Description
This detailed explanation with regards to startup guide 2014 successfully starting a new company with university inventions.
2014
Startup Guide
Successf ul l y St ar t i ng a New Company Wi t h Uni ver si t y I nvent i ons
1 Colorado State University Ventures • Startup Guide
Introduction ............................................................................................................................................. 2
Purpose of this Guide...................................................................................................................... 3
Section I: Steps to Creating A Company
Based on University Inventions .......................................................................................... 4
1. Propose Company Idea ................................................................................................. 5
Invention Disclosure ......................................................................................................... 5
Commercial Viability and New Company Concept .................................. 5
2. Develop Strategy ................................................................................................................. 6
Standstill or Option Agreement ............................................................................... 6
Con?ict of Interest Management ............................................................................. 8
Preparing for a License Agreement ...................................................................... 8
3. Form the Company ........................................................................................................... 9
Found Company .................................................................................................................. 9
Obtain Invention Rights – License Agreement .......................................... 10
Business Plan ..................................................................................................................... 12
4. Start Up Capital and Early Stage Financing ............................................... 13
SBIR/STTR Grants........................................................................................................... 13
Bank Loans ........................................................................................................................... 13
Friends & Family, Angel Investors, and VCs ............................................... 13
University Community and Af?liates.................................................................. 14
Basic Research Grants ................................................................................................ 14
Strategic Partners and Customers ..................................................................... 14
5. Further Research and Development for Commercialization ............. 15
Product Development and Business Development .............................. 15
Continue Research at the University or Elsewhere ............................... 15
Section II: Considerations When Working
With CSU Ventures, the University, and Beyond .............................................. 16
1. University Relationship to the Inventor ........................................................... 17
Sponsored Research .................................................................................................... 17
Consulting Arrangements ......................................................................................... 17
Compensation for Inventors who are University Employees ......... 18
Section J of the CSU Faculty Handbook....................................................... 19
Effect of Startup Activities on Academic Evaluation ............................. 19
2. Startup Responsibilities .............................................................................................. 20
Legal Counsel ..................................................................................................................... 20
Selection of Board Members and Executive Of?cers .......................... 20
Differences between Academic and Industrial Research ................. 21
Concluding Remarks .................................................................................................................... 22
Table of Contents
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This Startup Guide is provided for informational purposes only and does not constitute legal
advice or opinion. Nothing contained herein supersedes any applicable federal or state laws,
CSU policies, or the terms contained in any contracts or agreements with CSU Ventures. The
content provided herein is subject to change and may be updated at any time.
2 Colorado State University Ventures • Startup Guide
Colorado State University enthusiastically supports entrepreneurship as an
integral part of a healthy academic and research enterprise, and necessary
to accomplish its mission as a modern land-grant university. CSU Ventures
is dedicated to supporting Inventors and company founders, promoting
regional economic development, and helping the University create a culture
of innovation and commercialization throughout the entire institution. The
importance of entrepreneurship to the University community is highlighted
by the active role that the Of?ce of The Vice President for Research (OVPR)
takes in extending University research through private engagement to
aggressively achieve regional, national, and global impact, which includes
developing the University’s Supercluster® model.
To facilitate movement of inventions from universities to the marketplace,
in 1980 the federal government passed the Bayh-Dole Act, which
allows universities to own patents on inventions created using federal
research funds. State governments also encourage public institutions to
commercialize research innovations and create startup companies
2
to assist
with state-based economic development. Today, faculty engagement in
patenting and licensing their discoveries has become an enduring national
movement due to the many bene?ts it brings to the faculty, the university,
private enterprise, and the community.
Companies emerging from the University bring new ideas and excitement
to academic research programs and the fruits of research are multiplied
when the utility of a scienti?c discovery is valued in the marketplace. New
companies based on the transfer of University technologies are a key driver
of economic development for the state of Colorado and the nation as a
whole.
As much as founding a startup company is usually new and challenging to
Inventors, it can be one of the most rewarding experiences an individual may
ever encounter. The excitement of seeing an idea coming to fruition and
possibly changing people’s lives for the better is palpable and reinforcing.
1
The term Inventor will be used to denote any University employee or Member (as de?ned in
Section J of the CSU Faculty Handbook, see page 14) who creates an invention through his or
her university responsibilities.
2
This guide will variously use the terms startup, startup company, new company, and company
to refer to a company founded for the purpose of further developing and commercializing a
University invention.
Introduction
A QUICK INTRODUCTION
TO CSU VENTURES
CSU Ventures now facilitates commercialization
of all inventions created at the University.
Although previously the Technology Transfer
Of?ce within the Colorado State University
Research Foundation (CSURF) also managed
University inventions, this of?ce has been merged
with CSU Ventures in order to consolidate all
commercialization functions within a single
organization.
CSU Ventures is a 501(c)(3) not-for-pro?t
subsidiary corporation of CSURF. Our mission
is to actively support and promote the transfer
of Colorado State University research and
innovations into the marketplace for the bene?t of
society.
CSU Ventures is dedicated to serving CSU
af?liated inventors and only CSU af?liated
inventors are eligible to receive CSU Ventures
assistance.
3 Colorado State University Ventures • Startup Guide
The purpose of this guide is to explain how long-standing University policy
and procedures are being applied in the area of University entrepreneurship
with the twin goals of facilitating the development of new technology
companies while preserving the unique nature of the University academic
research enterprise. We hope this guide offers a useful roadmap for
Inventors navigating CSU Ventures and University policies and procedures
during the early stages of company formation and helps to ensure that the
new company starts off on the right foot.
Although launching a startup creates a unique set of challenges for
Inventors, in many instances Inventors who create an early-stage invention
are in the best position to launch its development. Not only do they possess
unsurpassed technical knowledge about their invention but they often best
appreciate and express the promise it holds with matchless optimism and
passion. Inventors usually learn about building a business in real-time,
which requires them to “wear two hats,” acting both as University employee
and company founder. In the ?rst stages of company formation, these
dual responsibilities may lead to real or perceived con?icts of interest and
con?icts of commitment. In most cases, con?ict concerns can be effectively
managed when Inventors utilize CSU Ventures support and adhere to the
University policies and procedures, which are discussed later in this guide.
Purpose of this Guide
What constitutes an invention?
What is IP?
According to the CSU Faculty Handbook, Section
J, inventions are de?ned as “New, useful, and
non-obvious ideas and/or their reduction to
practice that result in, but are not limited to, new
devices, processes, and/or methods of producing
new and/or useful industrial operations and
materials; any produced article useful in trade;
any composition of matter, including chemical
compounds and mechanical mixtures; any
plant covered under plant patent laws, the Plant
Variety Protection Act, or other methods that
provide protection; biological materials including
cell lines, plasmids, hybridomas, monoclonal
antibodies, and genetically-engineered organisms
with commercial potential; many new designs in
connection with the production or manufacture
of an article including computer software, data
bases, circuit design, prototype devices and
equipment; and any improvement upon existing
processes or systems. An invention may be
copyrighted, patented, and/or trademarked.”
Intellectual property (IP) is a term referring to
a number of distinct types of creations of the
mind for which property rights are recognized.
Invention as de?ned above and IP are generally
interchangeable, although this guide uses only
invention for consistency’s sake.
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4 Colorado State University Ventures • Startup Guide
This section explains how CSU Ventures facilitates and supports the
development of startup companies based on research conducted at
the University. It also addresses the potential roles, considerations, and
opportunities for Inventors. To help Inventors better understand the process
of building a new company, the following sections outline ?ve major steps
for launching a startup company from within the University community.
These steps are: (1) Propose Company Idea, (2) Develop a Strategy,
(3) Form the Company, (4) Find Funding, and (5) Further Research and
Development for Commercialization. Although these ?ve steps signify
major milestones that almost all Inventors will meet when founding a new
company, every startup process is unique. No two experiences will be exactly
the same and success is not guaranteed.
Section I:
Steps to Creating a
Company Based on
University Inventions
5 Colorado State University Ventures • Startup Guide
1. Propose Company Idea
The ?rst step in the process is communicating the invention and
company concept to CSU Ventures, who will then discuss the opportunity
with the Inventor.
Invention Disclosure
The process formally begins with the Inventor disclosing his or her
invention to CSU Ventures staff. Frequent dialog with CSU Ventures is
encouraged at all stages of academic research (even before the research
begins!); an Invention Disclosure Form (IDF) will need to be submitted
to CSU Ventures. After further discussion, it may be decided that a
startup company is a viable option that maximizes value to the Inventor
and the University.
Commercial Viability and New Company Concept
CSU Ventures will work with the Inventor to make an initial assessment
concerning patentability, technical feasibility, commercial potential, and the
opportunity to create a new company based on the University invention.
When does CSU Ventures
encourage a startup company?
This will depend on many factors, including the
invention, the founding team, and the target
market. Platform technologies (inventions that
could support multiple applications and numerous
products) and disruptive technologies (inventions
that will lead to products that are radically
different from existing products) are often well
suited to startup companies. Inventions that
lead to more incremental improvements, have
a very specialized focus, or that can be readily
implemented into an existing service or product
line are often best licensed to existing companies
that have the commercialization infrastructure
already in place. CSU Ventures will also consider
whether the size of the target market is suf?cient
to support a new company.
Much of the decision will also be based on the
skills, dedication, and ambition of the founding
team. CSU Ventures recognizes that University
inventions are frequently early-stage and that the
Inventor is often in the best position to further the
invention’s development. If the Inventor displays
a real commitment to forming a startup company
and the invention is appropriate, CSU Ventures
will fully support the startup.
Managing confidentiality
Con?dentiality regarding inventions may be
important to startups for a variety of reasons.
A primary motivation is that startups based on
technological innovation need to protect their
invention rights. Con?dentiality is a concern in
this regard because inventions that have been
publically disclosed will not be eligible for full
patent protection (unless the patent application
is ?led before public disclosure). A con?dentiality
agreement will allow conversations to take place
without constituting a public disclosure. CSU
Ventures can advise on and execute
these agreements.
6 Colorado State University Ventures • Startup Guide
2. Develop Strategy
Although occasionally the path forward may seem clear, often more
information will be needed to identify the most promising business
opportunity and commercialization strategy. Arrangements can be made
for CSU Ventures to delay pursuing other licensing opportunities while
the Inventor gathers more information, identi?es likely business partners,
and further assesses the commercial opportunity. The Inventor should also
notify his or her Department Head/Chair and begin the con?ict of interest
management process with the University. At the end of this stage, the
Inventor and CSU Ventures will have enough information to make a “go/no
go” decision on the startup.
Standstill or Option Agreement
As University policy requires invention rights to be assigned to the
University (see Section J of the CSU Faculty Handbook) and then transfers
these rights to CSU Ventures, the new company will need to obtain from
CSU Ventures the legal rights to further develop and commercially use the
invention. Ultimately, this will be accomplished using a License Agreement;
but in the early stages, other formal arrangements with CSU Ventures
can be worked out. These include a Standstill Agreement and an Option
Agreement. The end result of each is that CSU Ventures will agree to reserve
the intellectual property rights for the Inventor’s startup company for some
limited period of time, and the Inventor will agree to further mature the
company idea.
