Speaker 1 0:01 All right, we're gonna go ahead and get started. Welcome, everybody to today's autumn webinar, the true value of startup equity. My name is Savannah Clements, I'm one of autumns educate team and today's staff host. All of the lines have been muted to assure high quality audio, and today's session is being recorded. If you have a question for any of the presenters today, we encourage you to use the q&a feature on your zoom toolbar. And should you need closed captioning during today's session, the Zoom live transcript feature has been turned on and is available for you in your toolbar. Before we begin today, I'd like to acknowledge and thank autumns online professional development sponsor Marshall Gerstein. We appreciate your ongoing support with our webinars. And now I'd like to welcome a member of our online professional development committee, Karthik Gopalakrishnan from the University of Alabama Birmingham. Thank you, Carson, we are so excited to learn from you all today. Speaker 2 1:05 Thank you so much, Savannah really appreciate it. And also want to thank the online professional development committee for the opportunity to kind of bring this panel together. I'll be moderating the panel today. And we want this to be as engaging and interactive as possible. So as Savannah mentioned, please post your questions to the q&a chat, and I'll try my best to kind of keep tabs on them, we will have two or maybe three live polls during this discussion. And each poll will be kept on for about a minute or so. So please do vote because your answers will help make the discussion richer, we will also be sharing a slide deck VRM that covers all the topics that we'll be talking about. And the slides that we're going to see today are a subset of the slides that are gonna be made available. And the panelists that are part of this discussion today, kind of represent a broad spectrum of a public university. That's, that's me, a private university. That's Hana University across the pond from the UK. That's Tony and NBC. That's Mark singer. So essentially, what we're hoping to do is to provide all of you a variety of perspectives on this particular topic. So to make the process kind of efficient, and have more discussion, and and per the wishes of the panelists, I'm gonna introduce all of them today. So let me start off with Hannah. Hannah is the director for innovation, patents and licensing in Cal Tech's Office of Technology Transfer and corporate partnerships. Since 2015. She received her PhD in neurobiology from Caltech, and then she went away from bench science and consulted with McKinsey. For about five years, I think. She left McKinsey as an engagement manager, and then returned to Caltech in the field of technology transfer. Tony Hickson is the Chief Business Officer for Cancer Research UK, and cancer research horizons. Prior to that, he was the managing director of Imperial innovations. And they're essentially managing the emissions from Imperial College London. He's worked at Touchstone innovations and investment company that invest in technologies from universities, and he also advises the Cambridge enterprise and is on the board of Francis Crick Institute's translational advisory group. Mark singer probably needs an introduction to the audience here. He is the managing partner who has helped develop and launch Osage university partners in 2009. And he oversees and approves all investments and organizational activities. He has spent over 25 years in the VC world, including as a founding member of d v capital that has raised and invested over $200 million across 40 companies. He has a bachelor's in science and in finance from Wharton. And I'm Karthik Gopalakrishnan. I'm in my fifth year as the director of licensing in new ventures at the University of Alabama at Birmingham. And I have what 20 years of experience in technology transfer. And I have about 10 years of experience as a consultant for a startup in the oncology space. I received my PhD in biochemistry from an institute in India and got my start in the tech transfer world, from Duke University. So with that out of the way, I'd like to introduce at a very high level, why research institutes and or licensors actually take equity in their startups. Just to kind of set the stage and that'd be one slide for me and then Hannah, who is a self professed numbers geek will cover three additional slides, wherein she has analyzed the data that has been reported to autumn by the universities by you all just to kind of set the stage for this discussion. So with that, if I might request Hana to bring up the first slide, so there it is. So given so universities typically take equity in startups, because at that stage in their life time, startups are typically very cash constrained. And the universities take equity in lieu of a large upfront fee. Sometimes this might be due to differing of past patent cost reimbursement. And other times, it might because the university kind of gave additional support services of for the startup, for example, proof of concept funding, er, entrepreneurs in residence or mentors and residents advice, things like that. And the idea is that if the company is successful, and they actually have an exit, then along with the founders, The University also has an upside. So with that kind of setting the stage as to why University take universities take equity and startups, I hand it over to Hannah, to kind of go over some of the numbers. Unknown Speaker 5:50 All right, thanks, Karthik for the intro, and for teeing us off, and thank you, everybody for coming and attending. So yeah, so I was curious, you know, given that the topic of our discussion today, we decided to call it the true value of startup equity. And so I was trying to wrap my head head around, sir, how much is this activity of research institutions, universities, research hospitals, and so on taking equity and startups? How much is it actually worth on $1 basis? And how is that wealth distributed, again, across the across the sort of universe of tech transfer. So thanks to all of you who've been diligently completing your autumn licensing survey each year, Autumn actually has a wealth of data on this front, admittedly a little US centric, so I just looked at, I know, we do survey the Canadians as well. But I just looked at the US research universities and medical centers that reports data to autumn, just to get a sense of how much they have benefited financially from taking startup equity over the years. So overall, was the slide. There we go. And so 1996 was the first year that I saw equity numbers in the stat database. So I started with, with that all the way through the most recent survey year, which was 2022. So overall, over the course of that time period, universities and research institutions have reported about 3 billion in proceeds from the liquidation of equity that they held in their startups. And more than half of that was accrued to the top 10 schools or systems that that report in the database. So yeah, with the caveat that until very recently, certain state university systems reported collectively. So that certainly, I think, helped ut numerically being at the top of the rankings here, and the stuff the University of Texas System. And actually, the University of California system is just out of the top 10 At number 11. But you can see, you can see and probably no huge surprises amongst this list, except to me, I was actually a little surprised to see how many medical institutions that purely medical centers were in this. And so if you and also if you look beyond this top 10 There's actually a another for medical