Business Policies and Procedures Manual
Chapter 35: Intellectual Property
Acceptance and Management of Equity in WSU IP-Based Startup Companies
For more information contact:
Office of Commercialization
- 1.0 Purpose and Overview
- 2.0 Definitions
- 3.0 Applicable Laws and Regulations
- 4.0 Acceptance of Equity
- 4.1 Commercialization and Technology Transfer Program
- 4.2 Criteria for Accepting Equity
- 4.3 Process for Accepting Equity
- 5.0 Management of Equity
- 5.1 External Financial Advisors
- 5.2 Internal Controls
- 5.3 Ethics and Conflict of Interest
- 5.4 Standard of Care
- 6.0 Post-Initial Public Offering (IPO) and Liquidation
- 7.0 Resources and Related Policies
Consistent with its statutory mandate and mission to promote economic development in the state of Washington, Washington State University (WSU, University) accepts equity in startup companies engaged in the commercialization of WSU intellectual property (IP).
The purpose of this policy is to:
- Establish the criteria and process for the University’s acceptance of equity in WSU IP-based startup companies established pursuant to Executive Policy Manual EP38 (University Policies on Intellectual Property, Technology Transfer, and Commercialization); and
- Set forth the investment and operational procedures for managing equity, thereby ensuring prudent management while systematically realizing the gains from commercialization.
Equity is an ownership interest the University or its designee holds in a startup company that was based on University IP (“University startup company”). The University or its designee may either own or have the ability to exercise control over equity when the ownership interest is provided as consideration for the right to use IP owned by the University.
EAC is the committee charged with:
- Reviewing and recommending acceptance or nonacceptance of equity as part of the IP licensing consideration process;
- Considering general equity-related matters related to WSU IP-based startup companies and ensuring adherence to investment parameters; and
- Reviewing, advising, and recommending operational procedures to the Executive Vice President for Finance and Administration (EVPFA).
The EAC committee meets a minimum of once per fiscal year, or more frequently as needed, and consists of the following:
- EVPFA designee (Chair)
- WSU Office of Commercialization (OC) representative
- Representative (one) from the college or campus from which the technology originates, when applicable
- Representative from the Washington State Attorney General’s Office–WSU Division (AGO) (nonvoting)
- Outside legal counsel (nonvoting)
- External financial advisor (see Section 5.1) (nonvoting)
Federal and state laws and regulations encourage and, in some cases, require the University to commercialize IP developed by its researchers. Acceptance of equity in WSU IP-based startup companies is a reasonable and necessary component of the University’s commercialization program.
- The use of inventions that arise from federally supported projects; and
- The collaboration between commercial concerns and nonprofit organizations (including universities)
Under this law, universities are allowed to retain title to federally-funded IP under certain conditions, including if they:
- Assign rights to a subject invention only to an organization having as a primary function the management of inventions for the University, unless approved by the federal agency;
- Share royalties with the inventor;
- Use the balance of royalties after expenses for scientific research or education;
- Make efforts to attract, and give preference to, small business licensees; and
- Report to the federal government on the utilization of such IP.
State universities have a statutory mandate to engage in commercialization of research and other economic development activities that benefit the economic vitality of the state, including technology transfer activities. (RCW 28B.10.630)
The state Ethics in Public Service Act, RCW Chapter 42.52, supports universities’ technology transfer activities and allows them to manage conflicts of interest that may arise and create an administrative process exempting employees from certain requirements of the Act.
For transactions subject to this policy, no state funds may be used. See Washington State Constitution, Article VIII, Section 5.
The University’s acceptance of equity occurs only within the context of the University’s commercialization and technology transfer program.
University employees are required to assign their rights in IP developed in the following cases to the University:
- Significant University facilities and/or resources are used;
- A grant awarded to the University is used;
- The IP developed is “a work for hire” and is copyrightable. (See Faculty Manual, Sections IV F-G; RCW 49.44.140; and RCW 49.44.150.)
Employees transfer their ownership of IP to the University in exchange for consideration. This consideration includes sharing of any revenue generated by commercializing their IP, in accordance with EP38.
The University negotiates for license fees and royalties in cash whenever possible. However, when the acceptance of equity in a WSU IP-based startup company promotes the mission of the University, the University may agree to take, or authorize a designee to take, equity in the company as partial or full consideration for the granting of a license to IP owned by the University.
