
Licensing Agreements with Your Institution
A guide for startup entrepreneurs in life sciences
By Michael Schmanske, with Paulo Fontes, MD, FACS
For life science startup entrepreneurs, partnering with academic institutions can provide invaluable access to cutting-edge research, intellectual property (IP) and collaborative opportunities. Negotiating licensing agreements with hosting academic centers is a complex and crucial process that requires careful consideration of terms and strategic planning. We provide further detail and some examples of the key aspects to address in these agreements.
Laying the Groundwork: Essential Terms to Be Negotiated
The Scope of the License
The scope of the license is a critical component that defines the extent of a startup’s right to use licensed technology. This includes determining whether the license is exclusive or non-exclusive as well as specifying the field of use. Defining the specific field of application ensures clarity and prevents conflicts with other licenses issued by the academic center.Exclusive licenses often provide startups with a competitive advantage but may result in higher upfront costs. Defining the specific field of application ensures clarity and prevents conflicts with other licenses issued by the academic center.
The University of Michigan worked in collaboration with the Hospital for Sick Children in Toronto to create a flexible structure with carve-outs that both clearly defined the rights of innovators while maintaining public access for immediate application of widespread testing.
CASE STUDY—It’s for the Kids
The CFTR gene is crucial in cystic fibrosis research. The University of Michigan and the Hospital for Sick Children in Toronto strategically licensed this technology with field-of-use limitations that anticipated future scientific advancements. The approach allowed for the widespread application of genetic testing for cystic fibrosis while preserving access for clinical purposes. Such forward-thinking licensing ensured that innovation flourished while protecting both institutional and public interests, underscoring the benefits of detailed and deliberate delineation of rights.
A three-pronged licensing strategy was utilized to satisfy key stakeholders. A single exclusive license for a specific vector was licensed to a startup firm, this was paired with non-exclusive licensing for gene therapy and other therapeutic developments, and further non-exclusive licensing for diagnostic purposes with varying fees. This approach balanced the need for broad access to the technology with the financial and developmental interests of the involved parties.
Defining the Boundaries of Your Territory
Will you be developing the IP or using it ‘as-is?’ Are there any geographical carve-outs or use restrictions? What happens if a brand-new ‘use-case’ is developed by you, or by another innovator? By defining the intellectual “territory” of a licensing agreement, startups build a solid foundation for long-term success. These boundaries clarify expectations, guide development efforts and provide a framework for navigating challenges within their chosen fields of use.
When defining the boundaries it is important to include future development as well. Specifically, who owns further work product based on the existing research? In 2024 Roche Pharmaceuticals was understandably upset when two researchers went on to found companies based on extensions of IP they had previously sold to Roche in 2020.
CASE STUDY—Seller's Remorse?
In 2024, a significant legal dispute emerged involving Roche, Stanford University and the startup Foresight Diagnostics, highlighting the critical importance of clearly defined intellectual property (IP) boundaries in licensing agreements within the healthcare sector.
Roche alleged that Stanford professors Maximilian Diehn and Ash Alizadeh, whose technology Roche had acquired when it purchased their prior company Capp Medical in 2015, clandestinely established Foresight Diagnostics and unlawfully utilized Roche’s proprietary genetic-sequencing trade secrets to develop cancer-detection products.
The technology in question was integral to Roche’s Avenio kits. The complaint asserted that Diehn, Alizadeh, and Stanford professor David Kurtz were employed by Roche when they founded Foresight in 2020. The overlapping roles of academic researchers and their affiliations with both established corporations and emerging startups can blur the lines of IP ownership, leading to significant legal conflicts.
Financial Structure
Financial terms to consider typically include upfront fees, milestone payments and royalty payments. How these fees are calculated and when they are paid are important considerations for early stage companies. Upfront fees should be negotiated to preserve early stage capital, whereas milestone payments should reflect realistic development timelines. Royalty rates must be carefully assessed to ensure the long-term profitability of startups. Founders often have more negotiating power than they realize. Try to ensure the licensing entity only succeeds if you do.