A Standstill Agreement is one available strategy for the Inventor at this
point in the process. As per the Standstill Agreement, during the de?ned
standstill period, CSU Ventures agrees not to license the invention to
another party while the Inventor agrees to further develop the business
opportunity (with CSU Ventures’ help). A Standstill Agreement is an
appropriate choice when there are still too many uncertainties to justify
the time and expense of forming a company. At the end of the Standstill
Period, the Inventor should be able to provide a basic outline of the business
opportunity and have formulated a strategy to pursue it. A standstill period
typically is six months in duration but may be in?uenced by patenting
deadlines.
Another strategy would include an Option Agreement; this agreement
requires the company to be legally formed (see Section 3, Form the
Company). In this case, the new company will already exist but will not be
ready to negotiate a License Agreement. The Option Agreement provides the
How long does it take
to get a patent?
Obtaining a patent takes many years. After a
provisional application is ?led, a regular U.S.
application and any foreign applications must be
?led within one year of the provisional ?ling date.
Once a regular U.S. application is ?led, it usually
takes approximately two years before the USPTO
begins its review. Once the application is under re-
view, it can take another one to three years before
the patent issues, depending on the outcome of
the examination of the application. After the patent
is issued, it will be in force for 20 years from the
priority ?ling date (typically the date of the ?rst ap-
plication ?led). During that time, maintenance fees
must be paid at 3½, 7½, and 11½ years to keep
the patent in force.
If foreign rights are also pursued through the ?ling
of a PCT application, follow-on applications in
each foreign country must be ?led within 2½ years
(30-31 months) from the ?ling date of the provi-
sional application. Then each foreign application
is examined separately, a process that can take
anywhere from one to ?ve years before the foreign
patent is issued.
7 Colorado State University Ventures • Startup Guide
company with an Option to an exclusive License Agreement. The Option
may be exercised by the company at any time prior to the expiration of the
Option Agreement and assures the company that CSU Ventures will not
license the invention rights to another party while the Inventor’s company
continues to develop (e.g. further re?nes a business plan, looks for funding,
assembles a business team). Like a Standstill Agreement, the Option
Agreement preserves the startup’s ability to license the invention. However,
an Option Agreement provides a stronger guarantee, as the decision to
enter negotiations for a License Agreement is solely up to the new company
if it meets the basic obligations outlined in the Option Agreement. A
startup may also claim that it has “exclusive rights” to the invention during
the Option Period, which is often critical when seeking investors and/or
strategic partners.
A typical Option Agreement generally provides the startup with a six month
time frame within which CSU Ventures will not license the invention
rights to others. When the new company ful?lls the Option Agreement
requirements, it can exercise the license Option. If the new company does
not ful?ll the requirements of the Option Agreement, CSU Ventures may
either consider granting additional time or may decide to pursue other
licensing alternatives.
It is important to note that the patenting process has certain timeframes
and windows of opportunity for ?ling patent applications. As such, Option
Agreement and Standstill Agreement timelines will need to take into
account relevant patent deadlines so that all parties can make an informed
decision when considering a commitment to the signi?cant expense of
patent prosecution. (The approximate cost of a single U.S. non-provisional
patent application ?ling may typically be in the range of $10K-$15K plus
an additional $5K if patents in other countries are desired. Note that these
costs can vary and do not include the total costs to see a patent through to
issuance, which frequently amount to $20K-$40K or more.)
Alternatively, if considered strategically appropriate, the startup can
go directly to a License Agreement. Neither the Standstill nor Option
Agreements are required, although often the Inventor will want the time
provided by these agreements to further evaluate the business opportunity
and prepare a suitable commercialization strategy.
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8 Colorado State University Ventures • Startup Guide
Conflict of Interest Management
While the University supports Inventor-founded startups, the University
has policies designed to ensure that potential individual and institutional
con?icts of interest are managed properly. First and foremost, all Inventors
have an obligation to the University to report their intention of becoming
involved in the company. Inventors must work with their Department
Head/Chair and their college’s Research Associate Dean to address potential
con?icts of interest and/or commitment. A Roles and Responsibility Survey
(i.e., disclosure) must be submitted in order to evaluate the potential for real
or perceived con?ict of interest and/or commitment. Con?ict of interest
and/or commitment concerns are most frequently mitigated through the
development of a Con?ict of Interest Management Plan with the University.
Additional considerations may apply such as external sponsor noti?cation
and/or amendment of approved regulatory protocols, as applicable.
CSU Ventures will not enter into a License Agreement with a startup
company until the University is satis?ed that any potential con?icts of
interest are being appropriately managed.
Preparing for a License Agreement
Before entering negotiations for a License Agreement (either initially or at
the end of a Standstill or Option period), the Inventor will need to lay a
strong foundation for the startup. CSU Ventures is available to assist and
offers multiple resources for this purpose. In particular, CSU Ventures
highly recommends that the Inventor:
• establish a defned role for the Inventor,
• prepare a business and/or technology development plan,
• recruit an experienced business driver and/or management team,
• determine needs and formalize facilities (space and/or equipment)
arrangements, and
• obtain both initial funding and solid prospects for accessing additional
capital as needed to commercialize the invention and execute the
business plan.
CSU Ventures will discuss the proposed startup company with the Inventor.
Provided that a reasonable business case exists, the decision will be made to
found a company and GO FOR IT!
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9 Colorado State University Ventures • Startup Guide
3. Form the Company
Once the decision has been made to pursue a new company
commercialization strategy, the Inventor will found the company and
assemble a suitable team of advisors, of?cers, and employees. The company
will then secure its legal rights to the invention using either an Option or a
License Agreement as discussed previously. It is also generally necessary to
formalize a business plan that will guide company strategy and be used to
attract outside investment.
Found Company
CSU Ventures staff will collaborate with the Inventor and other proposed
founders to determine if establishing a new company is the optimal
approach and assist with determination of the appropriate level of founder
participation in the new company. At a point when the founders, including
the Inventor, and CSU Ventures staff determine that the proper blend of
skills, knowledge, experience, and personalities are evident in the startup
team, a new company will be formed by the founders at their own expense,
but with the assistance and advice of CSU Ventures personnel if desired.
Founding members are responsible for properly establishing the company
as a legal entity. Although certain initial steps can be performed quickly and
inexpensively online, the details of company formation are complex and
can dramatically in?uence a company’s decision-making for years. When
considering the startup’s legal entity, the founding team should consider the
current and future needs of the business in regards to fundraising, use of
equity, taxes, accounting, and corporate governance.
Consequently, CSU Ventures strongly recommends that the founders seek
professional legal counsel from the outset. Ultimately, the selection of law
?rm, corporate structure, and other details of company formation are
decisions for the founding team to make. CSU Ventures has knowledge and
experience with several law ?rms and is available to assist in the process of
company formation. In particular, CSU Ventures should be consulted when
deciding upon a corporate structure, as not all structures are suitable for the
terms typically required in licenses to University inventions. For example, S-
or C-corporations are often preferable to limited liability companies (LLCs)
when CSU Ventures is to acquire equity in the new company.
What does it mean
to be a company founder?
Generally, founders are considered to be the
individuals (or legal entities) that are assigned
ownership of the company upon its formation.
Inventors who form a startup company will
therefore be part of the founding team, which
may also include other persons such as investors,
entrepreneurs, and other strategic partners.
Although most companies will issue equity to
other persons (or organizations) subsequent to
the founding event, future equity holders will not
be considered founders.
It is also important to realize that founders do
not need to be involved in the day-to-day
operations of the company. Although the
founders’ roles are typically more active in the
beginning, most companies will utilize consultants
and/or hire executives and other employees to
manage many aspects of the business. This
allows the founders to contribute their time and
expertise to the company as their interest and
other obligations allow.
10 Colorado State University Ventures • Startup Guide
Obtain Invention Rights – License Agreement
The new company will need to obtain rights to use the invention created
by the Inventor as these rights will be held by CSU Ventures. It is advisable
to designate someone other than a CSU employee to negotiate with CSU
Ventures for a license to the invention rights for the new company in order
to avoid actual or perceived con?ict of interest or commitment. This license
must be put into place prior to any use of the invention by the startup.
License Agreements vary in scope and complexity. The Bayh-Dole Act,
University policy, and prudent University risk management provide a
simpli?ed framework and standard provisions for License Agreements
with CSU Ventures. These standardized, non-negotiable terms include the
following:
• the University’s retention of the right to practice the invention for
non-pro?t research and educational purposes (thereby allowing the
Inventor to continue his or her academic research),
• the University’s right to publish research results,
• the requirement that the company indemnify the University and
CSU Ventures,
• the absence of warranty and provisions that indemnify the company, and
• limitations on the use of CSU Ventures, and the University’s names.
Other provisions of the License Agreement, while negotiable, have been
standardized by CSU Ventures taking into account the average level of
technology maturity, legal expenses incurred, and typical R&D foundations
(e.g. prior federal funding) leading up to the invention. These terms include
but are not limited to:
• felds of use,
• the right to grant sublicenses,
• business development diligence,
• commercial milestone requirements,
• the company’s right to prosecute patent applications on the invention,
and
• the timing of fees, payments, reports, and royalty payments.
Most startup License Agreements are exclusive, meaning that CSU Ventures
cannot grant another party the same access to the licensed invention rights.
The scope of the license can be broadly de?ned to include all applications
and industries if the company can substantiate that need. Otherwise
the de?nition can be narrowed to speci?c applications, markets, and/or
geographic regions, according to the company’s business plan. In most
cases, CSU Ventures can be ?exible to accommodate the company’s needs,
although CSU Ventures must also consider how best to maximize the
impact of the invention, which may mean licensing to other entities those
applications that the Inventor’s company does not plan to pursue.
What is equity?
Put simply, equity represents ownership in the
company. Equity is typically counted by shares
or membership units, but the actual number of
these units is less important than the percent of
ownership. The greater the percent of ownership,
the more in?uence the equity holder has in
company decisions and the larger his or her share
of company value and pro?ts.
In the early stages of a startup, equity may be
the primary currency available to the company
when seeking early investment, negotiating
licenses, compensating executive management,
etc. Although the Inventor should expect that the
company will need to offer signi?cant amounts
of equity several times over its growth cycle, it is
important that equity not be given away casually
or at too low of a price. In the beginning, the
Inventor is advised to consult with CSU Ventures
or other trusted advisors before making large
offers of equity to others.
11 Colorado State University Ventures • Startup Guide
In exchange for a license to the commercial invention rights, the License
Agreement will typically require the new company to provide a percentage
of equity to CSU Ventures and pay a nominal cash fee. As a result, CSU
Ventures receives an ownership interest in the startup. For example, if the
startup is formed as a corporation, CSU Ventures receives stock in the
corporation. The University views equity as an important portion of the
compensation from the startup company for the considerable investment
and support that the University has made in the invention. It also allows the
usually cash-strapped startup company to avoid paying the large upfront
licensing fees that would otherwise be required. The percentage of equity
that CSU Ventures receives in a new company under a License Agreement
is typically 5-10%, carries voting rights, and is usually subject to dilution
(as is the Inventor’s equity). Any revenue received by CSU Ventures from
an equity cash-out is treated the same as royalties and distributed as per
University policy (see “Section J of the CSU Faculty Handbook ” for more
information).
