Explanatory Memorandum - Commercialisation Revenue Protocol

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1. Matters Covered in Explanatory Memorandum

The matters covered in this Explanatory Memorandum are:

1. Calculating Net Commercialisation Revenue;
2. Equity in a start up company;
3. Taxation aspects;
4. What percentage of commercialisation revenue is available to contributors;
5. To whom should commercialisation revenue be paid;
6. How to divide a share of commercialisation revenue amongst several contributors;
7. The duration of benefits.

2. Calculating Net Commercialisation Revenue

2.1 Treatment of Expenses

Commercialisation expenses will be recovered by QUT or bluebox before commercialisation revenue is available for distribution.

These include:

• patenting and other intellectual property protection expenses;
• legal expenses incurred on the commercialisation project (and not just on the particular transaction giving rise to the revenue);
• external professionals’ expenses incurred on the commercialisation project (and not just on the particular transaction giving rise to the revenue), which may include:
• accountants’ expenses for financial and taxation modelling;
• valuers’ expenses; and
• other consultants’ expenses (eg. commercialisation consultants);
• costs associated with the development of the intellectual property including proof of concept studies, prototype development, marketing studies and business planning;
• travel and accommodation expenses incurred on the commercialisation project (and not just on the particular transaction giving rise to the revenue) by any person (whether staff member, or an external professional);
• legal costs and related expenses incurred to commence or defend infringement proceedings; and
• taxes, duties or any other government levies incurred by QUT or qutbluebox, in respect of the commercialisation project or revenue.

Commercialisation expenses does not include:

• QUT’s and qutbluebox’s administration expenses;
• the cost of undertaking research, unless such research is funded by QUT or qutbluebox under a proof of concept or other funding mechanism,

For example, the following are not deducted to arrive at the “net”:

• the cost of QUT’s or bluebox’s administration staff 
• QUT’s or bluebox’s administration expenses (rent on building, cost of computers, cost of plant and equipment etc).

Ongoing Administration of  Commercialisation Expenses

In the course of administering a licence for its full term, such as the 20 year term of a patent, QUT and bluebox will incur expenses relating to the use of its staff. These expenses will not be deducted from commercialisation revenues. However, there may be a need to incur commercialisation expenses in administering a contract, such as legal fees etc. These commercialisation expenses will be deducted from commercialisation revenues.

Not all commercialisation expenses can be anticipated.  Other types of expenses may be incurred which should properly be deducted to arrive at the “net”.  The determination of whether a particular expense is or is not deducted from commercialisation revenue to arrive at the “net” will be made by the Deputy Vice Chancellor (Research and Commercialisation) upon recommendation by bluebox.

2.2 Treatment of Revenue

Commercialisation revenues actually received by QUT or bluebox from the commercialisation of Intellectual Property can include:

•  royalties upon sales by a licensee;
• royalties from sub-licence fees received from a licensee;
• lump sum licence fees (except where those fees are required to be used to subscribe for equity in a start-up company);
• proceeds from the assignment of QUT intellectual property;
• proceeds of sale of the QUT intellectual property (where a sale occurs);
• signing fees;
• milestone payments;
• minimum annual payments;
• reimbursement of patent prosecution and maintenance expenses;
• dividends upon shares owned by QUT or qutbluebox in a start-up company to which it grants a licence;
• proceeds of sale of shares owned by QUT or qutbluebox in a start-up company to which it grants a licence; and
• damages from infringement proceedings,

and does not include

• payments pursuant to a research or consulting agreement.

No commercial transaction will involve the receipt of all these types of revenues.

This list is not exhaustive. There may be other types of commercialisation revenue which are not included in this list. The determination of whether a particular item is commercialisation revenue will be made by the Deputy Vice Chancellor (Research and Commercialisation) upon recommendation by bluebox.

Lump Sum License Fees

In most instances, a lump sum license fee is commercialisation revenue.

However, where QUT or bluebox receives the lump sum license fee and then uses the whole of that fee to subscribe for shares in a start up company, no part of that fee that is expended upon those shares is commercialisation revenue.

This is because that fee is intentionally paid by the start up company to QUT or bluebox, with the complementary obligation to use that fee for the shares, the transaction being structured in this way to give to the start up company a taxation deduction.

What is commercialisation revenue instead is the dividends from those shares, and the proceeds of sale of those shares.

Shares received by QUT or bluebox issued for intellectual property

The cash benefits received by QUT or bluebox from shares issued to it in return for intellectual property, whether

• received directly for an assignment or licence or intellectual property; or
• paid for by QUT or bluebox with a lump sum licence fee

are commercialisation revenue.