centers in the group that rounds out the top 20. So in addition to you see, Mayo, Sloan Kettering, and Boston Children's here, but also Cleveland Clinic, Nationwide Children's, Dana Farber and Fred Hutchinson are also on the top 20. So I thought that was interesting, a little surprising. And in terms of so how much is this wealth being shared? So I looked at how many research institutions over these years had been reporting equity proceeds. And then of those institutions, how concentrated was that? So what did the top five account for so the blue columns are the number of institutions with the scale bar on the left, the red line is the percentage attributable to the top five. So back in 1996, we saw only 28 research institutions reporting equity proceeds, and the top five of those accounted for over 90% of those proceeds. But by 2022, we see over 60 different research institutions recording equity proceeds, and the top five by this point, only account for about half of that. And just to calibrate that a little bit. Also, I would point out that in all those years, there were roughly on 150 institutions total recording. So I think it's not just a sampling question is not just that people weren't recording. So over 150 institutions, and pretty much all these years, were reporting some kind of licensing revenues. But you can definitely see that the number that have been reporting revenues from equity has definitely grown over those years. And so what are the actual dollars over that time? And so this, the full bar is the total licensing revenues reported in each of the survey years, and see if they can see it's grown from half a billion back in 1996 to over three and a half billion in the most recent year. And so the orange is The non equity proceeds. So you can see is that the equity proceeds are actually a relatively small piece of that. And certainly through back prior to 2014 or so, most years, and it's sort of lost in the sort of rounding noise here. But most years, we saw reports of 20 to 65 million in equity revenues, with a little blip associated with the.com, boom, around the year 2000. So we saw a bit of an uptick in 2000. But then starting in 2014, we saw a real increase in that, and that seems to be continuing in the amount of equity proceeds that universities are reporting with a peak in 2021. What is that number? It's, yeah, almost half a billion equity proceeds in 2021, accounted for almost 20% of all licensing revenues that year. And so while things on the equity front did slow down a bit, and 2022, I think that very much maps on to what we saw in the equity markets more generally, which is a big peak and IPOs and acquisitions in 2021. And with that, I will turn it back to turn it back over to Karthik, although if anybody has questions about any of the numbers feel, please feel free to put them in the q&a. Unknown Speaker 11:13 I had, I might have just one commentary on that slide you were just showing us thinking about? Well, it's to equity proceeds with 20% of all licensing proceeds. It's a higher percentage of all proceeds from startups. So the licensing royalties to large pharma and other companies, if you narrowed this down to all proceeds from startups, and said, How much of the equity, what percent is equity of all proceeds from startups? It's higher than this significantly higher. I don't know what the number is. But if you focus on just revenue from startup activities, it's more meaningful. Unknown Speaker 11:48 Yep, that makes sense. Speaker 2 11:51 Great. That's, that's a great setting of stage. Hannah, thank you so much. And clearly there is a financial upside to having equity in a startup. But I'd like to ask the panel Oh, what are the other benefits of having equity in a startup? So maybe I'll just start off with, with Mark. Unknown Speaker 12:07 Yeah. But first, the biggest positive, in addition to sharing in the financial upside, is that you align everybody's incentives towards creating equity value for the business. And so when everybody is kind of pushing in the same direction, which is we want to make this business successful in whatever it's doing. Regardless of how it gets there, you get, you get everybody just pointed in the same direction. Oftentimes, if there's if there's not equity involved, that can be people can have different points of view where the license or the university wants to see the technology be successful, the company wants to see its ultimate products be successful. And those can be intention. And so we think having everybody aligned or is making the company valuable, which is ultimately defined by making the equity of the company valuable. You have everybody had the same set of incentives around that. And so for us that that sort of battle, the alignment of incentives is the most important component. Unknown Speaker 13:09 Thank you. Thank you, Mark. What about you, Tony? I think after that, Unknown Speaker 13:13 yeah, I was just gonna add on this, this sort of positive correlation, the you tend to see between universities that have equity stakes in startups and their overall performance. Now, there's not a great deal of academic data. I don't think on this, there is an Italian study, we found that shows a genuine positive correlation between where universities have equity stakes and the success of those businesses. But I think it's more intuitive. It's intuitive, that if you are associated with a high quality Institute, your chances of raising money or being successful as a company, are raised. And I think most people would probably agree with that. However, there is a threshold to that. And of course, we don't know what that threshold is. But there is a there is a point at which you tip over the positive correlation and start to move into well, is this a fair distribution of equity between the founders and the investors and the Institute? Speaker 2 14:02 Actually, I can add to that from from my own experience here. So if you're not in a jurisdiction or geography, which is VC rich, then the angel investors that kind of invest in startups, they attach a lot of cachet to being affiliated or associated with university. So that automatically brings some credibility to that startup, and you're a lot more comfortable investing in them. So so but but there is a there's, as he said, Tony, there's kind of a tipping point where how much equity again, there's a balance there. So point well taken, Hannah. Unknown Speaker 14:38 Yeah, I think there's a few other potential benefits to having the research institution and be a shareholder, like other shareholders in the startup company. So you know, in theory, regardless of what our license is there who or licensee is, whether it be an established company or startup, we're supposed to be getting regular progress reports. We're supposed to be keeping up Rhys does licensed ORS as to what is being done with our licensed IP. But being on the cap table being potentially having an observer board seat that comes along with the equity does tend to give us increased visibility into the company. And so there's that you do get a bit more out of going to those board meetings, getting the shareholder reports, and so on. And that sort of allows you to keep an eye on how things are going. And I think that can be very valuable for the research institution. Um, another thing and this kind of comes back to this question of alignment that Mark talked about is, sometimes what will happen, despite sort of everybody's best intentions is that the company might end up pivoting away from the IP that was originally licensed to it by the university. And so that would potentially foreclose any future