ?ou wlll need Lo anLlclpaLe poLenLlal parLners
LhaL wlll help you reach LhaL polnL, flnanclng sLraLegy, eLc.
lf your plan ls Lo sell Lhe company afLer a mllesLone ls reached (say afLer Þhase ll ln
developmenL), you mlghL wanL Lo sLarL checklng poLenLlal acqulrers' appeLlLe for your
Lechnology aL an early sLage.
D056-6-< &"0 +'(90&
ln order Lo wrlLe your buslness plan and effecLlvely neLwork wlLh oLhers, you wlll need Lo have
an ºelevaLor plLch" of your company. 1hls means LhaL you should be able Lo explaln wlLhln one
mlnuLe Lhe tolsoo J'ette for your company. 1he descrlpLlon should be compelllng enough for
an lnvesLor Lo wanL Lo conLlnue Lhe conversaLlon abouL Lhe opporLunlLy.
1he flrsL sLep ln deslgnlng your elevaLor plLch ls Lo have a well-deflned markeL. 8e careful,
however, noL Lo exaggeraLe Lhe slze of Lhe markeL or gloss over Lhe crlLlcal deLalls. lnvesLors
Lend Lo laugh aL academlc enLrepreneurs LhaL Lend Lo Lalk abouL a sLarLup wlLh a blockbusLer
markeL slze of mulLlple bllllon dollars.
ÞroducLs should address unmeL needs, as Lo creaLe a compelllng argumenL for a poLenLlal new
producL. 1he elevaLor plLch musL descrlbe Lhe unmeL need, Lhe cusLomers and why Lhey wlll
be lnLeresLed ln purchaslng Lhe producL.
19
ln acqulrlng such an undersLandlng, reallsLlc answers Lo Lhe followlng quesLlons should be
developed:
• WhaL ls Lhe unmeL need?
• Pow many people, companles, or oLher enLlLles currenLly have Lhls problem? ln Lhe
unlLed SLaLes? Worldwlde?
• ls Lhe lncldence of Lhe problem growlng or decllnlng? AL whaL raLe?
• Pow ls Lhls problem currenLly solved or avolded?
• Who sells producLs LhaL address Lhls problem? WhaL are Lhelr annual sales? WhaL ls
Lhelr esLlmaLed share of Lhe markeL?
• WhaL producLs for solvlng Lhls problem are ln oLher companles' developmenL
plpellnes?
• WhaL are Lhe sLrengLhs and weaknesses of exlsLlng producLs ln Lhls markeL?
• Pow do people make buylng declslons ln Lhls markeL?
• Why would a buyer choose your producL over Lhe oLhers?
CbLalnlng Lhls lnformaLlon, however, ls noL easy. ?ou should plan Lo devoLe Llme Lo do
research from boLh prlmary and secondary sources. ?ou wlll need Lo spend slgnlflcanL Llme
Lalklng wlLh lndusLry leaders, searchlng daLabases, eLc. lorLunaLely, norLhwesLern has Lhe
advanLage of havlng Lhe kellogg School of ManagemenL, one of Lhe besL schools ln markeLlng.
kellogg has hundreds of sLudenLs wlLh Lhe experLlse Lo do hlgh quallLy markeLlng research
analyses. Many of Lhese sLudenLs are wllllng Lo volunLeer Lhelr servlces ln exchange for Lhe
opporLunlLy Lo be parL of a sLarLup.
Cne of the |essons that I've |earned |s that hav|ng an
|nnovat|ve techno|ogy |s not enough to create a successfu|
bus|ness. It |s cr|t|ca| that you as an entrepreneur understand
and address the needs that ex|st |n the marketp|ace.
íJ colqote, lbu
ltofessot, Mecboolcol íoqloeetloq
Nottbwesteto uolvetslty
20
nav|ng an e|evator p|tch forces you to deve|op a c|ear and
conc|se statement of your company's m|ss|on and va|ue
propos|t|on. 8e|ng ab|e to convey th|s |n two m|nutes
demonstrates that you have true c|ar|ty on your bus|ness.
lblllppe looqokl
cíO, lolyeto
;:0-&65#6-< &"0 (6<"& =EF
llndlng Lhe rlghL CLC mlghL be Lhe mosL lmporLanL declslon LhaL Lhe academlc founders wlll
make for Lhe sLarLup. lounders are ofLen LempLed Lo play LhaL role. 1he LruLh ls LhaL lL almosL
never works. 1he sklll seL LhaL makes you a good researcher or lnvenLor rarely LranslaLes Lo
runnlng a buslness effecLlvely. lundralslng, wrlLlng buslness plans, negoLlaLlng leases for
faclllLles, and seLLlng up and managlng human-resources, purchaslng, accounLlng, regulaLory-
affalrs, manufacLurlng, and sales and markeLlng funcLlons are generally noL wlLhln Lhe realm of
Lhe researcher's experlence or lnLeresL. Lxperlence ln bulldlng sLarLups ls crlLlcal Lo be able Lo
ralse caplLal.
1here ls a Lendency ln academla Lo underesLlmaLe Lhe value LhaL Lhe buslness parLner brlngs
Lo Lhe Lable. Avold hlrlng Lhe flrsL poLenLlal CLC you conslder. lL ls lmporLanL Lo check
references and check how credlble Lhey are wlLh lnvesLors and compeLlLors. lnlLlal condlLlons
ln a sLarLup deLermlne Lhe fuLure paLh of Lhe company. lew sLarLups ever survlve a second-
raLe buslness parLner. Also, when lL comes Lo granLlng Lhe CLC equlLy ln Lhe company, you
may wanL Lo make lL sLrlcLly performance-based.
