Start-Ups

What is a Start-up?

View the UTRGV Start-up Guide.
Before you launch your startup, reflect deeply on these questions:

Markets are driven by the profits that are generated through products and services. Evidently, there is a distinct difference between entrepreneurs and academic entrepreneurs. Corporate entrepreneurs are often motivated by the market; however, academic entrepreneurs are driven by technology. The distinction between the two is that a corporate culture focuses on how technologies respond to existing market needs, whereas academic entrepreneurs focus on cutting-edge technologies which drive the market. Evidently, only a few inventions may be suitable to create a startup. Inventions may advance more rapidly in a focused startup than in a lab or large company. OTC can assist you with analyzing various factors that could lead to commercialization. Factors such as:

  • Demand for you core technology
  • Identification of your competition
  • Interest from existing companies for licensing
  • Availability of capital
  • Level of commitment & involvement of inventors
  • Support for the presence of a true business champion
  • Passion, experience, and drive of the startup’s executive team
  • Have I raised enough capital to cover 2 to 3 years of operations?
  • Have I focused more on the market need and less on the stage of development for the product/service?

Researchers get so excited about the idea of forming a company that they often lose sight of the hard road ahead. It is easy to overlook the fundamentals of building a successful business, such as favorable timing. While there is no formula for determining the proper time to start a new company, raising enough capital to cover two to three years of operations may be a good rule of thumb. The “right” time has less to do with the stage of research than with the capital markets. Academic research discoveries are generally quite far from being products and have increased chances of dying during development. Therefore, the pathway from discovery to product entails risk, which presents a significant hurdle when it comes to raising funds. The more embryonic the discovery, the higher the risk.

In the 90’s, it was easier to start up a company, even with very early stage research. Currently, investors prefer investing in companies that are much farther along in product development, for example, those with drugs in mid-stage human clinical trials, or those with successful beta tests of their software.

Investors can be stratified according to their comfort levels with the associated risks at each of the stages of the product development sequence. Those willing to invest early (high-risk) end are often called “seed” investors, and those at the later (lower-risk) stages are called “mezzanine” investors. It is important that the researcher understand the risks associated with getting their project to the marketplace because it will enable him/her to assess the current investment climate through existing networking contacts. Even with a positive investment market, much effort should be devoted to fundraising.

Generally, there are four legal considerations for startups as outlined. Usually, sole proprietorship is not appropriate for technology companies due to liability concerns and the limitations with raising capital. The C Corporation is the first choice for most venture capitalists. When the to-be venture-funded startup is a C Corporation, various administrative and other burdens are minimized for the venture firm, allowing them to transfer capital more easily and focus on developing the startup.
Properties for LLCs

Requirements

None

Personal Liability

Unlimited liability

Governance

Relatively few requirements

Management

Full control

Term

Terminated when proprietor ceases doing business or upon death

Taxation

Entity not taxable. Sole proprietor pays taxes.

Transferability of Assets

No

Fundraising

Individual provides capital.
Properties for C-Corps

Requirements

Must File with State, small fee required

Personal Liability

Shareholders are not held liable

Governance

Election of board of directors/officers, annual meetings, and annual report filing requirements

Management

Shareholders elect directors who manage business activities

Term

Perpetual: can extend past death or withdrawal of shareholders

Taxation

Taxed at corporate rate

Transferability of Assets

Shares of stock are easily transferred

Fundraising

Shares of stock are sold to raise capital (Securities laws apply)

30 states, including Texas, also have an optional subtype called Public Benefit Corporations. These have all the requirements of normal C-corps but must also manage and report on additional social responsibilities chosen by the Board. This allows corporate officers to balance profit and social interests without violating their fiduciary responsibilities. It is an excellent option for social entrepreneurs and investors.

Properties for S-Corps

Requirements

Must File with State,
 small fee required

Personal Liability

Shareholders are not held liable

Governance

Election of board of directors/officers, annual meetings, and annual report filing requirements.

Management

Shareholders elect directors who manage business activities

Term

Perpetual: can extend past death or withdrawal of shareholders

Taxation

No tax at the entity level - income passed through to the shareholders.

