Transcript Funding & Commercial Structures

OpenTTO.org - DILIGENT
Phase 5 – Funding & Commercial Structures
FCS Objective
Accessing Technology Finance
Concept of Ownership
Licensing Option
The Equity-Venturing Strategy
Structures and Taxation
©2004 OpenTTO.org
[email protected]
Slide 1
FCS
Objective
To identify strategic financial resources and structures:
• When and what kind of financial resources?
• What strategic resources and assets should be tied to
the investment or offer of money?
• What is the most appropriate rent mechanism?
• What are the most effective commercial structures?
The objective is to optimise the creation of value, and to exit the IP
in a way which captures best value in relation to the risk and
global commercialisation objectives.
©2004 OpenTTO.org
[email protected]
Slide 2
Funding & Commercial Structures
5.0
FCS
Overview
5.1
Revi
ew
Fina
ncin
g
5.2
Fund
ing,
Unde
rstan
d
Opti
ons
6.0 PMR
5.3
Wor
ksho
p
Own
ershi
p&
Lice
nsin
g
5.4
Wor7.0
ksho
p
Equit
yvent
urin
g
strat
egie
s
SPB
8.0 TRP
5.5
Revi
ew
Stru
cturi
ng &
Taxa
tion
Determine the optimum financial resources & commercial structures in order to
balance NPV versus risk and which match the commercialisation objectives.
Supplier
Business Lead
Process
5.1
Commercial Advisors
Product Development
5.2
Cost/Financial Analyst
Legal/Taxation Advisors
Input
5.2
5.4
VC Sources
Partner Information
©2004 OpenTTO.org
[email protected]
Review technology financing and the methods
Funding Strategy & Plan
and means to approach financing.
Rent Strategy – Licensing/Equity
Understand the funding lifecycle and the
Structures and Taxation
different forms of funding needed over time.
List of Candidates
Review the concept of ownership in the
VP for Candidates
context of licensing “rent” options.
5.3
CPA, MVP, IDA, ADC
Funding Programs
Output
5.5
Explore equity-venturing strategies and the
Customer
pluses and minuses of such a route of financing.
6.0 PMR
Review structuring and taxation issues in relation
Business Lead
to ownership and capital realisation.
Commercial Advisors
Complete and review Confidence Index for FCS
Slide 3
FCS
Suppliers and Inputs
I
S
P O
Transform
Typical questions for suppliers and inputs:
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C
Templates
How is the history of previous licensing deals?
What has been the spin-off success and risks?
What is the track record of licensors?
Is the scope domestic and global?
Is appropriate taxation advice available?
©2004 OpenTTO.org
[email protected]
Slide 4
FCS
Making The Rules
Remember the Golden Rule…
“Whoever has the gold makes the rules”
But remember that “the gold” is not one-sided and not
just money from VCs.
©2004 OpenTTO.org
[email protected]
Slide 5
FCS
I
S
P O
Process and Transformation
Transform
Financing options, typical questions include:
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C
Templates
Who do we know that has provided “our kind” of finance?
What working relationships do we have in place?
Are we familiar with the range of funding programs available?
Have we a preference and what is the rationale?
Do we know the type of funding which optimises our return?
Should we be seeking funding for prototype development?
Are we looking beyond venture capital funding?
Do we understand the stages and sources of funding?
How much funding is needed to cross the “valley of death”?
©2004 OpenTTO.org
[email protected]
Slide 6
FCS
Accessing Technology Financing
Is not always about financing first and foremost:
• It’s about building relationships
– Between sectors
– Between organizations (clusters)
– Among
people!
• Identifying sources, and
• Leveraging those sources
To capture smart money at the right cost.
©2004 OpenTTO.org
[email protected]
Slide 7
FCS
Start with Gaining Knowledge
Doing the homework, check at least:
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Determine the resource needs and priorities!!
Utilize the right resources at the right time
Programs to assist early commercialisation
Programs available to assist technology entrepreneurs
Recognize it will take time, effort and perseverance
Understand what kind of money is required
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Investment for equity
Debt
Convertible preference shares or options or other forms
Working capital financing
“Intelligent” collaborative venture money
Remember who helped you along the way!