1he most |mportant th|ng you can do for you techno|ogy |s to f|nd the r|ght management.
ktlstloo nommooJ, lbu
ltofessot, ílecttlcol íoqloeetloq ooJ compotet 5cleoce
Nottbwesteto uolvetslty
21
32-
'6%6-< 1he Lype of lnvesLors LhaL you wlll seek for Lhe company wlll depend on Lhe Lype of company
LhaL ls belng bullL, Lhe sLage of developmenL and Lhe caplLal needs. 1he mosL common are:
Sweat Lqu|ty, Ir|ends and Iam||y
usually, Lhe founders each puL some of Lhelr personal funds lnLo Lhe enLerprlse durlng lLs early
days Lo help wlLh expenses such as Lravel and lncorporaLlon. More commlLLed enLrepreneurs,
especlally Lhose wlLhouL co-founders, may puL a conslderable amounL of Lhelr own money lnLo
Lhe company, frequenLly uslng credlL-card and home-equlLy debL as an ad[uncL.
CfLen, enLrepreneurs wlll Lap Lhelr frlends and famllles as mlnl-angels Lo provlde lnlLlal
fundlng. Asklng for money from famlly and frlends can be a dlfflculL. lL ls wlse Lo be clear and
upfronL abouL your goals and lnLenLlons. Some sorL of a wrlLLen agreemenL or conLracL wlll be
useful.
Non-Þrof|t Grants
non-proflL foundaLlons are ofLen good places Lo seek fundlng lf Lhe mlsslon and goals of your
company allgns wlLh Lhe mlsslons and goals of a non-proflL foundaLlon. Cccurrlng more
frequenLly ln healLhcare and soclal lssues, foundaLlons such as Lhe CysLlc llbrosls loundaLlon
has funded cysLlc flbrosls research ln boLh lndusLry and academla. Accordlng Lo Lhe 8osLon
Clobe, uS foundaLlons dedlcaLed Lo flghLlng dlseases lnvesLed abouL $73 mllllon ln research
and dlscovery of drugs ln 2007, 10 Llmes more Lhan Lhe $7 mllllon LhaL was lnvesLed ln 2000.
S8Iks & S11ks
Small 8uslness lnnovaLlon 8esearch (S8l8) and Small 8uslness 1echnology 1ransfer 8esearch
(S118) are federal granL programs LhaL fund research ln companles wlLh fewer Lhan 300
employees. 1hese programs recognlze LhaL much of Lhe unlLed SLaLes' lnnovaLlon occurs
wlLhln Lhe small-buslness secLor, and Lhey seek Lo sLlmulaLe furLher lnnovaLlon ln selecL areas
of research. Cver Lwo bllllon dollars ln granLs are provlded each year by agencles of Lhe federal
governmenL under publlshed sollclLaLlons. Awards have Lhree phases: Þhase l (up Lo
$130,000), ln whlch new concepLs are explored, Þhase ll (up Lo $1 mllllon), ln whlch successful
Þhase l pro[ecLs are developed lnLo producLs, and Þhase llb (up Lo $3 mllllon) ln whlch Lhe
Þhase ll pro[ecLs are moved close Lo commerclallzaLlon.
22
S8l8/S118 awards are made Lo Lhe small buslness, buL a porLlon of Lhe funds may be
subconLracLed Lo a unlverslLy laboraLory, whlch can be a greaL source for managlng proof-of-
concepL pro[ecLs wlLhouL havlng Lo pay for expenslve lnfrasLrucLure such as lnsLrumenLaLlon ln
a prlvaLe secLor laboraLory (up Lo 33 percenL for S8l8 and 60 percenL for S118 durlng Þhase l).
S8l8/S118 awards are aLLracLlve Lo academlc sLarLups for Lwo reasons: Lhey play Lo Lhe granL-
wrlLlng sLrengLhs of academlc researchers, and Lhey are ouLrlghL granLs, noL equlLy
lnvesLmenLs (e.g., you don'L have Lo glve a plece of Lhe company away Lo geL Lhe money). 1he
ma[or downslde Lo Lhe awards ls LhaL Lhere can be a slgnlflcanL lag beLween Þhase l and Þhase
ll awards, and lL may be dlfflculL Lo keep research Leams LogeLher (l.e. meeL payroll) whlle Lhe
Þhase ll appllcaLlon ls pendlng.
Many academlcs have been LempLed Lo use Lhe S8l8/S118 programs Lo exLend Lhelr academlc
research lnsLead of uslng Lhe funds Lo bulld a company and develop producLs. LxperL panels
are uLlllzed Lo revlew Lhe granL appllcaLlons boLh for Lechnlcal and commerclal merlL.
AppllcaLlons LhaL are academlcally focused are generally academlcally focused are generally
noL accepLed. 8uL used ln Lhelr lnLended manner, S8l8/S118 awards are excellenL ways Lo fund
early research ln a new company, and Lhe Þhase ll awards are robusL. SLlll, a company Lrylng Lo
bulld lLs enLlre llne of producLs from S8l8/S118 granLs wlLhouL oLher lnvesLmenL ls noL llkely Lo
secure sufflclenL resources.
lor a LuLorlal on S8l8 granL wrlLlng, please check hLLp://www.dodsblr.neL/LuLorlal/Lour.hLm.
Ange| Investors
Angel lnvesLors are lndlvlduals who lnvesL Lhelr own personal money. An angel lnvesLor ls
usually someone who has led Lhe launch and developmenL of successful companles, followed
by a successful exlL. Angel lnvesLors ofLen form groups so poLenLlal lnvesLmenLs can be beLLer
evaluaLed. Lach angel Lyplcally lnvesLs beLween $23k- $100k.lf a group pools Lhelr money,
Lhe LoLal amounL of lnvesLmenL can reach over $1 mllllon dollars. Angel lnvesLors usually
come ln aL an earller sLage Lhan venLure caplLal flnanclng.