revenues to the university from running royalties on the on the products in question, if they're no longer covered by the IP that was originally licensed. But if the university still retains an equity piece in that company, then it can still benefit from the success of the company. And so everybody, everybody still benefits from that. So Speaker 2 16:10 I want to jump in here and ask a question from the Question and Answer chat box here. So the question is, is equity taken an exchange for license rights only or an assignment of IP generally, is the date available in this regard? So I want to take a first stab at this. So as I made a comment before, we have seen, at least at UAB, and in other places that you can get equity in exchange for no ha license, because again, the the startup wants to be affiliated or seen as affiliated with the university, because it gives them that instant credibility. But that's some of our experiences. But do Tony are, and I want to jump in and ask our product perspective here. Unknown Speaker 16:58 But well, I think it's the question is about assignment versus license. I, do you want equity because you're transferring ownership of the IP versus giving a license? Or is it more about it's more Speaker 2 17:12 is equity only given an exchange of IP, whether it's assignment or license? Or can equity be given or granted for things outside of that? Unknown Speaker 17:21 Okay, yeah. Yeah, yeah, absolutely. So it can be granted for no health for access to labs. There's also a sort of school of thought that says the university haven't employed the academics for a long period of time has given them the environment in which to create the venture. Certainly, in the UK, many academics don't leave the university, they have the startup as well as retaining their academic posts, the postdoc by Lee, the combination of all of that is wrapped up in the equity stake that the university gets, it's not simply a surrogate for an upfront fee in a license agreement. Unknown Speaker 17:55 And do you have anything to add to that? Unknown Speaker 17:56 I'm not really although I guess I also looking at the question the q&a was wondering if the question was more about assignment versus license, but maybe I'm not sure how to say how to parse that exactly. I mean, the short answer is we rarely assign our IP. So it's sort of a moot question for us. Yeah, Speaker 2 18:14 that's right, that we don't assign it at all. So any, any downsides to taking equity? Let's start off with Tony. Unknown Speaker 18:27 Yeah, I mean, obviously, you firstly, you've got a perception. So again, if you exceed that threshold of sets, then you're potentially getting the founders off side, in that they feel that you're robbing part of their initial stake towards the institute. And the investors as well, obviously, the investors want to see the founders rewarded, because they know that the dilution journey those founders are gonna go on. And the investors don't want to give up their equity to reward the founders, they might create an option for a rather University gave it up. So you've got that sort of the fair partition. And it also the accounting issues with equity, just need to be careful, you don't exceed 50%. So then you have to consolidate the company in your own books. You have to think about what happens when the spinner exits, and you potentially have an IPO or something like that, and you're, you've got a valuation issue. We've certainly seen situations where a vehicle connects, it's you can have an IPO, it's suddenly worth 50 million pounds or something like that in terms of book equity. And then you trip over into the next financial year, you're locked in for a whole year, you finally get out a year later, and equity is now worth 25 million. So you have to take a write down 25 million on your books, which can take a lot of explaining to the university. So you just got to think about some of the accounting issues that can go with equity as well. Anna Unknown Speaker 19:46 Yeah, I agree wholeheartedly with Tony about the potential complexity. Certainly on the accounting front, we find ourselves going into these exercises with our investment office where they're really unsure about the X sense to which they actually need to report some kind of a value for the equity that Cal Tech now holds. And it's particularly hard to do when it's a still a privately held company as most startups are until they're, you know, until they go IPO go public or potentially acquired by a public company. So it's a bit of an ongoing valuation exercise or not, are we throw our hands up and say, Look, this is de minimis, and chances are, it's not worth anything. And maybe it's okay to not do than to sort of find a way to sort of keep it normally on the books, but not overwork ourselves putting too much too much effort to put $1 value on it. And certainly, yeah, upon liquidation, you want to have a really clear policy as to how you're going to sell once you are able to sell publicly traded shares. There's also a bunch of paperwork associated with getting the equity and tracking it in the first place. So in addition to the license, suddenly, you've got a stock purchase agreement, you've got maybe an investor rights agreement, or shareholder rights agreements, and so on. A lot of these are more challenging for the tech transfer office to really evaluate and make sure that we are being treated fairly and on a par with with other equity holders, and so on. And so we end up having to turn to our corporate, corporate finance experts over and our Office of General General Counsel's review these things and start with a little bit of out of scope for us. Another thing that can happen is that the startups maybe don't want to clutter up their cap table. And this becomes a particular challenge at, you know, those institutions. Luckily for us, we're not one of them. But sometimes we have a partner institution like a joint owner, that has a policy that not only do they want to hold the equity at the time that the startup provides it. So suddenly, we've got, you know, not just Cal Tech, but Cal Tech plus our joint owner added to the cap table, but they might then in turn, have a policy that their individual researcher inventors who would eventually be entitled to approve any of the proceeds get their share at the time of issuance of equity, rather than at the time of liquidation. And suddenly, you've got this cap table with all these teeny, teeny, tiny shareholders audit, which I believe does not make the investors very happy. And Unknown Speaker 22:12 I would say I'm not pointing as investors, we've gotten used to cap tables that look like that, like it is most of the companies by the time we're investing in them, by the time they've raised multiple rounds, have lots of shareholders. And there are lots of tools out there from Karna and others to help manage your equity, it makes it a lot easier. So that that for us is not an issue of having too many shareholders at this point, you know, for us as investors, like the main question is always says the University on a fair percentage of equity. And then when it does, like, we're, we are strongly in favor of it. And I would say having watched universities have equity proceeds a little bit of what's behind some of the numbers, how to you presented earlier, our individual large realizations, like there is a little bit of a lottery ticket component to having equity and a number of startups in your portfolio at your university, where if one or two of those hits, you can have a very large, unexpected payout. That is that makes everybody happy. both economically and also