Representative Financial Terms from Leading U.S. Academic Centers
Academic Center | Upfront Fee (Typical Range) | Milestone Payments (Example Stages & Ranges) | Royalty Payments (Typical Range on Net Sales) | Example References |
---|---|---|---|---|
Massachusetts Institute of Technology (MIT) [Understanding the Licensing Process] | $25,000–$150,000 one-time fee on execution of exclusive license | $50,000–$250,000 at completion of Phase I/II clinical trials; higher amounts (e.g., $250,000–$500,000) upon regulatory approvals | 2–5% royalty on net product sales | MIT Technology Licensing Office: http://tlo.mit.edu |
Stanford University [Licensing Process] | $25,000–$200,000 initial licensing fee | $50,000–$200,000 on reaching key development milestones (e.g., IND filing, Phase I completion), scaling upwards to $250,000–$500,000 at FDA approval | 2–5% royalty; escalating tiers possible | Stanford OTL: https://otl.stanford.edu |
Harvard University [Sample Agreement] | $50,000–$250,000 at license execution | $100,000–$300,000 at significant R&D events (e.g., successful proof-of-concept, first human trial); further increments at regulatory approval | 3–6% royalty range; sometimes tiered by sales volume | Harvard Office of Technology Development: https://otd.harvard.edu |
University of California System [IP Guidance] | $25,000–$100,000 initial fee | $50,000–$200,000 at key inflection points (e.g., start of Phase II, completion of pivotal trial), with higher amounts due at regulatory approval | 1–5% royalty; may include minimum annual royalties | University of California Innovation & Entrepreneurship: https://www.ucop.edu |
Johns Hopkins University [Licensing Center] | $20,000–$100,000 upfront fee | $50,000–$250,000 upon achieving clinical milestones (IND/IDE filing, Phase II completion), and $100,000–$500,000 at product approval | 2–5% royalty; may include sublicensing revenue share | Johns Hopkins Technology Ventures: https://ventures.jhu.edu |
Note:
- Actual terms vary depending on technology maturity, field of use, competitive landscape and negotiation outcomes.
- Upfront fees may be lower for earlier-stage technologies and can sometimes be partially deferred.
- Milestone payments typically align with verifiable R&D achievements, regulatory clearances or commercial launches.
- Royalty rates often reflect the intellectual property’s strength, market potential and availability of competing technologies.
Managing Cash Flows and Fee Structures
The effective management of upfront fees, economic incentives and timelines requires a thoughtful, strategic approach that balances the interests of both licensors and licensees. The foundation of this management begins by aligning the fee structure with specific business objectives. Licensors must decide whether immediate revenue or long-term royalties take precedence, while licensees should evaluate whether paying larger upfront fees in exchange for reduced royalties aligns with their financial strategies.
An intelligently designed licensing agreement can provide security for investors, a transparent and steady capital stream for the startup and a clear incentivization framework for everyone involved. One effective approach is to implement tiered or milestone-based payments—which spread upfront fees across multiple installments tied to specific achievements or timelines. This arrangement reduces the risk for licensees while ensuring that licensors receive a guaranteed income. To encourage larger initial commitments, licensors can offer incentives, such as reduced royalty rates or other favorable terms, in exchange for substantial upfront payments.
In 2021, Beam Therapeutics entered into a licensing agreement with Verve Therapeutics. As startups, both companies had cash flow needs and concerns so they constructed an agreement that boosted Beam at a critical moment and led to a $6 Billion valuation funding round later that year.
CASE STUDY—Getting Paid Up Front
In 2021, Beam Therapeutics entered into a licensing agreement with Verve Therapeutics, another startup focused on gene editing for cardiovascular disease. The agreement included an upfront payment of $8.8 million from Verve to Beam, with the potential for up to $200 million in milestone payments. The upfront payment provided Beam with immediate operating capital while also ensuring potential future income through milestone payments. In exchange for Verve’s commitment, Beam offered favorable terms—including exclusive rights to certain cardiovascular targets. The licensing agreement contributed to Beam’s success, helping it secure a $6 billion valuation in early 2021.
Recoupment clauses provide an additional layer of financial protection for licensees by allowing them to recover their upfront investments through future royalty deductions. This can be particularly valuable if the sales performance falls below expectations. Similarly, conditional payments can be structured to make portions of the upfront fee contingent on specific milestones, such as successful product testing and effective risk distribution between parties.