©2004 OpenTTO.org
[email protected]
Slide 8
FCS
Prototype Development Funding
An option and objective for early-stage funding :
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Identifying, applying for and securing funding e.g. seed funding
Overseeing the development of prototypes and other scaling-up
Ability to integrate funding from several sources
No more than 1 in 10 potential opportunities reach prototyping
Outcomes:
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License or spin-off with reduced risk or greater value creation
Returned for further R&D
Abandon i.e. inability to scale-up or demonstrate proof of concept
Small well-defined investments, planned early in the commercialization
process, often save much larger amounts later in the cycle.
Only for those technologies with strong market potential where
there is a high probability of adding value and reducing the time or
increasing the attractiveness to the next round of resourcing.
©2004 OpenTTO.org
[email protected]
Slide 9
FCS
Venture Capital Only One Resource
Other resources may be more appropriate for the moment:
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Expand R & D efforts through University partnerships
Save time and money via Entrepreneurship programs
Use networks to locate collaborators & angel investors
Subsidize labor costs using workforce programs
Find people and informal funds through Mentors
Check pre-seed resources and Government funding
Planning, timing, collaborative resources and negotiating strength
should be optimised before seeking VC money
©2004 OpenTTO.org
[email protected]
Slide 10
FCS
Funding the Process
Basic
Applied
Research Research
Universities &
Federal Labs
Early
Prototype Commercialization
Ramp
Up
Mature
Seed Capital
Research Centers
Active & Passive Capital Networks
& Institutes
(e.g., COMET, GOV & “angels”)
Venture Capital
Decreasing Risk/ Reward
©2004 OpenTTO.org
[email protected]
Working Capital
(Banks)
Slide 11
FCS
Funding - The Valley of Death
Positive
Cash Flow
2 to 3 Years
Family & Friends
( $0 - 25K )
Passive Informal
Investors
( $25 - 100K )
Concept
Sweat
Equity &
Personal
Savings
Active Informal
Investors
( $100 -- 500K )
Seed Capital
Active Informal
Investors
( $0.5 – 1m )
PreVenture
Capital
Working
Prototype
(Applied Research)
Institutional
VCs ( $1m+)
Breakeven
Venture
Capital
Sales
Ramp Up
Engineering Prototype
Product Introduction
Production Prototype
(Early Commercialisation)
©2004 OpenTTO.org
[email protected]
Slide 12
FCS
I
S
P O
Process and Transformation
Transform
Rent mechanisms, typical questions include:
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C
Templates
Does the commercialisation strategy indicate a rent mechanism?
Are we clear about the meaning of “ownership”?
What rights constitute the concept of being an owner?
How should we split commercialisation and ownership rights?
Have we a preference and what is the rationale?
Are we prepared to give up development control by licensing?
Is up-front money more important than further control?
Do we want standard or individual licensing contracts?
Do we have the negotiating skills necessary for the complexity?
What kind of risk management system do we have over rent?
©2004 OpenTTO.org
[email protected]
Slide 13
FCS
Rent Mechanism
What is the appropriate “rent” mechanism?:
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Outright sale
Start-up
Exclusive licensing
Non-exclusive licensing
Venture spin-off
What are the ownership rights?
All prior DILIGENT steps are necessary in order to estimate real
value of invention to licensees and what can be expected in prepayments and performance.
©2004 OpenTTO.org
[email protected]
Slide 14
FCS
Ownership Rights
Rights which comprise the concept of being an “owner”:
• Licensing rights - split up between territories and fields of use
• Assignment rights (right to transfer/sell ownership)
• Security rights (right to mortgage or encumber ownership to
borrow funds)
• Right to patent/copyright
• Right to sue for infringement
• “Right” to be held liable for obligations or promises
• The right to commercialize the intellectual property
These rights can be divided up by the owner in many ways and result in a
variety of different parties deriving particular rights in specified
circumstances
©2004 OpenTTO.org
[email protected]
Slide 15
FCS
Commercialisation Vs Ownership
An important distinction between rights:
• Ordinarily the owner of intellectual property retains the
commercialization rights and undertakes all the necessary activities
to commercialize the intellectual property.
• However, commercialization rights are only one of the rights in the
bundle of rights retained by an owner.