The Inventor should anticipate that the new company will not generate
revenue quickly. It is common for new companies to take considerably
longer and need more initial capital than expected to achieve an early
revenue target. Given extensive experience with startups, CSU Ventures also
understands this and follows three principles to support startup growth
when negotiating the ?nancial terms of the License Agreement.
• First, CSU Ventures wants to see some level of fnancial commitment of
the founding team to the company.
• Second, CSU Ventures will not seek signifcant funds from the company
during the development period. Large fees (with the exception of patent
reimbursements and reasonable milestone fees) are seldom due prior to
product/service sales or external investments into the company of several
hundred thousand dollars, including government funding.
3
• Third, License Agreements are amended from time to time. CSU
Ventures recognizes that the new company is still nascent at the time
the license is executed and will need ?exibility as it progresses towards
being a successful business. As long as the startup is displaying true
commitment and open communication, CSU Ventures is usually willing
to modify the License Agreement to accommodate the changing needs of
the company.
While CSU Ventures is committed to serving the best interests of the
University, CSU Ventures works hard to ensure successful negotiations are
characterized as win-win situations. Although it is important for the startup
to secure its own legal counsel to assist with company formation and
incorporation, the standardized CSU Ventures startup License Agreement
template is well established and is similar in form to those used at other
institutions. As a result, negotiations should be direct and simpli?ed.
3
This does not preclude the University from appropriate reimbursement of expenses incurred through University specialized
facilities or space use, sponsored agreements, etc.
What is dilutive financing?
What is non-dilutive financing?
Dilutive ?nancing are methods by which the equity
in the company is exchanged for cash, goods, or
other services. Essentially, an investor contributes
to the company now and defers compensation
until later, when the equity shares have (hopefully)
increased in value. These investments are termed
“dilutive” because the ownership interests of
the previous shareholders (e.g. founders, other
investors) are decreased (when expressed as
a percentage) when stock is issued to a new
investor. However, it is important to realize that
dilutive ?nancing can still increase the value of the
previous shareholders’ interests.
Non-dilutive ?nancing are methods by which
the company can raise money or receive goods
or services without giving up equity in return.
These investments can be harder to ?nd but
offer the advantage of increasing the value of
the shareholders’ equity without diluting their
ownership percentage. Government grants are
an example of non-dilutive ?nancing available to
small technology companies.
12 Colorado State University Ventures • Startup Guide
An Inventor’s chosen role and equity in the new company should not
adversely affect the process or the outcome of the negotiations. Even if
the Inventor is actively involved (in terms of an of?cial company role) or
?nancially vested, it is advised that he or she does not directly engage in
the negotiations or advocate for any speci?c terms which would put the
Inventor in direct con?ict with his or her responsibilities to the University.
The process from invention disclosure to founding the company and
execution of the license agreement can take anywhere from weeks to
months. The more closely aligned the Inventor’s expectations are to
CSU Ventures’ template License Agreement, the faster the time to license
execution. CSU Ventures’ standard license framework for startups represents
an Inventor-friendly alternative to the license typically offered to more
mature companies.
Business Plan
A business plan is a formal document that illustrates the startup’s business
model and outlines the near- and long-term strategy of the company.
Although business plans are continually revised, these documents are
invaluable for attracting outside investment and may also be used to
guide daily decision-making. For these reasons, CSU Ventures strongly
recommends that a startup develop a solid, professional business plan, or
at least a well-developed executive summary. In the process of developing
the business plan, the founding members will develop and communicate
the startup company’s value proposition and think beyond the invention
and towards the actual business strategy with regards to the operations,
marketing, and ?nancing.
Typically, business plans are drafted by an experienced entrepreneur either
in the company or engaged as a consultant. With local resources such as
the Innovation Center of the Rockies, Rocky Mountain Innosphere, the
CSU School of Business and others, CSU Ventures can assist the founding
team to ?nd advisors with the expertise to formulate and create an effective
business plan. Contact CSU Ventures for more information.
What is a value proposition?
What is a business model?
A value proposition is the tangible bene?t that a
customer receives by using a business’s products
or services. Without a clear value proposition,
it is unlikely that a customer would choose to
purchase a product or service and therefore
unlikely that a business would succeed. Although
an invention may enable a new capability or
product, there will need to be a clear value
proposition for the invention to be successfully
commercialized.
A business model describes the manner in
which the new company will operate and bring
in revenue. Example decisions addressed in a
business model include:
• Will sales be direct to the user or through a
distributer?
• Will products be sold or licensed?
• What level of product support will be offered?
• Will users be given free access and fees
collected for advertising?
13 Colorado State University Ventures • Startup Guide
4. Start Up Capital &
Early Stage Financing
Every new company needs money. Fortunately, there are a variety of
funding sources available to startup companies emerging from institutions
of higher education. Understanding, selecting, and pursuing the appropriate
?nancing opportunities requires a mix of sophistication, experience,
persistence, and good fortune. The amount of time, effort, and talent
required for ?nding funding should not be underestimated and can often
be arduous.
SBIR/STTR Grants
Small Business Innovation Research (SBIR) grants, Small Business
Technology Transfer Research (STTR) grants, and other non-dilutive
sources of funding provide excellent opportunities for startups as they
will not decrease the percentage of founder ownership of the company.
However, SBIRs/STTRs are only offered in certain technology areas and at
speci?c times of the year.
Bank Loans
Another non-dilutive source of funding, a bank loan may be an additional
possibility for startup capital. However, early stage technology-based
startups are usually considered too risky to qualify for bank loans. Moreover,
typically banks will not lend to new companies without two to three years of
?nancial statements and proof of owner’s equity in the business. Almost all
bank loans will require personal guarantees and collateral to back the loans.
Home equity is one common form of bank collateral.
Friends & Family, Angel Investors, and VCs
So-called “friends & family” (FF), angel investors, venture capitalists (VCs),
and other sources of dilutive investment offer a means to trade equity in the
company in exchange for funding. Angels and VCs provide access to much
larger amounts of funding than other sources (roughly $0.5M-$2M and
$2M-$20M, respectively) and play a key role in many successful technology
startup companies because, in addition to capital, they often provide access
to experienced executive management and substantial business networking
resources. In return, investors of this type will expect an equity share in
the company and will also frequently require some degree of control and
oversight of company operations, such as a seat on the company’s board
of directors. Although this may seem like a high price to pay, if carefully
negotiated, these investments allow the company to grow its operations and
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14 Colorado State University Ventures • Startup Guide
increase its chances of success which in turn raises the value of all company
shares, including the Inventor’s. Investments of this type are a long term
relationship and care should be taken from the outset of negotiations.
University Community and Affiliates
There are also several ways in which the University and CSU Ventures may
assist a startup with ?nancing. Example programs are University seed grant
programs and the Bioscience Discovery Evaluation Grant Program, both
of which provide small non-dilutive funding for research and other early
stage company activities. Another option is the Commercial Opportunity
Investment Program (COIP), which offers a small convertible note up to
approximately $20,000 (depending on availability of funds) with ?exible
repayment options.
Basic Research Grants
External grants to the Inventor’s university laboratory for basic research
may continue to yield inventions of value to the startup. These inventions
may be licensed to the Inventor’s startup company in the same manner that
CSU Ventures licenses University inventions to other companies.
Strategic Partners and Customers
Companies, organizations, individuals, and other entities that may have
a vested interest in the success of the startup company are other possible
sources of ?nancing. For example, a large company selling a complementary
product may support the startup if the startup’s success would in turn boost
demand for the company’s own products. Also, potential customers that
would bene?t from a startup’s product may be willing to invest or pre-
purchase products. So-called “early adopters” of a startup’s product can also
offer invaluable feedback and credibility to the new company - bene?ts that
often far outweigh any cash contribution made by the early adopter.
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15 Colorado State University Ventures • Startup Guide
5. Further Research
and Development for
Commercialization
Most inventions arising from University research are early stage and require
further research and/or product development before the startup company
can begin generating revenue. There are several possible avenues that a
startup may take to accomplish this task. In addition, signi?cant time and
energy will need to be devoted to business development activities, which
seek to build vital relationships with a diverse array of investors, strategic
partners, and other stakeholders.
Product Development and Business Development
A startup company should plan to invest signi?cant resources in developing
its product as well as its business. Product development may include
further research but will almost certainly include product engineering,
design, and scale-up activities that often require specialized expertise.
Business development will generally focus on building relationships with
prospective customers, clients, investors, strategic partners, and other key
stakeholders. Although many Inventors have a tendency to focus on the
technical challenges facing a startup with respect to the product, business
development is a practiced art that often requires just as much time and
effort and is at least as critical to the ultimate success of the business.
Continue Research at the University or Elsewhere
A company may elect to perform all or some of its product development
research in its own company of?ces and/or laboratory. The company will
also need appropriate facilities for business development activities. Space for
both product and business development may be rented from the University,
a local incubator such as the Rocky Mountain Innosphere (RMI), or
anywhere else considered appropriate by the founding members. It is often
possible to utilize the Inventor’s university lab space for company activities.
CSU Ventures may also be able to offer space in the Research Innovation
Center (RIC) for approved companies, which is equipped with both lab and
of?ce space. Arrangements to use University space, including the Inventor’s
university laboratory and the RIC, require payment and are typically
formalized through a Master Research and Development Agreement
between the University’s Of?ce of Sponsored Programs and the company,
although other lease arrangements may be possible.
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16 Colorado State University Ventures • Startup Guide
Once the startup company has been founded, the Inventor will to some
extent be living in two worlds: that of the startup company and that of a
CSU faculty member.
This section discusses aspects of balancing these dual roles, including the
relationship of the startup company to the Inventor’s academic lab, as well
as how an Inventor may receive compensation from both CSU and the new
company. This section also provides some insight into typical operations
within a new company based on CSU research.
Section II:
Considerations When
Working With CSU Ventures,
the University, and Beyond
17 Colorado State University Ventures • Startup Guide
1. University Relationship
to the Inventor
Sponsored Research
Under proper disclosure, a current Con?ict of Interest management plan,
and an active Sponsored Research Agreement (SRA), the University will
typically permit companies in which the Inventor has an ownership interest
to fund sponsored research in his or her University laboratory. Given the
potential con?ict of interest this situation presents, con?ict of interest
management is paramount and proper safeguards will be necessary.
The standard industry SRA provides a mechanism for the sponsor (e.g. the
Inventor’s startup company) to secure rights to any inventions resulting
from the research (including patent rights, copyrights, and data). This
agreement also includes provisions protecting the ability of the involved
University researchers to publish the results of the research, subject to
certain review rights of the sponsor.
When an ongoing research relationship between the startup and the
University is expected, a Master Research and Development Agreement
(MRDA) is the preferred mechanism to sponsor research at the University.
The MRDA enables the startup to negotiate all of the standard SRA terms
upfront, contains provisions for use of university facilities (if desired), and
allows each subsequent research project to be easily submitted as a Task
Order without the need for repeated negotiations or excessive paperwork.
