The Nanotechnology Business Model: A Step-by-Step Guide to Starting a Nanotech Business in Canada

Lisa K. Abe

NNI Nanotechnology Innovation Summit December 9-10, 2010

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A Step-by Step Guide to Starting a Nanotech Business

• Objective: To build a viable business selling nanotechnology to make profit

1. Set up your nanotech business structure2. Raise financing, receive government grants and tax breaks3. Hire developers, employees, subcontractors and suppliers 4. Protect ownership of your intellectual property in nanotechnology5. Use open innovation to enhance R&D6. Commercialize your nanotechnology by licensing and distribution

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1. Set up your nanotech business structure

• Sole Proprietorship• Simple business name registration where individual

person owns all assets and liabilities, income/losses• Risks: No limits on liability – all personal assets at risk

• Partnership• Simple partnership name registration• Partnership Agreement• Risks: No limits on liability – all personal assets at risk• Liability for employees’ and partners’ actions

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1. Set up your nanotech business structure (cont.)

• Corporation• Separate legal entity - like a person, it can own assets, incur

liability• Liability limited to money and assets invested in the company by

the shareholders or lenders, except for certain types of liability, e.g. environmental, taxes, wages, personal guarantees (often required by bankers)

• Incorporation under Federal or Provincial Business Corporations Act by filing Articles – sets up shares

• Governance structure set up in By-law, Shareholders Agreement and by statute: shareholders appoint directors who then appoint officers of the company

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Basic Corporate Governance Structure

Shareholders(Owners)

Directors(Elected)

President(Appointed Officer)

Secretary(Appointed Officer)

Treasurer(Appointed Officer)

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Which Business Structure to Choose?

• Factors to consider:• Number of owners• Limited liability• Perpetual existence

• Dissolution may cause tax problems• Participation in business• Initial costs• Continuing costs:

• Accountants, annual returns, etc.• Financing• Citizenship and residency• Income tax implications• Research tax credits

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Partnership/Shareholder Agreements

• How are meetings to be held? What if there is a tie in votes – who gets the casting vote?

• How will profits be split? When can dividends be declared? Tax year end?

• Who is to sign cheques, contracts, promissory notes, loans, etc.? Limits on signing authority?

• What if there is a material change in the business?• How can business assets be sold?• How and when can loans, bonuses or other payments be made to a

shareholder/partner, director or officer, or their relatives?

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Partnership/Shareholder Agreements (cont’d.)

• Who decides if the business will enter into contracts, partnerships or joint ventures with others?

• When can one partner or shareholder be forced to sell or buy shares?

• How will each person’s share be valued in the event that there is a buy-out?

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2. Raise financing, receive government grants and tax breaks

• Seed capital, e.g. shareholders, partners, angel investors, VCs, joint venture companies

• Government grants, tax credits, e.g. SR&D• Loans• Public offerings (IPO), underwriters – start-up on smaller stock

exchanges, e.g. AIM• Key factors for Investors: incorporation, management, history

(track record), profitability, assets (intellectual property)• Risk: loss of ownership, personal guarantees

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3. Hire developers, employees, subcontractors and suppliers

• Non-disclosure and confidentiality agreements• Before, during and after employment• Only way to protect trade secrets

• Employment contracts• Supply, subcontracting or outsourcing contracts• Non-compete agreements or clauses• Transfers of IP ownership (assignments and waivers)

• Creations on-site, off site, during or after hours• Warranties and indemnities for infringement

• Corporate policies, e.g. IP development and procurement• Training and supervision

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4. Protect ownership of your intellectual property in nanotechnology

• Patents – need to be registered und Patent Act• Trade-marks - in words or logos; may be registered under Trade-marks Act

for national protection• Copyrights – exist automatically under Copyright Act - works owned by

developer (or company that employs them)• Other statutory IP, e.g. Industrial Designs, Integrated Circuit Topographies,

Plant Breeders’ Rights• Trade Secrets (Common Law)• Note: IP is unique to each country – need searches and registrations in each

jurisdiction• Warning: When inventions are disclosed to public, lose ability to obtain a

patent (subject to grace period in some countries)• TIP: NDAs and searches are critical

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What are some of the Rights that exist in Intellectual Property?