AcLlve Chlcago area angel groups lnclude:
WlldcaL Angels www.wlldcaLangels.com
Pyde Þark Angels www.hydeparkangels.com
PearLland Angels www.hearLlandangels.com
CornersLone Angels www.cornersLoneangels.com
23
LqulLy lnvesLors recelve sLock ln Lhe company, wlLh Lhe amounL dependenL on Lhe value
(ºvaluaLlon") of Lhe company ln proporLlon Lo how much Lhey have lnvesLed. 1he cash value
placed on a new company (ºpre-money valuaLlon") ls arblLrary and sub[ecL Lo negoLlaLlon, wlLh
enLrepreneurs usually Lhlnklng hlgh and lnvesLors low. lL ls lnevlLable LhaL afLer mulLlple
rounds of equlLy lnvesLmenL, Lhe lnvesLors wlll own a ma[orlLy of Lhe shares of Lhe company.
Academlcs ofLen vlew Lhls ouLcome as ºloslng conLrol" of Lhe company (ofLen called
ºfounder's syndrome"), buL wlLhouL exLernal lnvesLmenL, Lhe company would noL be able Lo
move forward.
Industry Þartnersh|ps
A sLarLup may also develop a sLraLeglc parLnershlp wlLh a larger company under whlch Lhls
parLner helps Lhe young company wlLh producL developmenL, generally ln Lhe form of cash or
collaboraLlve asslsLance. ÞarLnershlps are an excellenL source of non-dlluLed caplLal and also
usually have an lmpacL on Lhe company's valuaLlon because Lhey are used Lo valldaLe Lhe
Lechnologles. ÞarLnershlps are dependenL on producL sLage of developmenL and mllesLones.
Care musL be Laken LhaL Lhese relaLlonshlps do noL alLer Lhe core company focus and are noL
sLrucLured ln a way LhaL wlll hamper fuLure fundralslng or sale of Lhe company.
Venture Cap|ta| I|rms
venLure caplLallsLs (vCs) are professlonal lnvesLors and money managers who manage and
lnvesL a pool of money from hlgh neL worLh lndlvlduals and lnsLlLuLlonal lnvesLors who are
looklng for hlgher reLurns on Lhelr lnvesLmenLs Lhan Lhe average sLock markeL reLurns. 1here
are Lhousands of venLure flrms ouL Lhere, and each flrm usually speclallzes ln a parLlcular
lndusLry. 1here are more vCs focused on hlgh Lech Lhan llfe sclences, slmply because an exlL ln
a llfe sclence ls usually much longer.
vCs provlde slgnlflcanL values Lo a sLarLup company LhaL ls much more Lhan [usL money. Many
vCs were former execuLlves who launched and managed successful companles and Lhey can
provlde valuable advlce and guldance. ln addlLlon, when a vC slgns up Lo lnvesL, you are
geLLlng Lhelr enLlre neLwork of frlends. vCs have enormous neLworks of frlends LhaL can help
sLarLups solve problems.
24
vCs make money by charglng a managemenL fee of Lhe managed funds Lhey ralsed from
wealLhy lndlvlduals and lnsLlLuLlonal lnvesLors. lL ls ln a vC flrm's besL lnLeresL Lo make money
for Lhelr lnvesLors because Lhelr repuLaLlon ls on Lhe llne. 1helr repuLaLlon ls based on Lhelr
lnvesLmenL Lrack records. lf managers have below average success raLes, lnvesLors are llkely
Lo choose dlfferenL money managers.
Lqually lmporLanL as selecLlng Lhe rlghL CLC, ls Lhe selecLlon of Lhe rlghL lnvesLors. lnvesLors
play a crlLlcal role ln shaplng Lhe company, provldlng neLwork, managemenL, eLc. 1he quallLy
of your seed lnvesLors wlll play a key role ln aLLracLlng fuLure lnvesLmenLs. SomeLlmes, Lhe
enLrepreneur ls ln such desperaLe need for fundlng LhaL he/she accepLs lnvesLmenLs from
lnexperlenced lnvesLors. 1hese lnvesLors ofLen have unreallsLlc expecLaLlons, llLLle lndusLry-
speclflc neLwork and llLLle credlblllLy wlLh follow-on lnvesLors. lew sLarLups can survlve an
lnexperlenced seed lnvesLor.
Iundra|s|ng |s an a||-consum|ng process. It requ|res constant effort,
ded|cat|on, focus and a re|ent|ess pursu|t.
Collletmo Ameet, lbu
ltofessot, 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
S8Iks and S11ks have been of tremendous va|ue to the startup we created a
number of years ago. I|rst, and foremost th|s type of fund|ng |s non-d||ut|ve.
In add|t|on, |t |s m||estone-based wh|ch serves as a cont|nua| rem|nder of the
d|sc|p||ne necessary to successfu||y commerc|a||ze the techno|ogy. I
recommend that a|| facu|ty-|n|t|ated startups g|ve cons|derat|on to th|s type of
fund|ng.