Accepting equity only in limited circumstances enables the University to focus on fulfilling its land grant mission of economic development and its obligations to the researchers who assigned their IP rights to the University.
The University accepts equity only when all the following criteria and conditions are met:
- The equity is in a startup company created to develop University IP into marketable products and services.
- No state funds are used to purchase the equity.
- The University’s potential liability in accepting the equity is limited to the value of the stock.
- Neither the University, nor any designee, acts as a fiduciary to any person concerning equity or other consideration received under the terms of this policy.
- The University neither seeks nor accepts representation on the board of directors of a licensee in which it holds equity.
- The University accepts only nonvoting shares.
- The University does not accept more than a 10 percent share of ownership interest in a WSU startup company. See Section 6.2 regarding allowable share of ownership post-liquidation or initial public offering (IPO).
- All shares, warrants, or other instruments evidencing ownership are issued in the name of the University or its designee. The University’s preference is to take equity in the form of stock, rather than options or warrants. Although accepting an equity interest in the form of options or warrants may be appropriate at times, arrangements must be made before acceptance to either:
- Identify sources of cash other than state funds, if needed for exercise; or
- Provide that the yield on such instruments may be netted out for a cashless exercise.
The process for accepting equity is as follows:
- In consultation with the AGO, the WSU OC initiates, leads, and executes the IP license process and the process of accepting equity as a form of consideration in the IP license.
- Prior to formally accepting equity via shareholder agreements, the OC seeks review of the shareholder agreements and recommendation for approval by the EAC.
- The EAC conducts a thorough review of the proposal, ensuring that the above criteria (Section 4.2) are met and conducting additional due diligence as warranted, including ensuring compliance with EP38.
- If recommended by the EAC, the OC routes the shareholder agreements for review and signature by the EVPFA or designee accepting the equity.
- The EVPFA or designee reviews, signs, and holds the agreements and subsequent stock certificates. WSU OC holds a record copy.
The Office of the EVPFA is responsible for the management of University-held equity. The University or its designee maintains ownership, custody, and control in its own name of all shares, warrants, or other instruments issued to the University. The University is solely responsible for the transfer by sale or otherwise of such instruments.
The Office of the EVPFA retains external financial advisors or brokerage services to provide execution of the equity acceptance, investment parameters, and liquidation strategies outlined in this policy.
External financial advisors or broker-dealer firms are selected based on their experience in equity funds management or trading expertise. Financial advisors must be registered with the Securities and Exchange Commission as registered investment advisers, unless specifically excluded from registration (e.g., banks). Broker-dealer firms must be members of the Financial Industry Regulatory Authority (FINRA).
The selected firm or firms follow the liquidation procedures listed in this policy.
The Office of the EVPFA maintains internal controls to protect against negligence, theft, or misuse. These controls may include, but are not limited to:
- Use of third-party custody and safekeeping
- Clear and written delegation of investment authority
- Avoidance of physical delivery of securities
- Written confirmation of transactions for investments and wire transfers
- Written wire transfer agreement with third-party custodian
University investment portfolios are subject to public review and evaluation. The University’s equity program must be designed and managed with a degree of professionalism that is worthy of the public trust.
It is expected that WSU officers and employees conduct themselves in accordance with state and federal laws and regulations, as well as University policies regarding ethics and conflict of interest. Officers and employees must refrain from personal business activity that may conflict, or appear to conflict, with the proper execution of the investment program or may impair their ability to make impartial investment decisions.
In the event of a conflict or potential conflict, individuals must promptly disclose the issue to the EVPFA and/or the EAC and may be required to recuse themselves from participation. (See EP45.)
All persons involved in the management of WSU equities are governed in their professional investment activities by the code of conduct established by:
- Applicable state statutes
- Securities and Exchange Commission (SEC)
- Standards of Professional Conduct of the CFA (Chartered Financial Analyst) Institute
All persons involved must make management and liquidation decisions:
- With judgment and care
- Under the circumstances then prevailing
- In the manner which persons of prudence, discretion, and intelligence exercise in the management of their own affairs
- Not for speculation, but for investment
- Considering the probable safety of their capital as well as the probable income to be derived
In the event of an initial public offering (IPO) of the startup company, WSU’s consideration is converted into publicly traded stock. This stock is to be liquidated in accordance with this policy, thereby providing a predictable exit strategy while affording the opportunity to participate in future success of the IP.
