Archive for the ‘Technology Transfer’ Category

The Confusing World of Joint Ownership of Intellectual Property

A confusing topic for many entrepreneurs is joint ownership of intellectual property.  It often comes up in connection with joint development arrangements, subcontracting portions of work, joint ventures, and other collaborative projects involving intellectual property development, whether it be in connection with software, cleantech, medical device, drug development, or other technology-based initiatives.

Joint ownership of intellectual property can result when two (or more) people co-invent a patentable invention or co-author a joint work of authorship.  Joint ownership can also come up as a matter of a compromise in a contract.

While it may seem fair and a reasonable compromise to declare that all intellectual property developed as part of a collaborative project should be jointly owned, many of the implications of jointly owned intellectual property are counterintuitive.  For instance, joint ownership related to patents is very different than joint ownership of copyright.

So, let us go through the basic implications of joint ownership by the default rules in the United States for patents, copyright, trade secrets, and trademarks.

Joint Ownership of a Patent

In the absence of an agreement to the contrary, each joint owner of a patent may make, use, offer to sell, sell and import the patented invention without the consent of the other joint owners, provided that the joint owner does not infringe the patent rights under a separate patent.  Notably with patents, there is no duty of accounting among the owners of the patent.  In other words, one owner can profit from the patent and does not have to share  the proceeds of the profits with the other owner(s).

To exclusively license a patent to another, however, generally requires the consent of all the owners of the patent.  Also, the consents of all owners of a patent are generally needed for patent enforcement.  This means that in many cases, any single owner can limit enforcement of the rights under the patent.

Joint Ownership of Copyright

Analogous to patents, each owner of a copyright is free to copy, distribute, prepare derivative works based on the joint work, and exercise the other exclusive rights of copyright.  Unlike patents, however, joint owners of copyright do have to account to one another for profits they receive in connection with the jointly owned copyright.  In other words, each owner has to share the profits with the other owners.

To exclusively license copyright requires the consent of all the owners of the copyright.  Also, unlike joint owners of a patent, one owner of a copyright cannot block another owner of that copyright from suing for infringement by simply refusing to join in the suit.  While each individual owner has the right to enforce the copyright in preventing others from using the copyrighted material, another owner can circumvent that enforcement by simply licensing to the “infringer” the right to use the copyrighted material.

Joint Ownership of a Trade Secret

The law surrounding joint ownership of trade secrets is not as well established as it is for patents and copyright.  As with copyright, joint owners of a trade secret likely have to account to one another for profits related to the trade secret.  Although, that conclusion is not entirely clear by case law or statute.  To exclusively license a trade secret likely requires the consent of all the owners of the trade secret.  Sometimes joint ownership can make maintaining secrecy difficult, however, which if compromised could jeopardize the trade secret status.  Although in some contexts, joint owners may have an obligation to one another to keep a trade secret confidential.

Joint Ownership of a Trademark

While joint ownership of trademarks is possible, it is somewhat unusual in that joint ownership is counter to the fundamental purpose of a trademark, which is to serve as a designation of origin from a single entity or person.  A more common strategy is a jointly owned single entity owning the mark.  When there is joint ownership of a trademark, however, as with copyright and trade secrets, joint owners of a trademark likely have to account to one another for profits related to the mark.  To exclusively license a trademark requires the consent of all the owners of the trademark.

Other Issues of Joint Ownership of Intellectual Property

There are a few other general things to keep in mind with regard to joint ownership of intellectual property.  As with the status of joint ownership itself, the parties can modify many of the default rules by addressing the particular issues in a contract, subject to certain legal restrictions such as those related to antitrust.  For example, the parties can decide that only one party is in charge of registration, maintenance, and prosecution of the intellectual property and that the parties must share all royalties in a certain manner (e.g., 70/30).

In addition, the default rules outlined above are quite different in many foreign countries.  For example, in Canada and the U.K., in the absence of an agreement to the contrary, a joint owner of a patent, while having the right to exploit the patented invention, has no right to license it to a third party without the consent of the other owners.

While joint ownership makes sense in certain contexts, many times it does not.  Often joint ownership sounds good in concept at a very high level, but when emerging companies understand the implications of joint ownership of intellectual property they frequently try to avoid it or they contract out of many of the default rules.

July 26th, 2011 by Matt Storms | Permalink | 5 Comments


LLC Choice of Entity for Emerging Technology Companies

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program will be a real benefit to many area small life science and medical device companies. A surprise to many though when reading the requirements of the program is that limited liability companies (LLCs) that have as an owner a tax-exempt organization are not eligible for a grant under the program. Having a tax-exempt organization as an owner is more common than one might think. Many university technology transfer offices, such as the Wisconsin Alumni Research Foundation (WARF), are tax-exempt organizations and frequently hold an equity interest in the startups to which they license patents. As a result, those LLC biotech licensees are not eligible for a grant under the program. As the CEO of an LLC with which I work (but did not set up) said earlier this week about being excluded from eligibility, “Ouch! That stings! Another painful learning experience.”

