REG 10.00.04 – Equity Acquisition Regulation of North Carolina State University

Authority: Chancellor

History: First Issued: January 11, 2007.

Related Policies:
UNC Policy Manual 300.2.2 – Conflicts of Interest and Commitment Affecting Faculty and Non-Faculty EHRA Employees
UNC Policy Manual 300.6.1.2[G] – External Professional Activities of Faculty and Other Professional Staff
UNC Policy Manual 500.2 – Patent and Copyright Policies
UNC Policy Manual 500.6 – University Equity Acquisition 
NCSU REG01.25.01 – Conflict of Interest and Conflicts of Commitment
NCSU POL10.00.01 – Patent and Tangible Research Policy
NCSU REG10.00.03 – Royalty Sharing under NC State’s Patent Policy and Procedures

Additional References:
N.C.G.S. 14-234, Public Officers or Employees Benefiting From Public Contracts

Inventor Equity Agreement

Contact Info: Director, Office of Technology Transfer (919-515-7199); Office of General Counsel (919-515-3071)


1. Introduction

1.1. This regulation implements Board of Governors’ University Equity Acquisition Policy and establishes responsibilities and procedures for administration. As an institution of higher education which has as its missions teaching, research, and public service, North Carolina State University (NC State) encourages the development of intellectual property to promote technology innovation and economic development in the State of North Carolina and the world. As a part of its economic development mission, NC State encourages commercialization of its technologies through start-up companies or small businesses, when it is appropriate to do so. Because new ventures and small businesses generally do not have sufficient capital to compete with established companies for rights in university technologies, occasionally NC State will consider accepting equity in the company as partial consideration for the license grant and/or in lieu of, an upfront license fee.

1.2. There is considerable risk in accepting equity in lieu of a cash payment as consideration for a license fee, as the equity has no present value at the time the License Agreement is signed. NC State accepts this risk because of the manifold benefits including assisting in the commercialization of early stage technologies, which might not otherwise be licensed, and encouraging small business development. In addition, in those instances where the commercial effort is a success, NC State may realize a much greater return on its equity than it would have received as a license fee.

1.3. NC State also recognizes that accepting equity in a company formed around NC State technology creates potential for conflicts of interest, both for the institution and the inventors who own equity in the new company. The institution must not allow its ownership interest in the private enterprise to interfere with its primary missions of teaching and research and of advancing the public good. This regulation is designed to reduce the potential for real or perceived conflicts of interest, both at the institutional and individual level, and is intended to supplement UNC and NC State policies on Conflicts of Interest and Commitment, which pertain to individual conflicts.

2. Receipt of Equity

2.1. Conditions for the Receipt of Equity

2.1.1. NC State may accept equity as partial consideration for the transfer of technology to a company. Unless expressly approved in writing by the Chancellor or Vice Chancellor for Research and Innovation, equity may be received only pursuant to a written agreement negotiated by the NC State Office of Technology Transfer (OTT). Such equity is generally accepted as full or partial consideration for a license fee for NC State -owned technology, after careful consideration of factors such as the expertise of the management team, the financial condition of the company, and the business plan for capitalization and commercialization of the licensed technology.

2.1.2. Equity received in such transactions will be treated as other licensing consideration placing priority on the educational, research and public service missions of the university over institutional and/or personal financial gain. All licensing negotiations, including those involving equity, must comply with all relevant University policies including, but not limited to:

Conflict of Interest, External Activities for Pay; Patent Procedures, Royalty Sharing Under NC State’s Patent Procedures and Policies, Research, Copyright Regulation, Gift Acceptance Policy

2.2 Negotiation

2.2.1 Unless otherwise approved by the Chancellor or Vice Chancellor for Research and Innovation, OTT is the only unit of NC State that is authorized to negotiate on behalf of the University for the licensing of any University owned invention. No University inventor or other University entity has authority to negotiate a license on behalf of the University. University inventors may bring potential licensees to the attention of OTT, and provide technical data as requested by OTT, but the decision to award and the terms of the License Agreement are the exclusive responsibility of OTT. When an inventor wishes to recommend a commercial entity to develop and market a university invention, the employee should notify OTT and refrain from making any commitments that imply authority to grant rights in the technology. When an inventor recommends licensing to a company in which he/she holds a financial interest, whether through equity or contract, the inventor shall also disclose to OTT his or her relationship with the company.

