THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL

POLICY ON EQUITY ACQUISITION

I. Introduction

The Office of Technology Development (OTD) occasionally has the opportunity to acquire equity in companies on behalf of the University as consideration for a license agreement. Inclusion of equity in such agreements may be in the best interest of technology transfer. Young companies often do not have the requisite cash reserves to compete with an established company for rights to University technology. An offering of equity is a means of enabling otherwise qualified small companies to license University technology. However, the acceptance of equity presents two potential problems: risk and the generation of conflicts of interest and conflicts of commitment.

Risk is an issue because, at the time equity is given, it generally has no value. Whether or not it will acquire value will depend on the overall success of the company, which is a function of many factors that may not relate to the technology being licensed. Therefore, OTD will generally require some cash as part of the consideration for the license agreement to minimize risk.

Equity has considerable potential for creating conflicts of interest for inventors and the University because equity holders are part owners of the company. Owners stand to gain considerably if the company does well, and therefore there may be incentive to take actions and make decisions that favor the interests of the company over the academic missions of the University.

This Policy, while it does not address all aspects of institutional conflicts of interest, reduces the potential for real or perceived conflicts of interest by virtue of the fact that inventors, departments, schools, and OTD are all removed from the management and sale of University equity. The equity is owned by The University of North Carolina at Chapel Hill Foundation, Inc. for the University of North Carolina at Chapel Hill, and all decisions regarding the stock, including whether and when to convert the equity into cash are made in the sole judgment of The University of North Carolina at Chapel Hill Foundation, Inc., subject to the provisions of this Policy.

II. Policy

In the course of technology licensing, the Office of Technology Development (OTD) occasionally has the opportunity to propose that equity be acquired on behalf of The University of North Carolina at Chapel Hill by The University of North Carolina at Chapel Hill Foundation, Inc. This Policy enables a benefit to be acquired on behalf of The University of North Carolina at Chapel Hill through acquiring equity while addressing potential inventor and institutional conflicts of interest issues.

A. The University of North Carolina at Chapel Hill Foundation, Inc. may accept equity in a company on behalf of The University of North Carolina at Chapel Hill as partial or full consideration for technology licensing-related transactions as negotiated by OTD in appropriate circumstances pursuant to this Policy, with the approval of the Vice Chancellor for Research and Graduate Studies, on advice of the Dean of the School or College where the technology was invented and the Office of University Counsel.

B. Acceptance of equity by the Foundation on behalf of the University will be based on the University’s consideration of licensing a University technology upon the principles of openness, objectivity and fairness in decision-making, and preeminence of the education, research, and public service missions of the University over financial or individual personal gain. Such licensing activity shall be conducted in accordance with the Guidelines on University-Industry Relations, the Policy on Conflicts of Interest and Commitment, the Policy on Ethics in Research, the Policy on External Professional Activities for Pay, and other related University policies and guidelines.

C. (1) (a) OTD is the only authorized negotiating representative of the University for any University invention. Accordingly, no University inventor shall represent, or purport to represent, the University in negotiations regarding any license with a licensee, including a licensee company as to which that inventor is a Founder.

    (b) For purposes of this Policy, a "Founder" shall be any University faculty, staff or student inventor who as a result of acting as a founder, originator or promoter of a company has or is likely to have a “Significant Financial Interest,” as that term is defined in the University Policy on Conflicts of Interest and Commitment, in  that company. A University inventor who is a Founder of a company may elect to represent or participate on behalf of that company in the negotiation of a license or related contractual arrangements with the University. In such case the negotiations will be conducted at arm’s length, and the Founder will affirm in writing his or her acknowledgement that during the period of negotiation he or she will be considered an agent of the company, will not be privy to internal University deliberations regarding the conduct of the negotiations or the management of the technology proposed to be licensed, and will not attempt to influence the University’s position regarding any matter related to the proposed license, except through direct negotiation with the Office of Technology Development in his or her role as a representative of the company.  OTD will forward a copy of the written affirmation to the Provost and to the Vice Chancellor for Research and Economic Development, as well as to the Founder’s Dean and Department Chair.

   (c) Independent negotiations by an inventor regarding consulting contracts are permissible, provided the inventor complies with the Policy on External Professional Activities for Pay, the Policy on Conflicts of Interest and Commitment, the Patent and Copyright Policies, and other applicable policies. Before OTD may commence negotiations for a license involving equity, each inventor of the technology to be licensed by the University shall sign the statement attached to this Policy as Exhibit 1.

(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 by the Foundation with respect to a license to the company of which he or she is a Founder.  Two-thirds of that portion of the equity or proceeds of equity which under University policy would otherwise be directed to the Founder(s) as inventor(s) will be distributed to the department(s) of the Founder(s), and one-third shall be distributed to OTD.

D. The University (and The University of North Carolina at Chapel Hill Foundation, Inc., which holds such equity on behalf of the University) shall neither seek nor accept voting representation with respect to equity received as consideration for a license on the board of directors of a licensee in which it holds such equity, nor exercise any voting rights on board actions, regardless of the level of its equity interest received as consideration for a license. Exceptions to this provision require approval of the Vice Chancellor for Research and Graduate Studies, on advice of the Office of University Counsel. University employees who may accept appointment to boards of directors and scientific advisory boards of licensees do so in their individual capacities and not as University representatives, but are nevertheless subject to all applicable University policies in so doing, as detailed in Section II.C.