LLCs are Typically Not the Best Choice of Entity for Emerging Technology Companies

The “LLC issue” for emerging companies extends well beyond this grant issue for therapeutic companies. I say this even though many attorneys recommend LLCs for virtually all contexts. Sure, LLCs have their place. I frequently advocate using them as holding companies, investment vehicles, and joint venture entities. Among other situations, it also can be appropriate to use them when there is a limited, small group of owners actively participating in the business or when the owners want to have a certain allocation of profits and losses that cannot be accomplished when using an S or C corporation. But for many emerging companies that have or plan to have outside investors, the LLC is often not the best choice of entity.

Most people have a general understanding of the potential benefits of LLCs: pass-through tax treatment, flexibility, few formalities, ease of setup, etc. I will leave it to others to summarize in detail the benefits of LLCs, as there are many.

The “I didn’t know” LLC Issues for Emerging Technology Companies

What I often encounter is that an “issue” arises after the founders either worked with a drumbeating LLC advocate when they were initially organized or the founders organized the entity themselves through an easy-to-use website. In either case, frequently, the founders do not have a good understanding of the common issues that arise through the life cycle of the entity. These “I didn’t know” issues come up often after the company has been operating as an LLC for a while. Below is a list of some of the LLC issues that I have witnessed:

  • A 10% owner of an LLC becoming a less than 1% owner of a corporation after conversion to a corporation because his capital account in the LLC was propotionately less than that of the other owners.
  • A venture capital firm refusing to look past the heading of an executive summary after it discovers the entity is set up as an LLC.
  • Spending tens of thousands of dollars (not to mention management and investor time) implementing and maintaining “blocker corporations” to limit unrelated business taxable income (UBTI) to the VC firms’ limited partners, while trying to maintain economic parity between investors, through several rounds of venture capital financings.
  • “What do you mean I can’t take advantage of the losses because I don’t actively participate in the business?!?”
  • A small, dissident group of members refusing to consent to a conversion, which in many states requires a unanimous vote of LLC members.
  • Inability to take advantage of the special tax benefits of incentive stock options available to corporations.
  • Spending several dozens of hours more than it would take to administer a stock option or restricted stock program to administer a profits interest program.
  • Two members of an LLC (with negative capital accounts) owing taxes as a result of converting to a corporation.
  • Significantly higher investment transaction costs as law firms generally do not have “standard” LLC investment documents for sophisticated transactions.
  • When a company started to make money, requiring the owners to choose between receiving “phantom income” or making distributions to members to cover individual taxes at high marginal rates, despite a desire to reinvest that cash and grow the company.
  • Inability to do a tax-free reorganization as an exit strategy.
  • An LLC taking 5 months to obtain the required residency certifications and tax information authorization forms from each of its 78 members in order to limit the international tax withholding requirements in connection with a transaction.
  • An LLC obtaining the required written authorizations and powers of attorney of 90+ nonresident members in order to file consolidated state tax composite returns in 8 states (and the corresponding K-1′s from each state sent to each member).
  • Spending tens of thousands of dollars (attorney and accountant fees) converting to a corporation

I could go on and perhaps dedicate a post to each of these situations. And, of course, there are expensive and complicated solutions to some of these issues. But as some of my former colleagues at Michael Best said in a recent article, choosing an LLC can be a mistake for many companies and the decision should not be made without a full understanding of the ramifications.

Converting an LLC to a Corporation

A frequent comment I hear from executives of companies that are set up as LLCs is that they can convert to a corporation at any time. This is generally true. With the exception of some of the issues I described above, it often just involves an analysis of the benefits of being a corporation versus the time and expense involved to convert to one. I have handled a number of conversions and co-authored a brief post on the topic: Changing Your Choice of Entity: Cross-Species Mergers and Conversions. The difficulty is that the longer a company waits and the more complex the company’s capitalization structure, the more expensive it is and the longer it takes to do.

As with most important decisions, it is wise to talk with your trusted advisors about choice of entity issues. Take the time to understand the potential (and likelihood) of the benefits and costs long term, especially if you are considering using an LLC as the entity for your emerging growth company. Sometimes an LLC is the best entity choice, but more often for emerging technology companies, it is not.