psychologically. Because sometimes the universities when you see a successful startup, a lot of people start saying, Well, what did we get out of it? The trustees start asking why did we get out of it, then we got enough out and being able to say that you participate in the upside is an enormous positive. Speaker 2 23:32 That is a great segue. So I'm going to actually launch a polling question. And so I'm going to keep it on for a minute so that we can collate the responses and have our experts chime in. But as this poll is kind of launched and in process, I hope we all can see it. I am going to have Hannah, kick us off on the question on the poll. How does this issue that that kind of mark alluded to? How does this feel? Have we got enough equity come to you? Hmm. And then and then Tony chime in afterwards? Unknown Speaker 24:03 Yeah, I mean, as Mark said, right, there's this notion of okay, you know, here's the big hit, like how much did you get out of it? But maybe more general ends? We'll I think we'll come back to that. When we talk about how do we figure out how much do we actually end up getting and what it's how, you know, how hard should we fight for that extra point of equity. But more broadly speaking, we do find ourselves getting kind of sucked in, I would say into what we call a benchmarking exercise. You know, so hey, Cal Tech tech transfer office, how much percentage are you typically getting from your startups? Yeah, how much percentage of equity how does that compare with our peer institutions? You know, I hear that so and so is regular getting regularly getting X percent or are we getting that much and, you know, it ends up being a bit of an educational exercise somewhat in terms of managing upwards and really explaining that. That may or may not be a true apples to apples comparison. Right, because equity typically is just one piece of the considered financial consideration of any given license deal. Now, of course, as Mark pointed out for startups, in particular, if it is a relatively big piece, nevertheless, you know, there's a fair question of does it make sense to trade off accepting lower equity in exchange for higher royalty, etc, right? That's a calculus, we have to do every time that we negotiate a licensing deal. And we'll also talk about this a bit more about this question of percentage equity. Do we are we taking into consideration anti dilution levels? Right? And so it's, you know, it's fair enough to say like 3%, but is it? Oops, I think you accidentally lost number three. So, so I think, yeah, there's big difference between 3% With no further anti dilution protection and 3% with anti dilution protection up to a certain point. And so you need to understand not just that number, but is there anti dilution? At what point in the startups fundraising sequence? Are you receiving that equity? You know, what, what is what exactly is going on there? Unknown Speaker 26:14 Right, Tony, we're after that. Unknown Speaker 26:17 Yeah, I mean, I think in the UK, we've been on a sort of different sort of journey trajectory, although we're starting to all sort of converge in the same place, I think. And certainly we, for many years, in the UK, the sort of prevalent attitude was the universities are co founding the company with the with the founders, the academic founders. And the 5050 model was the prevalent model for quite a while now, of course, it never ended up being 5050, there was a negotiation University lesson there. But that was the starting position. And that model prevailed for quite a while and but over the last sort of decade or so we've seen a gradual movement away from that. And we've seen people experimenting with some different models. We saw Imperial, certainly, they offered a sort of scheme where you could have a five to 10% equity stake with an anti dilute, or you could have a higher equity stake with enhanced services. So we're trying some new stuff there. Exeter motor sort of 25% Fix model, Oxford's recently moved to a 20% sort of fix model. So we've seen some movement away from that prevalent 50% model. And some universities had a sort of horses for courses type model. So anything goes sort of depending on the circumstance, now in the latest iteration, and there's been some very vocal investors who still feel that it's too much. There's been some academic sort of Wipeout type stories, and some pressure from governments that sort of look at this, again, I think you're starting to see more of a harmonization, there's been a recent sort of publication by the 10, us six that are big, UK universities getting together, and trying to sort of harmonize now around the sort of optimistic equity stake are between 10 and 25%, with royalties on top, typically between naught point five and 5%. So we're starting to see some harmonization, I think, across the system, and the government review in the UK shortly about to read out very soon. So we'll we'll see sort of where that ends up. Speaker 2 28:05 Thank you, Danny. So let's pivot to another topic. So Hannah shared this data, where clearly the equity as a function of the total amount of money that comes in is a small number Mark hats and color added some color to that. But how much is it really worth for the reasons you say, I'm looking for a little more granularity? So Mark, if you want to expand on what you kind of had begun to allude to, on that. So what's the metadata here for the numbers that Hannah Hannah covered? How much equity really work for research institutions? Unknown Speaker 28:39 Right? Well, I would just say I could say from obviously, we can't talk about confidential information, but just seeing the equity payout. Some of our partners universities have received their there are numbers there that make them very happy. Like it is like when you when you do have a successful company, and you share in the equity, the numbers can get very meaningful. What's hard about it is it's inconsistent. Like it doesn't happen every year, and you cannot plan on it. So you almost have to assume you're not going to get proceeds from it. You know, Hannah mentioned earlier, you can even account for it has not been worth anything, until it is actually worth something that's hard from adapt standpoint. But um, but but it is it is unpredictable and challenging. But the The upside is very significant. And we have also seen in addition to just aggregate significant equity payouts, many situations even within our portfolio, were a company we've invested in about 150 University spinouts. In some of those cases, despite the best intentions of the company, they wound up not using the technology, they had license from the university. And that technology was the original foundation of a company. So the company raised capital on it, it built a management team on it. The license was really important, and ultimately it terminated the license because it developed, it didn't either the technology didn't work or the company pivoted. But when the university owned equity, it's still shared in the upside of that company appropriately. So, because that initial intellectual property was so pivotal to the founding of the company, the company never would have existed if it weren't for it. And if the university did not have equity, they would not have shared and that upside. Speaker 2 30:24 Fair enough. So pivoting again to different questions. So, Hannah, Tony, in your experience, how much time do you really spend negotiating with licensees for that one extra point of equity or that one extra million for anti-dilution? Is it all worth it? Given that it kind of comes down to a smaller number? Eventually? Maybe Hannah go