The Role of Equity, Royalty and Fixed Fees in Technology Licensing to University Spin-Offs

36 Pages Posted: 27 May 2013

See all articles by Nicos Savva

Nicos Savva

London Business School

Niyazi Taneri

University of Cambridge - Cambridge Judge Business School

Date Written: 2013

Abstract

We develop a model based on asymmetric information (adverse selection) that provides a rational explanation for the persistent use of royalties alongside equity in university technology transfer. The model shows how royalties, through their value-destroying distortions, can act as a screening tool that allows a less informed principal, such as the university's Technology Transfer Office (TTO), to elicit private information from the more informed spin-off. We also show that equity-royalty contracts outperform fixed-fee-royalty contracts as they cause fewer value-destroying distortions. Furthermore, we show that our main result is robust to problems of moral hazard. Beside the co-existence result, the model also offers explanations for the empirical findings that equity generates higher returns than royalty and that TTOs willing to take equity in lieu of fixed fees are more successful in creating spin-offs.

Keywords: university technology transfer, equity, royalty, fixed fees, contract design, screening games

JEL Classification: O31, O32

Suggested Citation

Savva, Nicos and Taneri, Niyazi, The Role of Equity, Royalty and Fixed Fees in Technology Licensing to University Spin-Offs (2013). Available at SSRN: https://ssrn.com/abstract=2270165 or http://dx.doi.org/10.2139/ssrn.2270165

Nicos Savva

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Niyazi Taneri (Contact Author)

University of Cambridge - Cambridge Judge Business School ( email )

Trumpington St.
Cambridge, CB21AG
United Kingdom

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