Rocking the SAILboat
Updating the SAIL framework through a literature review and community feedback
Last September, David Durand of MVIP, Rami Alhamad of
, and I released the first draft of Simple Agreement for Innovation Licensing (SAIL), a novel approach to tech transfer that seeks to address challenges with getting academic IP out of universities and into the hands of the startups that are best positioned to realize economic and social impact from that research.SAIL v1 generated a lot of discussion and engagement, and as a result of that, I am happy to share with you an update to the SAIL framework, informed both by a careful review of the literature on express licenses and by the feedback received to date from various corners of the innovation community. You can find a preprint of the literature review, co-authored by David Durand and myself, at the link below. The second version of SAIL is included in Supplementary Section S3 at the end of the document.
Rocking the SAILboat: A Novel Approach to Technology Transfer Informed by A Comparative Analysis of Express Licences
We are also in the process of constructing a dedicated website to provide guidance on the use of SAIL and continue building the framework in the open, which you can see (unfinished), here.
The core idea is to create a win-win-win-win situation that takes into account the incentives of all stakeholders in the process of tech transfer and subsequent commercialization. Using convertible debt in proportion to research institutional support for early-stage commercial operations, SAIL incentivizes research institutions to get more involved in providing value to the startup in the early stages and rewards them for doing so with a proportionate amount of equity. Founders get critical resources for early-stage development, only giving up equity in proportion to support they received without needing to undergo pointless valuation exercises before their market is established, and can fast-track IP due diligence when going for investment. Investors benefit from a clean, fully pre-negotiated agreement that has a clear path to transfer of ownership of the IP to the startup. Finally, funding agencies get critical data on innovation through built in reporting requirements, making evidence-based policy iteration possible.
In this article, I summarize the rationale for changes made between SAIL v1 and v2, which are elaborated in greater detail in the paper linked above.
Axioms of tech transfer
SAIL v1 was based on 5 axioms that we proposed as guiding principles for tech transfer framework design based on our own experience with the process. One of the goals in undertaking the literature review and community engagement was to test these principles, and to identify any that we had missed. This was a challenge: express licences appear to be relatively sparsely studied in the literature, and almost no work has been done attempting to correlate the details of licence agreements to long-term outcomes. In general, however, the axioms held up well both to what little literature is available on the subject, and to engagement with the community. There is, however, one addition to the list of axioms, appearing as number 5 in the list below, and the precise wording as been updated across the board to reflect refinements to the ideas and a commitment to plain language drafting in the design of SAIL.
A license should not unduly limit innovation or the use of publicly-funded research outputs from to realize economic benefit (axiom of benefit)
Ownership of the IP should transfer from the academic institution to the licensee if there is sufficient evidence to conclude that the licensee is an economically viable entity (axiom of ownership)
Valuation of an IP portfolio should be deferred until the market has been established (axiom of valuation)
Every dollar available to a startup should be used to build value in the IP portfolio (axiom of value creation)
The equity taken in consideration of tech transfer activities should be commensurate to the cost of commercialization (axiom of incentivization)
License templates should be understandable and usable by someone without legal training (axiom of simplicity and clarity).
The axiom of incentivization was added in response to a global debate currently underway with respect to the degree to which research institutions should benefit from the results of research commercialization. We found that in general, there has been little attempt to quantify the value added by research institutions to the spinout process, with institutional reward for tech transfer activity varying widely between different national contexts.
The framing of this axiom is intended to directly address the Canadian context, or indeed any context in which there is a dearth of capital and support available for low-TRL commercial technology development (which is to say, almost anywhere outside the United States, though we note that this is changing). SAIL takes the position that research institutions, mandated as they are to conduct and disseminate the results of research, provide value to the commercialization process through protection of the arising IP portfolio and any direct support (lab space, equipment access, IP management services, etc.) that would not have occurred in the course of research in the absence of a commercialization attempt. Through SAIL, universities are encouraged to defer these costs to convertible debt in the licensee, ensuring a fair equity stake while allowing uncapped upside in the case of a breakout success, and at the same time not taking resources away from the startup in its most vulnerable early stage.
This is not trivial in execution, however. Our review of the literature and conversations with universities made clear that this approach will not work in a vacuum. Tech transfer offices are underfunded and are in many cases unable to afford to defer debt in this way. If SAIL is to be effective, funding agencies and other parts of the innovation ecosystem will need to resource tech transfer offices to do so through resources explicitly allocated for tech transfer and IP protection activity, for example through publicly funded research grants.
Convertible debt
SAIL was named, and v1 was designed, to work with the SAFE agreement, but it was never intended to be locked into the SAFE. Any agreement that uses convertible debt to defer valuation is in principle usable in tandem with SAIL. SAIL v2 makes this more explicit, reducing dependence on the definitions and language used in the SAFE and tweaking the wording relating to conversion of the convertible debt to ensure that it can be used with the SAFE, the KISS, various flavours of convertible note, and even crowdfunding. A non-exhaustive overview of some compatible agreement types can be found here.
