Incentives (Returns) to Licensor Universities

Academics and researchers often establish startups and receive intellectual property (IP) transferred or licensed from the university. This time, we will consider the topic of incentives (returns) to universities that have granted an IP license.
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• Employee Invention
  • In the case of academics and researchers, their inventions are mostly classified as employee inventions under work regulations, and the rights holder is almost always the affiliated institution. First, please confirm the work or IP regulations of your affiliated institution.
  • shokumuhatsumeiseido.pdf
• IP Licensing
  • To enable a startup (SU) to use intellectual property, such as patents, held by a university, the university transfers or leases (licenses) the rights to the corresponding IP to the SU.
  • Consideration can be paid in cash, or by granting shares or stock options. The recent trend is an increase in the granting of stock options, following the lead of the US and Europe.
    • uni-ven-v2_2-license_chikujouari.pdf
• Definition of Terms
  • Various terms are used regarding IP licensing, but it is good to understand "license fee" and "royalty." However, there are actually other names, and "license fee" and "royalty" are sometimes used interchangeably, so let's stick to the general usage. The important thing is to decide how much to allocate to the university as consideration for the license, and to always clearly define the terms in the contract so that the contracting parties do not misunderstand each other.
• License Fee
  • Definition: Simply put, it is a usage fee. It primarily covers IP, but can also cover products or technology. Characteristics:
    • Often a lump-sum payment (upfront fee).
    • May include milestone payments, which are paid based on development progress.
      • Milestone Fee: An additional fee paid when the development of the technology or patent licensed from the university reaches a "specific milestone" defined in the contract.
    • Not directly linked to product sales.
    • The rate changes depending on whether the license is exclusive (exclusive license) or non-exclusive (non-exclusive license).
  • Purpose: Consideration for granting rights, proof of contract establishment, and risk recovery for the university.
  • Case Study: Yale University Startup Licenses
    • Yale adopts a special license for startups that includes a lump-sum payment at the time of the license agreement, plus the university acquiring company shares (equivalent to 3-5%) as an incentive. Therefore, milestone fees and royalties are not set, and the structure is completed with the grant of rights and stock acquisition upon contract signing. Yale Startup Licenses | Yale Ventures
  • "Consideration for License"
    • Although very abstract, it means comprehensive consideration and may include royalties as well as license fees.
  • "Implementation Fee" (Jisshi-ryo)
    • This is the usage fee for a patent. In English, it is called a license fee, but the "implementation rate" used in Japan is limited to IP, mainly patents. This is a term derived from the right to work (jisshi-ken) found in intellectual property law.
    • For reference, data on implementation fee rates for patent rights is available from METI. Although the document refers to it as the royalty rate, since the subject is limited to intellectual property, it can be read as the implementation fee rate. The average for biotechnology is the highest at 6.2%. Research Report on the Value Assessment and Utilization of Patents, etc., Based on Intellectual Property Valuation - Actual Status of Intellectual Property (Asset) Value and Royalty Rates - (METI/Ministry of Economy, Trade and Industry)
• Royalty
  • Definition: Compensation paid based on sales or profit when products are sold using the licensed patent or technology. When paid continuously based on sales, it is called a running royalty.
  • The royalty may be passed through to the university, even on the sales of a sublicensee.
  • Purpose: A mechanism for the university to gain revenue based on the successful commercialization of the technology.
  • In the biopharma sector, approximately 86% of license agreements include milestone payments, and over 65% include sales-based royalties. Many agreements adopt a complex structure of Upfront payment at contract signing + milestone fees at each stage of development, approval, and commercialization + royalties after market launch. A formula for drug licensing deals
