Reviewing SAIL: To Sell or to SAIL?
When and how SAIL suggests that IP should be transferred to the private sector
Three weeks ago we released Simple Agreement for Innovation Licensing (SAIL). Over the last few weeks, we have followed up with a detailed but plain-language review of the intent behind it. You can find previous articles in that series discussing how universities are compensated for licensing, and how SAIL handles the question of exclusivity and sublicensing rights.
Today’s article focuses on one of the fundamental questions that almost always comes up in tech transfer: what is the path, if any, to ownership of the IP?
You can find a copy of the agreement below for reference. As context for this article, I suggest reading Sections 3, 4b, 8, and 14.i of SAIL, as well as the Core Design Principles section of the original article.
Ownership Transfer
The second Core Design Principle of SAIL is that there should be a path to full ownership of the IP rather than a perpetual license. This was a consistent theme that came up in our research going into designing SAIL among both founders and early-stage investors. A clear, pre-negotiated path to IP ownership instills confidence in the long-term freedom to operate of the startup and increases its ability to attract private investment.
Ownership of the IP is historically not often explicit in licenses issued by universities. More often, agreements contain a non-binding commitment to renegotiate or consider IP transfer by mutual agreement at some unspecified later date. While this is better than nothing, in general, investors and founders flagged a requirement to renegotiate anything as a significant pain point in post-secondary technology licensing. Without knowing the cost of that transfer up front, it is difficult to assess the value of an IP asset. As a general rule, agreements that spell out all necessary considerations up front are much more valuable than those with nebulous renegotiation commitments.
On the other hand, universities that take ownership of research IP outputs have a duty to provide sound governance of that IP on behalf of both the taxpayers that funded the research and any inventors involves in its creation who may not be involved in commercializing it, and seek to benefit financially from relinquishing control over an IP asset. While Waterloo’s example demonstrates that giving inventors control over what happens with their IP is not a bad course of action, it is reasonable to want some assurances when considering licensing IP to an unproven startup, particularly when inventors who are first-time founders are involved.
SAIL reconciles these conflicting considerations by defining a clear milestone event that every IP receptor startup must hit in order to justify taking full ownership of the IP through a buyout event, a signal from an unrelated third party that the startup is a viable entity that is expected to have a real chance at successful commercialization. We do this by taking a page directly out of the approach taken by the SAFE that inspired SAIL. The startup is given the option to take ownership of the IP by paying a preset fee at any time after the convertible equity held in the form of the SAFE converts to equity, which is to say, when a third-party investor signals confidence in the startup as shepherd of the technology through leadership of a priced round.
Tying ownership transfer to market confidence is also beneficial for the university in that it provides an incentive for the startup to undertake the raise that triggers ownership transfer and conversion of the SAFE or other convertible instrument used by SAIL, while making it an option rather than an automatic trigger ensures that startups are not incentivized to delay such a round in cases where they might otherwise be forced to wait due to the financial constraints that so often plague deep tech startups companies. The university benefits directly from the associated value creation through the equity it holds in the company if that company is successful in commercializing the IP.
License Buyout
Upon exercise of the option to take ownership of the IP, the SAIL agreement terminates. While a handful of clauses survive termination, the most important one that does not is that which relates to the startup having an option on improvements to the IP portfolio, and any need for the university to spend time and effort on administration is removed. This again favors universities and puts an effective time limit on startup access to improvements to the IP portfolio of whatever length of time it takes them to raise a priced round, a timeline that on average is consistent with AUTM best practices on improvement access. Instead of SAIL imposing a fixed time limit, this approach adds in the flexibility of tying improvement access to the market signal that a startup is ready to stand on its own, at the pace required for the technology in question.
While it is at first glance possible in principle that a startup could delay a raise in order to maintain access to improvements in the long term (the subject of the next review article), section 3.d.iii avoids this. If Licensee fails to reasonably commercially exploit the IP (a concept that is well understood legally, see footnote 12 on page 7 of SAIL and links therein), SAIL can be terminated by the Licensor, who would then recover all IP.
License Back
In line with the requirement of universities to provide sound IP governance, SAIL has a failsafe mechanism in place in case of startup failure after license buy-out. If a startup ceases business operations after a buyout is triggered, one of the clauses that survives termination of SAIL is the requirement to assign the IP back to the Licensor, at the Licensor’s option. The exception to this rule is in case the IP has a lien or is otherwise encumbered by another contract (for example, through IP-backed financing as occasionally done through BDC).
In case the Licensor elects to take control of IP in such cases, they also must take control of any sublicenses that were previously issued by the Licensee, which will by definition be compatible with institutional management by virtue of Section 4b.
Wrapping Up
By including a milestone event that signals market confidence in a startup as a receptor of IP, SAIL balances the need for a clearly defined path to ownership against the need for universities to provide sound governance of IP assets produced through taxpayer-funded research, satisfying the second Core Design Principle of SAIL while balancing the needs of all stakeholders in the process.
We will conclude the review in SAIL in the next article, discussing how SAIL handles access to improvements to the underlying IP.
If you are interested in getting involved in ongoing development of the SAIL framework, or have feedback to share on any aspect of the proposed framework, reach out directly to the co-authors at the coordinates below:
You can find the other entries in the series reviewing SAIL below.
