Translation of TransferAllianz’s position paper on best practice for life science spinout creation

Hot on the heels of the US-BOLT and UK USIT recommendations for more standardised terms (or at least defined best practice) for creating new life science spinouts comes this position paper from Germany’s TransferAllianz - the German Association for Knowledge and Technology Transfer (translation courtesy of Microsoft’s Co-pilot, so no responsibility taken for any inadvertent errors!).

Interesting to see significant consensus building around certain terms, noting that both USIT and US-BOLT were agreed by working groups including academic research centres, investors and legal experts, thus aiming to establish a balanced view.

Also interesting to see that the position proposed regarding institutional founding equity stakes in spinouts is even lower than that suggested in the USIT guide; 10-15% versus 10-25%, evidencing an acknowledgement that more founder-friendly terms are the future.

The TransferAllianz paper focuses mainly on the financial terms and I look forward to seeing whether this is expanded in due course to mirror (through a Germany-centric lens) the more detailed recommendations of the USIT guide, for example with respect to subjects like IP improvements, extent of retained rights for the institution, warranties and indemnities etc.

Certainly Evotec’s Academic Partnerships team has found these position papers to be useful in building new BRIDGE drug discovery partnerships for which we often pre-define the terms of downstream spinouts and licences, and where such references can help to bring any outlier positions into more acceptable territory.

But how will this paper’s recommendations land across the wider German research institution landscape?

Position Paper

Faster and Smoother Spin-offs with Standardized Key Points Recommendation of the TransferAllianz for the Medical Life Sciences Sector

Fast and simple spin-off processes are crucial for successful technology transfer from research to application. Therefore, scientific institutions support founders within the scope of their funding regulations. They offer various services, from individual consulting and tailored coaching to their own funding programs for development projects and much more.

Individually negotiated conditions regarding licensing and potential participation (spin-off terms) – the current status quo at almost all German scientific institutions – mean a high time, cost, and personal effort for all parties involved. A significant reason for this is unclear and differing ideas about the appropriate consideration of the participation of publicly funded scientific institutions in potential economic success, as well as different levels of experience.

It is undisputed that more founder-friendly and liquidity-preserving conditions for spin-offs and their investors are needed. The TransferAllianz recommends orienting towards internationally tested and recognized models developed jointly by leading scientific institutions and investors. This guarantees international compatibility, secures the interests of founders, investors, and scientific institutions, and ensures fair and appropriate participation of all parties in the success. Notably, the recommendations of AUTM and the industry-specific USIT Guides of TenU are highlighted. Similarly, Dutch and Austrian universities in Europe have now issued their standards, which follow the same direction.

The USIT Guides are guidelines that describe best practices and methods for evaluating intellectual property (IP) and promoting technology transfer at universities and research institutions. The USIT Guides enable uniform standards and transparency in the development of investment conditions, based on extensive quantitative and qualitative data analyses, and provide an excellent foundation for universities, investors, and founders to make technology transfer and the commercial exploitation of research results more efficient and successful.

The main goals of the USIT Guides for all involved parties are:

• Standardization of Conditions: Defined terms and clear, consistent frameworks for spin-offs, investors, and scientific institutions avoid misunderstandings and facilitate and accelerate negotiations.
• Transparency and Fairness: The use of uniform conditions creates transparency, ensures equal treatment of all spin-offs, and strengthens fairness in negotiations between universities, investors, and founders.
• Fair Participation of All Parties in Value Creation.
• Support: Founders receive guidance and are supported in making informed decisions during negotiations (also with investors).
• Access to Best Practices: The USIT Guide contains best practices and recommendations based on the experiences of successful technology transfer.

Key Points for Standard Conditions for Spin-offs in the Medical Life Sciences Sector

Key points for spin-off conditions are always industry-dependent – there is no “one-size-fits-all” solution. Therefore, the TransferAllianz recommends industry-specific approaches based on the USIT Guides. For this position paper, it has developed specific key points for conditions in the Medical Life Sciences sector. The focus is on IP-based spin-offs. In some cases, other components such as access to infrastructures also play a central role and need to be negotiated separately.

Such key points define a binding framework for spin-off conditions, representing the best possible compromise between an inflexible, fixed standard and the consideration of product- or service-specific peculiarities that predefined values cannot adequately address.

The starting point is always a (usually exclusive) license agreement for the use of the required intellectual property. International practice is the combination of a license agreement and an open minority participation. License agreement and participation are to be considered as corresponding components that are part of a total package. The proposed low licensing conditions are to be seen in the context of the simultaneously proposed participation.

The participation is implemented by the scientific institution either directly or indirectly (through a third party). If direct or indirect participation is not possible for legal or structural reasons, virtual shares are also an option. While participation involves co-ownership with extensive corresponding rights (e.g., participation, speaking, and information rights) for which there are clear legal regulations, virtual shares (e.g., exit fee, phantom shares) represent a contractual claim that must be individually structured in separate agreements. Both virtual shares and real participation require professional participation management, especially regarding further financing rounds or an exit.