June 29th, 2010 by Matt Storms | Permalink | No Comments


Creating More Midwest University Start-ups

Regardless of whether they are called university spinoffs, spinouts, or just plain start-ups, the University of Utah sure has a lot of them: 23 that started just last year— that’s second best of all universities in the nation. Think about how impressive that is. Like many places here in the Midwest, Utah has not historically had the amount of venture capital, the number of serial entrepreneurs, or the depth of tech company managerial talent that much of the coasts and the handful of hotspots in between enjoy.

As might be expected in light of the economy and tight capital markets, the last 12 months have been atypically poor in terms of the number of start-ups coming out of many Midwest universities; most of our universities only had a handful or fewer new startups this last year. Of course, there were a number of tech companies that started up that were not based on university technologies and they shouldn’t be overlooked. But, this is the land of the Big 10 and other top universities, whose R&D dollars dwarf those spent at the University of Utah. University of Wisconsin’s federal R&D expenditures are consistently in the top three of the country and are more than three times those spent at the University of Utah. It’s not just the money spent, either. I’m told that roughly 50% of the world’s peer-reviewed nanotech articles come from an institution within a 200-mile radius of Chicago. Midwest universities are responsible for discoveries ranging from nuclear fission to stem cells. So, how can we better translate some of our incredible university-based science and technologies into more start-up companies in the region?

In this article, I outline some of the things that the University of Utah and the infrastructure around it has done to facilitate start-ups. I also outline some of the good things that are already happening here in the Midwest. Finally, at the end of this article, I put my “services” where my mouth is and offer free legal services (yes, free) in helping to encourage university start-ups. I also call upon others, whether they are investors, service providers, mentors, university faculty members, or government agencies, to think about or relook at what they can offer to encourage more university start-ups.

The University of Utah Tech Transfer Office Overhaul

The University of Utah has just under 29,000 students. For frame of reference, that’s roughly 70% of the student population of the University of Wisconsin-Madison. Its technology transfer office went through a significant overhaul in 2005 after a new University president (Michael Young) was appointed. The University created the Office of Technology Venture Development (Tech Ventures) to drive regional economic development and commercialization efforts. The group coordinates activities between the University’s Technology Commercialization Office (TCO) and other college and university groups. As part of the restructuring, a new Director was hired and the TCO established itself as what its Director refers to as a “service-based business.”

Since the restructuring in 2005, the University of Utah has averaged 20 start-ups per year. Compare that figure to the less than 5 per year average that the University had prior to the restructuring. The overwhelming majority of University start-ups in Utah are now started by professional management–not the professor/inventor as is often the case here in the Midwest. For the first year or two of the company, many of these entrepreneurs work part-time or telecommute from California or neighboring states. They will often split their time between more than one company during the company’s first couple years. The Utah start-ups are typically in the biotech, medical device, energy, Internet and software industries.

Utah’s Initiatives with Seed Stage Money, Entrepreneurial Talent, Communications, Research Support, and Venture Capital

I met the Executive Director of Technology Commercialization at the University of Utah, Brian Cummings, at a biotech/pharma collaborations conference last month in San Francisco. Brian attributes much of their success to the common vision, cooperation, and collaboration that is present across many Utah groups and constituencies—the University, investor groups, entrepreneurs, State government, professional services sector, etc. When I asked him about the challenges that many areas of the country face with the lack of seed and early stage capital and the lack of early stage professional management pool, he pointed out Utah’s efforts to address those areas and other issues:

  • The University of Utah established a seed fund named KickStart that was launched in April 2008. It is expected to fund 20-30 start-ups that are involved in the clean technology, life sciences and software/engineering industries. Average size investment per company for the fund is $100,000 – $250,000.
  • The TCO is currently establishing separate specialized investment funds that focus on key high-value research areas within the University, such as interventional medicine, software, imaging, and energy. Each of these funds will focus on early stage technology companies and be roughly $20 million each. The money is being raised by the TCO from private investors.
  • The TCO actively recruits entrepreneurs to start companies in Utah. Brian mentioned that the Utah ski resorts have been a particularly fruitful place for recruiting management talent visiting from places further West.
  • Venture Bench, a University-based accelerator, provides a suite of services for pre-revenue University of Utah start-ups, such as business plan development, market assessment, networking, accounting and insurance, federal and state grant application assistance, corporate governance counseling, legal costs, and state filings, each at no cost to qualified companies.
  • The TCO has a myriad of other very popular programs, such as business plan competitions, law clinics, entrepreneur in residence programs, etc. Many of these programs are cross-disciplinary or involve different colleges within the University.
  • There are multimedia initiatives (e.g., in place to help ensure industry news, opportunities, and trends are shared among the state’s newspapers, magazines, blogs, and websites.
  • The Utah Fund of Funds, a state of Utah economic development program (currently, $300 million), was created to support early-stage and growth-stage companies in Utah. Rather than investing directly in specific companies, the Fund of Funds is structured to influence venture capital and private equity firms to focus more of their investment efforts on Utah ventures.
  • The University has implemented what it refers to as a “virtual incubator” program for qualified small University of Utah start-ups. Under the program, each company receives a voucher that entitles them to a $50,000 credit for sponsored research conducted at the University to further product and market development of a given technology.

