Harvard University START-UP GUIDE

HARVARD UNIVERSITY  OFFICE OF TECHNOLOGY DEVELOPMENT

Startup Guide

An entrepreneur’s guide for Harvard University faculty, graduate students, and postdoctoral fellows

TABLE OF CONTENTS Why Start a Company?

2

Key Considerations

5

Startup Process

6

Funding Sources

7

Presenting to Investors

8

Financing Terminology

10

Company Considerations

13

Equity Considerations

14

Some Resources for Entrepreneurs

15

Key Factors for Success

16

We have ceated this handboo to seve as a high-level guide and oveview o soe e questions and issues that a conont ou, the aspiing entepeneu, as ou begin ou quest to stat a new copan aound innovations eanating o ou lab. Its pupose is not to suppl all the answes, but athe to povide a stating point o engaging ou in a convesation with the Oce o Technolog Developent (OTD) about ou entepeneuial joune. OTD wos closel with Havad acult, gaduate students, and postdoctoal ellows to exploe the potential o oing statup copanies aound new inventions and plato technologies aising o thei eseach. Ceating a statup copan, also nown as a NewCo, is a viable and oten attactive altenative to woing with an established copan. A NewCo can expedite the developent and coecialiation o nascent technologies that satis unet aet needs and benet the public good. OTD has the entepeneuial expetise to guide Havad investigatos though the challenging pocess o oganiing and stating a new copan. Ou tea ebes have extensive expeience cataling and oing eal-stage statup ventues, having ounded and secued unding o such copanies, and have paticipated in successul copan exits. I hope that ou will ae OTD ou patne in pusuing ou entepeneuial vision: we ae eage to be ou sounding boad, to addess ou questions, and to guide ou though the pocess o launching a new copan. Please tae the next step and stop b OTD antie to discuss ou statup ideas. We encouage ou to exploe the potential o entepeneuship and becoe pat o Havad’s expanding statup ecosste.

Isaac T. Kohlberg

Senio Associate Povost Chie Technolog Developent Oce

1

Why Start a Company? When launching a new copan, thee ae a nube o actos to tae into consideation. The ealit is that onl soe inventions a be suitable o the ceation o a statup copan. Innovations a pogess oe quicl in a ocused statup than in an acadeic lab o a lage copan. Along with the invention tea, OTD helps in analing seveal actos to deteine whethe a statup is the ost appopiate path to coecialiation:

• Licensing: Lielihood o inteest o

existing copanies in licensing the technolog. • Funding: Availabilit o capital to build

and gow the business, togethe with the inteest, capabilities, and tac ecod o liel investos. • Commitment: Level o coitent and

involveent o the inventos. • Support: Pesence o a tue business

chapion o both the technolog and the new ventue.

• Demand: Potential o the coe technolog

to povide a solid plato o ultiple aets o poduct oppotunities.

• Management: Expeience, passion, and

• Competition: Identication o othe

dive o the statup’s executive tea.

copanies that oe siila solutions.

O F F I C E O F T E C H N O L O G Y D E V E LO P M E N T

OUR MISSION

OTD’s ission is to ae the uits o Havad eseach oe accessible outside the Univesit, including undeseved counities, and to ensue that societ benets o Havad innovations b osteing thei swit, poessional, and eective developent and coecialiation. To this end, OTD sees to oste a spiit o innovation and entepeneuship aong the acult, haness the powe o Havad’s substantive intellectual popet, and advance the developent o new discoveies ade b the acult o the good o societ. Aspects o ou ission elevant to stating new copanies include: Promoting Innovation and Entrepreneurship

Encouaging innovation and acceleating technolog tanse in a anne consistent with Havad’s tadition o acadeic independence, public sevice, and coitent to the counit. Protecting and Harnessing Intellectual Property

Evaluating, patenting, licensing, and, when appopiate, ceating statup copanies aound new inventions and discoveies ade b Havad’s acult.

