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

Nicos Savva () and Niyazi Taneri ()
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Nicos Savva: London Business School, London NW1 4SA, United Kingdom
Niyazi Taneri: Singapore University of Technology and Design, Singapore 138682

Management Science, 2015, vol. 61, issue 6, 1323-1343

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 because they cause fewer value-destroying distortions. Furthermore, we show that our main result is robust to problems of moral hazard. Beside the coexistence 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. This paper was accepted by David Hsu, entrepreneurship and innovation.

Keywords: university technology transfer; equity; royalty; fixed fees; contract design; screening games (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (20)

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