first on this one? Yeah, Unknown Speaker 30:45 I mean, that's, that's that's a really tricky one, because you sort of don't know what you could have gotten or would have gotten? Yeah, I look. And so how much would it would it have been worth and to Mark's point? It's such a, it's such a purrito distribution, right? You've got a very few account for very much. So yeah, a very simplistic answer is okay. You know, if every time you know, if you managed to get 3% versus 2%, then all else being equal. Yeah, you would gotten 50% More at that, theoretically. But if you know, 99 times out of 100, it didn't end up mattering, because your exit was was so small, then How hard are you going to fight that fight. And I think it's more important, and perhaps more practical to take the view that Mark mentioned about, you know, these expensive lottery tickets, and it's better to just do do more deals, do things, you know, sort of be reasonable, be willing to accept terms that work for everybody, rather than grinding out that extra single point, on the off chance that that's the big one where it's really going to make a difference? Yeah, I looked at our data to try and wrap my head around it and wasn't super enlightening. But just to get a sense, again, of the sort of the lottery ticket numbers, we've had, you know, going back to 2000, we've started over, we've had over 300 companies that are startups out of Caltech, of those to date about 70 have had an exhibit with some kind of $1 return for an aggregate of about 50 million. And about 17 of those brought in over a million. So you know, even so on though, it was like if we had fought like tooth and nail to get that extra point, okay, we might have gotten a few 100,000 more, right. But at the end of the day, it just seems like on average, and I've tried comparing this with with other schools and other analyses, it seems that sort of, regardless of where you start, and how hard you fight, and whatever you're doing, well, if at time of exit, you still have 1% of the company, and then you get your 1% of the exit value. And yeah, I think some of the Express licensing efforts that we've seen out there, whether it's the Carolina Express, or others, kind of baked that in with this notion of having, you know, and this this sort of jumping the gun here, because we talked about this, but then an exit fee rather than equity. But again, it's sort of in that three quarters of a percent 1% range. I Speaker 2 33:16 agree with you, in my experience, it's about the same eventually you do get diluted to that kind of number ish. But Tony, given you guys start at a much higher equity share, because of the way you structure your deals. You don't have much dilution, or at least if you get a lot of equity. So does it still come down to eventually that kind of one presentation number for you guys? Unknown Speaker 33:39 Yeah, absolutely, I think I think we all end up in the same place. So I think that, you know, we formed over 70 companies that have Cancer Research UK, and typically our equity stake is one or 2%, by the time we exit. Now, of course, these are, we're in a world of biopharma of therapeutics, and so on. So these are capital intensive startups with massive dilution throughout their journey, but often sold a very large sums. Of course, if you are going for a revenue generating model straight out of the blocks, you might start with a lower equity stake, but that equity stake is going to be suffering, less dilution. So it does depend on the sort of market you're in as well. But the fact that we in the UK are typically taking slightly larger equity stakes, that's because we're not employing anti dilution. And devolution is sort of less familiar in the UK to UK investors. And I don't know how the math works out. It's impossible because you can't chart the dilution journey. But you could say that a 20% starting equity stake is equivalent to a 5% equity stake with an anti dilute to the end of series A so you know, it swings and roundabouts, the fact that we all end up in one or 2% equity in these startups in the day, I think is generally where we're expected to be. Right, Speaker 2 34:47 so, so to summarize, it's kind of hard to know what the true value of startup equity is, but it kind of comes out about 1%. So let's look at the alternative Unknown Speaker 34:56 other colleges that are out a couple of years ahead of course. So We many people know we've built a database of startup licenses for our partners, and it has about it has over 2000 startup license terms in it. And around my what percent? how, like how much equity do they own what a royalties and other things. And in those licenses, you also see first a very tight distribution of equity ranges. So most universities in the US this is all US data are in a pretty tight range of equity. Second, I would say that you see, when the equity moves up, in particular, it has more to do with the quality of the intellectual property portfolio than anything else. So So I'll give you kind of one general trend that points to that, if you've just isolated companies that are backed by VCs, and our licensing technology, after the venture capital backing has happened, oftentimes think, universities think, Oh, we're gonna wind up in less equity, because VCs are beating us up. They're aggressive. And so there's already this company's already venture funded, we're gonna get less equity. The answer is actually, that's not the case, that that VC backed deals have the same amount of university equity as non VC backed deals. And same around 82. Actually, they have VC backed deals have more anti dilution for universities, than non VC backed deals. And so when you drill into it, basically, it all comes down to the quality of the intellectual property portfolio. And that's what really drives how much equity you're able to get Speaker 2 36:27 out of. Thanks. Thank you, Mark. So Hannah, you kind of mentioned in your previous answer that there are some alternatives to taking equity. And you mentioned the Carolina Express license, kind of like an exit fee. So maybe you could just put up the slide, which talks about the exit fees as a context and American share some awesome questions. Speaker 2 36:57 Sorry, I'm working on it too many screens. Same here. There we go. Thank you. So so the exit fee. So there are pros and cons. And these are pros and cons, as viewed by, I guess, mostly from the research institute perspective. So there is more certain upside for the research institution, if with an exit for you, and how to deal with cap tables is obviously reduce paperwork and other complications that that was alluded to in in previous conversations. And, and the cons are, it's obviously seen as non diluted equity from the investor side, it keeps the research institution out of the boardroom, which sometimes is Helpful. Helpful, I guess from from the VC investor side, but from the university side, I think it's helpful for us to be on the board because it provides insight into what the company is doing and might lead to further collaborations from other faculty with the university and make the company stronger. No participation rights, Mark's not going to be happy with that. And no, not capturing the value if the company pivots. And afterwards just terminates license, so So you kind of you're left holding nothing. So that's just to capture the upsides and downsides to the exit fee. And now going back to two questions. So maybe, let's let's start with Tony. So is exit fee, something that you consider in the UK at all? Unknown Speaker 38:24 We have seen some people try them out. Absolutely. And I think it's quite interesting, because