2

“OTD’s knowledge o what it takes to start a company is based on rsthand experience and was vital to our ability to get our NewCo o the ground. They were with us every step o the way, oering valuable guidance and eedback.” — GÖkHAN S. HOTAmISLIGIL J.S. Sions Poesso o Genetics and metabolis Chai, Depatent o Genetics and Coplex Diseases Havad School o Public Health

3

“OTD was masterul in the initiation phase o the licensing process. Even more important, as our research progressed, they developed packages or a ollow-on license that enabled the company to secure a major strategic corporate partnership.” — GrEGOry L. VErDINE Eving Poesso o Cheist Depatent o Ste Cell and regeneative Biolog Havad Facult o Ats and Sciences

4

Key Considerations Below are items to consider when deciding whether or not to start a NewCo: 1

Is the invention a disuptive technolog? I not, how would it be categoied?

2 How soon can a coecial poduct

coe to aet? 3

What is the level o is associated with this statup?

4 Does the technolog have clea

applications and a denable aet? 5

Who owns the intellectual popet (IP)? Fo oe inoation, ee to OTD’s Inventor’s Handbook and Havad’s IP policies.

6 What will be  ole in the new co-

pan: ull–tie eploee, adviso boad ebe, executive, o consultant? 7

What ae the goals o the copan? Is it to gow the copan and position it o an acquisition o a possible initial public oeing (IPO)? O, is it to build a sall, et sustainable business?

8 Will capital o pivate investent

copanies be needed? I so, will the copan eventuall be sold o go public? Pivate investos el on these exit stategies to get a etun on thei investents. 9 What is the cuent value o the co-

pan? Pe-one valuations (valuation o a copan pio to an investent) o eal-stage copanies ae geneall in the $1–3 illion ange.

The valuations ae based on seveal actos, including: • In what stage of development is the

technolog? • Is there proof-of-concept lab data? • Is there a working prototype? • Are there paying customers?

OTD can help navigate these consideations. Howeve, we stongl ecoend speaing with extenal advisos o entos who can povide additional pespectives and guidance. Once IP potection is in place, tal about ou ideas (with a condentialit ageeent in place, when appopiate); the oe eedbac ou eceive, the highe the lielihood o success. Tal to potential custoes. The inoation obtained b asing questions will povide citical eedbac that not onl will incease condence in the statup’s potential, but also will enhance the lielihood o eceiving unding and, ultiatel, the success o the ventue. • Who are your customers? • What do they care about? • Can the company’s product(s) solve

thei pobles? • How are they currently addressing

the pobles? • How does the technology solve their

pobles in a unique wa? • How large is the market? • How much are they willing to pay for

a solution?

5

Startup Process: Six Steps to Launch

1

CONTACT OTD Discuss your invention and how to protect the intellectual property to decide whether a startup company is a suitable option.

2

PROTECT INTELLECTUAL PROPERTY  Work with OTD to le a patent application on the invention before it comes public. A major asset o a startup company is its intellectual property. Ater public disclosure, obtaining a patent, particularly outside the United States , may no longer be possible.

3

SEEK INPUT AND NETWORK Identiy a mentor and work with him or her regularly, network with like-minded entrepreneurs, review ideas with potential investors, and evaluate the commercial aspects with potential customers. OTD provides the resources to get started.

4

PLAN THE BUSINESS Develop an understanding o the market potential, competition, unding needs, and path to productization and protability. OTD’s expertise is useul in providing guidance on competitive analysis, market assessment, and business planning.

5

NEGOTIATE THE LICENSE OR OPTION AGREEMENT Obtain a license or option agreement rom Harvard to demonstrate to potential investors that the company has secured the rights to the technology. OTD leads these negotiations along with an ofcer o the company.

6

PURSUE FUNDING Commercializing technology typically requires external capital. Introduce the company to venture capitalists, angel investors, and, perhaps, riends and amily. OTD assists in making connections with entrepreneurs, angel investors, and venture capitalists.