Consulting Arrangements
The opportunity for faculty and staff to accept occasional professional
consulting engagements helps to disseminate knowledge and promote
technological advancement. This is as true when consulting for an
Inventor’s own startup as it is for organizations unaf?liated with the
University. As long as University policy is followed, an Inventor may enter
into a paid or unpaid consulting relationship with his or her own startup.
University policy requires that, prior to engaging in any consulting or
business activity with a third party, including a company they have founded,
University employees should make a full written disclosure (excepting the
amount of compensation) to his or her immediate supervisor. In addition,
University obligations must be made clear to the other party, particularly
with respect to intellectual property created by the Inventor.
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While CSU Ventures cannot negotiate the consulting agreement between the
Inventor and the company, CSU’s General Counsel can provide guidance on
these matters to help ensure compliance with University policy, including:
• Invention ownership and rights,
• Use of University facilities, personnel, and other resources,
• Use of University name, and
• Use of University students.
In particular, inventions in which the University may have an ownership
interest may not be transferred by University employees while engaged
in outside consulting or part-time employment. Accordingly, University
employees should not assign or agree to assign their ownership interest
in any invention of which they are an inventor to any third party unless
they have disclosed the invention to CSU Ventures and received a letter
of determination by which the University disclaims ownership to the
invention. Clauses in consulting agreements (including clauses on
con?dentiality and ownership/transfer of inventions) must be consistent
with the policy of the University and with University commitments under
sponsored research agreements as well as federal law. Consulting agreements
should also contain the company’s acknowledgement that to the extent
the consulting agreement is incongruent to the University employee’s
obligations to the University, the employee’s obligations to the University
shall prevail.
Compensation for Inventors who are
University Employees
Colorado State University faculty or staff who produce inventions that are
licensed to their own startup company are likely to receive personal income
and other compensation from at least three places: 1) from the University,
2) from the company licensing the invention rights, and 3) from CSU
Ventures.
An Inventor receives a salary and bene?ts from the University for his or her
research and academic activities. If his or her invention is licensed into a
startup company, the Inventor will likely receive ownership in the company
and may also receive consulting fees or salary from the new company in
exchange for their time and effort on its behalf. In addition, the Inventor is
entitled to receive a portion of the net licensing income (including equity
cash-outs) paid by the company to CSU Ventures, in accordance with
Section J of the CSU Faculty Handbook (see next section).
Each of these separate sources of income provides compensation for
separate and distinct contributions the Inventor has made or will make. The
Inventor may also be a PI on Sponsored Research Agreements between their
company and his or her University laboratory, subject to con?ict of interest
and/or commitment considerations.
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19 Colorado State University Ventures • Startup Guide
Section J of the CSU Faculty Handbook
Section J is the portion of the CSU Faculty Handbook that addresses
ownership rights of all forms of inventions created at the University or by
University employees. Section J de?nes Members as “University academic
faculty members, administrative professionals, state classi?ed staff, student
employees, and anyone af?liated in a professional capacity with the
University and using University resources who are inventors and creators
of inventions, academic materials, publications, and other creations.” In
particular, Members assign ownership rights to inventions developed in
the course of their University research responsibilities to the University,
which then transfers those rights to CSU Ventures pursuant to an operating
agreement.
Section J also addresses how revenue resulting from University-created
inventions is distributed. After recoupment of all patent, licensing,
marketing, and other commercialization expenses paid by CSU Ventures,
Section J provides that all ?nancial consideration received under a
license agreement to patentable inventions (including proceeds from the
liquidation of equity received) be distributed as follows:
• 35% is paid to the Inventors personally (essentially as supplemental
income);
• 15% is paid to the University’s Offce of the Vice President for Research;
• 10% is paid to the college within the University that contains the Inventors’
departments; and
• 40% is paid to CSU Ventures.
Effect of Startup Activities on Academic Evaluation
Within the University community there have been ongoing discussions
about the effect of the Inventor’s commitment to their new endeavor and
the impacts it may have on tenure and performance evaluations. Inventive
activity is generally encouraged at the University and is considered to
fall within the public service mission of the University. Nonetheless, at
many U.S. research universities, inventive activity is not always an explicit
criterion in the promotion and tenure process. Accordingly, an Inventor
should talk to departmental colleagues and proactively contact his or her
Department Head/Chair to assess the implications of involvement with
entrepreneurial activities. CSU Ventures can assist with de?ning roles and
business structures to create a situation that allows an Inventor to ful?ll his
or her academic responsibilities with minimal disruption.
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20 Colorado State University Ventures • Startup Guide
2. Startup Responsibilities
Legal Counsel
Although CSU Ventures may be able to offer limited legal assistance to a
startup in the beginning, the Inventor should realize that a new company
will require its own legal counsel and that these costs will be the responsibil-
ity of the company.
In addition to the paperwork involved in forming a new legal entity, a
startup company should consider legal counsel for many of its ongoing
operations, including: employee and consulting agreements, research
and development agreements, partnering arrangements, freedom-to-
operate analyses, tax and liability issues, board resolutions and actions, and
incentive stock option plans. The Inventor should also be aware that the cost
of obtaining a patent will be borne by the company (and not CSU Ventures)
and that these costs will amount to considerably more than just the upfront
?ling fees before a patent is actually granted by the USPTO.
Selection of Board Members and Executive Officers
Unless requested by the Inventor, CSU Ventures will generally not play a role
in matters of company formation, founder ownership and vesting, founder
duties, and other company governance issues such as board composition
and voting rights (except as may be pursuant to the license agreement
with CSU Ventures, see below). However, it is important to ensure that the
structure of the company is one amenable to growth, which typically means
external investment, additional shareholders and securing the services of
key managerial and technical talent.
Many startup companies will initially consist of founders, a board of
directors, executive management, and often outside advisors. The board of
directors is a body of elected or appointed members who jointly oversee
the activities of the company. Initially, it is up to the founders to select the
board members, although CSU Ventures License Agreements with University
startups typically require that CSU Ventures be granted a voting board seat
on the company’s board of directors. However, future investors will generally
also require board representation and it is anticipated that as the company
proceeds through multiple rounds of ?nancing, the CSU Ventures board
seat will be relinquished at the appropriate point in time. The number of
shareholders, the split of the controlling interests, and the goals, interests,
and personality dynamics of the shareholders and board members are all
strategic factors that can have lasting impact on the value and sustainability
of a company – each of these should be given due consideration when
founding the company and establishing a board of directors.
Death and taxes
While incorporation allows companies to “cheat
death” and survive in perpetuity, all companies
must still pay taxes. Some company structures
allow taxation to be passed through to the owners
but others do not. Even before a startup company
begins earning revenue, taxes must be ?led
annually. (In the beginning, however, a startup
company may even lower the personal tax burden
of the Inventor!)
Of course, it is up to the company (and not CSU
Ventures) to ensure that all tax obligations are
met. Consultation with legal counsel and an
accounting ?rm is strongly advised.
21 Colorado State University Ventures • Startup Guide
It is often desirable for an outside scienti?c advisory board to be recruited
and established. Scienti?c advisory boards are comprised of scientists
and other technical experts who provide objective advice on technology
development strategies and lend credibility to the startup company.
Nearly all startups seek quali?ed executives (e.g., CEO, COO, CFO)
who have the experience, skills, and time to perform the everyday duties
vital to startup success. Assembling an appropriate team of talented and
experienced executives is of critical importance to the startup’s credibility
and viability for long term success. Some recommended key assets would
include: a business driver who can communicate the mission and vision
of the company to potential partners and investors, an industry veteran
with experience and an established network, and someone experienced
with business operations and familiar with the ?nancial and accounting
details of the new company. These recommended qualities can be found
in one or many people, and it is the Inventor’s responsibility to form the
team according to the company’s needs. However, if desired, CSU Ventures
can assist and has a broad network of potential executives across Northern
Colorado and access to a variety of networking groups from which to
recommend talent. Also, as investors and acquirers are sensitive to the issue
of stock dilution, CSU Ventures recommends that the founders establish a
stock option “pool” at the time of incorporation, usually around 15%, which
will be used in the future as incentive for key employees and managers.
Differences between Academic and
Industrial Research
Most inventions licensed by a startup company will require further
development, and the Inventor should be aware that the research activities
of the new company will need to be conducted in a different manner than
typical academic research.
First and foremost, commercial research differs from academic research in
that the desired outcome is a proprietary, marketable product or service.
To reach this desired outcome, commercial research is typically structured
as a series of short-term, practical deliverables or milestones with the
expectation that the pace of progress will be very rapid. Since the ?nancial
support of the company is often dependent on reaching each milestone,
the new company will be operating under considerable pressure to meet
the speci?ed timelines. In this environment, commercial research is
generally very practical and typically affords few opportunities to advance
more fundamental lines of inquiry, which are usually best left to academic
research.
Another difference is that company strategy may include the development
of proprietary trade secrets and know-how, meaning that it may not always
be in the company’s best interest to publish research results. Since all
What is a stock option pool?
A stock option pool is an amount of a startup’s
common stock reserved for future issuances to
employees, directors, advisors, and consultants.
The option pool is formalized via a written plan
in which the startup designates a speci?c portion
of its authorized common stock to be issued as
compensation for the above types of services.
Having a formal stock option pool makes it
easier for current and future equity holders to
calculate the percent ownership that they will have
after a startup receives the anticipated services
requiring equity compensation (i.e. all parties can
see how their interests are likely to be diluted).
Greater clarity in this regard is a signi?cant
advantage when seeking additional investment or
executive management and CSU Ventures highly
recommends that a startup considering forming a
stock option pool at the outset.
22 Colorado State University Ventures • Startup Guide
sponsored research agreements (SRAs, MRDAs, etc.) that the University
negotiates will reserve the right to publish research results, a startup
company will need to decide what product development may be done
in the Inventor’s university lab and what will need to be done elsewhere.
In making this decision, a company must bear in mind that even if the
Inventor is willing to forego publication of research conducted in his or her
laboratory, the University requires publication of work involving graduate
students, post-docs and other researchers whose careers are bene?ted by
such activities.
It should also be noted that the best practices in the academic laboratory
may not always be suf?cient in a commercial setting. One example of
this is laboratory notebooks. A startup company based on technology
and innovation will often use invention rights as the cornerstone of the
company and laboratory notebooks play a key role in supporting those
rights (particularly patent rights), especially during litigation. As such,
companies will want to ensure that their researchers are keeping accurate
laboratory notebooks in accordance with best industry practices in order to
maximize the ability of the invention rights to withstand intense scrutiny
from investors and potential competitors. Put another way, the Inventor
should realize that laboratory notebooks in commercial research need to
meet the needs of attorneys as well as those of the researchers.
Concluding Remarks
Founding a new company with University inventions can be an exciting and
rewarding endeavor. CSU Ventures hopes that this Startup Guide will serve
as a useful overview of this process and will alleviate some of the confusion
that Inventors often experience in the beginning. Although each startup
opportunity is unique and will require some amount of ?exibility, the
steps and considerations outlined herein are generally applicable to most
startups founded with University inventions. CSU Ventures is always happy
to discuss opportunities with Inventors and to provide guidance on how to
best proceed given the individual requirements of each startup company.
This Startup Guide is meant to be supplemental to, and not a replacement
for, frequent dialog with the University and CSU Ventures. We look forward
to the next discussion and wish you “Good luck!” in the meantime.
