Interim Guidelines for Licensing to University Employee Start-Up Companies*

Participation by University employees in external activities, including technology transfer and start-up companies, can be beneficial to the University, its employees, and the society it serves. Such involvements help make important results of university research and teaching available to the public, enhance the faculty/academic staff member's professional skills, help attract and retain outstanding faculty, and provide valuable educational experiences for students. Indeed, the University is committed to enabling and facilitating start-ups when licensing to a start-up is the best/most feasible route for commercializing University-owned intellectual property. At the same time, it is important for start-up activities to be structured to avoid/manage any conflicts of commitment and/or interest that might exist relative to the employee(s)'s University responsibilities.

These guidelines are provided to assist colleges, departmental executive officers and University employees (a) with the disclosure and review process for intellectual property and start-up activities and (b) with the steps to follow for identifying and managing conflicts of commitment or interest. The steps outlined here are designed to protect the interests of both the University and its employees and to ensure compliance with Illinois law, University Statutes and policies, and federal regulations. Employees who are interested in licensing University owned intellectual property to an employee start-up company should read the University's Policy on Conflicts of Commitment and Interest and relevant provisions of the University Statutes on intellectual property and conditions of employment.

As the steward of University owned intellectual property, the campus takes an objective "arms length" position in evaluating proposals to license University owned technologies to start-up companies in which University employees may be principals or major shareholders. This evaluation process includes the following steps:

Part A: Disclosure and Due Diligence Business Evaluation

  1. The University employee(s) submit a patent and/or software disclosure form to the campus Research and Technology Management Office (RTMO). Following disclosure, the University employee(s) should then discuss and seek endorsement of the start-up proposal from his/her (their) department head(s) and a representative from the college office(s). At the same time, the employee(s) should provide the RTMO with descriptive information about the proposed start-up and preliminary plans for development and commercialization of the product.
  2. The RTMO reviews the disclosure and meets with the creator(s) to: (a) determine the technology's potential commercial viability, and (b) determine the best method(s) to protect the technology (e.g., provisional patent application, patent application, copyright registration, trademark registration, etc.). The technology is evaluated by the RTMO to determine if the University's intellectual property is best advanced by licensing to a start-up or to an established company.
  3. If it is determined that licensing the technology to a start-up company is an appropriate approach for the transfer of the University's intellectual property in question, the RTMO will work with the employee start-up company to evaluate in detail the company's plans for development and commercialization of the technology. At this stage, a detailed, confidential business plan for the start-up is submitted to the RTMO. The business plan should include the company's strategy for commercial development, financing and financial strategies, and identification of the principals of the company, the board members and current shareholders. Information and advice on structuring a business plan is available from the RTMO.

    The RTMO evaluates the business plan to determine: (1) Is this start-up a viable business concern? Does it have the capacity to successfully commercialize the University's intellectual property? (2) Does the business plan demonstrate that the company has developed a realistic strategy for providing sufficient staff and other resources to manage and operate the start-up company on an on-going basis?

  4. If it is determined that the employee start-up company is a viable approach for transferring the technology, the University and the start-up company will enter into an exclusive or non-exclusive agreement (e.g., option, license, etc.). The duration of the agreement, and all conditions, performance standards, milestones and timetables of the agreement are specified in negotiation between the RTMO and the start-up.

    On occasion differences of view may occur during the RTMO evaluation process relative to the question of licensing to a start-up company. As necessary, such matters are reviewed and resolved by the Vice Chancellor for Research.

Additional information, including copies of relevant policies and standard agreements, business development information, etc. can be found at the RTMO website.

Part B: Conflict of Commitment/Interest Evaluation and Management Plan

  1. Once the decision is made to license a University-owned technology to an employee start-up company, a Conflict Management Plan should be developed. The Plan is typically developed by the University employee(s), the department head(s), and a representative of the college office(s). The campus conflict-of-interest officer in the Office of the Vice Chancellor for Research (OVCR) and staff in the RTMO are available to provide advice and assistance in the development of the Plan. A fundamental objective in shaping the Plan is to support the development and potential success of the new company.