  • On the other hand, some deals may not set royalties and only include a license fee. For example, when an SU purchases the patent from the university in a lump sum, a license agreement for a certain period of software use, or when it is included in the license fee because management is cumbersome.
• Royalty Rate
  • 25% Rule
    • There is a principle called the 25% Rule, or the Goldscheider Rule. This is a payment of 25% of the product's "operating profit" as a royalty.
    • This is based purely on empirical rules and has been denied in past case law, stating that "it is not rational because the profit margin differs for each product" (Uniloc USA, Inc. v. Microsoft Corp. (January 4, 2011 judgment)).
    • Currently, the Georgia-Pacific Factors, etc., are used in calculating damages for infringement, but since these are originally used for calculating damages, let's keep them as a reference.
  • References
    • Private research companies and non-profit organizations have databases of past deal examples for royalty rates.
    • LES Royalty Rates and Deal Terms Surveys - Licensing Executives Society (LES), 2024_Royalty_Rate_&_Deal_Terms_Executive_Summary.pdf
    • In such documents, the sales-based rate is set higher as the phase progresses:
      • Early Stage: 1% - 3% Basic research or non-clinical stage. The road to commercialization is long and the risk is high, so the licensor's share is set low.
      • Phase I / II: 3% - 8% The stage where human safety and efficacy begin to be confirmed. Most licenses are concluded here, which becomes the market standard.
      • Phase III / Marketed: 8% - 15% Just before or after approval. The investment risk is low and revenue is certain, so the rate jumps up.
  • Basis
    • The basis on which the royalty rate is applied varies widely in practice, such as sales, operating profit, or net profit. By considering the balance of power with the counterparty and the SU's own development efforts, the adjustment can be made not only with the royalty rate but also with what the basis will be.
• Sublicense
  • Meaning: The licensed company (SU) re-licenses the right to a third party.
  • Image: University → SU → Major Company (Sublicensee)
  • Key Point: The university often contracts to receive a portion of the sublicense income.
• Three Structures for Sublicense Income Distribution
  • There are mainly three methods for distributing sublicense income, and these may be used alone or in combination.
    • Defining Sublicense Income To Avoid Problems Down The Road - Licensing Executives Society International
  • Allocation
    • A fixed percentage of all payments received from the sublicensee is distributed to the university.
    • Advantage: Simple and less prone to abuse.
    • Disadvantage: Difficult to set the percentage, balancing technology value and investment value is a challenge.
  • Tiered Allocation
    • Different percentages are set before and after commercialization.
    • Advantage: Supports the licensee's fundraising in the early stages and suppresses dilution.
    • Disadvantage: Requires complex negotiation.
  • Pass-Through
    • Royalties based on the sublicensee's sales are passed on to the university.
    • Issue: The university's share may decrease depending on the royalty rate setting.
• University Distribution of Sublicense Income
  • It is standard for "10% to 25%" of the revenue (upfront payment, milestone) received by the startup to be distributed (returned) to the university. Furthermore, a step-down mechanism (sliding scale) may be introduced where "the distribution rate to the university decreases as the startup takes on development risk and advances the phase."
  • Case 1: Cornell University FastTrack License
    • The principle is 25%, but it is reduced to 15% after obtaining "Approval/Certification."
    • FastTrack for Medical Device and Selected Life Science Technology - Center For Technology Licensing
  • Case 2: Yale University Yale Startup License
    • Initially 20%, but reduced to 10% after "4 years have passed."
    • Yale Startup Licenses | Yale Ventures
• Regulations, etc., Regarding Returns at Japanese Universities
  • Kyushu University
    • Has established guidelines for reducing or deferring license consideration (upfront payment, implementation fee) for early-stage ventures. https://airimaq.kyushu-u.ac.jp/_cms_dir/uploads/2022/08/venture_guideline.pdf
  • Kyoto University
    • Has established regulations that permit payment in "shares (stock options)" when cash payment is difficult. Kyoto University Regulations on the Handling of Shares, etc., Acquired as Consideration for Licenses, etc.

Licensing agreements are the lifeline of a startup (SU). It is recommended to involve an attorney familiar with life science licensing from before negotiations begin.

employee invention