These benefits include:

• dividends; and
• proceeds of sale.

Shares received for Services

Where QUT or bluebox receives shares in return for supplying services to a company, such as:

• the use of its laboratories or other premises
• the use of its facilities,

these shares are in a different category, and dividends on these shares, and the proceeds of sale of these shares, are not commercialisation revenue.

Similarly, where QUT or bluebox receives monetary consideration for these services, and applies those monies to purchase shares, these shares similarly are in a different category, and dividends on these shares, and the proceeds of sale of these shares, are not commercialisation revenue.

Reimbursement of Patent Expenses

Patent prosecution and maintenance expenses will be deducted from commercialisation revenues to arrive at the “net”.

However, QUT or bluebox would endeavour, as is usual, to seek that these expenses be reimbursed by licensees.

Where patent expenses have been deducted from commercialisation revenues, but are later reimbursed by a licensee, the amount of the expenses, to the extent of the reimbursement, are added to commercialisation revenues.

Damages

If damages are received by QUT or bluebox in relation to any infringement, they are received as compensation for commercialisation revenues that would otherwise have been expected, and so should properly be included as commercialisation revenue.

If infringement litigation is undertaken by QUT or bluebox instead of by a licensee, legal fees will be incurred, and these will be deducted from the commercialisation revenues.

Research funded by granting bodies and industry sponsors

Research funds received from any granting body, or from an industry sponsor, are not commercialisation revenue.

3. Equity in a Start Up Company

3.1 Introduction

Where QUT or bluebox negotiates a transaction where equity in a company is to be received, there are two ways that this might be dealt with:

• QUT or bluebox retains the equity; or
• QUT or bluebox makes part of the equity available to be held directly by the contributors.

3.2 QUT or bluebox retains equity

If QUT or bluebox retains the equity:

• cash dividends may be paid by the start-up company and any such dividends received by QUT or bluebox are commercialisation revenue
• when QUT or bluebox sells any shares, the cash proceeds of sale, are commercialisation revenue.

This does however mean that contributors:

• do not personally own shares;
• have no control over when shares are sold;
• do not have voting or other rights; and
• have no control over nor influence dividend declaration decisions made by the start-up company.

3.3 Contributors personally hold shares

Some contributors may prefer to personally own shares and in this way:

• have voting rights; and
• be able to personally decide when to sell shares.

Subject to the taxation considerations referred to below, it may well be appropriate for contributors to personally hold shares, after QUT or bluebox and those contributors have considered the taxation implications of doing so.

In these cases, the number of shares to be held by the contributors will be determined in accordance with the same principles as are described in this explanatory memorandum in relation to the distribution of commercialisation revenues, so that contributors receive between one third and one half of the “net” shares, not the gross shares.

In the same way that inventors receive “net” income, after deducting the expenses such as out of pocket commercialisation expenses referred to above, similarly, contributors should receive “net” shares after deducting an appropriate allowance for expenses.

The following example will illustrate the process:

• Intellectual Property is licensed to a start up company (“SU”);
• SU pays bluebox $1,000,000 for that license;
• bluebox pays $1,000,000 for 1,000,000 shares;
• Commercialisation out of pocket expenses including patenting, legal expenses etc have been $100,000;
• The “gross” number of shares is 1,000,000;
• The “net” number of shares is 1,000,000 less 100,000 = 900,000;
• The “net” number of shares that are accordingly available to be distributed to contributors is between one third and one half of 900,000.

In all cases, whether a contributor may personally hold shares in a company is a matter for the determination of the Deputy Vice Chancellor (Research and Commercialisation) upon recommendation by bluebox, having regard to the matters described below.

4. Taxation Aspects

4.1 Contributors need to obtain own advice

The comments below are general comments, and are not a substitute for professional advice which each contributor should obtain on the contributor’s own personal taxation affairs. Contributors will need to rely on their own such advice.

4.2 Commercialisation Revenue

Cash net commercialisation revenue that is distributed is taxable income to the Contributor.

Where the Contributor is a QUT staff member at the time of the distribution, QUT must deduct Pay As You Go tax from the payments to be made to Contributors. In other cases PAYG amounts may be required to be deducted if the Contributor does not provide an ABN.

4.3 Issue of shares to Contributors – personal taxation issues

The taxation implications of the issue of shares to a Contributor in a start-up company needs to be carefully considered.

On the one hand, a Contributor may be liable to taxation on the value of the shareholding that they receive. This will form part of their assessable income in the year in which the shares are issued to the Contributor, and be taxed in the same manner as if the market value of the shares were a cash payment.