For situations in which cash flow is a concern, exploring non-cash alternatives can provide creative solutions. Options such as equity stakes or in-kind services can deliver value to licensors, while easing the immediate financial burden on licensees. However, before finalizing any fee structure, thorough due diligence is essential to evaluate the market potential and risks, ensuring that the established fees are both fair and realistic.
CASE STUDY—Flexible Payment Plans
In 2017, Alector entered into a strategic collaboration with AbbVie for the development and commercialization of novel Alzheimer’s disease therapies. AbbVie made an initial equity investment of $205 million in Alector and committed to $986 million in potential milestone payments. The licensing agreement contributed significantly to Alector’s growth and success, going public in 2019 and raising $176 million in its IPO.
Small companies can embrace the strategy as well. In 2020, Alnylam Pharmaceuticals and Dicerna Pharmaceuticals—both relatively smaller biotech companies specializing in RNAi therapeutics—reached a licensing agreement that included a recoupment clause. Dicerna agreed to pay Alnylam $2 million upfront, with potential milestone payments of up to $13 million for each of Dicerna’s GalXC RNAi therapeutic products. Importantly, the agreement included a recoupment provision allowing Dicerna to credit the $2 million upfront payment against future milestones or royalties owed to Alnylam, allowing for an immediate payment to Alnylam while providing Dicerna with potential future financial relief.
As illustrated above, flexible compensation plans are useful to manage cash flows and equity stakes in both big and small deals but the implied incentive structure can be just as valuable to participants in building trust.
The inclusion of audit rights can provide licensors with the necessary oversight of sales records and royalty accuracy, potentially justifying the lower upfront fees. Another balanced approach combines smaller upfront fees with minimum royalty guarantees, ensuring steady income for licensors while reducing the initial costs for licensees.
Flexibility is crucial to these agreements. Including provisions for term renegotiation under specific conditions helps address unexpected circumstances that might affect a license’s value. This adaptability, combined with careful consideration of both parties’ unique needs and circumstances, helps to create upfront fee structures that effectively balance risk and align incentives, ultimately fostering successful long-term licensing relationships.
Intellectual Property Ownership
In addition to defining the scope of application, a robust licensing agreement must address critical aspects such as improvements to the intellectual property (IP), patent extensions and the conditions under which rights can be transferred or acquired. These components ensure the agreement remains relevant and equitable as the IP evolves and as business circumstances change.
Evolving with your IP
Advancements or modifications to the licensed technology—often referred to as “improvements”—can be controlled by either the original owner or the licensee. Licensors may seek to include such improvements within the scope to maintain control over the innovation’s lifecycle. Startups for their part, must carefully negotiate this point to retain the freedom to develop their own derivative technologies without excessive encumbrance.
Patent extensions or supplementary filings, such as continuations, are another area requiring clear terms. Startups must ensure they have access to any extended protections that may arise, as these can significantly impact the commercial viability of their products. Similarly, licensors may include provisions for jointly filing new patents that arise from collaborative efforts, reinforcing shared ownership while preserving the startup’s ability to commercialize the technology.
Provisions governing the transfer of licensing rights or the acquisition of the startup itself are equally critical. For instance, an academic institution may include restrictions or approval requirements for sublicensing agreements or for transferring the license to a third party—such as during an acquisition. Flexibility in transfer rights, subject to reasonable approval by the licensor, is often a mutually acceptable solution.
As a public policy advocacy program, the Breast Cancer Startup Challenge (BCSC) serves as an inspiring example of both intent and management. The organization provided for a clear delineation of licensing terms, performance obligations and support structures. Startups could be secure in their ownership rights with a solid foundation to advance the technologies toward commercialization.
CASE STUDY—Rising to the Challenge
The Breast Cancer Startup Challenge (BCSC) serves as a successful example of how well-structured licensing agreements can facilitate innovation and commercialization in the healthcare sector. Initiated by the National Cancer Institute (NCI) in collaboration with the Avon Foundation for Women, the challenge aimed to accelerate the development of breast cancer-related inventions by licensing technologies to startup companies. The challenge resulted in the creation of 11 startups and the execution of eight licensing agreements, collectively raising more than $3 million. Key to this success was the clear delineation of licensing terms, performance obligations and support structures, which provided startups with a solid foundation to advance the technologies toward commercialization. This case illustrates how transparent and supportive licensing frameworks can drive successful outcomes in the biotech startup ecosystem.
