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confusedPharm

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Hello,

If an academic physician manages to become a scientific co-founder of a startup that was launched based on his work, what percentage of the startup's total equity does he usually end up with, assuming that he does NOT leave his position in the university/lab (i.e. he does not want to become the company's CEO)?

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There's no absloute rule about this and it depends on the actual role of his intellectual property, and in general can be negotiated in every possible way. Also remember if the research is conducted at the university, the university also takes a cut. There are guidelines on the ownership of the intellectual property that's generated at the university, typically somewhere in the faculty manual. But if the estimated number is large, you can often write into the contract to have a flush depending on the total sales (i.e. 25% of profit share for the first 10 million, 5% of the next 100 million, etc.)

You also have to remember that equity of the company owning a patent does not equal to the value of the patent. A company can own 100% of a patent but run itself to the ground because of other issues unrelated to the technology, so owning equity of the company that you start with plan to commercialize isn't necessarily the right path for every technology. Very often the inventor retains the ownership of the patent (if that's what it is) and licenses it to a variety of companies without owning equity to any of them. Sometimes patents are never filed, but rather a recurrent royalty for application of unusual techniques or services was negotiated on an individual basis, primarily because the logistic difficulty of obtaining a patent. For example, software algorithms are very rarely patented because they get updated so frequently, so licensees are essentially getting exclusive access to the team with specialized expertise that would handle algorithm development for a period of time. Actual payouts can vary in time and are not necessarily fixed at the initial contracting (kind of like a landlord renting you a house with the promise of not raising the rent by X%, but when the time comes the rent could be raised by anywhere between 0% and X%, and the actual rate needs to be re-negotiated.) These royalty contracts themselves have value, and usual financial engineering techniques (i.e. trache, securitization, etc) can be applied to leverage their value directly without having to worry about the operational side of commercialization. There are private equity firms specializing in investments of royalty contracts (rather than companies). So if you are looking for a big payday you don't necessarily need to be running your own company.

There are also complicated issues involving conflict of interest, if further research is to be conducted at said university based on commercialization potential.

This is a fairly specialized area and if there's a really promising technology you would likely have to go through institutional channels to get advisory. Usually the technology transfer office will have a legal team that would handle the evaluation of the intellectual property, as well as mechanisms for building such startups through institutional incubators. Problem is, often the three players (the startup, the university and the individual inventor) do not have fully aligned interests, so if the inventor assumes the legal team at the university has a fiduciary duty to her, she would be thoroughly wrong. Litigation on this and related issues occur at some frequency, and probably is one of the core practice areas of IP litigation, because the interpretation of these early stage contracts are often unclear, and the significance of the lack of clarity, and resulting inequity, does not become apparent until later. Kind of like how often pre-nuptials don't resolve the necessity of an expensive divorce court proceeding.

If based on your evaluation the technology is potentially worth a lot of money, lawyering up independently before making any commitment to anyone or signing any contract is likely the most judicious thing to do.
 
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Great advice by sluox (particularly last sentence). Keep in mind that to bring a drug to market costs over a billion, and for a device (depending if implantable) could be 10-100 million. Where that money comes from? Often venture capital (i.e.: preferred A (or B, etc.) stock. These additional offerings will dilute your founding stock. It is not unusual that by the time the successful company is acquired that you have been heavily diluted, and now you are dealing with very low single digit (or less) percentage of ownership (still a little of a lot often is more than the alternative). There are many obstacles at each phase of R&D with benchmarks such as completion with positive results of phase III trial, FDA regulatory review, CMS reimbursement, etc. Each of these benchmarks increases or decreases the value of the company.

The other aspect is to keep advancing the technology with further patents. You don't know what would be used/claimed by the company as primary source of value, and by your competitors in the space.
 
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