Getting start-ups started faster
Start-up license template could reduce university-VC negotiation time 80%
A consortium of academic institutions, VCs and law firms are aiming to slash the time and cost of licensing IP for life sciences start-ups by 80%, through the publication of a model term sheet.
The consortium came together nearly three years ago based on shared frustration at the time it takes to reach agreement on a license term sheet between a technology transfer office and investors building a company around the academic IP.
“The more time you spend figuring out peripheral stuff such as licenses, the less money and time you have to spend on the science,” 5AM Ventures’ Galya Blachman told BioCentury. “There’s a real opportunity cost to not having these licenses done quickly.”
“We all know how the movie ends. Yet when we get together, we would all pretend like we’ve never seen the movie.”
The authors of the model term sheet believe that the typical timeline of six to nine months could be cut down to one or two months by avoiding protracted negotiations.
In addition, less experienced academic institutions and investigators are often at a disadvantage because they don’t have the history or confidence to know which are the battles worth fighting. With banner names endorsing the terms covering about 80% of the document as reasonably acceptable, the hope is that these organizations will use that as the starting point, and spend their time on the 20% that matters.
It may also decrease friction between academics and investors, as the more variables that require negotiating, the more opportunities there are to generate mistrust in a budding partnership.
The success of the template will depend on it being broadly adopted and quickly becoming the “standard of care” for life sciences start-up term sheets.
The term sheet problem
Tech transfer officers and VCs who spoke to BioCentury said the negotiation of the start-up license agreement is the lengthiest part of forming a start-up. But it doesn’t need to be.
Columbia University’s Orin Herskowitz told BioCentury that most experienced institutions and VCs have done enough start-up deals that they usually have a pretty good idea of what the final deal terms will look like going in. Herskowitz is Executive Director of Columbia Technology Ventures.
“We all know how the movie ends. Yet when we get together, we would all pretend like we’ve never seen the movie,” Herskowitz said. “We’d come in too high because we knew they would argue with us, and they’d come in too low, knowing we’d negotiate. And then we would all collectively just waste a bunch of time. It is just like theater.”
These delays are especially problematic for life sciences deals, he said.
“The problem is, when the thing you are talking about is a cancer therapeutic, a three- or six-month delay in getting that deal negotiated means a three- or six-month delay in getting the venture funding, which leads to an even bigger delay in entering clinical trials,” he said. “It is a bad outcome. And it is a totally pointless outcome too, because it benefits nobody.”
The perceived need to negotiate every point in a term sheet is often the result of either inexperience or a prior bad experience by one of the parties at the negotiating table.
Blachman noted that tech transfer offices often have post-docs negotiating licenses. “There are non-lawyers arguing over legal terms and often thinking that something is much more important than it is,” she told BioCentury. “I can’t tell you how many tense and unpleasant conversations I’ve had with tech transfer officers fighting over minor, silly sections in these documents.”
Herskowitz said the other side of inexperience is that smaller tech transfer offices or VCs who do fewer deals per year may be less familiar with the start-up license agreement process. “They don’t know what the norms are, so they’ll argue over every term,” he said. “So instead of having a three-month delay, you have a nine- or 12-month delay.”
“There’s no need on 80% of this language to do any negotiation.”
For more experienced groups, Jon Soderstrom said the psychology of wanting to avoid repeating a bad deal can make negotiations more contentious than necessary. “What happens is people are protecting against that bad experience,” he said. “That was why these conversations were so important, almost to point out to ourselves, that this bad experience wasn’t normal.”
Soderstrom is chief licensing advisor at law firm Wilson Sonsini Goodrich & Rosati; he was managing director of university technology commercialization and faculty innovation at Yale University when the collaboration on the model term sheet started.
This recognition of deal-making inefficiencies led 11 academic institutions, seven life sciences VCs and three law firms to come together in an effort to streamline the process.