    Indeed, the Plan should be viewed as a collaborative effort jointly developed by the employee(s) and the University. (The review/approval process for the Management Plan is described in Steps 2-4 below.) Issues to address in the Management Plan include:

    • Conflict of commitment. How much time is the University employee(s) devoting to the start-up company? The employee(s)'s first obligation is to the University and his/her teaching and research. Start-up company activities should not compromise those obligations.
      1. In the early stages of a start-up company the University employee(s) may participate, for limited periods of time, in business management discussions and decisions affecting the development of the company. Indeed, such involvement is often a necessity, especially at the outset. In accordance with the University's Policy on Conflicts of Commitment and Interest, it is expected that such involvement in business management discussions and decisions will be: (a) fully described and considered in the Management Plan, and (b) updated whenever there are significant changes in the situation.
      2. While University faculty and staff may provide professional consulting to a start-up company (frequently with titles such as chief scientific advisor or chief technical advisor), they are not normally permitted while employed full time by the University to hold active line titles/responsibility in the company, serve on the company's board of directors, or be actively involved in its day-to-day management and operation. Exceptions to the provision on holding line titles/responsibility or serving on the board of directors in a start-up company are not encouraged but may be considered on a case-by-case basis when it is clear (given the amount of time involved) that a conflict of commitment/interest does not exist relative to the employee(s)'s University responsibilities/obligations. Colleges and departments may consider requests from faculty and academic staff to reduce their University appointments or take leaves of absence from the University to actively participate in the day-to-day management and operation of a start-up company.
      3. Professional consulting to a start-up company is permitted (as specified by University policy and approved in advance by the unit head and the OVCR). Such activity includes using one's professional expertise to solve technical problems, assist in further development of the technology, and prepare for the commercialization of the technology. Consulting activity for an employee start-up company should be specified in the Management Plan and approved in advance.
    • Use of University resources. (space, equipment, personnel). The use of University resources by a start-up company may be permitted on a limited and defined basis. Full cost reimbursement to the University is required in all cases. A University Technical Testing Agreement or other University approved agreement is required. The projected use of University resources should be specified in the Management Plan and approved in advance.
    • University students and/or postdocs. The involvement of students and/or postdocs in University employee start-ups is reviewed carefully. While such involvement can be beneficial to the students/postdocs, the University's first obligation to its students and postdocs is to support and encourage either degree progress or completion of other academic work at the University. The involvement of University students in employee start-up companies should be specified in the Management Plan and approved in advance. Students/postdocs are personally contacted by their department concerning their involvement in the start-up company. An objective third party (often an associate department head or other senior faculty member) is designated as a contact point for the students/postdocs should they feel compromised in any way by their involvement in the start-up. These arrangements are confirmed in a letter from the department to the student(s)/postdoc(s).
    • Other University research. Another component of the Management Plan addresses the issue, as applicable, of oversight safeguards to ensure that other research and related resources (e.g., staff, equipment, etc. in the faculty member(s)'s lab) are not directed to the interests of the start-up company.

      In addition, University academic employees who are associated with a start-up company should be particularly sensitive to the provision in the University's Policy on Conflicts of Commitment and Interest which specifies: "It is improper for an academic staff member, without prior written approval, to divert to external entities or other institutions opportunities for research support that could have been obtained by the University."

    • Review cycle. A timetable and process is established in the Management Plan for regular review (at least annually) of the start-up activity.
  2. The Management Plan is reviewed and signed off on by the University employee(s) involved, the department head(s), and the college dean(s).
  3. The Management Plan is shared with the campus Conflict Review Committee (composed of senior faculty) for review before final campus-level approval is given by the Office of the Vice Chancellor for Research.
  4. Consistent with the University's Policy on Conflicts of Commitment and Interest, the start-up proposal (i.e., the license agreement(s) and Conflict Management Plan) is transmitted to the Vice President for Academic Affairs who evaluates the proposal on behalf of the President of the University. The University's Policy on Conflicts of Commitment and Interest stipulates: "The President remains the only person who can authorize a contract on behalf of the University with an entity in which a University employee has an interest."