Cteqoty Olsoo, 5cu
woltet l. Motpby ltofessot of Motetlols 5cleoce ooJ íoqloeetloq
Nottbwesteto uolvetslty
25
Þartner|ng w|th a |arge p|ayer |n the |ndustry can |ncrease your
startup's cred|b|||ty among potent|a| |nvestors. A |arger company can
a|so offer fac|||t|es and other resources requ|red to move a product
from the |aboratory to the |ndustry.
voJlm 8ockmoo, lbu
ltofessot of 8lomeJlcol íoqloeetloq
Nottbwesteto uolvetslty
G"0 (*10H%I *5 &"0 5*2-:0(% 6- &"0 %&'(&2, )*+,'-#
MosL flrsL-Llme academlc enLrepreneurs are uncerLaln abouL whaL role Lhey should play ln Lhe
formaLlon and operaLlon of a new company, Lhough cerLaln relaLlonshlps are falrly predlcLable.
laculLy Lyplcally prefer Lo reLaln Lhelr academlc poslLlon whlle worklng wlLh Lhe new company,
whlle sLaff, posLdocs, and graduaLe sLudenLs ordlnarlly leave academla Lo become company
employees. A faculLy member's role ln Lhe sLarLup ls llkely Lo be proscrlbed by a number of
unlverslLy pollcles, lncludlng Lhose on confllcL-of-lnLeresL, confllcL-of-commlLmenL, sponsored
research, and ouLslde consulLlng. 1he Lyplcal range of roles LhaL faculLy play ln con[uncLlon
wlLh sLarLups lncludes:
- lounder/equlLy holder
- ConsulLanL
- Member of Lhe sclenLlflc advlsory board
- Member of Lhe board of dlrecLors
- 8eclplenL of sponsored research fundlng
- Lmployee of Lhe sLarLup, on|y whlle on leave from Lhe unlverslLy
norLhwesLern, llke mosL academlc lnsLlLuLlons, has pollcles regardlng how faculLy may
parLlclpaLe ln new companles. 1he faculLy member should consulL Lhe confllcL of lnLeresL
pollcy hLLp://www.research.norLhwesLern.edu/pollcles/faculLy-confllcL-of-lnLeresL.hLml and
dlscuss wlLh hls/her school/deparLmenL before sLarLlng a company.
1he academlc researchers provlde Lhe Lechnlcal vlslon Lo gulde Lhe company's lnlLlal research
and developmenL. 1hey are lnLegrally lnvolved ln mulLlple aspecLs of bulldlng a buslness whlch
lncludes: developlng and wrlLlng Lhe buslness plan, recrulLlng an lndlvldual Lo lead Lhe
26
buslness slde of Lhe company, maklng presenLaLlons Lo poLenLlal lnvesLors, hlrlng lnlLlal
sclenLlflc sLaff, and launchlng Lhe company ln lLs own faclllLles. 1hese acLlvlLles requlre a large
Llme commlLmenL. A chlef execuLlve offlcer (CLC) may handle Lhe ma[orlLy of Lhe early work of
bulldlng Lhe company, buL lnevlLably Lhe researchers wlll be pulled lnLo Lhe process. lL ls
lmporLanL Lo noLe LhaL one of Lhe measures used by poLenLlal parLners and lnvesLors ln
assesslng Lhelr lnLeresL ln worklng wlLh a new venLure ls Lhe amounL of Llme LhaL Lhe academlc
founders devoLe Lo Lhe endeavor.
Cnce Lhe sLarLup ls launched, Lhe lnvolvemenL of Lhe founder ls ofLen lnversely relaLed Lo Lhe
number of employees aL Lhe company: as Lhe slze of lLs sLaff lncreases, Lhe day-Lo-day
parLlclpaLlon of Lhe founder decreases. ln esLabllshed companles, Lhe founder usually remalns
on Lhe company's sclenLlflc advlsory board and offers sLraLeglc consulLlng advlce.
B010)&6-< &"0 )*45*2-:0(% *5 ' %&'(&2,
laculLy members are ofLen LempLed Lo lnclude Lhelr research collaboraLors and graduaLe
sLudenLs as parLners of Lhe sLarLup, Lhough Lhls declslon can usually brlng headaches aL a laLer
Llme. 8ecause parLners usually share ln Lhe fuLure value of Lhe company- wheLher ln Lhe
form of proflLs, sLock holdlngs, or oLher arrangemenLs-declslons as Lo who wlll be a founder
should be made accordlng Lo Lhe expecLed conLrlbuLlon of each lndlvldual Lo Lhe enLerprlse. lL
ls much easler Lo look back aL a sclenLlflc sLudy and deLermlne who made Lhe conLrlbuLlons
necessary for lncluslon as a reporL's coauLhor Lhan lL ls Lo look lnLo Lhe fuLure Lo deLermlne
who should share, and ln whaL proporLlon, ln Lhe value creaLed by Lhe company.
Þlcklng your buslness parLners ls a blL llke plcklng a spouse. ?ou wanL Lo form relaLlonshlps
wlLh people who you know and LrusL and who share your values and asplraLlons. ?ou wanL
people LhaL had experlence as enLrepreneurs and are respecLed by Lhe lnvesLor communlLy. Cf
course, Lhey also need Lo be honesL, communlcaLe ln a sLralghLforward manner, and follow
Lhrough on whaL Lhey say. lnvC can help ldenLlfylng poLenLlal managers for Lhe sLarLups.
1he founders of a buslness nearly always reLaln equlLy rlghLs. 1here are Lwo forms of equlLy:
sLock and opLlons. 1he purchase of sLock by founders should happen early prlor Lo an exLernal
company valuaLlon. Cnce a value ls placed - Lhrough a Lerm sheeL, for example - Lhere are Lax
lmpllcaLlons. lounders' sLock can be resLrlcLed wlLh regard Lo Lransfer and reverse vesLlng. lor
example, lf a founder ends hls buslness relaLlonshlp wlLh Lhe company, Lhe company has Lhe
rlghL Lo repurchase hls/her sLock aL Lhe founder's orlglnal purchase prlce.