• Transferring commercialisation rights may not necessarily transfer
any other rights except the right the right to undertake
commercialization of the intellectual property.
• The commercialization right is none-the-less an important right
since, if the recipient of this right does not actively pursue
commercialization, it will have a major negative impact on the
revenues flowing back to the owner.
©2004 OpenTTO.org
[email protected]
Slide 16
FCS
US Government Ownership Rights
The Bayh-Dole Act:
Under the Patent and Trademark Laws Amendments of 1980, as amended
(commonly known as the Bayh-Dole Act), small businesses, non-profit
organizations, and certain contractors operating government-owned
laboratories may retain title to and profit from the inventions they create
under federally-funded research projects.
• Prior to 1980, the US government generally retained title to any
inventions created under federal research grants and contracts
• Now, by the Bayh-Dole Act 1980 plus 1987 Regulations, it retains:
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Non-exclusive
Non-transferable
Irrevocable
Paid-up (royalty-free) licenses to use the inventions.
©2004 OpenTTO.org
[email protected]
Slide 17
FCS
Bayh-Dole
Some key requirements:
1.
The contractor or grantee must attempt to develop or
commercialize the invention.
2.
If the contractor or grantee is a non-profit organization, the
contractor or grantee generally must give priority to small
businesses when licensing the invention.
3.
When granting an exclusive license, the contractor or grantee
must ensure that the invention will be “manufactured
substantially” in the United States.
4.
If the contractor or grantee is a non-profit organization, the
contractor or grantee must share a portion of the royalties with
the inventor(s).
©2004 OpenTTO.org
[email protected]
Slide 18
FCS
The Licensing Option
The minus aspects of licensing are:
• Losing control of further development
• Finding the right licensee is tough
• Protecting interests is crucial
The positive aspects:
• Having multiples resources to develop invention
• Potentially new applications arising
• May receive up-front money
All prior DILIGENT steps are necessary in order to estimate real
value of invention to licensees and what can be expected in prepayments and performance.
©2004 OpenTTO.org
[email protected]
Slide 19
FCS
The Licensing Option
Typical questions for licensing options include:
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Is the objective exclusive or non-exclusive licensing?
Will different licenses apply to different segments and industries?
Is one-off or annuity income the objective?
Have the main risks been identified?
How to balance up-front reward versus risk?
What is the risk versus the cash flow?
©2004 OpenTTO.org
[email protected]
Slide 20
FCS
The Licensing Option
Typical questions continued …
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NPV versus risk – timing and sensitivity?
Should license fees be performance-based?
What is the timing of the flow of funds?
Which is the best vehicle?
What are the potential liabilities?
Are international structures needed?
What are the taxation implications of the different vehicles?
How to handle tension between owner and licensee obligations
e.g. maintenance & improvements?
©2004 OpenTTO.org
[email protected]
Slide 21
FCS
License Agreement
The basic elements of a licence agreement are:
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The
The
The
The
The
The
identity of the parties
subject of the licence
licensor's obligations
licensee's obligations
common obligations of both parties
termination conditions and rights
These rights can be divided up by the owner in many ways and result in a
variety of different parties deriving particular rights in specified
circumstances
©2004 OpenTTO.org
[email protected]
Slide 22
FCS
License Contract
The contractual provisions typically include:
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Geographic range of the licence
Performance requirements by the licensee
Payments and royalties – timing and form
Payment of taxes
Ownership and rights to improvements to the subject of the licence
Protecting various parties from liability
Insurance held by the licensee
Use of the inventor’s or institution’s name
Further assignment of the rights
Confidentiality
Registering the licence with the appropriate asset register
The rights of faculty inventors regarding publication
©2004 OpenTTO.org
[email protected]
Slide 23
FCS
Negotiating Contract Terms
Expert advice needed:
STATE
LAW
CONFLICT
OF
INTEREST
FEDERAL
LAW
CONTRACT
ATO
R&D and
Other
RULINGS
Plus:
• Risk Framework
• Negotiating skills
©2004 OpenTTO.org
[email protected]
INTELLECTUAL
PROPERTY
TERMS
UNIVERSITY
IP POLICY
FUNDING
SOURCE
UNIVERSIT
Y
CUSTOM &
PRACTICE
Slide 24
FCS
I
S
P O
Process and Transformation
Transform
Analysing venture/equity and structuring options:
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C
Templates
Is the equity-transfer process clear?