Simplicity and clarity
A consistent piece of feedback on SAIL v1 was that it was not as simple as it could be, and we took that to heart in a number of ways.
First, SAIL v2 greatly simplifies negotiable elements to just a small handful of clearly defined numbers. There is an optional fee for the licence and an optional fee on transfer of the ownership of the IP to the Licensee, some or all of which can be deferred to the convertible debt. While SAIL is royalty free, there is passthrough royalty rate for sales by sublicensees, and binary toggle for access to improvements (discussed in more detail later). All of these numbers are suggested to be zero for Canadian licensees, bearing in mind the caveat that if we as an ecosystem want that to be possible, we must act together to enable tech transfer offices to do so through provision of the required resources.
Second, SAIL simplifies the four key stakeholder roles, which now include a Research Institution, an Investor, a Licensor, and a Licensee. In practice, the former three roles will usually all be played by the same entity, the university, but this separation of responsibilities provides some future proofing with respect to the evolution of Canada’s innovation ecosystem, allowing for arrangements where the Licensor is a third party (for example Axelys in Quebec, or Innovate Calgary), or for the Investor role to be played by rapidly emerging university investment funds that have been constructed for this purpose.
The entire agreement has also been edited toward being written in plain language, and while there is still work to be done on that front, it is much more readable and accessible than the first iteration.
Improvements
One area where SAIL v1 was well off the mark relates to access to IP arising from future research conducted in the lab from which the licensed IP originated. SAIL v2 dials this back. There is now a binary toggle, pre-negotiated, that determines whether improvements are included in the license, and the definition of what is included has been narrowed:
“Included Improvement” means an Improvement:
created by an inventor affiliated with the Research Institution,
created in whole or in party by at least one inventor involved in creation of any of the Licensed Technology IP, and
with respect to which Licensor has the right to grant a licence.
There are some subtleties here that are worth flagging. First, the use of “improvement” already narrows the scope of what is included based on a significant body of legal precedent around that term. It is then further limited to only improvements that share an inventor with the original IP. Finally, the third point is explicitly to handle cases in which the Licensor may not have the ability or standing to grant a license to future IP. TTOs in universities with inventor-owned IP that do license a subset of the IP arising from research (for example, Waterloo) or TTOs that are arm’s length from the university may not have the right to encumber future IP contractually. Being able to turn off improvement access at the negotiating table avoids any potential for misunderstandings with respect to access to improvements in these cases.
IP retention
A common theme in the debate around Canadian innovation today is retention of IP, by which I mean ensuring that a Canadian entity controls the IP, irrespective of the jurisdiction in which it is filed or used. SAIL v2 very intentionally does not explicitly have provisions related to IP retention, for the simple reason that universities, as a general rule, are not litigious. Any provisions relating to penalties on loss of control would be at best pointless in a licence agreement, and at worst potentially harmful since they would give the false impression that there is any force behind them. Instead, IP retention should be the purview of both upstream (e.g. through strings attached to federal and provincial research funding) and downstream (e.g. through investment review relating to economic and national security).
However, there are elements of SAIL that will contribute to positively incentivizing IP retention. Our literature review shows that universities almost always license locally when the licensee is a startup. To incentivize startups to stay local, guidance throughout the agreement suggests eliminating fees wherever possible when the licensee is Canadian, and providing institutional support post-licensing (e.g. lab space access), which usually requires that the licensee be physically present at the research institution. In other words, SAIL seeks to effect IP retention through rewarding the target outcome, rather than punishing licensees in situations where that retention is not possible.
As noted in almost all my writing, no part of the innovation pipeline operates in a vacuum, and for SAIL to be effective at addressing Canadian innovation challenges, including IP retention, the rest of the pipeline must operate in lockstep, in particular by providing the resources to research institutions to enable this support.
Looking ahead
Aside from the above, SAIL v2 makes numerous changes to the phrasing and language and overall improving the utility to be able to address Canadian tech transfer challenges independent of the details of the institutions IP policy and tech transfer structure.
We are far from done with SAIL. If you have comments, questions, feedback, or are interested in getting involved and supporting the initiative on the framework, please reach out directly. You can follow along with progress on SAIL at www.howtosail.ca, which will be constructed fully over the next weeks and months.
Over the next few weeks, I will be diving into the preprint linked above. Aside from just informing SAIL v2, the study found a number of points worth discussing in more detail, on which I will be elaborating in future posts.
Acknowledgements
Many thanks to everyone who commented, debated, criticized, or voiced support for the SAIL initiative. In particular, I would like to extend a heartfelt thanks to Robin Ford, the latest addition to the SAIL team, who has been incredibly generous with her time in helping a physicist and a lawyer to write in plain English, as well as to the University of Ottawa Innovation Support Services for their support of the literature review through funding from Intellectual Property Ontario.