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doc_785021989.pdf
This detailed explanation with regards to startup guide 2014 successfully starting a new company with university inventions.
2014
Startup Guide
Successf ul l y St ar t i ng a New Company Wi t h Uni ver si t y I nvent i ons
1 Colorado State University Ventures • Startup Guide
Introduction ............................................................................................................................................. 2
Purpose of this Guide...................................................................................................................... 3
Section I: Steps to Creating A Company
Based on University Inventions .......................................................................................... 4
1. Propose Company Idea ................................................................................................. 5
Invention Disclosure ......................................................................................................... 5
Commercial Viability and New Company Concept .................................. 5
2. Develop Strategy ................................................................................................................. 6
Standstill or Option Agreement ............................................................................... 6
Con?ict of Interest Management ............................................................................. 8
Preparing for a License Agreement ...................................................................... 8
3. Form the Company ........................................................................................................... 9
Found Company .................................................................................................................. 9
Obtain Invention Rights – License Agreement .......................................... 10
Business Plan ..................................................................................................................... 12
4. Start Up Capital and Early Stage Financing ............................................... 13
SBIR/STTR Grants........................................................................................................... 13
Bank Loans ........................................................................................................................... 13
Friends & Family, Angel Investors, and VCs ............................................... 13
University Community and Af?liates.................................................................. 14
Basic Research Grants ................................................................................................ 14
Strategic Partners and Customers ..................................................................... 14
5. Further Research and Development for Commercialization ............. 15
Product Development and Business Development .............................. 15
Continue Research at the University or Elsewhere ............................... 15
Section II: Considerations When Working
With CSU Ventures, the University, and Beyond .............................................. 16
1. University Relationship to the Inventor ........................................................... 17
Sponsored Research .................................................................................................... 17
Consulting Arrangements ......................................................................................... 17
Compensation for Inventors who are University Employees ......... 18
Section J of the CSU Faculty Handbook....................................................... 19
Effect of Startup Activities on Academic Evaluation ............................. 19
2. Startup Responsibilities .............................................................................................. 20
Legal Counsel ..................................................................................................................... 20
Selection of Board Members and Executive Of?cers .......................... 20
Differences between Academic and Industrial Research ................. 21
Concluding Remarks .................................................................................................................... 22
Table of Contents
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This Startup Guide is provided for informational purposes only and does not constitute legal
advice or opinion. Nothing contained herein supersedes any applicable federal or state laws,
CSU policies, or the terms contained in any contracts or agreements with CSU Ventures. The
content provided herein is subject to change and may be updated at any time.
2 Colorado State University Ventures • Startup Guide
Colorado State University enthusiastically supports entrepreneurship as an
integral part of a healthy academic and research enterprise, and necessary
to accomplish its mission as a modern land-grant university. CSU Ventures
is dedicated to supporting Inventors and company founders, promoting
regional economic development, and helping the University create a culture
of innovation and commercialization throughout the entire institution. The
importance of entrepreneurship to the University community is highlighted
by the active role that the Of?ce of The Vice President for Research (OVPR)
takes in extending University research through private engagement to
aggressively achieve regional, national, and global impact, which includes
developing the University’s Supercluster® model.
To facilitate movement of inventions from universities to the marketplace,
in 1980 the federal government passed the Bayh-Dole Act, which
allows universities to own patents on inventions created using federal
research funds. State governments also encourage public institutions to
commercialize research innovations and create startup companies
2
to assist
with state-based economic development. Today, faculty engagement in
patenting and licensing their discoveries has become an enduring national
movement due to the many bene?ts it brings to the faculty, the university,
private enterprise, and the community.
Companies emerging from the University bring new ideas and excitement
to academic research programs and the fruits of research are multiplied
when the utility of a scienti?c discovery is valued in the marketplace. New
companies based on the transfer of University technologies are a key driver
of economic development for the state of Colorado and the nation as a
whole.
As much as founding a startup company is usually new and challenging to
Inventors, it can be one of the most rewarding experiences an individual may
ever encounter. The excitement of seeing an idea coming to fruition and
possibly changing people’s lives for the better is palpable and reinforcing.
1
The term Inventor will be used to denote any University employee or Member (as de?ned in
Section J of the CSU Faculty Handbook, see page 14) who creates an invention through his or
her university responsibilities.
2
This guide will variously use the terms startup, startup company, new company, and company
to refer to a company founded for the purpose of further developing and commercializing a
University invention.
Introduction
A QUICK INTRODUCTION
TO CSU VENTURES
CSU Ventures now facilitates commercialization
of all inventions created at the University.
Although previously the Technology Transfer
Of?ce within the Colorado State University
Research Foundation (CSURF) also managed
University inventions, this of?ce has been merged
with CSU Ventures in order to consolidate all
commercialization functions within a single
organization.
CSU Ventures is a 501(c)(3) not-for-pro?t
subsidiary corporation of CSURF. Our mission
is to actively support and promote the transfer
of Colorado State University research and
innovations into the marketplace for the bene?t of
society.
CSU Ventures is dedicated to serving CSU
af?liated inventors and only CSU af?liated
inventors are eligible to receive CSU Ventures
assistance.
3 Colorado State University Ventures • Startup Guide
The purpose of this guide is to explain how long-standing University policy
and procedures are being applied in the area of University entrepreneurship
with the twin goals of facilitating the development of new technology
companies while preserving the unique nature of the University academic
research enterprise. We hope this guide offers a useful roadmap for
Inventors navigating CSU Ventures and University policies and procedures
during the early stages of company formation and helps to ensure that the
new company starts off on the right foot.
Although launching a startup creates a unique set of challenges for
Inventors, in many instances Inventors who create an early-stage invention
are in the best position to launch its development. Not only do they possess
unsurpassed technical knowledge about their invention but they often best
appreciate and express the promise it holds with matchless optimism and
passion. Inventors usually learn about building a business in real-time,
which requires them to “wear two hats,” acting both as University employee
and company founder. In the ?rst stages of company formation, these
dual responsibilities may lead to real or perceived con?icts of interest and
con?icts of commitment. In most cases, con?ict concerns can be effectively
managed when Inventors utilize CSU Ventures support and adhere to the
University policies and procedures, which are discussed later in this guide.
Purpose of this Guide
What constitutes an invention?
What is IP?
According to the CSU Faculty Handbook, Section
J, inventions are de?ned as “New, useful, and
non-obvious ideas and/or their reduction to
practice that result in, but are not limited to, new
devices, processes, and/or methods of producing
new and/or useful industrial operations and
materials; any produced article useful in trade;
any composition of matter, including chemical
compounds and mechanical mixtures; any
plant covered under plant patent laws, the Plant
Variety Protection Act, or other methods that
provide protection; biological materials including
cell lines, plasmids, hybridomas, monoclonal
antibodies, and genetically-engineered organisms
with commercial potential; many new designs in
connection with the production or manufacture
of an article including computer software, data
bases, circuit design, prototype devices and
equipment; and any improvement upon existing
processes or systems. An invention may be
copyrighted, patented, and/or trademarked.”
Intellectual property (IP) is a term referring to
a number of distinct types of creations of the
mind for which property rights are recognized.
Invention as de?ned above and IP are generally
interchangeable, although this guide uses only
invention for consistency’s sake.
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4 Colorado State University Ventures • Startup Guide
This section explains how CSU Ventures facilitates and supports the
development of startup companies based on research conducted at
the University. It also addresses the potential roles, considerations, and
opportunities for Inventors. To help Inventors better understand the process
of building a new company, the following sections outline ?ve major steps
for launching a startup company from within the University community.
These steps are: (1) Propose Company Idea, (2) Develop a Strategy,
(3) Form the Company, (4) Find Funding, and (5) Further Research and
Development for Commercialization. Although these ?ve steps signify
major milestones that almost all Inventors will meet when founding a new
company, every startup process is unique. No two experiences will be exactly
the same and success is not guaranteed.
Section I:
Steps to Creating a
Company Based on
University Inventions
5 Colorado State University Ventures • Startup Guide
1. Propose Company Idea
The ?rst step in the process is communicating the invention and
company concept to CSU Ventures, who will then discuss the opportunity
with the Inventor.
Invention Disclosure
The process formally begins with the Inventor disclosing his or her
invention to CSU Ventures staff. Frequent dialog with CSU Ventures is
encouraged at all stages of academic research (even before the research
begins!); an Invention Disclosure Form (IDF) will need to be submitted
to CSU Ventures. After further discussion, it may be decided that a
startup company is a viable option that maximizes value to the Inventor
and the University.
Commercial Viability and New Company Concept
CSU Ventures will work with the Inventor to make an initial assessment
concerning patentability, technical feasibility, commercial potential, and the
opportunity to create a new company based on the University invention.
When does CSU Ventures
encourage a startup company?
This will depend on many factors, including the
invention, the founding team, and the target
market. Platform technologies (inventions that
could support multiple applications and numerous
products) and disruptive technologies (inventions
that will lead to products that are radically
different from existing products) are often well
suited to startup companies. Inventions that
lead to more incremental improvements, have
a very specialized focus, or that can be readily
implemented into an existing service or product
line are often best licensed to existing companies
that have the commercialization infrastructure
already in place. CSU Ventures will also consider
whether the size of the target market is suf?cient
to support a new company.
Much of the decision will also be based on the
skills, dedication, and ambition of the founding
team. CSU Ventures recognizes that University
inventions are frequently early-stage and that the
Inventor is often in the best position to further the
invention’s development. If the Inventor displays
a real commitment to forming a startup company
and the invention is appropriate, CSU Ventures
will fully support the startup.
Managing confidentiality
Con?dentiality regarding inventions may be
important to startups for a variety of reasons.
A primary motivation is that startups based on
technological innovation need to protect their
invention rights. Con?dentiality is a concern in
this regard because inventions that have been
publically disclosed will not be eligible for full
patent protection (unless the patent application
is ?led before public disclosure). A con?dentiality
agreement will allow conversations to take place
without constituting a public disclosure. CSU
Ventures can advise on and execute
these agreements.
6 Colorado State University Ventures • Startup Guide
2. Develop Strategy
Although occasionally the path forward may seem clear, often more
information will be needed to identify the most promising business
opportunity and commercialization strategy. Arrangements can be made
for CSU Ventures to delay pursuing other licensing opportunities while
the Inventor gathers more information, identi?es likely business partners,
and further assesses the commercial opportunity. The Inventor should also
notify his or her Department Head/Chair and begin the con?ict of interest
management process with the University. At the end of this stage, the
Inventor and CSU Ventures will have enough information to make a “go/no
go” decision on the startup.
Standstill or Option Agreement
As University policy requires invention rights to be assigned to the
University (see Section J of the CSU Faculty Handbook) and then transfers
these rights to CSU Ventures, the new company will need to obtain from
CSU Ventures the legal rights to further develop and commercially use the
invention. Ultimately, this will be accomplished using a License Agreement;
but in the early stages, other formal arrangements with CSU Ventures
can be worked out. These include a Standstill Agreement and an Option
Agreement. The end result of each is that CSU Ventures will agree to reserve
the intellectual property rights for the Inventor’s startup company for some
limited period of time, and the Inventor will agree to further mature the
company idea.