Current Midwest University Initiatives to Encourage University Start-ups

While the University of Utah has done a lot, not all of their initiatives would work or “fit” here in the Midwest. But, there are a number of initiatives that we should consider. I don’t mean to suggest by this article that Midwest universities have been standing still. To the contrary, there are a number of initiatives that are currently underway and good things that are happening here at Midwest universities and their surrounding infrastructures. Being from Wisconsin, I know the most about those in Wisconsin. For instance, at the University of Wisconsin-Madison, the Wisconsin Alumni Research Foundation (WARF) offers a number of translational (from concept/lab to patent/commercial application) grant programs (typically up to $50,000 each), such as the Draper Technology Innovation grants, the Industrial & Economic Development Research grants, and the Coulter Foundation grants. WARF will also soon launch a significant new program that is designed to further these translational efforts of moving technologies from the lab to commercialization (details to follow soon). WARF has also set up a “co-invest fund” to invest in University of Wisconsin early stage companies alongside venture capital firms and strategic partners. WARF fully deployed its initial $10 million co-invest fund and has deployed roughly 20% of its second $10 million fund. WARF was also instrumental in setting up an early stage company mentoring group called MERLIN. The mentors in the group consist of experienced area business people that volunteer their time to support area start-ups.

According to my former partner at Michael Best, Alec Fraser, the University of Wisconsin-Milwaukee has had success recently with its initiatives. Brian Thompson, President of UWM Research Foundation (UW Milwaukee’s tech transfer group), attributes some of their success to their industry focus and catalyst grant program. UWM has targeted applied research and commercialization efforts in healthcare, biomedical, water, advanced manufacturing, and energy industries. They work with area large companies and foundations, such as Rockwell Automation and the Lynde and Harry Bradley Foundation, to help fund grants that support the evaluation of technologies and moving the technologies from the lab to commercial applications. The UWM Research Foundation also provides some funding support for writing grant applications.

Other Midwest Initiatives to Improve Start-ups

The positive initiatives are not limited to the universities. For example, the number of angel groups in the region has grown considerably over the last few years, through the efforts of people like Joe Kremer, Dennis Serio, and Tom Still. Most of these groups continue to actively invest, despite the economic downturn. Some states in the Midwest, such as Indiana, Michigan, Wisconsin, Iowa, and Kansas, have adopted aggressive tax incentives to encourage investments in technology company start-ups. More Midwest-based law firms are making concerted efforts at creating specialized teams that focus on technology companies and venture capital. New mentoring groups like that headed by Terry Sivesind (MERLIN) have popped up to assist early stage companies. And of course, websites such as Mike Klein’s WTN Media (, Russ Smestad’s BiotechProfiles (, and, among others, provide great communication platforms.

The AlphaTech Counsel Offer

While a lot is going on and many people are pouring considerable efforts in encouraging university start-ups, our raw numbers can and should be better. I know that we, collectively, can do more to facilitate more quality university start-ups in the Midwest. It’s always easy to point out what other people or groups should be doing. Instead, I like to think about what I can offer personally. So this is what I am willing to do. For any Midwest-based entrepreneur (or group of entrepreneurs) that is entering into discussions with a technology transfer office to license technology from the university, I am willing to offer free legal services to set up their organization and get them off on the right foot. Specifically, I will offer the legal services associated with the following, free of charge:

  • Choice of entity counseling
  • Articles and bylaws/operating agreement
  • Initial subscription agreements
  • Initial consents (incorporator, shareholder, and director)
  • EIN application
  • S election (if applicable)
  • Negotiate license agreement with university tech transfer office
  • Negotiate equity agreement with university tech transfer office (if applicable)
  • Employee invention assignment agreement
  • Employee confidentiality agreement

This offer is obviously subject to a conflicts check and compliance with applicable laws and doesn’t cover government filing fees. I’ll extend this offer at least until the end of 2009.

If you are involved or want to be involved with the commercialization of university-based technologies, I encourage you to consider (or reconsider) what you can do to better support both the number and quality of university start-ups. It does not matter whether you are an investor (or would-be investor), accountant, attorney, consultant, mentor, university faculty member or administrator, government employee, or entrepreneur, we all have a role. And, collectively, we can do a better job to ensure that more of the incredible discoveries that are coming out of our universities are commercialized through local efforts to produce promising companies with good paying jobs.

August 22nd, 2009 by Matt Storms | Permalink | 1 Comment