Transferability of Assets

Yes, observing IRS regulations

Fundraising

Shares of stock are sold to raise capital. Limitations prevent S Corp stock ownership by corporations
 sold to raise capital Securities laws apply)
Properties for Sole Proprieterships

Requirements

Must file with State, small fee required

Personal Liability

Members are not held liable

Governance

Few Requirements.

Management

Members can set up structure as they choose

Term

Perpetual, unless state requires fixed amount of time

Taxation

No tax at the entity level. Income passed through to members

Transferability of Assets

Depends on restrictions outlined in operating agreement

Fundraising

Subject to operating agreement (Securities laws apply)
Procedure for Managing Conflicts of Interest

Conflicts of interest may arise when an employee participates in the business of, or has a financial interest in, a company that conducts business with a component institution in the area of the faculty members' responsibilities. This may happen in corporate sponsorship for research and in technology transfer. Conflicts of interest in the conduct of scientific research manifest themselves in two different, but related, ways: conflicts of interestand conflicts of commitment.

  • Conflicts of interest: occur if the employee's financial interest in a sponsor or licensee causes bias in the design, conduct, or reporting of research or educational activities.
  • Conflicts of commitment: arise when an employee's activities on behalf of such a sponsor or licensee company detract from the employee's teaching, research, clinical, or administrative duties.

Either of these conflicts may lead to, or be accompanied by, the inappropriate transfer of state resources or assets to the sponsor or licensee company for its exclusive benefit. Merely owning an equity interest or participating in the business of a sponsor or licensee introduces only a potential for conflicts of interest.

The Texas Legislature provides a legal mechanism for addressing potential conflicts of interest that may arise when a University employee involved in the development or creation of intellectual property acquires equity in, or serves as a board member, officer, or key employee of, a company that sponsors the employee's research or licenses the intellectual property. In exchange for permission to be involved with a company in this way, and if such involvement is permitted by the employee's component institution, the employee and the institution must successfully manage the potential conflict of interest to reduce or eliminate the likelihood that actual conflicts will arise.

The employee and institution should take the following steps to prevent actual conflicts of interest:

  • Disclose all potential conflicts of interest.
  • Identify factors that may mitigate the likelihood of actual conflicts of interest. 
    • For instance, whether a sponsor or licensee is publicly or privately held can affect the employee's status as a "key" employee. Also, a significant difference between the research emphasis of the sponsor or licensee and that of the employee may reduce the likelihood of actual conflicts of interest.
  • Implement effective management strategies to minimize development of actual conflicts of interest.
    • Assign independent departmental personnel to monitor the employee's research activities.
    • Require administrative review and approval of the employee's research projects that are subject to potential conflicts of interest.
    • Require modification of research plans or transfer portions of research to independent researchers, if necessary, to avoid actual conflicts of interest.
    • Consider divestiture or withdrawal from conflicted activity, if necessary, to avoid actual conflicts of interest where management appears unlikely to succeed.
  • Carefully review sponsorship and license terms. Be aware of indications that the arrangement may not be an arm's length transaction. Look for the following:
    • Grants of an equity interest to an employee that provide disproportionate compensation: (a) relative to the standard share of royalties a faculty member might receive for technology licensed to an unrelated company, or (b) relative to the services provided;
    • Licensing of inventions covering basic research that may cause the licensee to compete with the institution for grant funding;
    • The present or near-term capacity to perform the essential functions outlined in the company's business plan;
    • Contracts-back to the institution of development work, which suggests that the technology could not have been licensed to a company in an arm's length transaction.

If attempts to manage potential conflicts of interest fail and actual conflicts develop:

  • The employee must disclose actual conflictsin all oral presentations and publications resulting from the conflicted research.
  • The employee must divest significant financial interests and/or sever the relationship with the sponsor or licensee, or withdraw from conflicted institutional activity.
  • The employee will be subject to appropriate internal disciplinary action.
  • The employee may be subject to applicable civil and criminal liability.