Helpful Information

One of the early and surprisingly big challenges for a startup company is to decide on a company name. The law considers a company to be a separate “person,” and selecting a name for this corporate person can be as difficult as naming a new baby! The following guidelines, largely based on characteristics of strong company names we all know, should help. These are not inviolate rules of course, and it is possible to successfully ignore them! But it should be done with care, as you and your investors will need to live with this name for a long time – and later investors may insist you change it, which can be costly and disruptive.

1. No more than four syllables. The reason is simple; people simply won’t say a name that is longer, they will abbreviate it. For example, nobody says International Business Machines, they say IBM.
2. Phonetically spelled. Think radio advertising. Can a listener find your company on the web, or do you have to spell it in your radio ad? There is an anti-snoring device called “Zyppah,” which they have to spell twice in every radio ad.
3. No tongue-twisters. Even if you find it easy to pronounce, remember that your audience, most importantly investors, may not find it so easy. And if there are several ways to pronounce it, that’s confusing, too. Ask friends and family, they will tell you.
4. Think about your audience when considering foreign language names. There are beautiful words and phrases in many languages. If you hope to attract investors from France, or if you plan to sell French wine, an obviously French name may be a good idea. But perhaps not so good for raising money for oil drills in Texas.
5. Don’t limit yourself to the current product. Startups often “pivot” to other products and markets over time, and you don’t want your company name to make that awkward or unexpected. If your company is “Computer Monitors Inc.,” will customers think of you when buying laptops, tablets or desks? Probably not. In addition, you might give up your current plans and go into a very different market. Why not recycle a good name you already registered the trademark for?
6. Be gender-inclusive. As interesting as the names of Greek gods are, using a clearly male or female name may not appeal to everyone.
7. Avoid negative meanings in foreign markets. Chevrolet was disappointed with sales of its Nova car model in South America, until someone pointed out that it means “no go” in Spanish!
8. “Merely descriptive” trademarks take 5 years to register. If your company name is “Diabetic Products Inc.,” the U.S. Patent and Trademark Office (USPTO) will reject it as “merely descriptive,” until you can prove that to the public it means your specific company – usually established by 5 years of continuous use in interstate commerce.
9. Consider the three more distinctive kinds of names. A “suggestive” name infers something about the company, e.g., Citibank (financial services), Greyhound (bus lines), and Jaguar (automobile). An “arbitrary” name is a word with no relationship to the products, which in time can become more known for the company or product than the dictionary meaning, e.g., Apple (computers) and Blackberry (cellphones). A “fanciful” name is a made-up word, e.g., Exxon (oil and gasoline), Kodak (camera film), and Xerox (copiers). A Scrabble set or writing positive words on paper slips and cutting them into syllables can help you come up with an arbitrary name.
10. Consider the tenor of your industry. “Yahoo!” is a great name for a search engine, but “Yahoo Pharmaceuticals Inc.” wouldn’t work at all!
11. Avoid the commonplace. A biotech company that has “bio” in the name or a nanotechnology company with “nano” in the name may sound like just one more “me too” among many companies. And keep number (5) above in mind, too.
12. Search the USPTO trademark database. You can find it at uspto.gov. Your goal is to avoid using a registered mark of another in the same product class (i.e., infringement), and avoid “likelihood of confusion” with other marks that will block your registration.
13. Search the web. There are many company and product names for which no trademark was registered, but your favorite search engine may find them.
14. Is the domain name available? A quick search on GoDaddy.com or another domain assignment site will reveal this. Sometimes people reserve names and then offer to sell them for a high price; you may want to avoid such names. For fanciful names you can often reserve the .com domain for a few dollars. If the most logical domain name for your company, e.g., “Arbuckle.com,” is already used by another company, using “Arbucklepharma.com” is not going to prevent searchers from going to the wrong web address. You might want to consider picking a different name.
15. Select several possibilities and ask around. Try to pick 2 or 3 possible names, and ask family, colleagues and friends what they think of them. You may find a name that sounds good to your ear is awkward or odd to people outside your technical field. Since you want to attract investors from all walks of life, this is feedback worth heeding!

If you are a faculty member, postdoc or graduate student and you wish to start a technology company based on inventions arising in your research, you will need three things: money, business leadership, and exclusive rights to the UMA patent applications and patents covering your inventions. But how do you get one without having the others first? The UMA Technology Transfer Office (TTO) helps startups overcome this apparent chicken-and-egg problem by providing startups with an exclusive option to obtain an exclusive license to the patent rights on which the company will be founded.