A Standstill Agreement is one available strategy for the Inventor at this
point in the process. As per the Standstill Agreement, during the de?ned
standstill period, CSU Ventures agrees not to license the invention to
another party while the Inventor agrees to further develop the business
opportunity (with CSU Ventures’ help). A Standstill Agreement is an
appropriate choice when there are still too many uncertainties to justify
the time and expense of forming a company. At the end of the Standstill
Period, the Inventor should be able to provide a basic outline of the business
opportunity and have formulated a strategy to pursue it. A standstill period
typically is six months in duration but may be in?uenced by patenting
deadlines.
Another strategy would include an Option Agreement; this agreement
requires the company to be legally formed (see Section 3, Form the
Company). In this case, the new company will already exist but will not be
ready to negotiate a License Agreement. The Option Agreement provides the
How long does it take
to get a patent?
Obtaining a patent takes many years. After a
provisional application is ?led, a regular U.S.
application and any foreign applications must be
?led within one year of the provisional ?ling date.
Once a regular U.S. application is ?led, it usually
takes approximately two years before the USPTO
begins its review. Once the application is under re-
view, it can take another one to three years before
the patent issues, depending on the outcome of
the examination of the application. After the patent
is issued, it will be in force for 20 years from the
priority ?ling date (typically the date of the ?rst ap-
plication ?led). During that time, maintenance fees
must be paid at 3½, 7½, and 11½ years to keep
the patent in force.
If foreign rights are also pursued through the ?ling
of a PCT application, follow-on applications in
each foreign country must be ?led within 2½ years
(30-31 months) from the ?ling date of the provi-
sional application. Then each foreign application
is examined separately, a process that can take
anywhere from one to ?ve years before the foreign
patent is issued.
7 Colorado State University Ventures • Startup Guide
company with an Option to an exclusive License Agreement. The Option
may be exercised by the company at any time prior to the expiration of the
Option Agreement and assures the company that CSU Ventures will not
license the invention rights to another party while the Inventor’s company
continues to develop (e.g. further re?nes a business plan, looks for funding,
assembles a business team). Like a Standstill Agreement, the Option
Agreement preserves the startup’s ability to license the invention. However,
an Option Agreement provides a stronger guarantee, as the decision to
enter negotiations for a License Agreement is solely up to the new company
if it meets the basic obligations outlined in the Option Agreement. A
startup may also claim that it has “exclusive rights” to the invention during
the Option Period, which is often critical when seeking investors and/or
strategic partners.
A typical Option Agreement generally provides the startup with a six month
time frame within which CSU Ventures will not license the invention
rights to others. When the new company ful?lls the Option Agreement
requirements, it can exercise the license Option. If the new company does
not ful?ll the requirements of the Option Agreement, CSU Ventures may
either consider granting additional time or may decide to pursue other
licensing alternatives.
It is important to note that the patenting process has certain timeframes
and windows of opportunity for ?ling patent applications. As such, Option
Agreement and Standstill Agreement timelines will need to take into
account relevant patent deadlines so that all parties can make an informed
decision when considering a commitment to the signi?cant expense of
patent prosecution. (The approximate cost of a single U.S. non-provisional
patent application ?ling may typically be in the range of $10K-$15K plus
an additional $5K if patents in other countries are desired. Note that these
costs can vary and do not include the total costs to see a patent through to
issuance, which frequently amount to $20K-$40K or more.)
Alternatively, if considered strategically appropriate, the startup can
go directly to a License Agreement. Neither the Standstill nor Option
Agreements are required, although often the Inventor will want the time
provided by these agreements to further evaluate the business opportunity
and prepare a suitable commercialization strategy.
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Conflict of Interest Management
While the University supports Inventor-founded startups, the University
has policies designed to ensure that potential individual and institutional
con?icts of interest are managed properly. First and foremost, all Inventors
have an obligation to the University to report their intention of becoming
involved in the company. Inventors must work with their Department
Head/Chair and their college’s Research Associate Dean to address potential
con?icts of interest and/or commitment. A Roles and Responsibility Survey
(i.e., disclosure) must be submitted in order to evaluate the potential for real
or perceived con?ict of interest and/or commitment. Con?ict of interest
and/or commitment concerns are most frequently mitigated through the
development of a Con?ict of Interest Management Plan with the University.
Additional considerations may apply such as external sponsor noti?cation
and/or amendment of approved regulatory protocols, as applicable.
CSU Ventures will not enter into a License Agreement with a startup
company until the University is satis?ed that any potential con?icts of
interest are being appropriately managed.
Preparing for a License Agreement
Before entering negotiations for a License Agreement (either initially or at
the end of a Standstill or Option period), the Inventor will need to lay a
strong foundation for the startup. CSU Ventures is available to assist and
offers multiple resources for this purpose. In particular, CSU Ventures
highly recommends that the Inventor:
• establish a defned role for the Inventor,
• prepare a business and/or technology development plan,
• recruit an experienced business driver and/or management team,
• determine needs and formalize facilities (space and/or equipment)
arrangements, and
• obtain both initial funding and solid prospects for accessing additional
capital as needed to commercialize the invention and execute the
business plan.
CSU Ventures will discuss the proposed startup company with the Inventor.
Provided that a reasonable business case exists, the decision will be made to
found a company and GO FOR IT!
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9 Colorado State University Ventures • Startup Guide
3. Form the Company
Once the decision has been made to pursue a new company
commercialization strategy, the Inventor will found the company and
assemble a suitable team of advisors, of?cers, and employees. The company
will then secure its legal rights to the invention using either an Option or a
License Agreement as discussed previously. It is also generally necessary to
formalize a business plan that will guide company strategy and be used to
attract outside investment.
Found Company
CSU Ventures staff will collaborate with the Inventor and other proposed
founders to determine if establishing a new company is the optimal
approach and assist with determination of the appropriate level of founder
participation in the new company. At a point when the founders, including
the Inventor, and CSU Ventures staff determine that the proper blend of
skills, knowledge, experience, and personalities are evident in the startup
team, a new company will be formed by the founders at their own expense,
but with the assistance and advice of CSU Ventures personnel if desired.
Founding members are responsible for properly establishing the company
as a legal entity. Although certain initial steps can be performed quickly and
inexpensively online, the details of company formation are complex and
can dramatically in?uence a company’s decision-making for years. When
considering the startup’s legal entity, the founding team should consider the
current and future needs of the business in regards to fundraising, use of
equity, taxes, accounting, and corporate governance.
Consequently, CSU Ventures strongly recommends that the founders seek
professional legal counsel from the outset. Ultimately, the selection of law
?rm, corporate structure, and other details of company formation are
decisions for the founding team to make. CSU Ventures has knowledge and
experience with several law ?rms and is available to assist in the process of
company formation. In particular, CSU Ventures should be consulted when
deciding upon a corporate structure, as not all structures are suitable for the
terms typically required in licenses to University inventions. For example, S-
or C-corporations are often preferable to limited liability companies (LLCs)
when CSU Ventures is to acquire equity in the new company.
What does it mean
to be a company founder?
Generally, founders are considered to be the
individuals (or legal entities) that are assigned
ownership of the company upon its formation.
Inventors who form a startup company will
therefore be part of the founding team, which
may also include other persons such as investors,
entrepreneurs, and other strategic partners.
Although most companies will issue equity to
other persons (or organizations) subsequent to
the founding event, future equity holders will not
be considered founders.
It is also important to realize that founders do
not need to be involved in the day-to-day
operations of the company. Although the
founders’ roles are typically more active in the
beginning, most companies will utilize consultants
and/or hire executives and other employees to
manage many aspects of the business. This
allows the founders to contribute their time and
expertise to the company as their interest and
other obligations allow.
10 Colorado State University Ventures • Startup Guide
Obtain Invention Rights – License Agreement
The new company will need to obtain rights to use the invention created
by the Inventor as these rights will be held by CSU Ventures. It is advisable
to designate someone other than a CSU employee to negotiate with CSU
Ventures for a license to the invention rights for the new company in order
to avoid actual or perceived con?ict of interest or commitment. This license
must be put into place prior to any use of the invention by the startup.
License Agreements vary in scope and complexity. The Bayh-Dole Act,
University policy, and prudent University risk management provide a
simpli?ed framework and standard provisions for License Agreements
with CSU Ventures. These standardized, non-negotiable terms include the
following:
• the University’s retention of the right to practice the invention for
non-pro?t research and educational purposes (thereby allowing the
Inventor to continue his or her academic research),
• the University’s right to publish research results,
• the requirement that the company indemnify the University and
CSU Ventures,
• the absence of warranty and provisions that indemnify the company, and
• limitations on the use of CSU Ventures, and the University’s names.
Other provisions of the License Agreement, while negotiable, have been
standardized by CSU Ventures taking into account the average level of
technology maturity, legal expenses incurred, and typical R&D foundations
(e.g. prior federal funding) leading up to the invention. These terms include
but are not limited to:
• felds of use,
• the right to grant sublicenses,
• business development diligence,
• commercial milestone requirements,
• the company’s right to prosecute patent applications on the invention,
and
• the timing of fees, payments, reports, and royalty payments.
Most startup License Agreements are exclusive, meaning that CSU Ventures
cannot grant another party the same access to the licensed invention rights.
The scope of the license can be broadly de?ned to include all applications
and industries if the company can substantiate that need. Otherwise
the de?nition can be narrowed to speci?c applications, markets, and/or
geographic regions, according to the company’s business plan. In most
cases, CSU Ventures can be ?exible to accommodate the company’s needs,
although CSU Ventures must also consider how best to maximize the
impact of the invention, which may mean licensing to other entities those
applications that the Inventor’s company does not plan to pursue.
What is equity?
Put simply, equity represents ownership in the
company. Equity is typically counted by shares
or membership units, but the actual number of
these units is less important than the percent of
ownership. The greater the percent of ownership,
the more in?uence the equity holder has in
company decisions and the larger his or her share
of company value and pro?ts.
In the early stages of a startup, equity may be
the primary currency available to the company
when seeking early investment, negotiating
licenses, compensating executive management,
etc. Although the Inventor should expect that the
company will need to offer signi?cant amounts
of equity several times over its growth cycle, it is
important that equity not be given away casually
or at too low of a price. In the beginning, the
Inventor is advised to consult with CSU Ventures
or other trusted advisors before making large
offers of equity to others.
11 Colorado State University Ventures • Startup Guide
In exchange for a license to the commercial invention rights, the License
Agreement will typically require the new company to provide a percentage
of equity to CSU Ventures and pay a nominal cash fee. As a result, CSU
Ventures receives an ownership interest in the startup. For example, if the
startup is formed as a corporation, CSU Ventures receives stock in the
corporation. The University views equity as an important portion of the
compensation from the startup company for the considerable investment
and support that the University has made in the invention. It also allows the
usually cash-strapped startup company to avoid paying the large upfront
licensing fees that would otherwise be required. The percentage of equity
that CSU Ventures receives in a new company under a License Agreement
is typically 5-10%, carries voting rights, and is usually subject to dilution
(as is the Inventor’s equity). Any revenue received by CSU Ventures from
an equity cash-out is treated the same as royalties and distributed as per
University policy (see “Section J of the CSU Faculty Handbook ” for more
information).