obviously, what what you're looking at is the the end nonstop entered on loop flow throughout the life, we've seen some people complain for Golden shares, you'll have a 1% fixed equity throughout the lifetime, but no more, no less. We've seen other people exit trees into the license. The biggest risk we're all dealing with here is of course is that later on, you come under pressure to remove them. So you put them in upfront. But if you get a huge syndicate of investors who come in and say, Look, we'll invest but you've got to take that out, you can come under immense pressure, because you want the spin out to succeed are you really going to stay in a way of that happening. So the biggest risk is either these exit, please don't survive the life of the company. We have seen some universities who are using a belt and braces approach. So they're taking an initial equity stake in a startup but they're also offering an express license. And in the Express license, there is a small exit fee as well. So even if that license is ultimately terminated, you still have the benefit of the starting equity founding equity stake, which is quite an interesting approach. Speaker 2 39:27 So there was an interesting variation of this that we had been discussing in the chat I want to put that up is an exit fee generally the same as change of control fee, is it fair to include both equity anti-dilution and an exit fee if one decreases the equity equity just a little bit? Unknown Speaker 39:46 Yeah, that gets it gets a little complicated and confusing and difficult to negotiation. Sometimes we try to at least not make it too punitive and having them not be We stacked on top of each other, right? So if we do get a positive return on the equity, it's creditable against that change of control fee, I don't know that we'd have both a change of control fee and an exit fee. That seems like it, I mean, change control feet, in our experience, at least tends to be a flat dollar sum or as an exit fees and keep more typically think of as a percentage. I know it kind of feels like the debate between annual minimum royalties and license maintenance fees, like would you ever do both right. And so some of it gets into semantics as well. Unknown Speaker 40:36 We've heard from from an investor standpoint, most VCs tend to not like exit fees for the reason Tony mentioned, which is like it's non diluted will, it's always there. And whenever you have a provision in your license, whether it's an exit fee, or anything else, that runs the risk of investors not liking it a lot, you do run the risk of losing it later. And then you have no alternative. Like it's hard to kind of back negotiate. So in most cases, we got our companies not taught to focus on exit fees on equity, and align everybody because in equity, if you have equity, you are aligned, where capital dilutes everybody if you have an exit fee or not. And so there's just always a risk with an exit fee, that you don't have it by the time you exit columns. And I think Unknown Speaker 41:24 you know, so this in a funny way, it ties back to something Mark said earlier about this notion that if you're negotiating on when the startups already VC funded, then perhaps counter intuitively, the university actually might do better in terms of the equity stake and anti dilution, and so on. And I think, you know, what the sometimes does end up happening. And I think Tony mentioned this as well, in terms of the stuff getting negotiated out is, you might as the university license or get what seemed like really favorable terms, if you're negotiating with a pre funded company that maybe doesn't have particularly sophisticated management yet. It doesn't have institutional investors in the book in the picture yet, so people who, you know, frankly, know more of what they're doing. And so when those VCs come in, or when the company is acquired by a bigger company that's been around the block a bit, a lot of that stuff does end up getting negotiated out. And as both mark and Tony said, you know, we might end up high and dry and stuck with nothing. Speaker 2 42:27 So here's an interesting question slash comment is to have a termination fee in the license. So in the case of an exit fee, if the company decides to pivot and terminate the license, thereby giving the founding institution nothing, have a termination fee. I mean, any luck with that? I have never done that before. Unknown Speaker 42:46 How would you enforce it? I don't know. Right? Usually our threat only threat is that, you know, if you don't comply with the terms we terminate, so yeah, yeah. Unknown Speaker 42:57 I mean, I think it's almost a poison pill, isn't it? It's how do you value it? I mean, how do you put a number on it, at least an exit fee is a share of the total value adds value by someone else at exit, whereas if you've got a fixed the termination fee, I mean, you can always make the exit, please survive termination of the license if you really want to use it as surrogate equity. But again, you're back to the points that everyone else has mentioned about are the investors gonna wear that in the future? Right. Unknown Speaker 43:22 Okay. During this whole area, there are lots of ways to be creative. And we've seen lots of creativity, including like a floor, you can have equity. But if you don't get a certain fixed dollar amount floor, then it effectively turns into a fixed dollar amount. Exit fee, but it just winds up being more headache than it's worth in most cases. Right. Right. Okay, Speaker 2 43:44 so we have about 15 minutes. So I'm going to have a series of rapid fire questions at all the panelists, and then hopefully get some more q&a from the chat. And so, Hannah, what factors influence the amount of equity that you ask for? Unknown Speaker 43:58 Well, I think, you know, Mark pre answered this earlier, where really, it's about the I think the biggest factor is the quality and quantity of the IP that's ultimately being licensed. If it is, you know, the crown jewels, and it's really going to be the heart and soul of this company, then we're going to get more than if it's just something that's more incidental or a weaker patent or anything like that. I mentioned before the trade off against other financial terms. So certainly there is a bit of a quid pro quo of okay, we could ruin the company, you really don't want to give us that much equity fine, but let's make it up in the milestones. Let's make it up in the royalties, whatever. It will depend on the stage that the company is in and what point in its fundraising journey it's in. So for example, we might be willing to waive or anti dilution or it might even be moot if we're getting the equity, add to stage where the company is already funded to a point that it's beyond whatever anti dilution threshold we might want to impose anyway. Another factor that we certainly take into account which is sort of market norms or comps and certainly, you know, we're able to work with various sources to get good comps. So that is helpful as well. And then precedent does sometimes play a role as well. And so sometimes, you know, if you're dealing with either a repeat entrepreneur or you know, the same investors and so on, they kind of get a sense of what the ballpark is that that we're typically going to be able to, to accept or offer. Great. Speaker 2 45:28 Thank you, Hannah. Tony, is no equity, ever the right answer? Unknown Speaker 45:34 Yeah, I mean, well, let me ask you the question is no royalty ever the right answer? Absolutely. So there are certainly there are certainly situations where royalties are just not applicable. Or it could be a really