27
1he oLher form of equlLy, opLlons, are Lhe rlghL Lo purchase shares of a company's sLock ln Lhe
fuLure aL a very low prlce. 1hese are Lyplcally granLed Lo new employees and consulLanLs and
vesL over Llme. SomeLlmes, however, shares from Lhe opLlon pool are glven Lo founders as a
way Lo reward noLable conLrlbuLlons by [unlor Leam members.
vesLlng ls a process by whlch sLock or opLlons become avallable Lo Lhe employee over Llme
accordlng Lo a predeLermlned schedule. vesLlng ls meanL Lo ensure long-Lerm commlLmenL Lo
Lhe company. 1he lengLh of a vesLlng schedule ls Lyplcally Lhree Lo flve years. vesLlng
schedules Lend Lo be fasLer on Lhe WesL CoasL Lhan on Lhe LasL CoasL. 1here are dlfferenL
Lypes of vesLlng. lor lnsLance, cllff vesLlng ls when a person's buslness relaLlonshlp wlLh a
company has Lo conLlnue for a seL perlod of Llme (e.g. one year) before LhaL person has a rlghL
Lo purchase sLock ln Lhe company. vesLlng can occur on a monLhly, quarLerly, or yearly basls.
When a company ls sold, vesLlng usually acceleraLes, and Lhe rlghLs of founders and employees
- whose opLlons also acceleraLe - need Lo be balanced.
ldenLlfylng founders and seLLlng up sLock plans ls someLhlng wlLh whlch an experlenced
aLLorney, who ls knowledgeable abouL sLarLup companles and sLock-ownershlp norms ln your
lndusLry, can help you durlng lncorporaLlon. Þlease conLacL lnvC aL lnvo[norLhwesLern.edu
for referrals Lo aLLorneys who speclallze ln sLarLups.
A0&@*(96-< '-: 56-:6-< &"0 (6<"& +0-&*(%
1here ls much Lo learn abouL organlzlng, fundlng, and launchlng a new company from Lhe
experlence of oLhers. 1he besL way Lo access Lhe know-how and wlsdom of oLhers ls Lhrough
ºneLworklng." ldeally, a researcher should alm Lo flnd a menLor (or a group of menLors) LhaL
wlll be able Lo offer quallfled advlce and help open Lhe doors. lnvC offers a formal menLorshlp
program called ºChlcago lnnovaLlon MenLors (ClM)" program Lo maLch enLrepreneurs wlLh
menLors (www.chlcagolnnovaLlonmenLors.org)
1here are many oLher opporLunlLles for neLworklng ln Lhe Chlcago area. A llsL of some
neLworklng resources ls llsLed aL www.lnvo.norLhwesLern.edu/resources. 1hese lnclude: speclflc
venues for enLrepreneurs Lo geL LogeLher Lo presenL Lhelr concepLs for new companles,
regular meeLlngs of local lndusLry groups, small companles maklng presenLaLlons aL
professlonal conferences, and regular meeLlngs of ºangel neLworks" aL whlch leaders of new
companles ofLen presenL Lhelr buslness plans.
1he concepL and pracLlce of neLworklng ls essenLlal for enLrepreneurs. lL ls Lhrough
neLworklng LhaL CLC and CSC (Chlef Sclence Cfflcer) candldaLes, consulLanLs, corporaLe
28
aLLorneys, lnsurance carrlers, and poLenLlal lnvesLors may be ldenLlfled. 1lps on wrlLlng a
buslness plan or applylng for S8l8 and S118 fundlng may also be gleaned from Lhese
lnLeracLlons. lurLher, neLworklng wlLh fellow enLrepreneurs, provlded LhaL Lhey are noL dlrecL
compeLlLors, ls an addlLlonal resource, as Lhey share Lhelr own experlences.
A varleLy of semlnars are regularly offered Lo help enLrepreneurs develop skllls and confldence
ln neLworklng - vlslL lnvC's web slLe - www.lnvo.norLhwesLern.edu for a llsL of upcomlng on-
campus and local semlnars.
Mentorsh|p from Ch|cago Innovat|on Mentors
(hLLp://www.chlcagolnnovaLlonmenLors.org/) has been |nstrumenta| |n shap|ng the
focus and d|rect|on of our commerc|a||zat|on p|ans.
keeJ Omoty, Mu
ltofessot, koJloloqy
lelobetq 5cbool of MeJlcloe
D6%)1*%6-< 6-5*(+'&6*-
Cnce you declde Lo sLarL a buslness, lL ls lmporLanL Lo be careful on how much lnformaLlon ls
belng dlsclosed Lo Lhe publlc. Þubllc dlsclosures could llmlL your ablllLy Lo obLaln paLenL rlghLs.
ln addlLlon, lL mlghL creaLe Lhe rlsk LhaL somebody wlll copy your ldeas.
lf you are ln a sLarLup buL have noL llcensed Lhe lnvenLlon, please consulL your lnvenLlon
manager aL lnvC before maklng any publlc dlsclosures. 1he manager wlll leL you know lf
slgnlng a ConfldenLlallLy ulsclosure AgreemenL (CuA) ls necessary. Samples of CuAs are found
aL: www.lnvo.norLhwesLern.edu/forms/guldellnes-confldenLlallLy-agreemenLs.
ln general, lL ls wlse noL Lo provlde Loo many deLalls of Lhe lnvenLlon when communlcaLlng
wlLh an exLernal parLy. Lven when common lnLeresLs are clear and furLher and more serlous
dlscusslon ls lndlcaLed, lL ls noL necessary Lo provlde all Lhe deLalls abouL Lhe lnvenLlon or Lhe
company. MosL lnvesLors ofLen do noL wanL Lo learn confldenLlal lnformaLlon unLll Lhey have
moved onLo Lhe sLage of ºdue dlllgence" and are serlously conLemplaLlng an lnvesLmenL. AL
LhaL polnL, lf Lhe sLarLup has already opLloned or llcensed Lhe Lechnology, Lhey should already
have a LemplaLe confldenLlallLy (nondlsclosure) agreemenL.
