The University Startup Company Law Firm www.rothmanandcompany.com steve@rothmanandcompany.com (310) 993-9664

1. The University Startup Company Law Firm www.rothmanandcompany.com  steve@rothmanandcompany.com (310) 993-9664 Stephen P. Rothman, Esq. 1

2. Special Issues Related to Employment and Consulting Agreements in the University Startup Company Setting - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - NCET2 Research Commercialization Online Course Lecture 3, Part 3 March 12, 2012 2

3. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - • Dual Roles – Employment by university; consulting to startup • Permitted roles • Time allocation issues • Use of equipment and space issues • Use of students and post-doc issues • IP Ownership Issues • Full-time employment by startup • Neither employment by nor consulting to startup • Possible board service • Equity ownership • License participation 3

4. Dual Roles – Employment by university; consulting to startup • Permitted roles • Management of corporations and LLCs • Stockholders and Members • Board of Directors and Board of Managers • Officers • Non-officer employee • Example: Caltech policy • Faculty consultant to startup can be on board of directors but not permitted to be an officer • Then who are the officers – professional CEO; former student or post-doc who goes full time; spouse - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 4

5. Dual Roles – Employment by university; consulting to startup - 2 • Time allocation issues – often for regular faculty a maximum of 20% or 1 day per week • Can’t interfere with teaching, academic research - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 5

6. Dual Roles – Employment by university; consulting to startup - 3 • Use of equipment and space issues • Generally can’t run business from university or government lab • Causes problems with tax-exempt bond financing – research agreement that gives preferred position to research sponsor considered a “private business use.” Can’t fix royalty in advance on invention arising from sponsored research. • Causes “private inurement” problems for 501(c)(3) • Conflict of interest rules will apply to any use of university facilities that would benefit a company in which a faculty member has a financial interest. Rules vary by institution and by state. • Where equipment is specialized and very expensive, and already owned by university, it may make more sense to do work at university, pursuant to a sponsored research agreement or facilities use agreement that is approved through proper channels, with consequence that university owns resulting IP • Conflict of interest issues need to be cleared, sometimes by department chair, sometimes by a committee, or both; in some cases a written COI agreement or management plan is required. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6

7. Dual Roles – Employment by university; consulting to startup - 4 • Use of students and post-doc issues; university startup company may be prohibited by university policy from employing student who is at that time in the founder’s class or for whom the founder is an advisor. • May be prohibited; may just need appropriate consent from university administrator • Sometimes grad students or post-docs move on to full time with company • IP Ownership Issues - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 7

8. Dual Roles – Employment by university; consulting to startup - 5 • IP Ownership Issues • If university facilities used, university owns the IP • Usually only “substantial” use, excludes use of telephone or library – means doing research in the university lab; but this depends on university policy • Who cares? If IP licensed from university to startup anyway, difference is the royalty obligation; some startups conclude its not worth trying to evade this but concede whatever the ongoing professor / founder invents is going to be university IP • Investors may want to prohibit faculty consultant in consulting agreement from using university facilities while performing consulting services to startup - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 8

9. Dual Roles – Employment by university; consulting to startup - 6 • Consulting Contract • IP assignment to company must dovetail with university obligations • Negotiations can be difficult with investors who are more used to the model of an unaffiliated founder who contributes all relevant IP to the startup company outright; • Investors may seek prohibition of use of university facilities while working for startup • Investors may request trade secret type provisions that are inconsistent with university mission (publication restrictions) • Prior assignment to university controls if university facilities used • But was there a valid prior assignment to university? (Stanford v. Roche case ) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9

10. Stanford v. Roche case - 1 • Stanford alleged that Roche infringed two patents concerning a method of determining the effectiveness of an HIV therapy by measuring the amount of HIV virus in blood using Polymerase Chain Reaction (PCR) technology. PCR was developed by Cetus scientists in the mid-1980s. • A Stanford employee, Mark Holodniy, in 1990 spent nine months as a visitor at Cetus, a biotechnology company later acquired by Roche, in order to work with and learn from Cetus employees.  While there, he developed a method of using PCR technology to measure the amount of HIV virus in blood. • After returning to Stanford, he did additional research on the extent to which the PCR-based tests actually had clinical significance. Cetus had no role in this later work, which served as the basis of Stanford’s patent. I I I I I I I I I I I I I I I I I I I I 10

11. Stanford v. Roche case - 2 • Holodniyhad signed an invention assignment agreement with Stanford in 1989 in which he “agreed to assign” inventions resulting from his employment with Stanford University. • When Holodniy agreed to visit at Cetus he signed an agreement with Cetus which stated Holodniy “will assign and do[es] hereby assign” to Cetus his inventions arising from his access to Cetus’ facilities. • Both Stanford and Roche claimed ownership of certain inventions that utilized techniques that Holodniy learned at Cetus, but aspects of which grew out of the significant additional research conducted after Holodniy returned to Stanford. I I I I I I I I I I I I I I I I I I 11

12. Stanford v. Roche case - 2 • Holodniyhad signed an invention assignment agreement with Stanford in 1989 in which he “agreed to assign” inventions resulting from his employment with Stanford University. • When Holodniy agreed to visit at Cetus he signed an agreement with Cetus which stated Holodniy “will assign and do[es] hereby assign” to Cetus his inventions arising from his access to Cetus’ facilities. • Both Stanford and Roche claimed ownership of certain inventions that utilized techniques that Holodniy learned at Cetus, but aspects of which grew out of the significant additional research conducted after Holodniy returned to Stanford. I I I I I I I I I I I I I I I I I I 12

13. Stanford v. Roche case – 4 • Result – universities are re-doing their assignment provisions to say “I hereby assign” (even as to future inventions), instead of “I will assign.” That’s the lesson of the case for the university. • What is the lesson for the researcher? Don’t get into a mess like that one. • Be careful about assignment provisions in employment and consulting agreements. Make sure they are consistent. Ideally consult a lawyer or perhaps university tech transfer office before signing such agreements. • Even documents that appear standard at first glance may actually assign away valuable intellectual property. For example, the agreement at issue in the Stanford case was titled “Visitor’s Confidentiality Agreement,” but it was not just a confidentiality agreement but also an assignment.  It assigned to Cetus (Roche’s predecessor) everything the researcher conceived of “as a consequence of access to Cetus’ facilities or information.” I I I I I I I I I I I I I I I I I I I I 13

14. Dual Roles – Employment by university; consulting to startup - 7 • Different models • Part-time consulting • Leave of absence – 3 – 6 months • Longer leave of absence – 2 years • Usually some maximum – Beckman example I I I I I I I I I I I I I I I I I 14

15. Full time employment by startup • Risk / Entrepreneurial drive? • Work driven by commercial need, not curiosity • Different equity opportunity for founder versus consultant; likelihood of dilution greatest where there is no ongoing role; a bit lower for consultant; lowest for successful officer • IP owned by startup • Paradoxically – no “inventor’s share,” but outweighed by equity position I I I I I I I I I I I I I I I I I 15

16. Neither employment by nor consulting to startup • Possible board service • Equity likely to be diluted to nothing • Least control or even information • Still get to participate in university license revenue I I I I I I I I I I I I I I I 16

17. Questions? Stephen P. Rothman, ESQ. ROTHMAN AND COMPANY, P.A. www.rothmanandcompany.com E-MAIL:steve@rothmanandcompany.com (310) 993-9664 17