The potential difficulty that this gives rise to for Contributors is that, for example, a Contributor may receive $100,000.00 worth of shares, and may have to pay tax on the value of those shares. As the shares are not marketable at this stage, none of the shares can be sold to obtain the funds to pay this tax, and the Contributor will have to rely on the Contributor’s own funds to pay this tax.

4.4 Issue of shares to Contributors – Fringe Benefits Tax issues to employer

A separate consideration is that QUT has to consider the fringe benefits tax implications of the issue of shares in a start-up company.

Fringe benefits tax is payable by QUT upon the value of any benefit given by QUT to an employee or an associate of an employee, where the benefit is given in respect of the employment of the employee.

QUT may have an exposure to FBT even if it invests in start-up companies formed by employees, if that investment is seen to be a benefit given in respect of the employment of employees.

Any fringe benefits tax liability which QUT may have, on the facts of each particular proposal whereby an employee who is a Contributor will have shares, will have to be individually considered by QUT. QUT will not consent to any proposal which exposes it to a fringe benefits tax liability.

QUT will reassess its tax liability exposure if any from time to time, and may be receptive to its staff members personally holding shares in a start-up company, if either the law changes or it can otherwise be satisfied it has no FBT exposure.

5. What Pecentage is to be Paid to Contributors

QUT will distribute Net Commercialisation Revenue in accordance with QUT’s Intellectual Property Policy.

6. Determining Who is a Contributor

A portion of Net Commercialisation Revenue is paid to Contributors. “Contributor” means the creators, and any other staff or student who has substantially contributed to QUT intellectual property, as determined by the Deputy Vice-Chancellor (Research and Commercialisation).

In the case of Intellectual Property that is patentable, a creator is a person who according to patent law has made an inventive contribution to the invention that is the subject of a patent.

In the case of Intellectual Property that is copyright, the creators will be the authors.

In the case of intellectual property that is a design, the creators will be the designers.

In the case of confidential information, the creators will be those persons who were responsible for the development of the confidential information.

QUT will have regard to the views of the project team as to who should be considered a creator.

QUT will decide who qualifies as the Creators. Inventorship, authorship and creative contribution are the principal criteria, not employee status. Conventions that apply in relation to authorship of a publication do not apply where inventorship, authorship, or more broadly, creative contribution is to be determined.

QUT will decide who qualifies as Contributors.  Just because an Assignment Agreement is signed by a student will not mean that student qualifies as a Contributor. There must be inventorship, authorship, or more broadly, creative contribution.

If necessary, if there is uncertainty or the sense or perception of potential mistake due to information asymmetry, whether in the case of a staff member’s or a student’s contribution, the matter may be referred to an expert for an independent expert determination to assist QUT in its decision.

7. Dividing Revenue Amongst Several Contributors

Where there is only one Contributor, the whole of the distribution available to Contributors is paid to that Contributor.

Where there is more than one Contributor, the Contributors’ share needs to be divided between all the Contributors.

In deciding how, proportionally, to divide the Contributors’ share, QUT will have regard to:

• any agreement as to that division reached by the Contributors, including after mediation; and
• generally, all other matters, including the relative inventive, authorship and creative contributions by all the members of the creative team.

It will be exceptional for QUT to decide upon a manner of dividing the Contributors’ share that is different to that manner that the Contributors have themselves agreed upon. However, QUT reserves the right to do so to ensure that from all objective criteria, the division of the Contributors’ share is made in a way that is seen to be, and is, equitable.

If necessary, if there is uncertainty or the sense or perception of potential mistake due to information asymmetry, whether in the case of a staff member’s or a student’s contribution, the matter may be referred to an expert for an independent expert determination, to assist QUT in its decision.

Any cost of expert advice, and any cost of mediation, is a commercialisation expense that is fully set off against the net commercialisation revenue distribution available to Contributors, instead of being set off against the gross revenue that is received.

Such an expense is incurred only

• if and when commercialisation revenue is received; and
• if there is a dispute, or sufficient uncertainty.

8. The Duration of Benefits

Contributors will participate in distribution of Net Commercialisation Revenue until Net Commercialisation Revenue is exhausted.

Receipt of benefits is not dependent upon employment at QUT continuing.

Intellectual Property rights exist for certain statutory periods. For example:

• in the case of patents: 20 years from the date of the patent application (although the duration of some patents can be extended)
• in the case of copyright: the period equal to the life of the author, plus 70 years.

It is customary for the duration of benefits to Contributors to be for as long as Net Commercialisation Revenue is available, and this will be the case.

When a Contributor dies, it is customary for benefits to continue to be paid to the Contributor’s estate, and this also will be the case.