Framework for Technology Transfer Through Spin-off Companies

1. Introduction

   One of the advantages and privileges of working within a university environment is the opportunity to follow intellectual pursuits. As a consequence, scholars and researchers often have the chance to create intellectual property, which, when properly refined, can be of significant economic value. The transfer of this intellectual property (IP) has become an important mandate of the University and the Faculty of Applied Science and Engineering. As public funds have been largely employed in the creation of IP, there is currently substantial public expectation that benefits should accrue, leading to job and wealth creation.

   There are numerous approaches to the exploitation of intellectual property some of which are identified below:

   1. The patenting and eventual commercialization with an industrial partner of the concept/invention by the researcher either solely, or with the assistance of a third party such as the Innovations Foundation or Centres of Excellence,
   2. Patenting, expressly for licensing to an industrial partner,
   3. Non-disclosure, but commercialization based on know-how, possibly leading to a spin-off company opportunity,
   4. The patenting of the concept and invention followed by the formation of a spin-off company to specifically develop the idea for the marketplace.

   The transfer of technology and the formation of spin-off companies is a desirable objective for the Faculty. Such companies allow us to contribute in a direct way to the creation of wealth in our economy. Spin-off companies also provide tangible benefits to the Faculty and the University through enhanced connection to the industrial and commercial sectors. They open avenues for the pursuit of new research as well as financial opportunities for the Faculty, its staff and students. For these reasons, it is important to establish a framework to encourage and guide the formation of spin-off companies within the Faculty.

   Complex issues do arise with the creation of spin-off companies, issues that centre on conflict of interest, financial support and potential exploitation of University resources and personnel including the student body. The intent of this framework is to assist all researchers, whether they be academic staff, graduate or undergraduate students, research associates/assistants and/or scientists and engineers within the Faculty of Applied Science and Engineering to understand better the complexities associated with wealth creation opportunities arising from research results originating from within the Faculty. It is essential that these issues be discussed openly and that all members of the Faculty recognize the potential value of these opportunities to the researchers involved, to the University and ultimately to the community at large.

   The Framework described here is intended to provide constructive insight to assist all members of the Faculty. It outlines important directions to facilitate the nurturing of spin-off companies within the environment of the Faculty while ensuring an open approach that minimizes any conflict of interest. Too often, new research ideas and concepts which are developed within the University environment are floated to test potential industrial/business interest for possible licensing and/or patents, only to be discarded prematurely. These ideas thus ultimately languish on library shelves in journal volumes. As a Faculty we need to use and exploit this intellectual property in an effective manner.

   One purpose of this Framework is to establish an approach which allows researchers in the Faculty to continue to incubate, grow and develop the research concept to a point where it has matured sufficiently to enable a spin-off company to survive outside the University environment.

   Secondly, the Framework also sets out the guidelines under which spin-off companies should be formed and can exist, whether situated outside the University environment, or nurtured within. Faculty resources, appointment of directors, the holding of shares in these companies, reporting income and the like, need to be carried out with strict accountability and full disclosure. University participants will be bound by the institutional policies of conflict of interest and commitment. This is part of our institutional responsibility.

2. Categories of Activity It is important to clarify the various types of research and development that are on-going in the Faculty of Applied Science and Engineering. These are mainly:
   1. Grant supported research through NSERC, MRC, SSHRC and foundations, corporations etc.;
   2. Contracted research through industry, centres of excellence etc.;
   3. Consulting activities, either group or individual;
   4. Concepts initiated externally but requiring internal exploration, commitment and support.

   Any of these activities could lead potentially to a concept and/or idea that offers the opportunity for commercialization of a product, a process, an algorithm or an item of software. Each such concept, at the time it is identified, will inevitably be in a unique stage of development in terms of its route to eventual commercialization. It is therefore important to define the various phases through which a potential spin-off company might evolve within the Faculty of Applied Science and Engineering.

   Phase I: A researcher develops a concept or idea that has the potential to eventually lead to a spin-off company. Whatever the funding source there will be commitments and responsibilities that are to be respected. Given that these can be addressed, and they should be clarified, the researcher will usually continue with the development of this work, possibly with a view to commercialization downstream. As the concept matures, it could eventually become necessary to protect the intellectual property through disclosure and/or patents which is handled in the normal way through the Office of the Assistant Vice-President, Technology Transfer (AVP/TT). The disclosure process, which is available to the Faculty, would form the Faculty data base for all subsequent spin-off companies. The Chair/Director would be informed of the disclosure at this time if not already aware of it.