29
(See hLLp://conLracLs.corporaLe.flndlaw.com/corporaLe/nondlsclose/343.hLml for an example
of a confldenLlallLy agreemenL.) noLe LhaL unLll your company has opLloned or llcensed
underlylng lÞ from norLhwesLern , or any oLher llcensor, confldenLlallLy agreemenLs wlll need
Lo lnclude such parLles, as Lhey hold Lhe rlghLs Lo Lhe lÞ.
='- ; :* (0%0'()" 6- +# ')':0+6) 1'8*('&*(# 5*( +# %&'(&2,.
Cnce Lhe company ls lncorporaLed, all research relaLed Lo Lhe sLarLup needs Lo be conducLed
wlLhln Lhe sLarLup. 1here are sLrlcL regulaLlons why sLarLup companles are noL allowed Lo
conducL company's work wlLhln Lhe walls of Lhe academlc lnsLlLuLlon. uslng Lhe unlverslLy's
faclllLles can resulL ln grave penalLles for Lhe lnsLlLuLlon and Lhe researcher. Powever,
someLlmes Lhe academlc lab pursues baslc research LhaL ls complemenLary Lo Lhe company's
producL developmenL work. ln oLher lnsLances, lf proof-of-concepL or reducLlon-Lo-pracLlce
experlmenLaLlon sLlll needs Lo be done, Lhe academlc laboraLory may be besL equlpped Lo
perform Lhe work. ln Lhese cases, Lhe sLarLup can enLer a sponsored research agreemenL wlLh
Lhe founder of Lhe sLarLup. lundlng from sLarLups Lo Lhe founder's academlc laboraLory needs
Lo be cleared by Lhe Cfflce of Sponsored 8esearch and Lhe School's confllcL-of-lnLeresL
admlnlsLraLor. CfLen Lhe founder ls noL allowed Lo recelve Lhe funds lf he or she has a
slgnlflcanL flnanclal lnLeresL (l.e., sLock or oLher ownershlp lnLeresL).
8egardless, Lhe faculLy member wlll need Lo develop a plan for golng forward wlLh Lhe
research ln such a manner LhaL poLenLlal confllcLs have been mlLlgaLed. Such plans generally
pay speclal aLLenLlon Lo graduaLe sLudenL and human sub[ecL lnvolvemenL ln Lhe research and
Lo publlc dlsclosure ln publlcaLlons resulLlng from Lhe sponsored research, and Lo corporaLe
Lles. ulLlmaLely, a research conLracL wlll be negoLlaLed beLween Lhe company and
norLhwesLern Lhrough whlch Lhe company wlll galn prospecLlve llcenslng rlghLs Lo Lhe resulLs
of Lhe research and any assoclaLed lnLellecLual properLy. ConLracL negoLlaLlon ls handled by
Lhe Cfflce for Sponsored 8esearch (hLLp://www.research.norLhwesLern.edu/osr/).
D* ; -00: '- *,&6*- *( 16)0-%0 5*( &"0 %&'(&2,.
lnvC encourages Lhe founder Lo conslder an opLlon raLher Lhan a llcense. An opLlon ls fasL and
less expenslve and, furLher, lL glves Lhe enLrepreneur more Llme Lo ralse funds. lf Lhe
enLrepreneur ls noL successful, Lhe Lechnology has been Lled up only for Lhe duraLlon of Lhe
opLlon.
30
1yplcally, an opLlon fee varles dependlng on Lhe number of lnvenLlons, demand for Lhe
lnvenLlons, eLc. 1he opLlon perlod ls normally 6-12 monLhs, buL exLenslons are usually
posslble. 1he opLlonee has Lhe rlghL Lo exerclse Lhe opLlon upon ralslng funds, usually a
mlnlmum of $300k. A Lerm sheeL, whlch seLs forLh all Lhe buslness Lerms, ls aLLached Lo Lhe
opLlon. Converslon Lo a llcense musL be done wlLhln Lhe perlod seL forLh ln Lhe opLlon.
!"'& &* 0J,0)& @6&" &"0 %&'(&2, 16)0-%0
1he lnvenLor lnpuL ls lmporLanL ln llcenslng declslons. Powever, because of Lhe lnvenLor's
poLenLlal confllcLs-of-lnLeresL, he needs Lo negoLlaLe wlLh norLhwesLern from an "arms-
lengLh" relaLlonshlp. AgreemenLs wlLh faculLy-lnlLlaLed companles need Lo be revlewed
carefully Lo ensure LhaL norLhwesLern ls [usLlfled ln granLlng rlghLs Lo Lhe Lechnology Lo Lhe
sLarLup (as opposed Lo a larger company). 1he sLarLup needs Lo demonsLraLe LhaL Lhey are
beLLer poslLloned Lo commerclallze Lhe lnvenLlon Lhan exlsLlng companles. ln general,
norLhwesLern glves prlorlLy Lo sLarLups founded by norLhwesLern researchers.
lL ls lmporLanL for Lhe founder and Lhe buslnessperson from Lhe sLarLup Lo be famlllarlzed wlLh
Lhe general llcense LemplaLe and flnanclal Lerms for sLarLups aL norLhwesLern. Þlease conLacL
your lnvenLlon manager for a LemplaLe. Llcense negoLlaLlons can be very fasL or Lake several
monLhs. ln general, Lhe lengLh of Lhe negoLlaLlon depends on Lhe experlence of Lhe
managemenL Leam ln Lransferrlng Lechnology ouL of Lhe unlverslLy envlronmenL lnLo a sLarLup.
