Magic words for academic founders: Unencumbered IP

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I'm posting this article from the APS March Meeting in Boston, where I've had the pleasure of seeing many friends and colleagues across the quantum computing research community. All have expressed interest in my transition from academic to founder, and many have inquired about the same thing - how to deal with IP. And so it seems to be perfect timing to share the next insights in this series.

When I was only exploring opportunities to start a commercial venture in quantum computing (which eventually became Q-CTRL) I received a pretty clear impression from a variety of the investors with whom I spoke:

Some said that while they’d be happy to chat, they would never back a “University spinoff.”

All wanted to understand in detail the equity and IP relationship between any commercial venture and my University employer*.

Some suggested that maintaining any kind of relationship with the University while running a company could make us uninvestable.

For good or for ill, investors on average appear quite shy about engaging with Universities and their affiliates in new ventures. To clarify, I think the reticence is much more focused on the institution rather than individual academics.

Understanding this is essential as many new founders coming out of Universities may uncritically accept an equity deal for either IP ownership or early capital from their University employer prior to engaging with the investor market.

This can be the kiss of death for a new startup. 

To avoid it I offer three key pieces of advice.

First, think very hard and engage with the private investor market before accepting University equity ownership of a new venture. This may not always be possible, and experiences will vary dramatically based on the relative maturity of the University’s commercialization activities. As you might expect, a handful of US institutions have simple and streamlined processes, but others have been described as a “torture chamber of negotiation.” 

You should therefore carefully explore what the cost of the small initial capital is. Will it saddle you with compliance obligations that slow down operations and distract from core business? Will it wrap you into interminable negotiations? Will it forever append a scarlet letter – “U” that (fairly or not) deters future investors? 

Second, try to ensure a new venture is based on unencumbered IP – that is the essential IP needed to start your company is best if it’s not protected and owned by a University (or anyone else) as licensor. Negotiations on licenses can drag on for months or even years and if access to this IP is essential to your company you may be heavily delayed or struggle to attract the operating capital to sustain negotiations or basic operations. The timeline for University licensing negotiations is set by lawyers, while the timeline for a startup's viability is set by a rapidly moving market. They are, in general, not aligned. Again, this experience will in reality vary substantially by institution.

Of course it may not always be possible, but academics should be comfortable leveraging a combination of their know-how and public-domain information (e.g. from their publications) as the basis of a company. Just think about how difficult it is for other academic teams to fully duplicate your work without your assistance. In a commercial setting this provides an initial advantage free from protracted IP negotiations. Over time the company can then develop its own unencumbered and possibly protected IP as an asset base.

Finally, if you’re looking to maintain a part-time academic appointment this will likely raise concerns among investors who fear the University may at some point in the future claim ownership of things you’ve done inside the company. Managing this will take special care. You will have to likely sign a warrant ensuring you will abide by University IP policy and then actively implement IP segregation. This means that IP from University activities never flows to the commercial entity before it is either reported via proper channels and/or placed in the public domain (e.g via publication of an article or patent). In my view this is quite fair and I didn’t meet any pushback from the University of Sydney when I worked to ensure this segregation. But determining the pathway up front is essential to avoid lengthy lawyerly debates…

The negotiations will not be trivial, but having some knowledge of the relevant pain points for both sides will help you approach the engagement with a better understanding of how you can achieve your goals.

*For the record, Q-CTRL is fully independent of The University of Sydney, which has no equity ownership of the company. The University has been supportive of this new venture as a high-impact outcome of public-sector research activity.