Part C: Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) Grants and Subcontracts

The SBIR Program

The SBIR Program is mandated by Public Laws PL 97-219, PL 99-443, and PL 102-564. The basic design of all the SBIR Programs under each federal agency’s supervision is in accordance with the Small Business Administration (SBA) SBIR Policy Directive, January 1993.

Each proposer must qualify as a small business for research or research and development purposes as defined in Section 2.0 and certify to this on the Cover Sheet (Appendix A) of the proposal. In addition, a minimum of two-thirds of the research and/or analytical work in Phase I must be carried out by the proposing firm. For Phase II, a minimum of one-half of the research and/or analytical work must be performed by the proposing firm. The percent of work is usually measured by both direct and indirect costs, although proposers planning to subcontract a significant fraction of their work should verify how it would be measured with their contracting officer during contract negotiations. For both Phase I and II, the primary employment of the principal investigator must be with the small business firm at the time of the award and during the conduct of the proposed effort.

Primary employment means that more than one-half of the principal investigator's time is spent with the small business. Primary employment with a small business concern precludes full-time employment at another organization. Deviations from the requirements in this paragraph must be approved in writing by the contracting officer (during contract negotiations).

For both Phase I and Phase II, all research or research and development work must be performed by the small business concern in the United States. Joint ventures and limited partnerships are permitted, provided that the entity created qualifies as a small business in accordance with the Small Business Act, 15 USC 631, and the definition included in Section 2.2.

The STTR Program

The STTR Program is mandated by Public Law 102-564. The basic design of the DoD STTR Program is in accordance with the Small Business Administration (SBA) STTR Policy Directive of 1993. This is a pilot program under which awards are made to small business concerns for cooperative research and development, conducted jointly by a small business and a research institution, through a uniform process having three phases. STTR, although modeled substantially on the Small Business Innovation Research (SBIR) Program, is a separate program and is separately financed.

The STTR Program is designed to provide a strong incentive for small companies and researchers at research institutions, i.e., non-profit research institutions, contractor-operated federally funded research and development centers (FFRDCs), and universities, to work together as a team to move ideas from the research institution to the marketplace, to foster high-tech economic development, and to address the technological needs of our federal government.

Review/Approval Process

  1. The investigator(s) should contact his/her (their) departmental business office as soon as he/she (they) begins to consider SBIR/STTR funding. The unit business office will assist the investigator(s) with completing the proposal submission. Questions should be directed to the University's Office of Grants and Contracts.
  2. A determination is made as to whether or not the University investigator(s) - who will receive the SBIR/STTR subcontract - has (have) any ownership interest in the company that will receive the SBIR/STTR award and subcontract to the University.
    • No Ownership Interest If the University investigator has no ownership interest in the company making the subcontract award, the following step applies:An intellectual property agreement between the University and company awarded the SBIR/STTR needs to be executed. The RTMO will take the lead in preparing this document. This agreement does not have to be in place before the company submits the grant application. It is wise, however, to begin putting this agreement together as early in the process as possible; in many cases, the funding agencies insist that the agreement be executed almost immediately after the award has been made.
    • Ownership Interest If the University investigator(s) has (have) an ownership interest in the company, additional steps need to be taken beyond putting together the intellectual property agreement as noted above. A Conflict Management Plan also needs to be prepared, as outlined above in "Part B: Conflict of Commitment/Interest Evaluation and Management Plan." An approved Management Plan is required before the SBIR/STTR subcontract award can be made through the University's Office of Grants and Contracts.

* These Interim Guidelines reflect current practice on the Urbana campus based on relevant University policies and University Statutes. They were developed by the Office of the Vice Chancellor for Research in consultation with representatives from several campus departments and colleges, the Research and Technology Management Office, Grants and Contracts, Legal Counsel, the Offices of the Provost and Chancellor and the Conflict Review Committee. The guidelines also were reviewed by the Senate Council and the Council of Deans. The Vice Chancellor for Research will initiate a reevaluation of these Interim Guidelines not later than 9/1/01.