unlverslLles are requlred Lo lnclude dlllgence Lerms Lo ensure LhaL slgnlflcanL progress ls belng
made Lowards commerclallzaLlon of Lhe lnvenLlon. 8uslness and developmenL plans are
requlred. 1he plans need Lo lnclude baslc lnformaLlon such as: Lhe company's purpose, a
descrlpLlon of Lhe Lechnology, a markeL analysls, opporLunlLy, sLages for developmenL,
Llmellnes, mllesLones, and a flnanclng plan. 1he buslness plan ls noL a procedural manual buL
more of a hlgh-level vlew of Lhe sLarLup's lnLended sLrucLure and funcLlon. 8ecause buslness
plans are sub[ecL Lo frequenL revlslon as dlrecLlons change, Lhey are a snapshoL of Lhe
company aL a parLlcular polnL ln Llme. 1he exerclse of wrlLlng Lhe plan ls lLself lnvaluable ln
LhaL lL makes Lhe enLrepreneur confronL Lhe key aspecLs of bulldlng a new buslness and form
reallsLlc raLlonales for why he or she belleves Lhe company wlll be successful. lnvenLlon
managers aL lnvC can provlde a general LemplaLe of a buslness plan.
Cnce Lhe llcense ls execuLed, Lhe llcensee wlll relmburse norLhwesLern for Lhe legal cosLs
assoclaLed wlLh Lhe prosecuLlon of Lhe lÞ. lf, for some reason, exLraordlnary legal expenses
31
have been accrued durlng Lhe prosecuLlon of Lhe lnLellecLual properLy, a relmbursemenL plan
wlll be esLabllshed Lo help Lhe sLarLup.
Some general Lerms Lo expecL ln Lhe llcense:
• lleld of use resLrlcLlons, slnce a sLarLup company ofLen cannoL develop all Lhe
appllcaLlons of an lnvenLlon.
• LqulLy, mllesLone paymenLs and royalLles Lo Lhe unlverslLy because norLhwesLern
lnvesLed resources, salarles, and space
• MalnLenance fees Lo ensure LhaL Lhe company ls serlous abouL developlng Lhe
lnvenLlon. ln order Lo help Lhe sLarLup, Lhe malnLenance fees may be delayed/walved
Lhe flrsL year.
• 8equlremenL of sufflclenL lnsurance as speclfled by norLhwesLern unlverslLy.
K0':6-< %*2()0% *5 5(2%&('&6*- 5*( &"0 ')':0+6) 0-&(0,(0-02(
A sLarLup moves aL varylng speeds, alLernaLlng beLween dlzzylngly fasL perlods aL hlgh energy
Lo oLher perlods when Lhe process seems sLalled. 1hese laLLer perlods are Lhe ones LhaL Lhe
enLrepreneur seems Lo flnd Lhe mosL frusLraLlng. Much of Lhe frusLraLlon ls based upon a
mlsmaLch of expecLaLlons. We llsL some of Lhe leadlng sources of frusLraLlon among academlc
enLrepreneurs below.
1. ka|s|ng Cap|ta|. A company wlLhouL a clearly arLlculaLed and credlble buslness opporLunlLy
(Lhe so-called ºvalue proposlLlon") wlll noL be able Lo ralse money. Lven federal granL
programs such as S8l8 and S118 requlre a vlable producL-commerclallzaLlon plan for Þhase
ll awards. Academlc enLrepreneurs musL make sure LhaL Lhe company ls pursulng markeLs,
noL Lechnology.
2. Irustrat|ons w|th the Un|vers|ty - IÞ ass|gnment: ?ou LhoughL LhaL you owned Lhe lÞ on
whlch your company ls Lo be based. unless your research flndlngs are already ln Lhe publlc
domaln, Lhe company wlll mosL llkely need Lo negoLlaLe an lÞ llcense wlLh norLhwesLern.
Þlease remember LhaL your paLenL wlll be mosL llkely wlll be lnvalldaLed lf lL ls noL
approprlaLely asslgned Lo norLhwesLern. lL ls lmporLanL Lo make full dlsclosures of your
32
plans Lo Lhe lnsLlLuLlon's Lechnology Lransfer offlce before golng Loo far down Lhe road ln
sLarLlng Lhe company-especlally before deallng wlLh poLenLlal lnvesLors.
3. Irustrat|ons w|th the Un|vers|ty - CCI: ConfllcLs-of-lnLeresL revlew and approval enLall
more Lhan checklng a few boxes on a form. lull dlsclosure, ofLen ln face-Lo-face meeLlngs,
ls necessary.
4. ke|at|onsh|ps w|th bus|ness partners d|sso|ve. 8elng parLners wlLh people ln a buslness ls
noL Lhe same as belng ln research collaboraLlon wlLh Lhem. 1he pressures assoclaLed wlLh a
buslness may brlng ouL behavlors ln frlends and colleagues LhaL you wlsh you had never
seen. A frayed personal relaLlonshlp can be one of Lhe mosL dlfflculL Lhlngs Lo endure ln a
sLarLup, especlally when you are legally sLlll parLners wlLh Lhe lndlvldual (e.g. Lhrough sLock
ownershlp). lL ls Lhus essenLlal LhaL you undersLand Lhe moLlvaLlons, vlslons, and goals of
your co-founders, boLh on Lhe sclence and Lhe buslness sldes, before you enLer lnLo
parLnershlp wlLh Lhem.