E. The terms of any equity-based technology licensing transaction, with the exception of the form of consideration, shall be consistent with University transactions for comparable technologies. The University will not accept more than a minority ownership share in a licensee as consideration for a license.

F. (1) Where there is a proposal for equity in a company to be accepted by the Foundation on behalf of the University as consideration for a technology licensing-related transaction, OTD, taking into account any legal restrictions and after considering the wishes of each inventor involved, may:

(a) arrange for inventor(s) other than Founders to receive equity directly from the company upon execution of the relevant agreement, including provisions relating to restrictions, if any, on transfer or disposition of inventor(s) equity, in which case the inventor will be responsible for retaining her or his own business advisors, legal counsel and tax counsel and will be responsible for all financial, tax and legal consequences related to the equity he or she receives; or

(b) arrange for all equity, including shares attributable to the inventor(s) other than Founders, to be issued in the name of and held by The University of North Carolina at Chapel Hill Foundation, Inc. The non-Founder inventor(s)’ sole right under these circumstances is the receipt of the appropriate share of such equity or its cash equivalent at such time and in such form as provided pursuant to Section G., below, and the inventor will be responsible for retaining her or his own business advisors, legal counsel and tax counsel and will be responsible for all financial, tax and legal consequences related to the equity or cash equivalent he or she receives.

(2) The Foundation shall make decisions regarding the management and disposition of equity it receives pursuant to this Policy based upon sound business judgment and publicly available information, and such decisions shall be made independent of any influence by the inventors, the Office of Technology Development, or any other University unit or employee. Under no circumstances shall the University, the University Endowment, The University of North Carolina at Chapel Hill Foundation, Inc., or The University of North Carolina at Chapel Hill Investment Fund, Inc. make any direct investment in any licensee in which equity has been accepted by the Foundation on behalf of the University as consideration for a license pursuant to this Policy unless and until the licensee company is publicly traded or until the company’s equity is priced by independent means. The foregoing prohibition shall not apply to investments made by an entity formed with approval of the University for the purpose of investing in companies that are formed based upon or to commercialize University technology.

G. (1) Taking into account any obligations imposed by applicable agreements, the Foundation shall dispose of equity acquired pursuant to this Policy at the earliest time following an Initial Public Offering by the Licensee company. To the extent required by contract or law and where necessary in the judgment of the Foundation to avoid depression of the Licensee company’s stock price, the Foundation may stagger sales of equity acquired pursuant to this Policy.

(2) The University shall determine the non-Founder inventor(s)’ share according to The University of North Carolina at Chapel Hill Patent and Copyright Policies and Procedures and other relevant policies, including deduction for the Invention Management Fund and any out of pocket expenses.

(3) The Foundation shall distribute equity or cash proceeds, upon conversion of equity to cash, to OTD for further distribution in accordance with the schedules and formulas established in The University of North Carolina at Chapel Hill Patent and Copyright Policies and Procedures and other relevant policies, taking into account the inventor(s)’ equity distributions, if any, already made pursuant to this Section G or to Section II.F.(1)(a), above.

H. This Policy is effective on and after August 1, 2002.

     Revised October 7,2004.

EXHIBIT 1

THE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL

POLICY ON

EQUITY ACQUISITION

Name:

School/Department:

Licensed Technology:

Licensee Company:

Because of the license granted or to be granted by the University to the above Licensee Company ("the Licensee") and in light of any Significant Financial Interest I have or may have in the Licensee, I acknowledge the potential for a conflict of interest between the performance of my research and teaching obligations at the University and my personal financial interests as well as my contractual and other obligations to the Licensee. Therefore, I agree that I will not:

1. Involve myself, or if I supervise students or post-doctoral fellows, involve students or post-doctoral fellows of the University in research and development projects for the company, including human subjects research, without the prior approval of my dean(s) or as otherwise allowed by University policy;
2. Restrict or delay general access to information from University research; and/or
3. Alter the scope or direction of my University research in order to materially benefit the company.

I affirm that I have read, understood and will comply with each of the University Policy on External Professional Activities for Pay, the University Policy on Conflicts of Interest and Commitment, and the University Policy on the Acquisition of Equity in Licensing Transactions, and will continue to comply with them as they may be amended from time to time. I understand and acknowledge that my compliance with these policies is a condition of my employment at the University.

To avoid the appearance of a conflict, I will at all times attempt diligently to differentiate clearly between the intellectual directions of my University research and my contributions to the Licensee. I agree not to involve myself independently of the University in negotiating the terms of any University agreement with the Licensee except to the extent allowed by the Policy on the Acquisition of Equity in Licensing Transactions. I agree that under no circumstances will I involve myself in negotiation of business terms of the License except as allowed by the University Policy on the Acquisition of Equity in Licensing Transactions. I understand that given the potential conflict of interest, as determined by the Dean or other relevant University administrator, in some circumstances the University may not be allowed to accept sponsored research funding on my behalf from the Licensee. If the University is allowed to accept sponsored research funding on my behalf from the Licensee, I agree to initiate and conduct such research only as allowed under the Policy on Conflicts of Interest and Commitment and any disclosure, monitoring or management procedure imposed pursuant to that Policy.

I acknowledge that it is my responsibility to obtain my own financial, tax and legal advice in regard to any equity or proceeds of equity that I may receive.

Finally, I understand that I must disclose any Significant Financial Interest I have in the Licensee in all publications or public statements I make presenting research related to this license.