complex product, when it's just impossible to calculate what a royalty would be. If you're asking about whether equity, I would say, yes, of course, there are scenarios where equity is not the right answer, but they're rarer. They're less common. And so might be, for example, a disgruntled founder, or there might be a reputational risk associated with that company that you'd rather have the distance to just an arm's length license. And we've certainly seen circumstances like that. So. So yes, there are circumstances they're rare. Why are they rare, because I think we've always had the kind of mixed model of equity and royalty, because we just don't know we've seen too many occasions where it's gone down one path or the other. And the founders are wiped out, or the license falls away, because as Mark said, they move on to a different technology. Having the benefit of both is not just good for the university, it's good for the founders as well to protect them. So we that's why we generally advocate taking a bit of pause. Unknown Speaker 46:33 And if I could jump on that it sort of occurred to me of another sort of downside scenario of taking equity in one where the answer might be just don't take it at all, which is with foreign startups, right foreign to whatever country the US license are based in. And especially in the USD these days, with the increased scrutiny on issues of foreign engagement in our tech transfer to hostile nations, things like that, we might not want to be in a situation where we are equity stakeholders in countries based in certain jurisdictions. And the other the other time we've occasionally done no equity in a startup is when the startup has actually agreed to pay the big upfront instead, we said, You know what, we'll take the burden the hand, I mean, the company is well funded, and they don't have for all the kinds of reasons that we discussed. They don't necessarily want or need us as an equity holder. So final multiple take the cash up front. Yeah, but we have so good. Well, okay, let me get one more so but we have been yelled to Tony's point about striking the balance. On the flip side, we have been definitely burned by equity only licenses where, you know, for whatever reason, with with down rounds, and our dilution, we got nothing. And had we had like, even a fractional royalty on this company's products, we would have done extremely well. So Speaker 2 47:53 and that's a nice pivot to the next question, which was going to be to you is an equity only deal the right answer in any situation? Yeah. Unknown Speaker 48:00 So rarely, which is, you know, sometimes maybe, you know, to Tony's point, if it's a in a field or other type of technology, where a royalty really wouldn't be the norm. And certainly, we see that a lot more in tech and software and so on. Speaker 2 48:17 Tony, any thoughts on? Is equity only deal the right answer in any situation? Yeah, Unknown Speaker 48:22 no, no, nothing to add. I Unknown Speaker 48:24 think we've covered the main. But I think Mark wanted to jump in with something else I had Mark. Yeah, I was Unknown Speaker 48:28 gonna say there was another time I've heard our partner universities ask whether they should take equity, which is an LLC, yes. Oh, yeah. Yeah. And because of the pass through dynamics, and being a tax exempt entity, should universities accept membership interest in LLCs, we've actually seen more of our partner universities do that. So I think it used to be the would prohibitive and now there seems to be kind of an increasing acceptance that that's an okay way to take equity as well. Speaker 2 48:59 So let me ask you a question mark. So you hear all these responses from Hannah and Tony, and what so those are just part assets in a very interesting kind of place here. So since you do prefer, or we would like for all of our other universities you work with to have an equity stake, your venture partners might sometimes wish that so much equity was not granted to the university. So so how do you kind of balance that? And do you have any thoughts on that? Yeah, that's Unknown Speaker 49:27 a good question. We do sit on all sides of this or very much like in between our partner universities who we do view and treat hopefully very much as partners and, and venture capital firms who are co investors with us and so we are on all sides of this. And here I see all the tension and negotiating conflicts and everything and at the end of the day, we find if everybody is reasonable on all sides, there are some obvious solutions here. So it is it is obvious to us and to our co-investors that universities should have equity in their companies, it's also obvious that it shouldn't be a massive amount of equity, that it should be a reasonable amount of equity and the anti dilution provisions should be reasonable. And so as long as we're all in the reasonable range, this whole process works pretty well. And sometimes when somebody objects in particular, let's say a venture firm, that objection says these terms are not reasonable. It's because they had one deal somewhere, that that was very different. And you have one of the problems you have in the venture world is people take their most favorable, the most favorable licensing terms, and say all of our deals should look like this one. And there's some special reason why that deal had very low equity or no royalty, or other things that if you're on the university side, I would encourage you not to actually play into that, to have them produce, like all their deals. Because Because the average, if you looked at the average equity, owned by universities, in the venture portfolio of any given VC that funds University startups, you're gonna see they all wind up being pretty similar. So as long as everybody can be reasonable, I think this whole process works well. Unknown Speaker 51:11 Yeah. Unknown Speaker 51:12 Don't let them cherry pick the best terms of like, across their deals to it's like, oh, well, we got, you know, X percent here and y percent there. It's like, Yeah, but those are different deals. Right. And Unknown Speaker 51:23 sometimes we hear on the university side, someone will say, Well produce that entire license for me. Like, if you think you know, you had 1% equity in this deal. And you want us to do, let's see the all the terms of the full license, like what else was in there? Because there are there can be trade offs? Or Speaker 2 51:39 not? That's an interesting question in the q&a, is vesting of equity REITs becoming more common? I didn't even know it was a thing for universities. But it's an interesting way to approach it, I guess. Unknown Speaker 51:49 We have never seen it in a university. But you, you do always want vesting for the founders, or the early managers. And sometimes we see companies make a mistake and not have vesting, the founders, and then you have, say a pie who gets a big equity stake and moves on and doesn't help that company. And you're stuck with that big equity stake. So you absolutely want it on the founder side. Yep. Yeah, Unknown Speaker 52:15 I think we were exactly the same in the week. I don't think I've seen many occurrences in February of universities, states vesting, but from the founders point of view, we do make a big effort to separate the active founders, those that are ie founders who get their shares of the IP creating University. And then there are ones that remain active in the spin out going forward, and they should be participating in a separate auction ball, and they will learn their shares as besting as they add value to the company. Speaker 2 52:42 Great. Thanks, Tony. So to wrap up, so how can research