1. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 1 OpenTTO.org - DILIGENT Phase 5 – Funding & Commercial Structures FCS Objective Accessing Technology Finance Concept of Ownership Licensing Option The Equity-Venturing Strategy Structures and Taxation

2. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 2 FCS Objective To identify strategic financial resources and structures: When and what kind of financial resources? What strategic resources and assets should be tied to the investment or offer of money? What is the most appropriate rent mechanism? What are the most effective commercial structures? The objective is to optimise the creation of value, and to exit the IP in a way which captures best value in relation to the risk and global commercialisation objectives.

3. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 3 Funding & Commercial Structures 5.0 FCS 5.1 Revi ew Fina ncin g 5.2 Fund ing, Unde rstan d Opti ons 5.3 Wor ksho p Own ershi p & Lice nsin g 5.4 Wor ksho p Equit y- vent urin g strat egie s 5.5 Revi ew Stru cturi ng & Taxa tion Business Lead Commercial Advisors Product Development Cost/Financial Analyst Legal/Taxation Advisors CPA, MVP, IDA, ADC Funding Programs VC Sources Partner Information 5.1 Review technology financing and the methods and means to approach financing. 5.2Understand the funding lifecycle and the different forms of funding needed over time. 5.2 Review the concept of ownership in the context of licensing “rent” options. 5.3 Explore equity-venturing strategies and the pluses and minuses of such a route of financing. 5.4 Review structuring and taxation issues in relation to ownership and capital realisation. 5.5 Complete and review Confidence Index for FCS Funding Strategy & Plan Rent Strategy – Licensing/Equity Structures and Taxation List of Candidates VP for Candidates 6.0 PMR Business Lead Commercial Advisors Determine the optimum financial resources & commercial structures in order to balance NPV versus risk and which match the commercialisation objectives. Process Supplier Input Output Customer Overview 6.0 PMR7.0 SPB8.0 TRP

4. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 4 FCS Suppliers and Inputs Typical questions for suppliers and inputs: How is the history of previous licensing deals? What has been the spin-off success and risks? What is the track record of licensors? Is the scope domestic and global? Is appropriate taxation advice available? Templates P C S O I Transform

5. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 5 FCS Making The Rules Remember the Golden Rule… “Whoever has the gold makes the rules” But remember that “the gold” is not one-sided and not just money from VCs.

6. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 6 FCS Process and Transformation Financing options, typical questions include: Who do we know that has provided “our kind” of finance? What working relationships do we have in place? Are we familiar with the range of funding programs available? Have we a preference and what is the rationale? Do we know the type of funding which optimises our return? Should we be seeking funding for prototype development? Are we looking beyond venture capital funding? Do we understand the stages and sources of funding? How much funding is needed to cross the “valley of death”? Templates P C S O I Transform

7. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 7 FCS Accessing Technology Financing Is not always about financing first and foremost: relationshipsIt’s about building relationships –Between sectors –Between organizations (clusters) people! –Among people! Identifying sources, and Leveraging those sources To capture smart money at the right cost.

8. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 8 FCS Start with Gaining Knowledge Doing the homework, check at least: Determine the resource needs and priorities!! Utilize the right resources at the right time Programs to assist early commercialisation Programs available to assist technology entrepreneurs Recognize it will take time, effort and perseverance Understand what kind of money is required –Investment for equity –Debt –Convertible preference shares or options or other forms –Working capital financing –“Intelligent” collaborative venture money Remember who helped you along the way!

9. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 9 FCS Prototype Development Funding An option and objective for early-stage funding : Identifying, applying for and securing funding e.g. seed funding Overseeing the development of prototypes and other scaling-up Ability to integrate funding from several sources No more than 1 in 10 potential opportunities reach prototyping Outcomes: –License or spin-off with reduced risk or greater value creation –Returned for further R&D –Abandon i.e. inability to scale-up or demonstrate proof of concept –Small well-defined investments, planned early in the commercialization process, often save much larger amounts later in the cycle. Only for those technologies with strong market potential where there is a high probability of adding value and reducing the time or increasing the attractiveness to the next round of resourcing.

10. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 10 FCS Venture Capital Only One Resource Other resources may be more appropriate for the moment: Expand R & D efforts through University partnerships Save time and money via Entrepreneurship programs Use networks to locate collaborators & angel investors Subsidize labor costs using workforce programs Find people and informal funds through Mentors Check pre-seed resources and Government funding Planning, timing, collaborative resources and negotiating strength should be optimised before seeking VC money

11. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 11 FCS Funding the Process Basic Research Mature Applied ResearchPrototype Early Commercialization Ramp Up Universities & Federal Labs Research Centers & Institutes Venture Capital Active & Passive Capital Networks (e.g., COMET, GOV & “angels”) Seed Capital Working Capital (Banks) Decreasing Risk/ Reward

12. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 12 Positive Cash Flow Breakeven FCS Funding - The Valley of Death Concept Working Prototype (Applied Research) Engineering Prototype Production Prototype (Early Commercialisation) Product Introduction Sales Ramp Up Family & Friends ( $0 - 25K ) Passive Informal Investors ( $25 - 100K ) Active Informal Investors ( $100 -- 500K ) Active Informal Investors ( $0.5 – 1m ) Institutional VCs ( $1m+) Sweat Equity & Personal Savings Seed Capital Pre- Venture Capital Venture Capital 2 to 3 Years

13. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 13 FCS Process and Transformation Rent mechanisms, typical questions include: Does the commercialisation strategy indicate a rent mechanism? Are we clear about the meaning of “ownership”? What rights constitute the concept of being an owner? How should we split commercialisation and ownership rights? Have we a preference and what is the rationale? Are we prepared to give up development control by licensing? Is up-front money more important than further control? Do we want standard or individual licensing contracts? Do we have the negotiating skills necessary for the complexity? What kind of risk management system do we have over rent? Templates P C S O I Transform

14. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 14 FCS Rent Mechanism What is the appropriate “rent” mechanism?: –Outright sale –Start-up –Exclusive licensing –Non-exclusive licensing –Venture spin-off What are the ownership rights? All prior DILIGENT steps are necessary in order to estimate real value of invention to licensees and what can be expected in pre- payments and performance.

15. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 15 FCS Ownership Rights Rights which comprise the concept of being an “owner”: Licensing rights - split up between territories and fields of use Assignment rights (right to transfer/sell ownership) Security rights (right to mortgage or encumber ownership to borrow funds) Right to patent/copyright Right to sue for infringement “Right” to be held liable for obligations or promises The right to commercialize the intellectual property These rights can be divided up by the owner in many ways and result in a variety of different parties deriving particular rights in specified circumstances

16. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 16 FCS Commercialisation Vs Ownership An important distinction between rights: Ordinarily the owner of intellectual property retains the commercialization rights and undertakes all the necessary activities to commercialize the intellectual property. However, commercialization rights are only one of the rights in the bundle of rights retained by an owner. Transferring commercialisation rights may not necessarily transfer any other rights except the right the right to undertake commercialization of the intellectual property. The commercialization right is none-the-less an important right since, if the recipient of this right does not actively pursue commercialization, it will have a major negative impact on the revenues flowing back to the owner.

17. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 17 The Bayh-Dole Act: Prior to 1980, the US government generally retained title to any inventions created under federal research grants and contracts Now, by the Bayh-Dole Act 1980 plus 1987 Regulations, it retains: –Non-exclusive –Non-transferable –Irrevocable –Paid-up (royalty-free) licenses to use the inventions. FCS US Government Ownership Rights Under the Patent and Trademark Laws Amendments of 1980, as amended (commonly known as the Bayh-Dole Act), small businesses, non-profit organizations, and certain contractors operating government-owned laboratories may retain title to and profit from the inventions they create under federally-funded research projects.

18. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 18 FCS Bayh-Dole Some key requirements: 1.The contractor or grantee must attempt to develop or commercialize the invention. 2.If the contractor or grantee is a non-profit organization, the contractor or grantee generally must give priority to small businesses when licensing the invention. 3.When granting an exclusive license, the contractor or grantee must ensure that the invention will be “manufactured substantially” in the United States. 4.If the contractor or grantee is a non-profit organization, the contractor or grantee must share a portion of the royalties with the inventor(s).

19. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 19 FCS The Licensing Option The minus aspects of licensing are: Losing control of further development Finding the right licensee is tough Protecting interests is crucial The positive aspects: Having multiples resources to develop invention Potentially new applications arising May receive up-front money All prior DILIGENT steps are necessary in order to estimate real value of invention to licensees and what can be expected in pre- payments and performance.

20. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 20 FCS The Licensing Option Typical questions for licensing options include: Is the objective exclusive or non-exclusive licensing? Will different licenses apply to different segments and industries? Is one-off or annuity income the objective? Have the main risks been identified? How to balance up-front reward versus risk? What is the risk versus the cash flow?

21. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 21 FCS The Licensing Option Typical questions continued … NPV versus risk – timing and sensitivity? Should license fees be performance-based? What is the timing of the flow of funds? Which is the best vehicle? What are the potential liabilities? Are international structures needed? What are the taxation implications of the different vehicles? How to handle tension between owner and licensee obligations e.g. maintenance & improvements?

22. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 22 FCS License Agreement The basic elements of a licence agreement are: The identity of the parties The subject of the licence The licensor's obligations The licensee's obligations The common obligations of both parties The termination conditions and rights These rights can be divided up by the owner in many ways and result in a variety of different parties deriving particular rights in specified circumstances

23. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 23 FCS License Contract The contractual provisions typically include: Geographic range of the licence Performance requirements by the licensee Payments and royalties – timing and form Payment of taxes Ownership and rights to improvements to the subject of the licence Protecting various parties from liability Insurance held by the licensee Use of the inventor’s or institution’s name Further assignment of the rights Confidentiality Registering the licence with the appropriate asset register The rights of faculty inventors regarding publication

24. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 24 Expert advice needed: Plus: Risk Framework Negotiating skills FCS Negotiating Contract Terms CONTRACT INTELLECTUAL PROPERTY TERMS ATO R&D and Other RULINGS CONFLICT OF INTEREST UNIVERSITY IP POLICY STATE LAW UNIVERSIT Y CUSTOM & PRACTICE FEDERAL LAW FUNDING SOURCE

25. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 25 FCS Process and Transformation Analysing venture/equity and structuring options: Is the equity-transfer process clear? Should it be exclusive or non-exclusive? Which is the best equity transfer structure? How much and what form should residual equity be held? How is a valuation determined? How should ownership change over time? What capital realisation method is preferred and at what risk? What structure will facilitate the best exit tactics? Does the structure support the desired taxation outcomes? How do all parties benefit by the proposed structure? Templates P C S O I Transform

26. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 26 FCS The Equity-Venturing Strategy Equity venturing has dangers: High risk – remember 0.8%! - and slower payback Finding the right management team is tough Protecting assets and cash is vital But also higher rewards if successful: May be a big success – 1 in 4500! May attract high performance team Offers more control of development and application All prior DILIGENT steps are necessary inputs to a Business Plan to take to strategic or other investors.

27. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 27 FCS Venture Capital Financing Desired characteristics of a VC – before money: Prefer early-stage firms with a geographic focus Prefer a focused technology thrust Need to be fully integrated into private risk capital system (angel, institutional investment, venture loans and R&D taxation) Preferably tied to university innovation streams Need to have management skilled in early-stage tech ventures Track record!Track record! Venture capital firms want to know first and foremost how a start-up plans to make money from an idea. They are more interested in management teams and complete marketing plans than they are in specific technological concepts.

28. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 28 FCS Targeting Venture Capital 1 Need to pro-actively target appropriate firms: Seeking to engage with the wrong firms is a black mark Must understand the process! In addition fund raising will take longer be “over shopped” - risky Venture capitalists’ have an investing style and timing: Geography – this is basic! Industry specialisation – i.e. don’t shop IT to biotech VC Stage of development – e.g. some do not touch early-stage Size of investment preferences Research the appropriate funds and know their style

29. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 29 FCS Targeting Venture Capital 2 Evaluate the benefits that a particular venture firm offers: Do the venture capitalists have experience with similar types of investments? Do they take a highly active or passive management role? Are there competing companies in their portfolio? Are the personalities on both sides of the table compatible? Does the firm have strong syndication ties with other venture firms for additional rounds of financing? Can they help provide contacts for distribution channels and executive search?

30. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 30 FCS Targeting Venture Capital 3 The most important factor in valuation is the stage: Stage I: Ventures have no product revenues to date and little or no expense history, usually indicating an incomplete team with an idea, plan, and possibly some initial product development Stage II: Ventures still have no product revenues, but some expense history suggesting product development is underway Stage III : Still operating at a loss but show product revenues Stage IV : Companies have product revenues and are profitable As milestones are achieved, risk is reduced and subsequent rounds of financing can usually be raised at more attractive valuations. The best way to build value in a company is to achieve the goals and milestones within the timeframes designated in the business plan

31. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 31 FCS Targeting Venture Capital 4 Understand who you are approaching e.g.: A “stage 4” VC will not be interested in a stage 1 prospect: –Will discount hugely i.e. very low valuation as risk hedge –Will not have the evaluation skills –Will not have the management skills and connections to assist development of an early-stage venture –Will not have the risk profile and temperament –Will have too high overheads for small investments Wasting everyone’s time, especially your own at a critical time Displays a lack of commerciality in the management team VCs talk and will reflect negatively on the venture

32. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 32 FCS Targeting Venture Capital 5 Then get the financing basics clear: How much you want? How you will spend it, and in what chunks? By what milestones you will be measured? What structure will carry the money and business? How do you justify the valuation? What is the (anti) dilution strategy? Make sure the financials match the business planning

33. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 33 FCS Critical Role of Formal Capital Transition through growth stages requires: Money, of course - but different forms of money Business & Strategic Plans become more formal Risks tracked and managed in a formal manner Technology and Innovation Protection must continue Experience & Expertise must be matched to stages Shift critical attention to production and then sales Comprehensive changes in the entrepreneur and their company Formal Capital forces these types of changes

34. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 34 FCS The Next Round Know where the next round is coming from: When will it be needed? How much? By what method? Who are the likely investee targets and why? How will dilution be handled? Investing without knowing where the next round will come from is a cardinal sin of venture capital.

35. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 35 FCS Build Structures to DIVEST The “HIDDEN SECRET” is in getting out cleanly: Not whether to get out but when How to give up ownership and control? Under what circumstances? By what method? In the pain of “giving up” it is often forgotten that the goal IS TO GIVE UP. Give up control of the assets and exit in an timely fashion with optimum risk and cost.

36. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 36 FCS Structures Forward planning taxation issues is critical, eg: R&D tax credits Capital Gains Tax CRC IP Coy Commercialisation Company License Researchers & Inventors Commercialisation Management Inventors & Spin-off Staff Spin-offs

37. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 37 FCS Structures & Taxation Forward planning taxation issues is critical, eg: R&D tax credits, with carry-forward provisions Multi-year net operating loss provisions Investment tax credits for purchase of laboratory equipment, coupled with sales or use tax exemptions Separation of R&D and commercialisation / marketing entities Implications of ownership of IP, and over time Capital gains tax Foreign tax and structures Effect on fund raising and different funding instruments

38. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 38 FCS Outputs and Customers Finance and commercial structures conclusions: What are the compelling financing and rent options? How do they impact on the valuation of the invention? Which players stand out as strategic investors? What strategy is the best for financing the next step? When should venture capitalists be approached? At what stage should licensees be approached? Which structures need to be put in place in the short term? What is the quickest way to get to the financial outcome desired? Templates P C S O I Transform NPV versus Risk compared to Commercialisation Objectives.

39. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 39 FCS Summary Alliances, distribution and clusters offer value Which parties –Add value –Add disproportionate value –Seek to capture disproportionate value –Provide partnering advantages Process to understand industry –Describe the partnering and value stream to customers –Describe value propositions to partners –Create partnering and strategic investment models

40. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 40 FCS Templates The FCS Phase Summary Report: Part of the evolving Business Plan Contains sections describing: –Which financing strategy Adds most value now Creates most value over time Yields the best input of non-financial assets Provides appropriate exit mechanisms Can be implemented in workable commercial structures –Select of rent mechanism Describe the chosen licensing or equity/start-up options Comparison of NPV versus risk Prepare a pro-forma investment and capital expenditure plan Actions for further work may precede or run in parallel with the next Phase - PMR Templates P C S O I Transform

41. ©2004 OpenTTO.org walter.adamson@opentto.org Slide 41 FCS Confidence Index How confident are you that: The funding alternatives have been understood? The funding alternatives have been sufficiently explored? Licensing options have been fully examined? The role and timing of investment is clear? The type of investment is well thought through? The pluses and minuses of venture capital are clear? All ownership issues are clear and not in dispute? The appropriate structure is clear? Taxation has been optimised? All parties will benefit from the structure and taxation?