Should it be exclusive or non-exclusive?
Which is the best equity transfer structure?
How much and what form should residual equity be held?
How is a valuation determined?
How should ownership change over time?
What capital realisation method is preferred and at what risk?
What structure will facilitate the best exit tactics?
Does the structure support the desired taxation outcomes?
How do all parties benefit by the proposed structure?
©2004 OpenTTO.org
[email protected]
Slide 25
FCS
The Equity-Venturing Strategy
Equity venturing has dangers:
• High risk – remember 0.8%! - and slower payback
• Finding the right management team is tough
• Protecting assets and cash is vital
But also higher rewards if successful:
• May be a big success – 1 in 4500!
• May attract high performance team
• Offers more control of development and application
All prior DILIGENT steps are necessary inputs to a Business Plan to
take to strategic or other investors.
©2004 OpenTTO.org
[email protected]
Slide 26
FCS
Venture Capital Financing
Desired characteristics of a VC – before money:
• Prefer early-stage firms with a geographic focus
• Prefer a focused technology thrust
• Need to be fully integrated into private risk capital system (angel,
institutional investment, venture loans and R&D taxation)
• Preferably tied to university innovation streams
• Need to have management skilled in early-stage tech ventures
• Track record!
Venture capital firms want to know first and foremost how a start-up
plans to make money from an idea. They are more interested in
management teams and complete marketing plans than they are in
specific technological concepts.
©2004 OpenTTO.org
[email protected]
Slide 27
FCS
Targeting Venture Capital 1
Need to pro-actively target appropriate firms:
• Seeking to engage with the wrong firms is a black mark
• Must understand the process!
• In addition fund raising will take longer be “over shopped” - risky
Venture capitalists’ have an investing style and timing:
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Geography – this is basic!
Industry specialisation – i.e. don’t shop IT to biotech VC
Stage of development – e.g. some do not touch early-stage
Size of investment preferences
Research the appropriate funds and know their style
©2004 OpenTTO.org
[email protected]
Slide 28
FCS
Targeting Venture Capital 2
Evaluate the benefits that a particular venture firm offers:
• Do the venture capitalists have experience with similar types of
investments?
• Do they take a highly active or passive management role?
• Are there competing companies in their portfolio?
• Are the personalities on both sides of the table compatible?
• Does the firm have strong syndication ties with other venture firms
for additional rounds of financing?
• Can they help provide contacts for distribution channels and
executive search?
©2004 OpenTTO.org
[email protected]
Slide 29
FCS
Targeting Venture Capital 3
The most important factor in valuation is the stage:
• Stage I: Ventures have no product revenues to date and little or
no expense history, usually indicating an incomplete team with an
idea, plan, and possibly some initial product development
• Stage II: Ventures still have no product revenues, but some
expense history suggesting product development is underway
• Stage III : Still operating at a loss but show product revenues
• Stage IV : Companies have product revenues and are profitable
As milestones are achieved, risk is reduced and subsequent rounds of
financing can usually be raised at more attractive valuations.
The best way to build value in a company is to achieve the goals and
milestones within the timeframes designated in the business plan
©2004 OpenTTO.org
[email protected]
Slide 30
FCS
Targeting Venture Capital 4
Understand who you are approaching e.g.:
• A “stage 4” VC will not be interested in a stage 1 prospect:
– Will discount hugely i.e. very low valuation as risk hedge
– Will not have the evaluation skills
– Will not have the management skills and connections to assist
development of an early-stage venture
– Will not have the risk profile and temperament
– Will have too high overheads for small investments
• Wasting everyone’s time, especially your own at a critical time
• Displays a lack of commerciality in the management team
VCs talk and will reflect negatively on the venture
©2004 OpenTTO.org
[email protected]
Slide 31
FCS
Targeting Venture Capital 5
Then get the financing basics clear:
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How much you want?
How you will spend it, and in what chunks?
By what milestones you will be measured?
What structure will carry the money and business?
