I walked 100 miles for this term sheet
By Sarah Reed
Sarah Reed is General Counsel at RA Capital Management. She is the only lawyer to have received the National Venture Capital Association’s Outstanding Service Award, for her leadership role in conceiving of and spearheading the NVCA Model Legal Documents (for VC financings).
November 21, 2022
I really thought they were insane.
It was 2002, during my first job at an investment firm, Charles River Ventures. We were backing a couple of founders straight out of Harvard Business School. They’d won a business plan competition, and their idea was premised on licensing the core technology from MIT. They had already spent a few months negotiating an option for it, and they asked if I could help. I hadn’t done this kind of licensing deal before – but I figured, hey, I’m good lawyer, I’m smart, I can figure it out. Plus, for them, my hourly rate was unbeatable: free.
“We need to decide on a day of the week for a recurring half-day meeting with the MIT technology license office,” the founders told me. “For the next six months.”
Half a year? I think I was able to suppress my laughter. That’s not the way corporate transactions work, I tell them (in a slow calm voice, the way you might talk to overexcited children). They’ll just send us their standard licensing agreement. We’ll discuss it, we’ll redline it, we’ll send it back to them. They’ll send it back to us. A few times. Maybe this takes a month? Two at the most? Wow, I’m thinking, these guys are so naive. Yet they seemed to have done their homework. They’ve talked to the licensing office, and some others who’d licensed tech from the university. What if …
Half a year later, we finally inked the agreement. Turns out they were not insane. Rather, it’s the process that’s insane. Turns out six months was actually fairly speedy! And, over the years, the process has not improved. It still takes about six to twelve months. There is no other business transaction process that I’m aware of in the US that routinely takes so much time (and frustration!).
But thanks to the selfless efforts of a handful of smart and dedicated volunteers from a few tech transfer offices (TTOs), law firms, and investment firms, that may be changing.
RA Capital has developed a variety of short, free, self-guided online learning modules called RA University. Our goal is to share practical and theoretical concepts fundamental to the biotech industry that aren't being presented anywhere else.
Baby steps
The friction inherent in extricating technology licenses from universities boils down to a certain level of healthy paranoia and differing opinions about the intellectual property the institution is hoping to commercialize.
It makes sense. A TTO may often think it could be taken advantage of by an unscrupulous or inept investor. In reality, that’s probably a (very) low-probability event. After all, this is a business built on relationships and reputations as much as science. But “low-probability” sadly doesn’t mean no-probability. In parallel, an investor may fear it’s only getting the mere seed of an idea (or even just a small part of it), not everything that may grow out of it to create a successful company – and hence the hours of wrangling over esoteric, elusive concepts like “improvements” and “know how” not to mention the more straightforward ones of “reservation of rights” and “Field of Use”.
So here we have it, a typical negotiation starts with ample mistrust, risk aversion, and a disconnect about the value of the underlying license, on both sides, invariably leading to extended negotiations. TTOs often ask for overly broad, overprotective, full belts-and-suspenders provisions that VCs understandably push back on … and sometimes eventually acquiesce only to renegotiate once a significant funding round is on the table a ways down the road. And VCs sometimes fail to recognize that, for certain provisions, TTOs have little wiggle room vis-à-vis their nonprofit status or their university’s mission.
This all sets up a broken dynamic, but that’s the current state of play. And it’s against that backdrop that Orin Herskowitz, Executive Director of Columbia University’s tech transfer office, finally said: Hey, can’t we just step back and see if we can make this a little easier?
For Orin to take the lead here was crucial. This first overture had to come from the TTOs, the key partners (do the law firms mind the extended back and forth? Hey, it may be annoying, but the hours are billable). Further, it had to be someone as well respected as Orin to say hold on - why does it take so much time? Why is it so expensive? Why is it so complicated? And then to form the small group of TTO professionals, expert attorneys and VCs who would try to mend this broken process.
Immediately I assumed we would get together to draw up some out-licensing model documents, much like the model venture financing documents that I launched under NVCA auspices nearly twenty years ago (those documents are used by everybody now). But we weren’t quite there yet.
100 hours, 100 miles
Orin correctly apprehended that what we needed first was a statement of principles. We really needed to agree on the basics. We needed to listen to one another. The process was so broken that we needed to talk about the basic ways of conducting a negotiation.
Those conversations started in early 2020. Our first working session was discombobulated by Covid and so along with everyone else we headed to Zoomland, and in an odd way that probably enabled the eventual success of the project in that having large group video conferencing meetings became the norm.
Eventually, after many hours of conversation and trust-building, we felt that indeed we could move toward creating an Out-licensing Model Term Sheet. Our Noah’s Ark (afloat for much longer than 150 days) included expert law firm licensing attorneys, TTO representatives (from both state and private universities) and personnel from life sciences investment firms – shout out to my RA Capital colleague Nadim Shohdy who brought his considerable domain expertise to bear, and to 5AM’s General Counsel Galya Blachman, who did most of the heavy lifting along with Orin, and who now feels like a sister (not just at the Bar) as a result of our hours spent together IRL and on Zoom.
Each meeting was anywhere from three to five hours. If you’ve Zoomed with me, you know I’m on a walking desk. We had so many meetings – I figure I accumulated a good 100 miles on my Fitbit.
The finish line
At the outset, we set expectations that we would not even try to tackle the especially contentious provisions. But after many hours of fruitful interactions, we agreed to take on topics where VCs and TTOs are usually poles apart, such as sublicensing, know-how, and commercialization clauses. This wasn’t a walk in the park and featured some passionate debate. Nevertheless, the sharing of perspectives and underlying motivations (and a few colorful war stories) moved the needle towards greater consensus. And lo and behold, at the end of the day we were able to address all of the provisions of the Out-licensing Model Term Sheet.
A two year journey completed, and we now have our shiny Out-licensing Model Term Sheet. It’s a start – at least now everyone has a pretty robust scaffolding on which to build their licensing deals (with the stipulation, as noted in its introduction, that it is likely that not all users of the Term Sheet, in all cases, will be able to accept all the provisions as written). We see it as a reasonable framework overall for most parties to use in most situations. It’s based on those core principles we agreed to back in 2020. We’ve circulated it to a much broader group, and so far dozens of institutions are signing on.
By creating a standardized process for venture financings through the NCVA documents, I believe we helped turbocharge the venture financing ecosystem - there are now thousands of those deals closed every year in the US. I hope this new Model Term Sheet will prove just as impactful for biotech startup out-licensing from academia. More of the important discoveries made in universities should have a fighting chance to get licensed, developed, and commercialized.
In our business that means more drugs for patients who need them. And it means they’ll get them faster. Why should it take so many additional months for a drug to get to market just because we’ve settled into an unnecessarily combative and onerous process for moving discoveries out of academia? What typically takes up to twelve months can now, using our Out-licensing Model Term Sheet, take three or four months. Eventually, it should take even less time. And everybody wins.
Just maybe my optimism all those years ago at Charles River, walking into the MIT tech transfer office and thinking this will all be done in two months, wasn’t misplaced or naive. Maybe it was prescient!
The latest version of our Out-licensing Model Term Sheet can be downloaded from the Association of University Technology Managers (AUTM - Word and PDF) and the National Venture Capital Association (NVCA - Word). BioCentury’s excellent coverage is here.
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