Key Points for Licensing IP to Spin-offs

When using intellectual property, a market-standard, usually exclusive license agreement with license fees in the form of milestone payments and royalties is concluded. The amount of royalties depends on the scope of the IP package (e.g., patents, scope of protection, uniqueness, geographical coverage, etc.), the investment required to reach market maturity, the maturity level of the technology (TRL), benchmarks, and regulatory requirements. All inventors benefit from the income from a license agreement, including those not involved in the founding.

• The royalty rate is: 1 to 4% for therapeutics (small molecules, gene and cell therapies, repurposed drugs, vaccines, etc.) depending on the product’s development stage, 0.5 to 1.5% for pure know-how licenses, 3 to 6% for medical devices of risk class IIa-III (including software as a medical device) and in-vitro diagnostics, 5 to 20% for medical devices of risk class I, software, and research tools depending on the maturity level and service character.
• Milestone payments and royalties are agreed upon according to market standards but adjusted in the package with the participation level; liquidity-friendly for spin-offs and investors (“back-loaded”), i.e., payments are made only when sufficient liquidity is available.
• The spin-off usually takes over the ongoing and reimburses the previous patent costs within a period of two years. For universities, the reimbursement of previous patent costs is in addition to the employee inventor compensation to be paid. For high amounts, the reimbursement can be adjusted appropriately. The responsibility for any patent defense lies with the spin-off.
• The institution receives a right of use for research and teaching.
• If relevant and appropriate, anti-stacking clauses, combination product regulations, and a paid option for future IP in the same technology field or application area are included.
• In suitable cases, an annual minimum license fee (2 to 20 thousand euros, creditable against royalties) is agreed upon to ensure development pressure. The sublicense fee is usually in the range of 5-30% depending on the development stage but can also be significantly higher.
• No representations and warranties beyond ownership are agreed upon for the IP.

Key Points for Participation in Spin-offs

Founders benefit from the professional support of the scientific institution’s participation management. This brings experience that protects the spin-off from typical mistakes and can act as a supportive position towards investors. Other advantages of participation include aligning interests, enhancing the credibility/reputation of the spin-off, access to the institution’s network and infrastructures, and the realization of a “back-loaded deal model.”

The spin-off terms presented here are based on the internationally established models described above but are in some cases even more founder-friendly compared to the current USIT Guide:

• Participation amount: 10 to 15% dilutable shares (dilution, 10% base value, higher values depending on the IP situation or extensive support), or in the special case of spin-offs mainly in the USA: 5% non-dilutable shares (anti-dilution) up to a company value (post-money) of €10 million.

An individual solution is required if the institution’s IP share is low or the founding is based on know-how/IP before the employee joined the institution.

With the recommendations for the Medical Life Sciences sector, TransferAllianz focuses on models that are internationally established and thus compatible. The specific recommendations proposed here for the Medical Life Sciences sector validate and refine these models. Further industry-specific recommendations, for example, related to the recently published USIT Guide for Software, will follow.

Note: The participation amount is 10-15% instead of 10-25% in the USIT Guide.

Glossary:

• IP: Intellectual Property (Patents, copyrights, trademarks, know-how, software, material, data, etc.)
• Spin-off (Spin-out): A company formed to commercialize research or technology developed within a scientific institution.
• Anti-stacking Clause: A provision ensuring that royalties from different licensors do not excessively accumulate.
• Combination Product Clause: Regulates royalties for products that contain multiple licensed active substances or are sold in combination with other licensed components.
• Exit Fee: A contractual obligation due in the event of a company sale.
• Royalties: Payments made by the licensee to the licensor for granting commercial usage rights of IP.
• Indirect Participation: Equity participation in a company through an external commercialization partner.
• Dilution: The reduction of ownership percentages through capitalization measures.
• Premoney/Postmoney: Company valuation before (premoney) or after (postmoney) a financing round.
• Back-loaded Deal Model: A founder-friendly approach where the majority of the compensation for a license (from the scientific institution to the spin-off) is deferred to a later date, such as after achieving certain financial milestones or an exit, to avoid financial burden on the spin-off and investors at the start.
• Reps & Warranties: Representations and warranties regarding the legal and financial status of the IP or technology licensed to the spin-off.

TransferAllianz e.V. is the German Association for Knowledge and Technology Transfer (WTT). It unites universities, research institutions, patent commercialization agencies, and other transfer service providers into a nationwide, growing network. Through its approximately 110 members, TransferAllianz has access to the experiences and research results of over 250,000 scientists in public research. Annually, more than 1,000 new spin-offs are created within member institutions, about 25% of which are IP-based spin-offs (2021 survey). The goal of TA activities is to structurally and sustainably promote the transfer of knowledge and technology from science to industry and society, thereby strengthening Germany’s innovation landscape.