The scope of the claims owned by each party can be particularly messy when developing early stage research. Without a fully developed IP framework your rights to development may be challenged in the future or the court could be faced with interpreting or setting case law as Amgen found to its detriment in 2020.
CASE STUDY—Small Details, Big Money
In 2023, the U.S. Supreme Court delivered a unanimous decision in the case of Amgen Inc. v. Sanofi, which had significant implications concerning the scope of patent claims and the disclosure requirements for improvements to existing intellectual property (IP). The dispute centered on Amgen’s patents for a class of cholesterol-lowering drugs known as PCSK9 inhibitors.
Amgen claimed that their patents covered not only the specific antibodies they had developed, but also a broader genus of antibodies that performed similar functions. Sanofi, having developed its own PCSK9 inhibitor, contested the validity of Amgen’s broad patent claims, arguing that they failed to meet the enablement requirement—that is, the patents did not sufficiently describe how to make and use the full scope of the claimed inventions without undue experimentation.
In his decision in favor of Sanofi in the case study above, Justice Neil Gorsuch summarized the position on enablement as follows:
“If a patent claims an entire class of processes, machines, manufactures or compositions of matter, the patent’s specification must enable a person skilled in the art to make and use the entire class. In other words, the specification must enable the full scope of the invention as defined by its claims. The more one claims, the more one must enable.”
The decision sent shockwaves through the life sciences industry with concerns that broad claims are now susceptible to being struck down in favor of narrower claims. Ultimately, patent law—like the technology it protects—is always evolving.
Performance Obligations
While financial terms often dominate negotiations, the structure, timeline, and legal considerations tied to performance obligations are equally critical. For healthcare startups, these obligations can significantly impact their ability to innovate, secure funding, and achieve milestones, making it essential to approach this aspect of agreements with strategic foresight.
Establishing Appropriate Milestones
Performance obligations are typically defined by specific milestones, such as achieving clinical trial phases, obtaining regulatory approvals or meeting sales targets. For healthcare startups, these milestones must be realistic and take into account the unpredictable nature of research and development. Structured, phased milestones—starting with flexible early-stage goals that become more concrete over time—can provide clarity while accommodating the evolving needs of the startup and the licensor.
Timelines tied to performance obligations should reflect the inherent uncertainties in healthcare innovation. Licensing agreements should allow for extensions or renegotiations in cases of unforeseen delays, such as regulatory hurdles, clinical trial setbacks or changes in market conditions. Force majeure clauses can provide additional protection against uncontrollable events, ensuring that the startup is not unduly penalized for delays outside its control.
Delays are an inevitable part of the healthcare development process. Licensing agreements should include cure periods, providing the startup with a window to address any issues before triggering termination clauses. This not only protects the startup from abrupt consequences but also helps maintain a productive relationship with the licensor. Moreover, agreements that balance strict enforcement of obligations with flexibility demonstrate an understanding of the realities of healthcare innovation, fostering trust between the parties.
CASE STUDY—Eliem Therapeutics and Acelyrin Asset Acquisition
In June 2024, Eliem Therapeutics entered into a definitive agreement to acquire specific assets from Acelyrin, Inc., including worldwide licenses and intellectual property rights for the development and commercialization of TNT119 (budoprutug) for non-oncology indications. This agreement encompassed substantial performance obligations, requiring Eliem to achieve specified development, regulatory and commercial milestones. The structured milestones were designed to ensure the progressive advancement of TNT119 through various stages of development and market introduction.
Timelines were established for each milestone, with provisions for potential extensions to accommodate unforeseen delays in the research and development process. The agreement also included financial commitments, with Eliem obligated to make payments up to $157.5 million, alongside royalty and sublicense income payments. This case exemplifies how well-defined performance obligations within a licensing agreement can facilitate the structured development of healthcare innovations, ensuring that both parties are aligned in their expectations and responsibilities.