The objectives and guidelines stated in this policy apply only to WSU’s portion of consideration received through the IP license and not to any portion that may belong to individual staff, faculty, or students, either in accordance with EP38 or outside of the IP license.
WSU expects the number of holdings to grow over time, as more faculty successfully commercialize their inventions. Investment management of the equity holdings consists largely of following the trading strategy outlined in Section 6.3. Because each holding represents a unique opportunity for WSU, management of the portfolio focuses on each stock individually. The objectives for each security, in priority order, are safety, liquidity, and return on investment.
- Safety: Preserving the original post-IPO cost basis for each stock is the foremost objective of the investment program. WSU expects to recover its consideration for licensing the intellectual property over the shorter term and to benefit from the success of that property over the longer term. WSU intends to accomplish this by systematically selling stock only when the market value exceeds the original cost basis and limiting the overall holding period to ten years from the date of the IPO.
- Liquidity: Stock sales provide resources for ongoing research, development, and protection of new intellectual property. Managing the liquidation process to provide an ongoing stream of funding for these activities is important to sustaining WSU’s research efforts, research reputation, and ability to attract research talent.
- Return on Investment: Each new company created by the commercialization of IP has the potential to revolutionize an industry. However, success post-IPO is not guaranteed. By systematically divesting of its post-IPO stock over a predetermined intermediate time horizon, WSU is afforded some opportunity to participate in success, while limiting downside risk.
- SEC Compliance: In the event that WSU receives notice that a company intends to liquidate or go public, WSU reviews its holdings for compliance under SEC rules and specifically under the Exchange Act of 1934. As part of this review, WSU ensures that its holdings do not exceed thresholds that may trigger beneficial owner reports.
The following investment parameters apply to all post-IPO equity held by the University:
- At the time of initial public offering (IPO), a baseline market value is established for the holding. The baseline market value of a holding is the closing price at the close of the business on the day of the IPO.
- Shares sufficient to recover outstanding and reasonably anticipated WSU expenses and tier 1 royalty distribution as outlined in EP38 and the Faculty Manual are sold as soon as practicable after restrictions are lifted, and inventor share of the tier 1 income is distributed. Share value may vary from the established baseline depending on market conditions at the time of distribution.
- Inventors’ portion of the remaining shares in their entirety are distributed directly to the inventors, and WSU’s portion of the shares is held with an external agent.
- Market value is assessed at the same date annually, commencing at the end of the first full year of holding (first partial year excluded).
- Year 1 begins on the first September 15th after the holding is acquired.
- On annual date of assessment, September 15 th, shares above the established baseline value are liquidated, returning the holding to the established baseline value.
- If the value of the position is below the baseline, no action is taken.
- Holding is assessed annually on September 15 th, or the next business day, and the process is repeated according to the above schedule.
- The Office of the Executive Vice President for Finance and Administration executes the liquidation within 72 hours after the close of business on September 15th.
- If the position still holds value at the end of year 10, the position is liquidated in its entirety, irrespective of whether the value at that time is above or below the initial market baseline established.
- The lifespan of the holding does not exceed 10 years, from the first September 15 th after distribution.
- If the WSU start-up company changes ownership, the holdings are liquidated in their entirety.
- The liquidated proceeds are sent to the Office of Commercialization for distribution of the University’s portion in accordance with the Faculty Manual and EP38.
The EAC is responsible for ensuring these parameters have been established and are followed. These parameters may be adjusted only with prior written approval from the EVPFA, upon the recommendation of the EAC.
Post-IPO equity from commercialization of intellectual property is managed in accordance with the parameters in Section 6.3. The EVPFA, in consultation with the ECA and external financial advisors, establishes appropriate benchmarks against which performance is compared on a regular basis. These benchmarks take into consideration the investment objectives in Section 6.2 of this policy.
WSU’s external financial advisors provide reports, including quarterly investor reports issued by companies in which WSU holds equity, to the OC. The OC distributes the reports to the EAC, the EVPFA, and other interested WSU parties.
EP38: University Policies on Intellectual Property, Technology Transfer, and Commercialization
EP45: University Ethics Policy
EP27: University Research Personnel Conflict of Interest, Technology Transfer, and State Ethics Requirements
Faculty Manual, Section IV: University Policies Affecting Faculty
RCW 28B.10.630: Commercialization of Research and Other Economic Development and Workforce Development Opportunities
RCW Chapter 42.52: Ethics in Public Service
Revisions: June 2023 – new policy (Rev. 612).