   Further work on the concept could lead to a decision to form a spin-off company. The principals involved (academic staff, research staff, graduate and undergraduate students), would inform their Chair/Director in writing in advance of registering such a company. If it is anticipated that the company might require incubation rights within the Faculty, the principals would outline in particular, any elements of work (research and other) related to the anticipated activities of the spin-off company planned to be undertaken within the Faculty. This would be communicated to the Vice-Dean of the Faculty who would add this information to the data base or registry.

   A spin-off company is considered to exist once legally incorporated under Federal or Provincial laws.

   Phase II: The spin-off company may be incubated within the Faculty environment with the support of the Chair/Director. The normal period for incubation within the Faculty is 36 months at which point the arrangement is subject to critical review. The right to permit incubation is the prerogative of the Dean of the Faculty. Favourable terms to address the direct and overhead charges related to the emerging spin-off company may be granted by the Faculty with the approval of the University, provided it is in the interest of the Faculty and the University to nurture this company. The precise nature of the terms will require negotiation, but the over-riding principles are:

   • public funds cannot be used to subsidize the development of private companies;
   • all direct and indirect costs associated with the incubation period must be fully accounted for and full reimbursement planned through some combination of equity in the company, royalties or the equivalent.

   Phase III: A third phase begins with the transition of the company from the Faculty environment to the corporate sector. Under normal circumstances, this would take place after a maximum of 36 months of incubation. It has been shown however, that spin-off companies in transition can sometimes benefit substantially from having access to technical and related management services. For this reason, a transition agreement between the Faculty and the spin-off company can sometimes be established. The normal period of this agreement is two years. In special circumstances, this may be extended.

   Phase IV: A fully mature spin-off company would exist when the transition is complete. At this point, the company would operate totally independently of the University.

3. Approval Process It is present University policy for all inventors (whether academic or non-academic staff, graduate and undergraduate students and research associates), to register disclosures with the office of the AVP/TT. Should any of the principals, working on a concept, anticipate establishing a spin-off company to be incubated within the Faculty, notice must be given and a business plan produced. This is to be submitted through the Chair of the Department to the Faculty. The plan must show
   1. how the intellectual property will be exploited,
   2. the value of the technology to the marketplace,
   3. specify clear commercial targets and
   4. outline the management structure of the company.

   Furthermore, where applicable, it should include a justification for the need of an incubation period within the Faculty, the length of time for the incubation and a clear schedule of the milestones by which the anticipated results of the development can be evaluated in the future. Finally, it should include a budget, the projected sources of funds during the incubation period and the detailed description of direct and indirect resources being supplied from the Faculty.

   A committee appointed by the Dean will review the business plan, and recommend to the Dean whether or not the spin-off company be invited to incubate within the Faculty. If approved, the Dean and the Vice-Dean, the Chair of that Department along with the AVP/TT, would negotiate the specific terms of the agreement. The period of the agreement would extend through the incubation phase, and be subject to critical review at the end of three years. An estimate of all the contributions to be provided by the University must be outlined in the agreement. The potential for payback to the University should also be described in the agreement. The options for licensing might include equity within the company, a share of subsequent royalties on the product, future cash payments, external venture capital etc.

   Any academic would normally be expected to have a principal involvement in no more than a single spin-off company at one time, during the incubation period.

4. Sources of Funding

   4.1 Venture Capital Once the business plan is reviewed and approved, every effort must be made to secure venture capital funds and other support as is possible in order to permit a smooth transition from incubation to the corporate sector.

   4.2 University Resources University resources will normally be charged at full cost-recovery rates with appropriate overhead. As part of the investment and commitment to the spin-off company by the Faculty, the Agreement will have negotiated provision for reducing infrastructure costs such as space, services and facilities, as a way of providing embryonic support. This type of support, in quantitative terms, must be recorded in the Agreement and should be fully recoverable by the University. This Agreement would normally be subject to annual periodic review and revision as appropriate by the committee appointed by the Dean.

5. Accounting Procedures and Progress Reports Detailed accounting and reporting of the project is essential. The spin-off company principals will prepare reports at six month intervals outlining progress towards stated goals and milestones. These reports will be reviewed by the committee reporting to the Dean and recommendations will be made to the Dean at that time to continue the project or phase out the operation.

6. Staff Participation Although the primary commitments of any academic staff member are to teaching and research, creative professional activities, such as the exploitation of IP, are important adjuncts. In such situations, remuneration to the inventor/entrepreneur must be an integral component of the drive to commercialize intellectual property and create spin-off companies. As stated in the Faculty Policy on Conflict of Interest, the critical cornerstone is disclosure. It should be generally understood that staff members can expect to be reasonably compensated or rewarded for their entrepreneurship in establishing a successful spin-off company. However, under most circumstances staff would not expect significant personal remuneration during the incubation or transition stage of the spin-off company.