How do you justify the valuation?
What is the (anti) dilution strategy?
Make sure the financials match the business planning
©2004 OpenTTO.org
[email protected]
Slide 32
FCS
Critical Role of Formal Capital
Transition through growth stages requires:
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Money, of course - but different forms of money
Business & Strategic Plans become more formal
Risks tracked and managed in a formal manner
Technology and Innovation Protection must continue
Experience & Expertise must be matched to stages
Shift critical attention to production and then sales
Comprehensive changes in the entrepreneur and their company
Formal Capital forces these types of changes
©2004 OpenTTO.org
[email protected]
Slide 33
FCS
The Next Round
Know where the next round is coming from:
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When will it be needed?
How much?
By what method?
Who are the likely investee targets and why?
How will dilution be handled?
Investing without knowing where the next round will come from is a
cardinal sin of venture capital.
©2004 OpenTTO.org
[email protected]
Slide 34
FCS
Build Structures to DIVEST
The “HIDDEN SECRET” is in getting out cleanly:
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Not whether to get out but when
How to give up ownership and control?
Under what circumstances?
By what method?
In the pain of “giving up” it is often forgotten that the goal IS TO
GIVE UP. Give up control of the assets and exit in an timely fashion
with optimum risk and cost.
©2004 OpenTTO.org
[email protected]
Slide 35
FCS
Structures
Forward planning taxation issues is critical, eg:
• R&D tax credits
• Capital Gains Tax
License
IP Coy
Researchers
& Inventors
CRC
Commercialisation
Company
Commercialisation
Management
Inventors &
Spin-off Staff
Spin-offs
©2004 OpenTTO.org
[email protected]
Slide 36
FCS
Structures & Taxation
Forward planning taxation issues is critical, eg:
• R&D tax credits, with carry-forward provisions
• Multi-year net operating loss provisions
• Investment tax credits for purchase of laboratory equipment,
coupled with sales or use tax exemptions
• Separation of R&D and commercialisation / marketing entities
• Implications of ownership of IP, and over time
• Capital gains tax
• Foreign tax and structures
• Effect on fund raising and different funding instruments
©2004 OpenTTO.org
[email protected]
Slide 37
FCS
I
S
P O
Outputs and CustomersTransform
Finance and commercial structures conclusions:
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C
Templates
What are the compelling financing and rent options?
How do they impact on the valuation of the invention?
Which players stand out as strategic investors?
What strategy is the best for financing the next step?
When should venture capitalists be approached?
At what stage should licensees be approached?
Which structures need to be put in place in the short term?
What is the quickest way to get to the financial outcome desired?
NPV versus Risk compared to Commercialisation Objectives.
©2004 OpenTTO.org
[email protected]
Slide 38
FCS
Summary
• Alliances, distribution and clusters offer value
• Which parties
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Add value
Add disproportionate value
Seek to capture disproportionate value
Provide partnering advantages
• Process to understand industry
– Describe the partnering and value stream to customers
– Describe value propositions to partners
– Create partnering and strategic investment models
©2004 OpenTTO.org
[email protected]
Slide 39
FCS
Templates
I
S
P O
C
Transform
The FCS Phase Summary Report:
• Part of the evolving Business Plan
• Contains sections describing:
Templates
– Which financing strategy
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Adds most value now
Creates most value over time
Yields the best input of non-financial assets
Provides appropriate exit mechanisms
Can be implemented in workable commercial structures
– Select of rent mechanism
• Describe the chosen licensing or equity/start-up options
• Comparison of NPV versus risk
• Prepare a pro-forma investment and capital expenditure plan
• Actions for further work may precede or run in parallel with the
next Phase - PMR
©2004 OpenTTO.org
[email protected]
Slide 40
FCS Confidence Index
How confident are you that:
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The funding alternatives have been understood?
The funding alternatives have been sufficiently explored?
Licensing options have been fully examined?
The role and timing of investment is clear?
The type of investment is well thought through?
The pluses and minuses of venture capital are clear?
All ownership issues are clear and not in dispute?
The appropriate structure is clear?
Taxation has been optimised?
All parties will benefit from the structure and taxation?
©2004 OpenTTO.org
[email protected]
Slide 41