6

Funding Sources When stating a copan, geneating unding to suppot the business is pehaps the single ost ipotant tas at hand. Beoe ebaing, it is necessa to deteine how uch unding is equied and o whee it will coe. Hee ae soe actos to conside in deteining how uch unding is necessa: • Time to market (that is, how long before

initial sales) • • • • •

Employee salaries and benets Space Equipment Travel Legal fees

Funding o the copan a coe o one o oe souces, including sales, gants, and investos. Fo exaple: Organic Growth: Gow the business slowl

based on sales, without the need to aise extenal unds. Oganic gowth can be a easonable stateg o cetain NewCo ventues. Tpicall, howeve, univesit innovations ae at such an eal stage o developent that additional unds ae necessa to ove the o the lab to aet.

Friends and Family: It a be possible to

secue a sall aount o unding o iends and ail to launch the business while additional unding is sought. Small Business Innovation Research (SBIR): Appl o eseach gants. The U.S.

govenent povides innovation eseach gants to sall copanies, which can be geat souces o initial capital. SBIr gants can onl be povided to a copan, not diectl to an acadeic lab. Fo oe inoation, visit www.sbi.gov. Angel Investors: Individuals o goups that

invest thei own one in eal-stage copanies. New England has a nube o angel investo goups, including Launchpad, CoonAngels, Hub Angels, and Boston Habo Angels. Fo a listing o angel goups in the egion as well as othe useul inoation, visit www.angelcapitalassociation.og/ diecto. Venture Capitalists: Ventue capital s

anage and invest the unds o othe investos. OTD is ailia with ventue capitalists in New England and beond, and can help to establish connections within these s. moe inoation can be ound at www.newenglandvc.og.

STARTUP SUCCESS STORY: Tetraphase Ph armaceuticals

In 2005, D. Andew mes and colleagues in Havad’s Depatent o Cheist and Cheical Biolog published esults o thei eseach on new classes o antibiotics aied at dug-esistant inections. OTD woed closel with D. mes to activel evaluate and pusue ultiple coecialiation altenatives. Extensive aet, IP, and copetitive analses wee copleted, leading OTD to initiate eal developent plans o a NewCo, including the coecialiation stateg and the assebl o an initial investo sndicate. The eots o OTD led to the launch o Tetaphase Phaaceuticals in 2006 with $25 illion Seies A nancing to capitalie on this goundbeaing technolog o D. mes.

7

Presenting to Investors Pesenting the idea along with the suppoting eseach to investos is an ipotant step in the statup pocess, and one that equies thoough pepaation. When scheduling a eeting with an investo, be ve clea about its pupose. An inoational o exploato eeting a be acceptable, but be sue that the investo undestands that this is the intent o the eeting. I the pupose o the eeting is to equest unding, and the pesentation tea is not popel pepaed, then subsequent eetings (and unding) ae unliel. Include the ollowing inoation in the copan pitch: • What problem does the technology

addess? • How does the technology provide

a solution? • What market is being pursued?

• What is the state of the intellectual

popet? Is the technolog well potected? Will IP be needed o othe souces? • Who is the competition? Investors expect

that thee is copetition in eve aet aea; clais o no copetition ae geneall et with disbelie. What is the copetitive advantage? Wh would custoes pee the poduct o solution being oeed ove anothe? • Who is on the executive team, and what

ae thei oles? Wh should soeone invest in this tea? • How does the business model relate

to the sales stateg and picing? • What are the expense and revenue

pojections o a ve-ea peiod?

What is the addressable aet? Do not infate data; i the idea is o a paticula aet segent, povide data o that segent onl.

• What are the key company milestones?

- maet sie - Taget custoe - maet segent

The pesentation should be inteesting and engaging. Tell a sto and use exaples. I potential custoes o patnes have povided eedbac, include exaples.

• How much money is being requested?

How long will it last? How will the unds be spent?

STARTUP SUCCESS STORY: Diagnostics For All (DFA)

DFA is a not-o-pot oganiation established to tanslate eal-stage technologies developed in the lab o D. Geoge Whitesides o Havad’s Depatent o Cheist and Cheical Biolog. DFA’s eots will intoduce innovative, aodable, and eective point-o-cae diagnostic solutions to edical pobles in the developing wold. Honoing OTD’s and Havad’s coitent to the pinciples o sociall esponsible licensing, OTD oed a collaboative and suppotive elationship with DFA. This elationship epesents a new paadig o how a univesit can ulll its public sevice ission b acilitating the apid and specic atuation o innovation o deploent in the global health aena.