1. What is an “option contract”? Simply put, an option contract creates a binding obligation to enter into another contract, if the option holder so chooses during the option period. For a simple example, suppose you want to buy a classic old automobile, and you find one offered for the price of $5,000. Maybe you are not sure if this is the one you want, or maybe you don’t have the money right now. You ask the buyer to hold it for you until the end of the month, and they say, “Sure.” But when you come back at the end of the month, it’s already been sold! There is nothing you can do, since the agreement to hold it for you was a “gift” that could be withdrawn at the giver’s whim. However, if you were a bit more knowledgeable about contracts, you might have offered to pay the owner $50 to hold the car until the end of the month. Then, if you came back at the end of the month and the car was sold, the owner would be in breach of the option contract, for which you could sue. On the other hand, if you decided not to buy the car by the end of the month, the option period would expire; the owner could pocket the $50, and sell the car to whomever they choose.
2. How does an option for a license work? The option contract that UMA offers to startup companies is similarly simple. It is a two-page document in which UMA agrees not to offer a license to the patent rights to any other party during the option period, which is usually 6 to 12 months. Anytime during the option period the company can “exercise” the option by notifying the TTO in writing, and the parties will negotiate a license agreement on commercially reasonable terms. Once the company exercises the option, there is a “negotiation period” of 3 months in which to complete the license, which can be extended if need be. Note: keep reading the material later in this series that describes what to expect in such a license agreement.
3. How much does the option cost? For a startup company founded by faculty, postdocs and/or students in the absence of a founding investor, the option is only $50.00! UMA’s goal is to get the company started, and a commitment of the patent rights can be a good catalyst. If on the other hand the company has a founding investor, the cost may be a bit higher, in order to help offset previously incurred patenting costs. An option to a funded company will also generally require reimbursement of ongoing patenting costs.
4. What happens if the company isn’t ready for a license before the option expires? In most cases, provided that the company and its founders have made a good faith effort to find investors and business leadership during the initial option term, UMA will agree to extend the option period.
5. Will investors and potential business partners find an option sufficient? The use of such option agreements with university startup companies is fairly standard practice in the U.S., so most investors and business partners will probably be familiar with the practice. If not, please encourage them to call the TTO, and we will explain how our process works.
6. What if investors want to know what the financial terms of the license will be? Another section in this series explains what to expect in a UMA patent license, which may give investors all the information they need. The TTO staff is also glad to speak with potential investors and business partners, and give them comfort that our licensing practices are fair and reasonable.
   • If investors want to know actual royalty rates and fees, the TTO is glad to negotiate a “term sheet” with the company, which is typically a two-page document outlining the license scope and the key financial terms. This term sheet is then appended to a revised option, which specifies that the license to be negotiated will include the term sheet’s provisions. However, at the earliest stages of a company’s development, it may not be feasible to negotiate a term sheet. In order to do so, it will be necessary for the company to have a fairly well-defined business model, specific product concepts, a product development timeline, and identified target markets. All of these issues factor into what the fees will be, when they are due, and what royalty rate is reasonable. Another issue is that because of conflict of interest concerns, the TTO is not permitted to negotiate with a UMA employee. So by the time a term sheet is to be negotiated, the company will have to have a non-UMA employee CEO or other authorized executive to negotiate with the TTO. (Another section in this series outlines how the UMass conflict of interest policy applies in the startup company context.)

For a company based on an invention made in the course of UMA research, a key asset will be a license to patents on the invention. A patent gives the owner the exclusive right to make, use, offer for sale, sell or import a patented article for a period ending 20 years after the first patent filing date. A license to these exclusive rights is an incentive for investors and the company’s management, as they can expect significant profits from the company’s efforts.

Patents have been licensed in the U.S. at least since the Patent Act of 1890, and the terms and conditions of a license from UMA to a startup company, as summarized below, are quite traditional. You will immediately notice that there will be quite a few payments to the university! Just like there are many different fees and payments due when buying a house, there are quite a few in licensing as well. Keep in mind that these various forms of payment are fungible, e.g., if the royalty rate is higher then other fees may be lower, and vice-versa. Also keep in mind that payments are not necessarily large; they may be small for incremental technologies in small or crowded markets. And, of course, the resources available to a start-up company are quite different from those of a big company, so early financial terms are more modest in start-up licenses than they would be for established companies (thus startup licenses are sometimes referred to as “back-end loaded.”)

A license is a highly complex and customized contract, with many terms and conditions that are interesting reading only for lawyers. The terms described below are the business and financial terms that potential investors are most likely to ask you about.

