University revenues from technology transfer: Licensing fees vs. equity positions

Abstract

This paper analyzes the financial return of universities' taking equity in their spin-off companies, and the prevailing attitudes toward taking equity. The reasons for taking equity include: the flexibility it gives licensing managers in structuring deals, the possibility that the university will still hold something of value if their technology is replaced, and, the reduced time required to generate revenue compared to a traditional license. A traditional license is preferred when the technology is not suitable for a spin-off company, or when the technology is one of the rare jackpot licenses that bring in millions of dollars every year. The financial reward of taking equity was determined by comparing the value of equity sold in public spin-off companies to the return on an average license. A traditional license consists of a license issue fee between $10,000 and $250,000 and an annual royalty on sales. In 1996 the average annual income from a traditional license was $63,832. The average value of equity sold in 16 university spin-off companies is $1,384,242. If one assumes that half the spin-offs fail before they go public, the average value of equity is $692,121. This is more than 10 times the average annual income from a traditional license, and is significantly higher than the amount usually received as a license issue fee. The high average value of equity depends on the presence of a few million-dollar equity sales. If those sales are excluded, the average value of equity is $139,722, which is within the range that can be received as a license issue fee. There is a high correlation between million-dollar equity sales and the amount of venture capital spending in the region. The million-dollar sales in this study all occurred in the top 11 states in the country in terms of venture capital spending in 1997. From a financial viewpoint it makes sense for licensing managers to take equity in their start-up companies. Our data show that even if none of the start-ups produces a million-dollar equity sale, the financial return of equity will be within the range normally received as a license issue fee. Taking equity leaves the door open for the occasional jackpot, which will bring in significantly more money than a standard license. When combined with a strong program of traditional licensing, taking equity in start-up companies maximizes the financial return that universities realize from their intellectual property.