3. ¥ou have to rep|ace the CLC ---aga|n and aga|n. uo noL plck your CLC merely by Lhe facL
LhaL he or she has had ºbuslness experlence." All Loo ofLen, Lhe buslness person ln a
nascenL company lacks Lhe rlghL experlence or skllls Lo run a sLarLup ln Lhe company's
parLlcular lndusLry. 8eplaclng Lhe CLC noL only Lakes a greaL deal of Llme, bus also may
dlsslpaLe any momenLum Lhe company has bullL as well as depress sLaff morale.
6. ¥our and the CLC's v|s|ons for the company are at odds. no maLLer who ls rlghL ln such a
slLuaLlon, lf Lhe lnvesLors declde Lo back Lhe CLC your vlslon ls unllkely Lo prevall. 1hus, you
may have Lo compromlse ºfor Lhe good of Lhe company" ln order Lo remaln a key player.
1he fundamenLal role of compromlse ln a young company's success ls a deparLure from Lhe
academlc culLure, whlch Lyplcally rewards lndependence. lf Lhe buslness ls Lo be successful,
you musL be wllllng Lo llsLen, communlcaLe effecLlvely, and LrusL Lhe experLlse and buslness
acumen of your parLners.
7. ke|at|onsh|ps w|th |nvestors sour. SomeLlmes lnvesLors, Lhlnk LhaL academlc dlscoverles
are much closer Lo Lhe markeL Lhan Lhey acLually are. 1hey may noL have Lhe paLlence for
Lhe ups and downs of an exLended perlod of 8&u. 1hls dlsconnecL may resulL from Lhe
lnvesLors' lack of famlllarlLy wlLh Lhe lndusLry (so-called ºdumb money") or Lhelr havlng
been glven an unreallsLlcally opLlmlsLlc plan for producL developmenL. lL ls, Lherefore, very
much ln Lhe academlc enLrepreneur's lnLeresL Lo be as reallsLlc as posslble abouL 8&u
Llmellnes when courLlng lnvesLors.
33
8. Verba| prom|ses have not been kept. ln Lhe heady days of formlng a new company, when
everyone ls exclLed abouL growlng a new venLure, a pleLhora of lLems are dlscussed and
many promlses are made. All Loo ofLen, however, promlses are noL documenLed. A year or
Lwo laLer, Lhose who made Lhem elLher clalm Lhey do noL remember dolng so or are
dlslncllned Lo make good on Lhem. Pandshakes are nlce, buL you should geL such maLLers ln
wrlLlng, especlally when relaLed Lo money or sLock.
9. Start|ng and grow|ng the company are consum|ng too much t|me. uo noL underesLlmaLe
how much Llme lL wlll Lake Lo form a new company. WlLh Lhe lnlLlal vlslon for Lhe company,
Lhe founder wlll be called on Lo lmparL LhaL vlslon Lo CLC candldaLes, poLenLlal lnvesLors,
and numerous oLher people durlng neLworklng acLlvlLles. 8ecause of Lhe hosL of
responslblllLles LhaL founders have, lL would be wlse Lo Lalk wlLh founders of oLher
companles regardlng Lhe amounL of Llme ls needed Lo devoLe Lo Lhe enLerprlse.
10. ¥ou fear |os|ng contro| of the company. CaplLal lnfuslons from ouLslde lnvesLors are a
double-edged sword. Cn Lhe one hand, Lhey are Lhe llfeblood LhaL allows Lhe company Lo
move forward, buL on Lhe oLher, Lhey resulL ln Lhe Lransfer of ownershlp lnLeresLs. ln an
equlLy-lnvesLmenL company, lL ls vlrLually lnevlLable LhaL Lhe enLlLy's founders wlll one day
become mlnorlLy shareholders. A modesL-lnvesLmenL company, however, has a much
greaLer chance of remalnlng under Lhe founders' conLrol. AL numerous Llmes ln Lhe llfe of a
company, cholces wlll have Lo be made wlLh regard Lo accepLlng Lhe money of oLhers. Pow
lmporLanL ls Lhe lnvesLmenL caplLal? ls lL worLh Lhe lnvesLors' lnpuL and posslble conLrol of
Lhe venLure?
Grow|ng a company requ|res strong res|||ence. 1emporary
setbacks are part of the startup process. ¥ou need to be
ab|e to bounce back.
1bomos MeoJe, lbu
ltofessot, cbemlstty
Nottbwesteto uolvetslty
34
Þers|stence |s probab|y the most |mportant part of entrepreneursh|p.
¥ou must be prepared to pers|st |n ach|ev|ng your goa| unt|| you
||tera||y can not phys|ca||y or menta||y do |t anymore. It |s a way of
||fe not a character tra|t. If your goa| has va|ue, you w||| reach |t
eventua||y.
Iosepb Moskol, lbu
loooJet
Nootex, loc.
Northwestern Lntrepreneur|a| kesources
norLhwesLern ls growlng a vlbranL communlLy of faculLy, sLudenLs and alumnl enLrepreneurs.
lor an up Lo daLe llsL of avallable commerclallzaLlon resources, please refer Lo
hLLp://www.lnvo.norLhwesLern.edu
About the Innovat|on and New Ventures Cff|ce
lounded ln 2010, 1he lnnovaLlon and new venLures Cfflce lnsplres and nurLures a
culLure of lnnovaLlon, brldglng norLhwesLern research wlLh lLs pracLlcal use for publlc
beneflL.
lor more lnformaLlon conLacL:
Ieff Coney, M8A
D|rector, Lconom|c Deve|opment
(e) [-coney[norLhwesLern.edu
(p) 847-491-4732
www.|nvo.northwestern.edu
doc_131347926.pdf