University revenues from technology transfer: Licensing fees vs. equity positions

This paper analyzes the financial return of universities' taking equity in their spin-off companies, and the prevailing attitudes toward taking equity . The reasons for taking equity include: the flexibility it gives licensing managers in structuring deals, the possibility that the university will st ill hold something of value if their technology is replaced and, the reduce d time required to generate revenue compared to a traditional license. A tr aditional license is preferred when the technology is not suitable for a sp in-off company, or when the technology is one of the rare jackpot licenses that bring in millions of dollars every year. The financial reward of taking equity was determined by comparing the value of equity sold in public spin-off companies to the return on an average li cense. A traditional license consists of a license issue fee between $10,00 0 and $250,000 and an annual royalty on sales. In 1996 the average annual i ncome from a traditional license was $63,832. The average value of equity s old in Id university spin-off companies is $1,384,242. If one assumes that half the spin-offs fail before they go public, the average value of equity is $692,121. This is more than 10 times the average annual income from a tr aditional license, and is significantly higher than the amount usually rece ived as a license issue fee The high average value of equity depends on the presence of a few million-d ollar equity sales, If those sales are excluded. the average value of equit y is $139,722, which is within the range that can be received as a license issue fee. There is a high correlation between million-dollar equity sales and the amount of venture capital spending in the region. The million-dolla r sales in this study all occurred in the top II states in the country in t erms of venture capital spending in 1997. From a financial viewpoint it makes sense for licensing managers to take eq uity in their start-up companies. Our data show that even if none of the st art-lips produces a million-dollar equity sale, the financial return of equ ity will br within the range normally received as a license issue fee. Taki ng equity leaves the door open for the occasional jackpot, which will bring in significantly more money than a standard license. When combined with a strong program of traditional licensing, making equity in start-rip compani es maximizes the financial return that universities realize from their inte llectual property. (C) 2000 Elsevier Science Inc.