   In all cases, Faculty guidelines on conflict of interest and conflict of commitment will delimit the role of the staff member in any spin-off company and the commitment of time to that company. The specifics of any release time, financial remuneration, etc., would need to be specified in the Faculty agreement.

   Once the spin-off company has reached the fully mature stage, the participation by a staff member will be governed solely by the guidelines of conflict of interest and of commitment.

7. Student Participation Clear guidelines must be available when students, graduate, undergraduate or postdoctoral, are to be involved with the spin-off companies. The potential for conflict here is high and exploitation of students must be avoided. At the same time, the opportunity for students to be involved in a truly applied project as part of their research has distinctly positive benefits. Student projects or theses can often be defined to complement the activity of spin-off companies. Care is needed here, however, to distinguish between the mandate of the spin-off company and the research demands of a project or thesis which has to lead in part to a graduate degree.

   Students involved with spin-off companies will be required to sign a statement indicating that they are aware of the commercial aspect of the activity. A specific agreement should be signed at that time with respect to the rights and distribution of intellectual property, within which the student may be expected to share. This agreement would have to be sanctioned by the committee reporting to the Dean and the Chair of the Department.

   To safeguard the student's academic interests, the Ph.D. Advisory Committee will monitor involvement of the student in the company as well as the research progress. In such cases, the Graduate Chair must ensure that the Committee will have members, other than the Student Advisor, who have no connection to the project or the Company. This Committee should meet a minimum of every six months. At the Masters students level, the Graduate Department will appoint the oral committee at the beginning of the program and which will undertake a review every six months.

   Guidelines for student participation are given in Appendix II.

8. Dispute Resolution In the event of a dispute among parties, including academic and non-academic staff, students, postdoctoral fellows and research scientists, with respect to any matter concerning the spin-off company, the dispute will in the first instance be referred to the Dean, who may appoint a committee to adjudicate the issue.

   Appeals of the Decanal decision shall be referred to the Office of the Provost for enactment of University policy as appropriate.

9. Check List A check list is provided to enable faculty to cover the essential aspects of forming a spin-off company.
   1. Development of concept/invention or idea
   2. Disclosure of intellectual property to Office of Assistant Vice-President Technology Transfer
   3. Steps taken to protect intellectual property normally with the assistance of the Office of the Assistant Vice-President
   4. Decision of researcher to form or participate in the formation of a spin-off company to develop and market concept
   5. Notice of intent to form spin-off company in writing to Chair/Director, Dean and Vice-Dean of the Faculty
   6. If the spin-off company wishes to be considered for incubation within the Faculty, submission of business plans to the Vice-Dean, six months in advance of desired information of the company
   7. Review of business plan by the committee reporting to the Dean
   8. If approved by Committee, negotiation of specific terms of agreement for incubation within Faculty by Dean, Vice-Dean, Chair and Assistant Vice President, Technology Transfer
   9. If student(s) to be involved;
      • thesis advisory committee(s) approved by Chair/Director
      • awareness statement signed by student(s)
      • agreement with respect to sharing of intellectual property signed

   APPENDIX I

   University of Toronto Draft Guidelines on Spin-off Companies

   1. The University should assist in the establishment of companies based on technology created in its laboratories.
   2. All arrangements with spin-off companies should be recorded in writing and receive approval from the appropriate officials.
   3. The University should be adequately compensated for all space and facilities used by spin-off companies.
   4. Shares in spin-off companies may be owned by the University.
   5. No student should be taught or supervised by a faculty member who is his/her employer without approval from the immediate supervisor of the faculty member.

   APPENDIX II

   Faculty of Applied Science and Engineering Guidelines for the Involvement of Students in Spin-off Companies

   1. Undergraduate, graduate and postdoctoral students will be eligible to work within spin-off companies while these companies are within the University system if this can be seen to offer academic and financial benefit to the student.
   2. The terms of the work will be defined through a written agreement in each case.
   3. Such agreement will describe the scope of the work and how this work fits into their academic program. It will also spell out the terms of the sharing of any intellectual property created in whole or in part by the activities of the student.
   4. The student will be under the jurisdiction of the Ph.D. Advisory Committee, composed of the staff advisor, (who may be associated with the company), and two other members of the faculty not associated with the Company. This committee will be responsible for setting up the agreement and monitoring the progress of the student. For Masters students, this function will be performed by the Departmental Graduate Committee.

   This Framework was approved on May 28th, 1997 by Faculty Council.