• s. 3(1) Copyright Act – produce, reproduce, perform, publish, translate, and depending upon the work, convert, adapt, present, communicate by telecommunication, rent; s.14, moral rights of author (integrity, association, anonymous)

• s. 42 Patent Act gives patentee exclusive right to make, construct, use and sell the claimed invention

• s. 19 Trade-marks Act – use registered TM in respect of wares or services throughout Canada

• other, e.g. duties of confidence, enforcement rights, right to sue, right to file applications or prosecute pending applications, indemnity rights, royalty rights, options

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5. Use Open Innovation to Enhance R&D

• Open Innovation Marketplaces, e.g. InnoCentive started by Eli Lilly• Initially started in chemistry and life sciences and now expanded into other

disciplines including physical science, engineering and design, computer science, mathematics, and business and entrepreneurship

• Benefits: bring together a global community of organizations and individuals, such as researchers, scientists, developers, corporations, universities and technology companies to find creative solutions to problems quickly

• Results: faster technological breakthroughs and products launched into marketplace bring competitive advantages to businesses

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How the Open Innovation Marketplace works

• “Challenges” are posted by Seekers (corporations, government agencies, and nonprofit organizations) who are looking for help with product development and other business and science problems

• Seekers provide significant financial awards, typically between $10,000 to $100,000, for what they determine is the best solution

• Solvers register with the marketplace to solve Challenges

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Open Innovation (cont.)

• InnoCentive offers 4 Challenge types:• Ideation • Theoretical • RTP • eRFP

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What is an InnoCentive Ideation Challenge?

• A broad, non-detailed question to obtain access to new ideas• A brainstorming session, market survey or simple contest for new ideas• In an Ideation Challenge, a Solver may:

• submit ideas of their own • submit third party information they have the right to and further the right to

convey those rights to use and develop derivative works to seeker • submit information considered in the public domain without any limitations

on use • Solvers should not reveal any confidential information in their

submissions. Often the Ideation Challenge will be followed by one or more of the other three challenge types to further develop the ideas and gain IP protection when the concept has been well-defined. Ideation challenge submissions (if written) must be limited to 500 words or less.

• Note: Seekers obtain a non-exclusive, perpetual license to use ANY of the submissions that are submitted by solvers.

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What is an InnoCentive Theoretical Challenge?

• A detailed solution requirement• The intellectual property (IP) rights are generally transferred from the

Solver to the Seeker• Some Seekers may prefer to obtain a non-exclusive perpetual

license • The IP requirements are spelled out in the Challenge statement• A Seeker that requires specific IP rights or licensing, and also needs

detailed solution submissions, should choose a Theoretical over an Ideation Challenge

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What is an InnoCentive RTP Challenge?

• Highly detailed• One step further than a Theoretical Challenge, asking the

Solver to submit a validated solution in the form of either original data or a physical sample

• IP is always transferred to the Seeker in an RTP Challenge

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What is an eRFP?

• “Requests for Proposals” (RFP) • After a Solver submits an eRFP response, the Seeker

evaluates the responses and determines which Solver(s) to contact and begin further business discussions

• The Solver should NOT provide any confidential information in the eRFP response

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Who owns the IP?

• Depends on type of Challenge• All Solvers must sign a Solver Agreement and NDA• If solution is selected to receive the award, the winning Solver needs

to show they are capable of transferring ownership of the solution• Warning: Solvers must ensure their employer/university permits

them to participate in R&D for others and ultimately transfer ownership of all IP to the Seeker

• Employers must sign IP transfer agreement too if their facilities are being used to create solutions

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6. Commercialize your nanotechnology by licensing and distribution

• License Agreements – ability to retain ownership and “sell” the same nanotechnology more than once for multiple fees/royalties

• Non-exclusive – sole – exclusive?• Who is the licensee? One company? Its affiliates? End users?

Distributors? Subcontractors? Service providers? Sublicensees?• Scope of rights, e.g. make, use, sell, copy, distribute, modify• Territory: geographic, product, process• Time period: perpetual or specified term• Sublicenseable• Restrictions • Ownership of modifications/derivative works• Warranties, indemnities, limits on liability

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Conclusion

• Structure your nanotech business and financing carefully• Have the right agreements in place to deal with potential risks• Ensure your IP is protected by searches and registration – in each country

where you may be doing business• Ensure you own all critical IP – get proper transfers/assignments and waivers

from all employees, subcontractors, suppliers and outsourcers• Must have NDAs and non-competes• Take advantage of open innovation to speed up product development• Commercialize your nanotechnology world-wide by licensing• Hire distributors and build a global customer base to make your nanotech

business more profitable

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This presentation contains statements of general principles and not legal opinions and should not be acted upon without first consulting a lawyer who will provide analysis and advice on a specific matter.

Fasken Martineau DuMoulin LLP is a limited liability partnership under the laws of Ontario and includes law corporations.

Lisa K. Abelabe@fasken.com416 868 3358