Nearly three years of monthly meetings among the group showed that the vast majority of the specifics within a typical term sheet didn’t require renegotiation every time — there was language that all parties agreed would be reasonable in most instances.
This resulted in the drafting of the model term sheet, a template that any tech transfer office and VC can use when negotiating the license of IP for life sciences start-ups.
“If 95% of the clauses in there are going to be good enough 95% of the time, that means you’ve gotten a lot of drugs, devices and diagnostics to market years faster than they otherwise would,” Herskowitz said.
Reducing the variables
Herskowitz and Soderstrom said minimizing the number of variables to be negotiated allows the parties to focus their time on the key numbers, such as equity compensation, license fees, royalty rates and other major inputs that determine the value of a deal for both sides.
“You’re going to save time and cost, because there’s no need on 80% of this language to do any negotiation,” Soderstrom said. “Just take it, and worry about the things like what numbers go to fill in the blanks.”
Both argued that the model agreement should also give less experienced tech transfer officers or VCs the confidence to move forward with a deal because they can show their superiors that the terms used are good enough for some of the most well-respected VCs and academic institutions in the sector.
“What this does on both sides is if you’re a small- or medium-sized VC and you take this template, you can say, if it is good enough for Polaris, Atlas, 5AM, RA Capital, OUP and Venrock, then this is not where I should spend my time trying to optimize,” Herskowitz said.
“We want to get it the same way as the NVCA documents, where everyone’s using this license, and if you aren’t, something is off.”
In addition, entering a negotiation where about 80% of the terms are already agreed to means there’s much less opportunity to develop mistrust between negotiating partners, increasing the likelihood that the deal gets done.
“What you end up cutting out are the arguments that invariably ensue, where one side says everyone does it this way, while the other side says we’ve done 50 like this. Here you cut out that argument completely because here you have it in black and white,” Blachman said. “Those types of arguments can absolutely erode trust.”
Blachman argued that with a trusted partner such as Herskowitz, an agreement using the template could probably be reached within a month vs. the typical 6-9 month time frame. For a new partner, she hopes the model term sheet can reduce that time to about two months.
“Venture dollars are limited. If you’re spending 20% of your pre-seed budget on a license, you may not have money to do a proof-of-concept study. That could lead to your company failing,” she said. “These companies die on the vine because the license doesn’t get done, and that’s a huge waste of money for everyone.”
All the collaborators said the aim is for the model term sheet to become the new “standard of care” when it comes to negotiating a life sciences start-up term sheet, similar to how the NVCA model equity financing term sheet is the commonly accepted gold standard.
RA Capital’s Sarah Reed was involved 20 years ago in the creation of the model equity financing term sheet that standardized much of the language used for venture financings. Those are now widely accepted as the starting point for any venture financing deal.
Blachman said the NVCA model equity financing term sheet has become so standard that one would immediately question why someone did not want to use it in a deal. The group has the same goal for the model start-up license term sheet.
“We want to get it the same way as the NVCA documents, where everyone’s using this license, and if you aren’t, something is off,” she said. “That’s our real challenge right now.”
All four emphasized that while these terms should be “good enough” for most situations, the expectation is that even their own firms won’t use the document 100% of the time. There may be instances in which a university has a Nobel Laureate faculty member with such highly sought-after technologies that they can command even better terms than the model document will provide.
“Sometimes you have market power, and that’s OK,” Herskowitz said. “We aren’t saying this is the only thing we can ever do. But if you are in a situation where speed and low friction are important things, you can use this document and feel good about it. This represents the vast majority of the deals.”
Reed said that though it will take time for broad adoption of the model term sheet, she believes uptake could be faster than it was for the NVCA model equity financing documents because the start-up term sheet is being driven by major players on all three sides.
The expectation is that as the template gets used and there’s feedback on what works and what doesn’t, it will be updated and likely evolve over time to reflect the needs of the market.
“We aren’t trying to lead the market, we’re just trying to reflect the market. So if the market moves, the document will have to move,” she said.