As the case study above exemplifies, well-defined performance obligations within a licensing agreement can facilitate the structured development of healthcare innovations, ensuring that both parties are aligned in their expectations and responsibilities.
On the other hand, NOT meeting those timelines and obligations can certainly have their ramifications as well. Although as Bristol Meyer Squibb learned: You can try to refuse payment, but if you were the reason timelines were not met, legal action is sure to follow.
CASE STUDY—Bristol Myers Squibb and the Celgene Contingent Value Rights (CVR) Litigation
In 2019, Bristol Myers Squibb (BMS) acquired Celgene Corporation in a deal that included Contingent Value Rights (CVRs), offering Celgene shareholders an additional $9 per share if three specific drugs received U.S. Food and Drug Administration (FDA) approval by set deadlines. The CVR agreement stipulated precise milestones for each drug’s approval, with financial implications hingeing on meeting these deadlines.
However, delays occurred, and as a result the CVRs expired worthless—leading to significant financial losses for former Celgene shareholders. This outcome prompted legal action, with shareholders alleging that BMS failed to exert diligent efforts to secure timely approvals, thereby breaching the CVR agreement. The lawsuit sought $6.4 billion in damages, reflecting the potential payout had the milestones been achieved as scheduled.
In September 2024, U.S. District Judge Jesse Furman dismissed the lawsuit, citing procedural issues related to the appointment of the trustee representing the CVR holders. The judge did not rule on the merits of the case, leaving open the possibility for the plaintiffs to refile with proper representation.
In the end Celgene didn’t actually win the case above either—leading to continuations and ongoing legal action. Make sure the milestones are properly defined and do not rely unduly on third parties.
Termination Clauses
Termination clauses are critical components of licensing agreements, establishing the conditions under which the agreement can be ended by either party. For startups, particularly in healthcare, poorly structured termination terms can jeopardize years of investment and progress.
Legal Terms and Considerations
For Cause Termination: Allow the licensor to terminate the agreement if the startup breaches key terms, such as failure to meet performance milestones, non-payment of fees, or misuse of intellectual property (IP). Startups should negotiate for “cure periods”, which provide a defined timeframe to rectify the breach before termination is triggered. This safety net prevents abrupt loss of rights.
Termination for Convenience: Some agreements include provisions allowing the licensor to terminate the contract without specific cause. While this benefits licensors, it poses significant risks to startups reliant on the licensed IP for their operations. Startups should limit such clauses or include compensation, such as reimbursement for sunk costs or transition periods, to mitigate damage.
Mutual Termination: These clauses enable either party to terminate the agreement by mutual consent. Including clear terms for notice periods and responsibilities during the transition ensures an orderly exit, minimizing disruptions.
Flexibility for Unforeseen Circumstances
Healthcare startups often face unpredictable hurdles, such as regulatory delays, clinical trial failures, or market shifts. To protect against unfair termination, agreements should include:
- Force Majeure Clauses: Covering unexpected events (e.g., pandemics, regulatory changes) that prevent milestone achievement.
- Milestone Renegotiation: Allowing for adjustments to performance obligations in light of legitimate delays.
Legal and Financial Ramifications
Termination clauses must also address post-termination responsibilities, including:
- IP Reversion: Clearly stating whether rights to improvements or developments made during the licensing period revert to the licensor or remain with the startup.
- Exit Fees: Defining any penalties or payments due upon termination to prevent financial ambiguity.
Termination clauses must strike a balance: protecting licensors from non-performance while ensuring startups have the flexibility and time to adapt to challenges. By negotiating cure periods, force majeure protections, and clear post-termination terms, startups can safeguard their investments and maintain operational continuity even in uncertain environments.
No one goes into a relationship or a business partnership expecting it to fail. Creating clear termination language is akin to signing a pre-nuptial contract but unlike a marriage this is not an emotional decision and a clean agreement eliminates drama as NRX learned in June last year.
CASE STUDY—NRX Pharmaceuticals Faces Agreement Termination
In June 2024, NRx Pharmaceuticals and Alvogen terminated their licensing agreement concerning the development and commercialization of NRX-101, an investigational therapy for suicidal treatment-resistant bipolar depression and chronic pain. The original agreement, established in June 2023 and amended in February 2024, outlined collaborative efforts for NRX-101’s advancement. The partnership involved joint development, supply, marketing and licensing of NRX-101, with Alvogen providing financial support—including an advance milestone payment of approximately $4.4 million in February 2024.