8

“OTD negotiated a air and reasonable licensing agreement with the NewCo that ormed out o my lab. They were extremely helpul to us both in the initial stages o orming a company and beyond.” — ANDrEW G. myErS Ao Houghton Poesso o Cheist and Cheical Biolog Depatent o Cheist and Cheical Biolog Havad Facult o Ats and Sciences

9

Financing Terminology Equity: The owneship inteest o the copan that is held b vaious paties.

Initiall, the oundes tpicall own 100 pecent o the copan. A license ageeent with Havad and equit nancing (in which soeone povides unding in exchange o a pecentage o the copan) oten occu eal in the oation o a NewCo. At that tie, the ownes o the equit ae the oundes, the investos, and Havad. The investo goup will tpicall want 40 to 60 pecent o the copan, though the pecentages can va based on a nube o actos, and a be less o individual investos. Ownership compared to control: Equit investos ae geneall in contol o the

copan. Povisions in the investent docuents usuall give the investos authoit ove cetain decisions, such as whethe to accept an acquisition oe, even i the have less than 50 pecent o the outstanding shaes. Ate a st ound o nancing, the oundes’ total equit pecentage is oten “diluted” to less than 50 pecent. Option pool: A pecentage o stoc options set aside o special puposes.

Soeties, investos equie that about 20 pecent o the copan’s options be eseved to attact e eploees. Pre- and post-money valuation: The copan’s pe-one valuation is its

value beoe an investent is ade. Pe-one valuation ust be easonable. Post-one valuation is the pe-one valuation plus the aount invested. Fo exaple, i investos povide $3 illion and the pe-one valuation is $2 illion, the post-one valuation is $5 illion. In this exaple, the investos have 60 pecent o the equit. Convertible debt: Funding that can be conveted into shaes at a late unding

ound. Soeties convetible debt is a good unding altenative. Howeve, the copan iediatel has debt on the balance sheet, and a valuation still ust be set in case additional unding ounds ae not needed.

10

Preerred shares compared to common shares: Investos tpicall tae

peeed shaes, and the oundes and eploees hold coon shaes. Peeed shaeholdes a have additional ights. Fo exaple, peeed shaeholdes have the ight to get a ultiple o thei investents bac (oten one ties the aount, but it can be highe) beoe an distibution to othe shaeholdes. This can be illustated with a siple exaple in which the peeed shaeholdes (investos) invested $5 illion, the hold 50 pecent o the equit, have a 1X peeence, and the statup is sold o $25 illion. In this case, the investos will st get $5 illion, and then the eaining $20 illion is split accoding to the equit pecentage o the shaeholdes: $10 illion to the investos, and $10 illion to the coon shaeholdes. Anti-dilution: Potection against utue nancing when the value o the

copan deceases (also eeed to as a down-round). Anti-dilution ensues that equit staes do not dop below a cetain pecentage. The ost coon is weighted aveage anti-dilution. Full atchet potection a also be used at ties, and povides investos with the highest level o potection.

Only some o the provisions and terminology o a nancing term sheet are reerenced here, and these are not necessarily ully dened. More in-depth listings, denitions, descriptions, and sample term sheets can be ound on the Internet. A mentor who is a seasoned entrepreneur is also an excellent source o guidance. When negotiating a term sheet with investors, the company’s principals should hire an attorney with relevant experience to represent them.