2.2.2 Occasionally, it may be helpful to OTT, and to the company licensee founded in whole or in part by the inventor, for the inventor to assist in negotiations involving the inventor’s scientific expertise. If OTT deems such assistance necessary to further the negotiations, OTT may request permission from the Vice Chancellor for Research and Innovation, and with approval, permit the inventor to participate. In no case shall a University inventor involve himself or herself in negotiation of the business terms of such a license except as specifically requested by the Vice Chancellor for Research and Innovation.

2.2.3 Before OTT begins negotiation for a License Agreement that may include equity, each inventor of the relevant technology must sign the Inventor Equity Agreement.

2.3 Individual Equity Ownership

2.3.1 When an inventor is entitled to receive a share of licensing revenue pursuant to NCSU POL10.00.01 – Patent and Tangible Research Policy, a grant of equity in the same percentage as that percentage of revenue to which the inventor is entitled under NCSU REG10.00.03 – Royalty Sharing under NC State’s Patent Policy and Procedures, under NCSU POL10.00.01 – Patent and Tangible Research Policy, shall be conveyed by the company directly to the inventor at the same time the equity grant is made to NC State. Under no circumstances will NC State accept and/or hold inventor equity. The inventor is responsible for obtaining individual tax, securities, and other legal advice relating to the transfer of stock from the company to the inventor.

2.3.2 Any person who is a Founder of a company shall not be eligible to receive and shall be deemed to have waived all rights to receive equity or the proceeds of equity accepted on behalf of the University. For purposes of this Regulation, a “Founder” shall be any University faculty, staff or student inventor who has received, receives, or is likely to receive a substantial economic benefit as a result of acting as a founder, originator, or promoter of a company.

2.4 Voting Representation

NC State may not accept a voting position on the board of directors of a Licensee in which it holds an equity position. NC State may accept non-voting, observer positions on such Licensee boards. Employees, acting as individuals and not on behalf of NC State, may accept voting positions on the board of directors for a licensee in which NC State has equity but only in accordance with all relevant policies including, but not limited to, the policies noted in Paragraph 2.l.2.

2.5 NC State Employee or Officer Equity Ownership

No officer or employee of NC State who is involved in negotiating or administering the License Agreement and or the equity terms on behalf of the University, or who obtains information pertaining to the business of the Licensee through his/her office or university employment, shall be permitted to receive or hold equity or to receive compensation of any kind from the Licensee, until the Licensee’s equity is publicly traded or priced by independent means.

2.6 NC State Equity Holding

All equity obtained from a license or other agreement negotiated by OTT will be held and controlled by the Vice Chancellor for Finance and Administration. The Vice Chancellor for Research may, from time to time, recommend that equity held by NC State be liquidated. However, the Vice Chancellor for Finance and Administration will make all decisions regarding the liquidation of such equity based only on publicly available information and the relevant shareholder and/or stock purchase agreements. The Vice Chancellor for Finance and Administration will not have access to OTT License Agreement files or any confidential information of Licensee.

2.7 Equity Terms

OTT will choose the Licensee through careful examination of all relevant information available to it at the time of licensing, and will exercise its business judgment as to the amount of equity it will accept in lieu of an up front license fee. NC State will not give preference to equity above any other type of consideration, and will endeavor to ensure that the terms of the license involving equity are comparable to the terms of non-equity transactions involving similar technologies.

2.8 Ownership of Licensee

NC State may not accept or hold a controlling interest in a Licensee. Therefore, NC State will not accept more than a twenty five percent (25%) share of equity in a Licensee, excluding any inventor equity, without approval by the Vice Chancellor for Research and Innovation, who will grant approval only upon receiving objective evidence that the percentage of equity does not constitute a controlling interest as defined by N.C.G.S. 55-9A-01 (b)(2).

2.9 Proceeds from Liquidation

Proceeds from the liquidation of equity will be distributed according to Royalty Sharing under NCSU POL10.00.01 – Patent and Tangible Research Policy  except that an inventor who has already received his/her pro rata share of NC State equity, or who has received Founder’s equity, shall not be entitled to receive any proceeds from liquidation of NC State’s equity holdings.

2.10 Additional Investment

To avoid any appearance of securities improprieties, NC State may not make any direct investment in a Licensee from which NC State has accepted equity, unless and until the Licensee Company is publicly traded or until the fair market value of Licensee’s equity is determined by unrelated and independent means, including but not limited to an investment in the Licensee Company by an unrelated third party, or a written valuation by an unrelated third party selected in good faith by the board of directors or other governing body of the Licensee Company and approved by NC State, through the Vice Chancellor for Business and Finance or the Vice Chancellor for Research and Innovation.