How separate should faculty start-ups be as university spin-offs?

faculty startup; faculty research; university startup; autm technology transferI am a former patent examiner and registered patent attorney.  I worked as a Technology Transfer Specialist in the Office of Research at my alma mater, the University of Illinois Urbana Champaign.  I managed the College of Engineering’s technology.  I went on to become Old Dominion University’s Director of Intellectual Property and Research Compliance.  Many research universities take equity share ownership in and provide supporting resources to faculty members that the university has encouraged to venture out and start up a technology based business involving their research on campus.

Andrew Campbell’s May 26, 2014 Harvard Business Review article entitled “How Separate Should a Corporate Spin-Off Be?” intrigued me.  Campbell cited large corporate examples including Shell, BAT, Virgin Group and Unilever.  But, it strikes me as a question that should and often is considered with respect to research universities and their faculty’s small corporate spin offs.

When businesses set up a separate business unit, Andrew Campbell posed the following questions:

  • Which corporate policies should apply to the new division and which should not?

With university faculty start-ups, many of the university’s policies still apply to the faculty member since the faculty is still on staff.  Many university’s follow business ethics policies such as the American Association of University Professors (AAUP) Statement on Corporate Funding of Academic Research adopted by the Association’s Council in November 2004.  This Statement mentions problems that arise when universities actively encourage faculty members to form private research companies to promote licensing of innovations.  The AAUP states that a faculty member’s entrepreneurial instincts may lead her to try to identify and patent discoveries that will have a payoff and “[t]he danger exists that universities will be so assimilated into society that [they] ..must guard against being harnessed directly to social purposes in any way that undermines the fundamental character of the university”.  Thus, a university’s culture and policies related to its vision of its ivory tower role would have to be taken into consideration!

  • Should the managers in the new division have similar terms and conditions and bonus arrangements to those of their colleagues in the existing businesses?

This issue is not as relevant to university faculty start ups.  The amount the faculty startup management team gets paid will depend on any funding it secures and revenues it earns.

  • How much time should the corporate executive committee spend on this new activity?

Now, this is a very relevant question for university research administrators and others that support faculty start-ups.  This is particularly true of the university technology transfer office staff.  How much distance should they maintain?  I have met research faculty at emerging research institutions that do not believe they are getting adequate support for their start-ups.  Any lack of support is dangerous because the university runs the risk of losing valuable human capital to competitng research universities.  I have assisted emerging research institutions like Florida A&M University and like many of universities, they are grappling with this problem.  On the other hand, if the university seeks to maintain limited liability in its equity stake in a start-up, then it needs to limit its involvement with respect to managing day to day activities.

  • How should it be monitored and targeted?

This is another relevant question.  If a university provides support to a faculty member’s start-up, then how should the university go about monitoring the start-ups’ progress?  It has been my experience that universities will require licensing revenue and sales reports.  But, this financial information does not address business development and product development issues that an advisory board could address.  Should these university’s mandate their expert advisement and require advisory boards?  I have experienced first hand many business school staff wanting to get more intimately involved with the research office’s tech transfer staff in providing business advice to research scientists and engineers that lack that know-how.

  • Should the new activity be a joint venture with a third party?

This is possible and depends on who the joint venture partner will be.  The key here is to avoid conflicts of interest.

  • Should the new activity have a separate stock market listing or separate funding?

Of course, teeny tiny faculty startups do not have to worry about stock market listings.  But, the issue of separate funding is very important.  Again, there are many concerns about the use of corporate funding for academic research.  Just because the funding is funneled through a startup does not mean the research university is totally absolved of any subsequent ethical issues when the faculty researcher remains a university employee.

In conclusion, just as large corporations should consider how separate they should be from their spin-offs, so should universities with respect to their research faculty’s startup companies involving university research.

By Clovia Hamilton, MBA JD – President Lemongrass Consulting

(c) 2014. All Rights Reserved. Lemongrass Consulting, Inc.

Written by

Clovia Hamilton is an entrepreneur with 30 years of professional work experience as an adjunct biz law & ethics professor, university technology transfer specialist, engineer and planner. Clovia is a licensed patent attorney and completed an Executive MBA at Wesleyan College. Her next pursuit is a Phd in Mangt and she supports The Phd Project, American Association of University Women (AAUW), and Women in Public Policy (WIPP)! Clovia has trained hundreds of business owners since 1999 when she began to assist the Univ of IL in Champaign with faculty high tech start ups. She has also assisted hundreds of small biz owners by training them on how to get government grants and contracts.

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