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“OTD’s understanding o and insight into the ormation o startup ventures were key to the successul ormation and launch o our company.” — D AV I D A . W E I T z mallincodt Poesso o Phsics and o Applied Phsics Havad School o Engineeing and Applied Sciences

12

Company Considerations Legal representation: OTD is not in a

position to povide legal advice, no does this docuent pupot to lend legal advice. Seeing counsel a be o geat benet in aing the vaious decisions elated to stating a copan. An attone with expeience in business entit oation and equit consideations can be a eliable and tusted adviso. Type o company: When incopoating,

choose aong an S-Cop, C-Cop, o Liited Liabilit Copan (LLC). Copanies that plan to tae an equit investent should geneall be established as a Delawae C-Cop. Board o directors and the advisory board:

Establish an adviso boad eal in the launch pocess. An adviso boad should be thee to ou people who can povide guidance in aeas with which the oundes ae not ailia; o exaple, aising one, hiing, sales, poduct developent, and anuactuing. A boad o diectos should

include one individual o the copan, one o oe investos, and independent indust epesentatives. Management team: Conside each ounde’s

ole in the anageent tea. Geneall, a acult ebe will have an adviso boad ole, and a postdoctoal o PhD student a be the chie technolog oce o the vice pesident o eseach and developent. Othe tea ebes a be needed with stong doain expetise, sales expeience, and aeting now-how. Investos ae usuall inteested in a copan with a stong anageent tea; the ae unliel to und even the best ideas i the ight tea is not in place. Space, insurance, and payroll: mae

decisions about wospace, insuance, and paoll ight awa so that the tea can concentate on building the poduct and the business. Conside hiing an opeations peson o an assistant to anage these ites, enting shaed oce space, and outsoucing paoll.

STARTUP SUCCESS STORY: Crimson Hexagon, Inc.

Cison Hexagon was established to develop and coecialie a novel algoith developed b D. Ga king in Havad’s Depatent o Govenent in the Facult o Ats and Sciences. D. king’s technolog o sentient analsis is an innovative eans o gleaning opinions o unstuctued text in was that supass existing appoaches. Initiall developed to deteine sentient on blogs about pesidential candidates, its e aetable application is o copanies to: • Lean oe about coon peceptions o thei poducts • receive eal-tie, ongoing inoation elated to what is being witten • Undestand the opinions and sentients o thei custoe base

OTD woed closel with D. king to develop the initial business stateg o the copan. The initial unding o the copan cae o an angel investos goup that OTD intoduced to the copan’s ounding CEO. 13

Equity Considerations When stating a copan, the co-oundes should agee about how to split the equit. A convesation o this natue should tae place eal in the pocess, and ageeent should be oalied. Is the contibution o each ounde equal? Is the is the sae o each ounde? Fo exaple, is one ounde leaving a job to wo ull-tie and unpaid at the copan, while anothe is continuing in his o he cuent job until the statup is able to aise one? It is also ipotant to conside evese vesting, whee each ounde’s equit pecentage becoes available ove tie. I all the oundes get all o thei equit on da one, and six onths late one ounde leaves while othe oundes continue to wo o seveal oe eas, the equit will not be ail distibuted. revese vesting allows an individual to eceive stoc iediatel, which a be benecial o tax easons, but still aintains vesting equieents, such as length o eploent, to be et. Conside i equit can and should be used to pa o outside sevices. Legal counsel, aeting, and accounting poessionals

a tae equit in lieu o cash. This tpe o paent a see useul beoe one has been aised, but tae note — it can be exteel dicult to establish a ai aount o equit in exchange o such sevices. How uch equit should be set aside o the adviso boad and o the boad o diectos? Tpical aounts ae one-quate to one-hal pecent o adviso boad ebes, and one-hal to one pecent o diectos. Thee ae pesonal tax iplications o oundes, depending on how equit is ganted. It is vital that ou get legal advice on these tax iplications beoe incopoating the copan and issuing shaes. Choose legal counsel that has expeience woing with statup copanies. Havad expects equit and othe consideation, including oalties, in exchange o a license to the IP. This equit is a inoit position and can include anti-dilution povisions. Havad does not invest one diectl in statup copanies.

STARTUP SUCCESS STORY: GnuBIO, Inc.

D. David A. Weit o Havad’s School o Engineeing and Applied Sciences is a wold-enowned expet in icofuidics and eulsions. His eseach led to the application o techniques in the eld o DNA sequencing. Alead a seasoned entepeneu, D. Weit appoached OTD about stating a new copan to coecialie his latest innovations. GnuBIO, Inc., was launched in 2010 to develop this next-geneation sequencing technolog o the olecula diagnostic and applied eseach aets. Woing closel with D. Weit and the GnuBIO ounding tea, OTD ade intoductions to potential investos, advised the tea on an appopiate capital stuctue, povided guidance on a ai distibution o equit, and woed collaboativel with all paties to ensue a sooth and ecient negotiation o the license tes.