1. Degree of exclusivity. Although there are times that a non-exclusive license is sufficient, most startups need the lure of market exclusivity to raise money. If an invention has a naturally confined field of use, e.g., a radio antenna, then the license may be for all fields. If an invention has many diverse uses, e.g., an aluminum alloy, then the license may be exclusive for a particular “field of use,” e.g., aircraft and spacecraft applications. This would allow UMass to license the rights in other fields, e.g., dental implants.
2. Retained rights. For obvious reasons, the university retains the right to use the invention in research and education, and to allow the inventors to continue their research should they relocate to another academic institution.
3. Equity. It is traditional to charge an “up-front fee,” the amount depending on the value of the invention, the size of the market and the level of development. Since startups usually don’t have funds to pay such a fee, or investors don’t want their funds used in that way, a modest amount of equity is given to the university in lieu of a cash fee. The amount of equity can vary based on the same factors as for cash fees, but except in unusual cases the university’s share is below 10%.
4. Non-dilution. A company may have 1,000 shares of stock today, and a 6% equity stake would be 60 shares. But nothing would prevent the company from creating another 9,000 shares tomorrow, in which case the 60 shares would drop in value to 0.6%! In order to prevent such artificial changes in the value of the license equity, the license protects the university equity from dilution until some threshold of outside investment has been made, e.g., until $4 million has been raised. This means the university would get 6% of any newly created shares until this threshold is reached.
5. Performance milestones. An exclusive license requires that the licensee commit to developing and selling products; otherwise the patent rights would be wasted. The university and the company negotiate a set of milestone events and dates the milestones should be reached; e.g., make a prototype within 6 months, start manufacturing within 12 months, and begin sales within 18 months. For a startup, however, there are many unknowns regarding product development and fundraising. So, the license also includes a provision allowing for adjustment of milestones to allow for unforeseen technical and business challenges.
6. Milestone fees. When performance milestones are reached, this usually means a certain amount of risk has been removed, and a set of increasing fees are typically due at those achievement points. For a startup company, early milestone fees are necessarily modest. But later milestone fees, such as those close to product launch, will be more significant considering that the company’s success at that point will make more traditional milestone fees affordable. How large or small such fees may be depends on the value of the invention, the size of the market and profit margins in that market, so such fees can differ greatly from license to license.
7. Minimum annual royalties. These fees usually don’t become due for a period of years after the license begins. They are fully creditable against royalties due for a given year, so if royalties exceed the minimum amount, no added fee is due.
8. Running royalties. Royalties are paid as a percentage of “Net Sales,” which is essentially sales revenue less returns and rebates. Royalty rates vary widely from license to license, depending on the value of the invention, the size of the market, profit margins in that market and the size of other payments under the license. But only a “shelf-ready” product would have a royalty obligation of 10% or more.
9. Sublicensing revenue. An exclusive license usually allows the company to sub-license to other companies. For example, a company might develop a product to a certain extent, and then sublicense that product to an established company to sell. Presumably the sublicensee would pay a considerably higher royalty than that owed to the university, so there would be income for the initial company after the university royalties are paid. A sublicense may also include other fees and payments, such as up-front fees and milestone fees, as described above. The university typically gets a share of such non-royalty sublicensing income, in a downward sliding scale to be negotiated in each license. The reason for the sliding scale is if a company sublicenses the day after the license is signed, the value of the sublicense is almost entirely from the university patent rights; but if a company fully develops a commercial product and then sublicenses, the value of the sublicense will also be based on the company’s own patents, copyrights and know-how.
10. Patenting costs. Because the university has limited funds for patenting, the company is required to pay ongoing patenting costs once a license is signed. This way, the university can re-cycle those funds to patent more inventions. The university has no funds for foreign patenting, which can get very expensive very fast; so the company has to decide which countries it wishes to license patents in, and pay the costs of securing them. Patent costs incurred before the license are also reimbursed, but startup companies are typically given a time payment plan that allows those costs to be paid in installments based on the amount of funds raised.
11. Risks and Liabilities. Once a company takes a license, what happens from that point forward is decided entirely by the company. There are a number of risks in developing, making, marketing and selling products, such as infringing patents of others, injury, death or property damage caused by the company’s products, and worker injuries, to name but a few. A license contains several provisions that assure the university that the company will take full responsibility for these risks, even if someone sues the university. The license also requires the company to have an insurance policy that covers such risks.
12. Term and termination. An exclusive license usually runs until the last patent expires, but can be terminated at the company’s discretion upon 90 days’ notice. The reason is so the university can get back unused technologies and license them to other companies. The university, however, can only terminate for “material breach,” e.g., failure to pay amounts due, failure to meet commercial milestones, etc.