institutes and our licensees best approaches matter? So I'd love to have your opinions, thoughts, resources, specifically, which of course, for attendees, you will find it in our slides, kind of best practices used as reference. So let's start off with the mark. Unknown Speaker 53:01 Yeah, firstly, I'd say we on our website, which is up to a VC, you could find a section called insights, which has lots of best practices in it around this. And we also have lots of webinars around best practices, one of the things we've been talking about lately is actually around founders equity and how it does get distributed. And making sure because that can be a barrier. In the future, if one founder has too much, or the equity split isn't right. But more more broadly, I would just say like for us the best practice around license negotiation and equity is everybody started at a reasonable point. And then second, everybody talked to each other, and not just communicate through documents and email, because that leads to issues festering and you don't settle things, the more you can get on the phone on Zoom or even in person and work things through the more you can settle things relatively quickly. Unknown Speaker 53:52 Yeah, I know that I have too much to add to mark serve very reasonable advice. I think the other thing I would point people to on the Osage site is something we hinted at but didn't really get into in detail because it could fill at least an hour itself is really, really understanding sort of how dilution works, what effect it has on equity, sort of what ends up happening to the university share over multiple investment rounds, depending on what the valuations are at each round. And there's some excellent tutorials on there as you're working through some of these examples of how it all plays out. I'll also mention a another initiative that ODP was involved with, we weren't involved with this one directly, but a number of other US TT O's were, which is this for Life Science startups, specifically, this this forum that was I think, you know, spearheaded by by Columbia and others inter and involved other VCs as well just to sort of get universities and VCs on the same page about what to expect Take what realistic expectations should be, you know, Mark, use the term reasonable a lot. And of course, you know, reasonable people can disagree about what's reasonable. And so, you know, having those conversations is important. And this was sort of a way of memorializing, as I understand that the results of many such conversations. Also, as a bonus, if you go and that I put the link in the chat, if you scroll down, you'll also see some of the the Osage data on their specific, you know, equity versus other types of financials results, which map actually quite well to the overall aggregate autumn data that we showed earlier. Speaker 2 55:38 Right, Tony, any any quick thoughts? Because we're hitting the top of the hour? Unknown Speaker 55:42 Yeah, no, just the similar thing is happening in the UK. And we've seen the same in the Netherlands, we can post some links about those as well. And the 10 year, a group of universities have got together here and created something called User Guide. And a similar way to the Columbia group. The key thing being a group of investors have come together with a group of universities and come together. And there's more than just guidance on equity ranges, there's guidance on dilution, and all those sorts of things. So these are helpful guides. Speaker 2 56:08 Great. So Kevin, it's very close to 12. Maybe there's one more question that that I thought was interesting. And it's a topic that we kind of kept in reserve, the concept of double dipping. So Hannah, want to quickly lay out the stage and what, where we kind of evolved on that matter in the US, and Tony can jump in on the UK side. Unknown Speaker 56:30 Oh, sure. Okay, I thought maybe, sorry, not to derail things. I was wondering if we should check the q&a and see if there's questions in the q&a. So Oh, was it okay, it was? Yeah. All right. Great. Yeah. So So I see. Yeah. Right. So double dipping as it as often, as the term is often used here in the US refers to this question of what if a researcher is getting founder shares in the startup on account of their role as a founder as the originator of the IP, but as an individual directly from the startup, plus, they will typically also be an inventor on the IP that was licensed to the startup. And so by the university's policies, they also get a distribution when the university liquidates its shares, and they get their percentage based on the university's policies. And so this this perennial question that comes up, at least in the States is, is that allowed? Because over the years, some institutions have actually called that double dipping and disallowed it and said, Hey, researchers, you can't get both. You can't get better, you can't benefit from equity directly from the company, and from the university portion of equity. I think the consensus right now is that it's not double dipping, because these are for very different reasons right to recognize these these individuals, very different roles. And so the last time this question surfaced on the autumn discussion boards, I think just about everybody had moved to a model where it was okay for for researchers to get both Speaker 2 58:17 got a Tony, any any different perspective from UK? Unknown Speaker 58:21 I'm not sure I can really comment on whether we harmonize yet and UK around that policy, I think there's different policies floating around out there. And what I would say is double dipping has different meanings to different people. And sometimes we've seen them double dipping as just the mere fact that taking equity and royalty, the mixed model are some investors pushing back, so you need to choose between one or the other. And obviously, we believe in the mixed model. And actually, we've seen it applied the other way as well towards investors where investors are attempting to apply sort of preference shares were participating liquidation preferences, ie they get their money back, and they share in all the upside as well. And, you know, there's an argument to say that's a form of double dipping as well. So we see the term applied in lots of different circumstances. Right. Okay, Speaker 2 59:03 it's it's 12 o'clock. So to be respectful of everybody's time, I want to thank the panelists for their time and sharing their wisdom on these topics are special thanks to Anna and Savannah at autumn for technical matters and had been put this together. And if if the panelists have any parting thoughts, please feel free to chime in. If not, we wish you all a very good afternoon, panelists, any any any final thoughts to end this? Great. So I do have Speaker 1 59:34 one thing I wanted to throw in just again, on behalf of autumn and our sponsor Marshall Gerstein. I want to thank everyone, for coming today and thank our panelists for this informative presentation. Just a reminder, a recording of this webinar in the slide deck will be available in the autumn Learning Center within a week of this event and that is included in your registration. If you have any issues accessing it, just let us know. And then do Just another quick reminder, please complete the webinar evaluation that's going to be sent to you as soon as you sign off from this session via a follow up email later tomorrow. So again, thank you so much for joining us today and I hope you all have a good rest of your day. Unknown Speaker 1:00:15 Thank you. Thank you. Thank Unknown Speaker 1:00:16 you, everyone. Transcribed by https://otter.ai