The Inventor should anticipate that the new company will not generate
revenue quickly. It is common for new companies to take considerably
longer and need more initial capital than expected to achieve an early
revenue target. Given extensive experience with startups, CSU Ventures also
understands this and follows three principles to support startup growth
when negotiating the ?nancial terms of the License Agreement.
• First, CSU Ventures wants to see some level of fnancial commitment of
the founding team to the company.
• Second, CSU Ventures will not seek signifcant funds from the company
during the development period. Large fees (with the exception of patent
reimbursements and reasonable milestone fees) are seldom due prior to
product/service sales or external investments into the company of several
hundred thousand dollars, including government funding.
3
• Third, License Agreements are amended from time to time. CSU
Ventures recognizes that the new company is still nascent at the time
the license is executed and will need ?exibility as it progresses towards
being a successful business. As long as the startup is displaying true
commitment and open communication, CSU Ventures is usually willing
to modify the License Agreement to accommodate the changing needs of
the company.
While CSU Ventures is committed to serving the best interests of the
University, CSU Ventures works hard to ensure successful negotiations are
characterized as win-win situations. Although it is important for the startup
to secure its own legal counsel to assist with company formation and
incorporation, the standardized CSU Ventures startup License Agreement
template is well established and is similar in form to those used at other
institutions. As a result, negotiations should be direct and simpli?ed.
3
This does not preclude the University from appropriate reimbursement of expenses incurred through University specialized
facilities or space use, sponsored agreements, etc.
What is dilutive financing?
What is non-dilutive financing?
Dilutive ?nancing are methods by which the equity
in the company is exchanged for cash, goods, or
other services. Essentially, an investor contributes
to the company now and defers compensation
until later, when the equity shares have (hopefully)
increased in value. These investments are termed
“dilutive” because the ownership interests of
the previous shareholders (e.g. founders, other
investors) are decreased (when expressed as
a percentage) when stock is issued to a new
investor. However, it is important to realize that
dilutive ?nancing can still increase the value of the
previous shareholders’ interests.
Non-dilutive ?nancing are methods by which
the company can raise money or receive goods
or services without giving up equity in return.
These investments can be harder to ?nd but
offer the advantage of increasing the value of
the shareholders’ equity without diluting their
ownership percentage. Government grants are
an example of non-dilutive ?nancing available to
small technology companies.
12 Colorado State University Ventures • Startup Guide
An Inventor’s chosen role and equity in the new company should not
adversely affect the process or the outcome of the negotiations. Even if
the Inventor is actively involved (in terms of an of?cial company role) or
?nancially vested, it is advised that he or she does not directly engage in
the negotiations or advocate for any speci?c terms which would put the
Inventor in direct con?ict with his or her responsibilities to the University.
The process from invention disclosure to founding the company and
execution of the license agreement can take anywhere from weeks to
months. The more closely aligned the Inventor’s expectations are to
CSU Ventures’ template License Agreement, the faster the time to license
execution. CSU Ventures’ standard license framework for startups represents
an Inventor-friendly alternative to the license typically offered to more
mature companies.
Business Plan
A business plan is a formal document that illustrates the startup’s business
model and outlines the near- and long-term strategy of the company.
Although business plans are continually revised, these documents are
invaluable for attracting outside investment and may also be used to
guide daily decision-making. For these reasons, CSU Ventures strongly
recommends that a startup develop a solid, professional business plan, or
at least a well-developed executive summary. In the process of developing
the business plan, the founding members will develop and communicate
the startup company’s value proposition and think beyond the invention
and towards the actual business strategy with regards to the operations,
marketing, and ?nancing.
Typically, business plans are drafted by an experienced entrepreneur either
in the company or engaged as a consultant. With local resources such as
the Innovation Center of the Rockies, Rocky Mountain Innosphere, the
CSU School of Business and others, CSU Ventures can assist the founding
team to ?nd advisors with the expertise to formulate and create an effective
business plan. Contact CSU Ventures for more information.
What is a value proposition?
What is a business model?
A value proposition is the tangible bene?t that a
customer receives by using a business’s products
or services. Without a clear value proposition,
it is unlikely that a customer would choose to
purchase a product or service and therefore
unlikely that a business would succeed. Although
an invention may enable a new capability or
product, there will need to be a clear value
proposition for the invention to be successfully
commercialized.
A business model describes the manner in
which the new company will operate and bring
in revenue. Example decisions addressed in a
business model include:
• Will sales be direct to the user or through a
distributer?
• Will products be sold or licensed?
• What level of product support will be offered?
• Will users be given free access and fees
collected for advertising?
13 Colorado State University Ventures • Startup Guide
4. Start Up Capital &
Early Stage Financing
Every new company needs money. Fortunately, there are a variety of
funding sources available to startup companies emerging from institutions
of higher education. Understanding, selecting, and pursuing the appropriate
?nancing opportunities requires a mix of sophistication, experience,
persistence, and good fortune. The amount of time, effort, and talent
required for ?nding funding should not be underestimated and can often
be arduous.
SBIR/STTR Grants
Small Business Innovation Research (SBIR) grants, Small Business
Technology Transfer Research (STTR) grants, and other non-dilutive
sources of funding provide excellent opportunities for startups as they
will not decrease the percentage of founder ownership of the company.
However, SBIRs/STTRs are only offered in certain technology areas and at
speci?c times of the year.
Bank Loans
Another non-dilutive source of funding, a bank loan may be an additional
possibility for startup capital. However, early stage technology-based
startups are usually considered too risky to qualify for bank loans. Moreover,
typically banks will not lend to new companies without two to three years of
?nancial statements and proof of owner’s equity in the business. Almost all
bank loans will require personal guarantees and collateral to back the loans.
Home equity is one common form of bank collateral.
Friends & Family, Angel Investors, and VCs
So-called “friends & family” (FF), angel investors, venture capitalists (VCs),
and other sources of dilutive investment offer a means to trade equity in the
company in exchange for funding. Angels and VCs provide access to much
larger amounts of funding than other sources (roughly $0.5M-$2M and
$2M-$20M, respectively) and play a key role in many successful technology
startup companies because, in addition to capital, they often provide access
to experienced executive management and substantial business networking
resources. In return, investors of this type will expect an equity share in
the company and will also frequently require some degree of control and
oversight of company operations, such as a seat on the company’s board
of directors. Although this may seem like a high price to pay, if carefully
negotiated, these investments allow the company to grow its operations and
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increase its chances of success which in turn raises the value of all company
shares, including the Inventor’s. Investments of this type are a long term
relationship and care should be taken from the outset of negotiations.
University Community and Affiliates
There are also several ways in which the University and CSU Ventures may
assist a startup with ?nancing. Example programs are University seed grant
programs and the Bioscience Discovery Evaluation Grant Program, both
of which provide small non-dilutive funding for research and other early
stage company activities. Another option is the Commercial Opportunity
Investment Program (COIP), which offers a small convertible note up to
approximately $20,000 (depending on availability of funds) with ?exible
repayment options.
Basic Research Grants
External grants to the Inventor’s university laboratory for basic research
may continue to yield inventions of value to the startup. These inventions
may be licensed to the Inventor’s startup company in the same manner that
CSU Ventures licenses University inventions to other companies.
Strategic Partners and Customers
Companies, organizations, individuals, and other entities that may have
a vested interest in the success of the startup company are other possible
sources of ?nancing. For example, a large company selling a complementary
product may support the startup if the startup’s success would in turn boost
demand for the company’s own products. Also, potential customers that
would bene?t from a startup’s product may be willing to invest or pre-
purchase products. So-called “early adopters” of a startup’s product can also
offer invaluable feedback and credibility to the new company - bene?ts that
often far outweigh any cash contribution made by the early adopter.
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5. Further Research
and Development for
Commercialization
Most inventions arising from University research are early stage and require
further research and/or product development before the startup company
can begin generating revenue. There are several possible avenues that a
startup may take to accomplish this task. In addition, signi?cant time and
energy will need to be devoted to business development activities, which
seek to build vital relationships with a diverse array of investors, strategic
partners, and other stakeholders.
Product Development and Business Development
A startup company should plan to invest signi?cant resources in developing
its product as well as its business. Product development may include
further research but will almost certainly include product engineering,
design, and scale-up activities that often require specialized expertise.
Business development will generally focus on building relationships with
prospective customers, clients, investors, strategic partners, and other key
stakeholders. Although many Inventors have a tendency to focus on the
technical challenges facing a startup with respect to the product, business
development is a practiced art that often requires just as much time and
effort and is at least as critical to the ultimate success of the business.
Continue Research at the University or Elsewhere
A company may elect to perform all or some of its product development
research in its own company of?ces and/or laboratory. The company will
also need appropriate facilities for business development activities. Space for
both product and business development may be rented from the University,
a local incubator such as the Rocky Mountain Innosphere (RMI), or
anywhere else considered appropriate by the founding members. It is often
possible to utilize the Inventor’s university lab space for company activities.
CSU Ventures may also be able to offer space in the Research Innovation
Center (RIC) for approved companies, which is equipped with both lab and
of?ce space. Arrangements to use University space, including the Inventor’s
university laboratory and the RIC, require payment and are typically
formalized through a Master Research and Development Agreement
between the University’s Of?ce of Sponsored Programs and the company,
although other lease arrangements may be possible.
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16 Colorado State University Ventures • Startup Guide
Once the startup company has been founded, the Inventor will to some
extent be living in two worlds: that of the startup company and that of a
CSU faculty member.
This section discusses aspects of balancing these dual roles, including the
relationship of the startup company to the Inventor’s academic lab, as well
as how an Inventor may receive compensation from both CSU and the new
company. This section also provides some insight into typical operations
within a new company based on CSU research.
Section II:
Considerations When
Working With CSU Ventures,
the University, and Beyond
17 Colorado State University Ventures • Startup Guide
1. University Relationship
to the Inventor
Sponsored Research
Under proper disclosure, a current Con?ict of Interest management plan,
and an active Sponsored Research Agreement (SRA), the University will
typically permit companies in which the Inventor has an ownership interest
to fund sponsored research in his or her University laboratory. Given the
potential con?ict of interest this situation presents, con?ict of interest
management is paramount and proper safeguards will be necessary.
The standard industry SRA provides a mechanism for the sponsor (e.g. the
Inventor’s startup company) to secure rights to any inventions resulting
from the research (including patent rights, copyrights, and data). This
agreement also includes provisions protecting the ability of the involved
University researchers to publish the results of the research, subject to
certain review rights of the sponsor.
When an ongoing research relationship between the startup and the
University is expected, a Master Research and Development Agreement
(MRDA) is the preferred mechanism to sponsor research at the University.
The MRDA enables the startup to negotiate all of the standard SRA terms
upfront, contains provisions for use of university facilities (if desired), and
allows each subsequent research project to be easily submitted as a Task
Order without the need for repeated negotiations or excessive paperwork.
Consulting Arrangements
The opportunity for faculty and staff to accept occasional professional
consulting engagements helps to disseminate knowledge and promote
technological advancement. This is as true when consulting for an
Inventor’s own startup as it is for organizations unaf?liated with the
University. As long as University policy is followed, an Inventor may enter
into a paid or unpaid consulting relationship with his or her own startup.