On June 21, 2024, Alvogen notified NRx Pharmaceuticals of its immediate termination of the agreement, citing concerns over the anticipated requirement for extensive clinical trials involving over 500 patients for broad approval—a level of investment Alvogen was not prepared to undertake. The termination triggered a 30-day period for both parties to negotiate and agree upon a royalty amount due to Alvogen, as stipulated in the agreement’s termination provisions.
Cross Your T’s and Dot Your I’s
Before entering exclusive licensing agreements with academic institutions, companies must conduct thorough due diligence across several critical domains. The scope of licensed rights demands careful examination—particularly regarding field of use definitions, territorial boundaries and the duration of exclusivity. These parameters directly impact commercialization potential and require precise definition to prevent future disputes or limitations on market access.
The fundamental strength and status of the intellectual property represents another crucial verification area: Companies should investigate patent validity, enforceability and maintenance responsibilities, while also examining any existing legal disputes or encumbrances that could affect IP utilization. When negotiating financial terms, companies should structure upfront payments to preserve early-stage capital, potentially offering equity in lieu of cash when appropriate. Milestone payments should be tied to significant value-creating events that reflect realistic development timelines—such as IND filing, first patient dosed or pivotal trial initiation—rather than early research achievements. Royalty rates warrant particular attention, as they directly impact long-term profitability. Companies should advocate for tiered royalty structures that decrease with increased sales volume, and ensure royalty stacking provisions are included to account for third-party licenses that may be required for commercialization.
Performance requirements and diligence obligations form the operational backbone of these agreements. Clear development timelines, commercialization expectations and specific reporting requirements must be established to maintain exclusivity rights and ensure productive collaboration. Regulatory considerations—particularly those involving government rights under the Bayh-Dole Act and export control compliance—warrant careful attention given their potential impact on commercialization freedom.
The agreement should clearly address sublicensing permissions and rights to future improvements. Companies should negotiate for favorable sublicensing terms, including the right to retain a majority of sublicensing revenue and flexibility in structuring such agreements. This includes defining conditions for third-party involvement and establishing ownership structures for joint inventions or modifications. Financial obligations for patent prosecution and maintenance costs should be carefully negotiated, potentially including caps or cost-sharing arrangements—especially for broad patent families with international filings.
Finally, compliance with institutional policies, particularly regarding conflicts of interest and academic publication rights, requires careful balance. These agreements must preserve academic freedom while protecting proprietary information, ensuring a sustainable partnership between commercial and academic entities. Companies should also negotiate for appropriate delay periods for academic publications to allow for patent filings and protection of confidential information. This comprehensive verification and negotiation process helps establish a foundation for successful long-term collaboration while minimizing potential risks and complications.
The financial structure of these agreements should reflect the early-stage nature of academic technologies and the substantial investment required for commercialization. Companies should advocate for terms that align payment obligations with value creation and maintain flexibility for future business development activities. This includes negotiating caps on milestone payment obligations, ensuring change of control provisions don’t trigger excessive payments, and structuring royalty obligations to maintain profitability across different commercialization scenarios.
Paulo Fontes, MD, FACS, is an accomplished transplant surgeon and entrepreneur who moved to Pittsburgh from São Paulo, Brazil, to work with leading experts in organ transplantation at UPMC. Dr. Fontes is the Chief Medical Officer of LyGenesis, a startup pioneering the development of cell therapies that use a patient’s lymph nodes to grow functioning ectopic organs. His focus has shifted from clinical practice to innovation, as he continues to mentor entrepreneurs in the life sciences and drive advancements in transplant medicine from his base in Pittsburgh.
Michael Schmanske is a 24-year Wall Street veteran with experience on trading desks and asset managers. He is the co-founder of Prognosis:Innovation as well as founder of MD.Capital.
Be sure to check out “Life Sciences: Licensing Agreements Part 1,” which covers planning and management of your first IP partnership—critical information for startups.