14

Some Resources or Entrepreneurs At Harvard

Around New England

OTD: The Oce o Technolog Developent

MIT Enterprise Forum: A ou that oes

is esponsible o Havad-owned intellectual popet and taes an active ole in woing with acult, gaduate students, and postdoctoal entepeneus within the Havad counit.

nueous events o entepeneus aound New England (no aliation with mIT is equied).

TECH: The Technolog and Entepeneuship

Cente at Havad wos with undegaduate students to suppot and encouage thei entepeneuial ideas, and uns an annual business plan copetition. HBS Entrepreneurship Center: The Athu

roc Cente o Entepeneuship at Havad Business School is a esouce o HBS students inteested in copan oation. Harvard Innovation Lab: Launched in 2011,

the Innovation Lab is a esouce o student entepeneus thoughout the Havad counit. Harvard Startups: A yahoo! goup that

povides esouces o entepeneus and business individuals to post questions, inoation, jobs, and oe. mainl tageted at Havad aluni.

Cambridge Innovation Center: One o

seveal places that povide shaed oce space o eal-stage copanies. TechStars: A entoship-diven seed-stage

investent poga that uns in Boston and othe cities. Dogpatch Labs: Ceated b Polais Ventue

Patnes to connect entepeneus and help oundes conceive and launch statups. Betaspring: A entoship-diven statup

acceleato poga o technolog and design entepeneus based in Povidence, rI. Blogs

Nueous blogs exist that ae geat souces o inoation o the aspiing entepeneu. Bowse the selection below o an intoduction to the eve-gowing blogging wold. • www.robgo.org • www.platformsandnetworks.blogspot.com

Commercializing Science and High Technology: An HBS class that is open

to students thoughout the Univesit, one o seveal such entepeneuial classes at Havad. Student teas wo on coecialiation stategies o Havad eseach lab technologies.

• www.founderresearch.blogspot.com • www.bostonvcblog.typepad.com • www.avc.com • www.feld.com/wp • www.steveblank.com

15

Key Factors or Success This guide povides an oveview o the statup pocess and the elevant aspects o stating a business. O couse, thee ae an additional souces o inoation. Howeve, OTD is a good place to stat — ou tea can povide sound advice and guidance. Be sue to: • Obtain trusted advice and mentorship. • Talk to customers. • Bring on the right team members. • Be passionate. • Prepare a one-minute elevator pitch that will grab someone’s attention and motivate

hi o he to as o oe inoation. • Practice the company pitch. • Network with other entrepreneurs and representatives in the industry.

OTD can: • Provide an initial sounding board for exploring startup ideas. • Protect the intellectual property that is the foundation of the new company. • Make introductions to entrepreneurs, angel investors, and venture capitalists. • Provide assistance with business planning. • Assist you on competitive analysis, market assessment, and investor pitches.

Harvard University Ofce o Technology Development www.otd.harvard.edu

In Cambridge

In Longwood

(617) 495-3067

(617) 432-0920

(617) 495-9568 fax

(617) 432-2788 fax

Holyoke Center Suite 727E

Gordon Hall Suite 414

1350 Massachusetts Avenue

25 Shattuck Street

Cambridge, MA 02138 USA

Boston, MA 02115 USA

16

These logos represent a few of the many Harvard startups that OTD has helped launch.

QSTREAM

Harvard University Ofce o Technology Development www.otd.harvard.edu

In Cambridge

In Longwood

(617) 495-3067

(617) 432-0920

(617) 495-9568 fax

(617) 432-2788 fax

Holyoke Center Suite 727E

Gordon Hall Suite 414

1350 Massachusetts Avenue

25 Shattuck Street

Cambridge, MA 02138 USA

Boston, MA 02115 USA

Copyright © 2011 The President and Fellows of Harvard College