University policy requires that, prior to engaging in any consulting or
business activity with a third party, including a company they have founded,
University employees should make a full written disclosure (excepting the
amount of compensation) to his or her immediate supervisor. In addition,
University obligations must be made clear to the other party, particularly
with respect to intellectual property created by the Inventor.
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18 Colorado State University Ventures • Startup Guide
While CSU Ventures cannot negotiate the consulting agreement between the
Inventor and the company, CSU’s General Counsel can provide guidance on
these matters to help ensure compliance with University policy, including:
• Invention ownership and rights,
• Use of University facilities, personnel, and other resources,
• Use of University name, and
• Use of University students.
In particular, inventions in which the University may have an ownership
interest may not be transferred by University employees while engaged
in outside consulting or part-time employment. Accordingly, University
employees should not assign or agree to assign their ownership interest
in any invention of which they are an inventor to any third party unless
they have disclosed the invention to CSU Ventures and received a letter
of determination by which the University disclaims ownership to the
invention. Clauses in consulting agreements (including clauses on
con?dentiality and ownership/transfer of inventions) must be consistent
with the policy of the University and with University commitments under
sponsored research agreements as well as federal law. Consulting agreements
should also contain the company’s acknowledgement that to the extent
the consulting agreement is incongruent to the University employee’s
obligations to the University, the employee’s obligations to the University
shall prevail.
Compensation for Inventors who are
University Employees
Colorado State University faculty or staff who produce inventions that are
licensed to their own startup company are likely to receive personal income
and other compensation from at least three places: 1) from the University,
2) from the company licensing the invention rights, and 3) from CSU
Ventures.
An Inventor receives a salary and bene?ts from the University for his or her
research and academic activities. If his or her invention is licensed into a
startup company, the Inventor will likely receive ownership in the company
and may also receive consulting fees or salary from the new company in
exchange for their time and effort on its behalf. In addition, the Inventor is
entitled to receive a portion of the net licensing income (including equity
cash-outs) paid by the company to CSU Ventures, in accordance with
Section J of the CSU Faculty Handbook (see next section).
Each of these separate sources of income provides compensation for
separate and distinct contributions the Inventor has made or will make. The
Inventor may also be a PI on Sponsored Research Agreements between their
company and his or her University laboratory, subject to con?ict of interest
and/or commitment considerations.
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19 Colorado State University Ventures • Startup Guide
Section J of the CSU Faculty Handbook
Section J is the portion of the CSU Faculty Handbook that addresses
ownership rights of all forms of inventions created at the University or by
University employees. Section J de?nes Members as “University academic
faculty members, administrative professionals, state classi?ed staff, student
employees, and anyone af?liated in a professional capacity with the
University and using University resources who are inventors and creators
of inventions, academic materials, publications, and other creations.” In
particular, Members assign ownership rights to inventions developed in
the course of their University research responsibilities to the University,
which then transfers those rights to CSU Ventures pursuant to an operating
agreement.
Section J also addresses how revenue resulting from University-created
inventions is distributed. After recoupment of all patent, licensing,
marketing, and other commercialization expenses paid by CSU Ventures,
Section J provides that all ?nancial consideration received under a
license agreement to patentable inventions (including proceeds from the
liquidation of equity received) be distributed as follows:
• 35% is paid to the Inventors personally (essentially as supplemental
income);
• 15% is paid to the University’s Offce of the Vice President for Research;
• 10% is paid to the college within the University that contains the Inventors’
departments; and
• 40% is paid to CSU Ventures.
Effect of Startup Activities on Academic Evaluation
Within the University community there have been ongoing discussions
about the effect of the Inventor’s commitment to their new endeavor and
the impacts it may have on tenure and performance evaluations. Inventive
activity is generally encouraged at the University and is considered to
fall within the public service mission of the University. Nonetheless, at
many U.S. research universities, inventive activity is not always an explicit
criterion in the promotion and tenure process. Accordingly, an Inventor
should talk to departmental colleagues and proactively contact his or her
Department Head/Chair to assess the implications of involvement with
entrepreneurial activities. CSU Ventures can assist with de?ning roles and
business structures to create a situation that allows an Inventor to ful?ll his
or her academic responsibilities with minimal disruption.
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20 Colorado State University Ventures • Startup Guide
2. Startup Responsibilities
Legal Counsel
Although CSU Ventures may be able to offer limited legal assistance to a
startup in the beginning, the Inventor should realize that a new company
will require its own legal counsel and that these costs will be the responsibil-
ity of the company.
In addition to the paperwork involved in forming a new legal entity, a
startup company should consider legal counsel for many of its ongoing
operations, including: employee and consulting agreements, research
and development agreements, partnering arrangements, freedom-to-
operate analyses, tax and liability issues, board resolutions and actions, and
incentive stock option plans. The Inventor should also be aware that the cost
of obtaining a patent will be borne by the company (and not CSU Ventures)
and that these costs will amount to considerably more than just the upfront
?ling fees before a patent is actually granted by the USPTO.
Selection of Board Members and Executive Officers
Unless requested by the Inventor, CSU Ventures will generally not play a role
in matters of company formation, founder ownership and vesting, founder
duties, and other company governance issues such as board composition
and voting rights (except as may be pursuant to the license agreement
with CSU Ventures, see below). However, it is important to ensure that the
structure of the company is one amenable to growth, which typically means
external investment, additional shareholders and securing the services of
key managerial and technical talent.
Many startup companies will initially consist of founders, a board of
directors, executive management, and often outside advisors. The board of
directors is a body of elected or appointed members who jointly oversee
the activities of the company. Initially, it is up to the founders to select the
board members, although CSU Ventures License Agreements with University
startups typically require that CSU Ventures be granted a voting board seat
on the company’s board of directors. However, future investors will generally
also require board representation and it is anticipated that as the company
proceeds through multiple rounds of ?nancing, the CSU Ventures board
seat will be relinquished at the appropriate point in time. The number of
shareholders, the split of the controlling interests, and the goals, interests,
and personality dynamics of the shareholders and board members are all
strategic factors that can have lasting impact on the value and sustainability
of a company – each of these should be given due consideration when
founding the company and establishing a board of directors.
Death and taxes
While incorporation allows companies to “cheat
death” and survive in perpetuity, all companies
must still pay taxes. Some company structures
allow taxation to be passed through to the owners
but others do not. Even before a startup company
begins earning revenue, taxes must be ?led
annually. (In the beginning, however, a startup
company may even lower the personal tax burden
of the Inventor!)
Of course, it is up to the company (and not CSU
Ventures) to ensure that all tax obligations are
met. Consultation with legal counsel and an
accounting ?rm is strongly advised.
21 Colorado State University Ventures • Startup Guide
It is often desirable for an outside scienti?c advisory board to be recruited
and established. Scienti?c advisory boards are comprised of scientists
and other technical experts who provide objective advice on technology
development strategies and lend credibility to the startup company.
Nearly all startups seek quali?ed executives (e.g., CEO, COO, CFO)
who have the experience, skills, and time to perform the everyday duties
vital to startup success. Assembling an appropriate team of talented and
experienced executives is of critical importance to the startup’s credibility
and viability for long term success. Some recommended key assets would
include: a business driver who can communicate the mission and vision
of the company to potential partners and investors, an industry veteran
with experience and an established network, and someone experienced
with business operations and familiar with the ?nancial and accounting
details of the new company. These recommended qualities can be found
in one or many people, and it is the Inventor’s responsibility to form the
team according to the company’s needs. However, if desired, CSU Ventures
can assist and has a broad network of potential executives across Northern
Colorado and access to a variety of networking groups from which to
recommend talent. Also, as investors and acquirers are sensitive to the issue
of stock dilution, CSU Ventures recommends that the founders establish a
stock option “pool” at the time of incorporation, usually around 15%, which
will be used in the future as incentive for key employees and managers.
Differences between Academic and
Industrial Research
Most inventions licensed by a startup company will require further
development, and the Inventor should be aware that the research activities
of the new company will need to be conducted in a different manner than
typical academic research.
First and foremost, commercial research differs from academic research in
that the desired outcome is a proprietary, marketable product or service.
To reach this desired outcome, commercial research is typically structured
as a series of short-term, practical deliverables or milestones with the
expectation that the pace of progress will be very rapid. Since the ?nancial
support of the company is often dependent on reaching each milestone,
the new company will be operating under considerable pressure to meet
the speci?ed timelines. In this environment, commercial research is
generally very practical and typically affords few opportunities to advance
more fundamental lines of inquiry, which are usually best left to academic
research.
Another difference is that company strategy may include the development
of proprietary trade secrets and know-how, meaning that it may not always
be in the company’s best interest to publish research results. Since all
What is a stock option pool?
A stock option pool is an amount of a startup’s
common stock reserved for future issuances to
employees, directors, advisors, and consultants.
The option pool is formalized via a written plan
in which the startup designates a speci?c portion
of its authorized common stock to be issued as
compensation for the above types of services.
Having a formal stock option pool makes it
easier for current and future equity holders to
calculate the percent ownership that they will have
after a startup receives the anticipated services
requiring equity compensation (i.e. all parties can
see how their interests are likely to be diluted).
Greater clarity in this regard is a signi?cant
advantage when seeking additional investment or
executive management and CSU Ventures highly
recommends that a startup considering forming a
stock option pool at the outset.
22 Colorado State University Ventures • Startup Guide
sponsored research agreements (SRAs, MRDAs, etc.) that the University
negotiates will reserve the right to publish research results, a startup
company will need to decide what product development may be done
in the Inventor’s university lab and what will need to be done elsewhere.
In making this decision, a company must bear in mind that even if the
Inventor is willing to forego publication of research conducted in his or her
laboratory, the University requires publication of work involving graduate
students, post-docs and other researchers whose careers are bene?ted by
such activities.
It should also be noted that the best practices in the academic laboratory
may not always be suf?cient in a commercial setting. One example of
this is laboratory notebooks. A startup company based on technology
and innovation will often use invention rights as the cornerstone of the
company and laboratory notebooks play a key role in supporting those
rights (particularly patent rights), especially during litigation. As such,
companies will want to ensure that their researchers are keeping accurate
laboratory notebooks in accordance with best industry practices in order to
maximize the ability of the invention rights to withstand intense scrutiny
from investors and potential competitors. Put another way, the Inventor
should realize that laboratory notebooks in commercial research need to
meet the needs of attorneys as well as those of the researchers.
Concluding Remarks
Founding a new company with University inventions can be an exciting and
rewarding endeavor. CSU Ventures hopes that this Startup Guide will serve
as a useful overview of this process and will alleviate some of the confusion
that Inventors often experience in the beginning. Although each startup
opportunity is unique and will require some amount of ?exibility, the
steps and considerations outlined herein are generally applicable to most
startups founded with University inventions. CSU Ventures is always happy
to discuss opportunities with Inventors and to provide guidance on how to
best proceed given the individual requirements of each startup company.
This Startup Guide is meant to be supplemental to, and not a replacement
for, frequent dialog with the University and CSU Ventures. We look forward
to the next discussion and wish you “Good luck!” in the meantime.
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