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Startup Guide
OTD works closely with Harvard faculty, graduate students, and postdoctoral fellows
to explore the potential of forming startup companies around new inventions and
platform technologies arising from their research. Creating a startup company, also
known as a NewCo, is a viable and often attractive alternative to working with an
established company. A NewCo can expedite the development and commercialization
of nascent technologies that satisfy unmet market needs and benefit the public good.
OTD has the entrepreneurial expertise to guide Harvard investigators through the
challenging process of organizing and starting a new company. Our team members have
extensive experience catalyzing and forming early-stage startup ventures, having
founded and secured funding for such companies, and have participated in successful
company exits.
I hope that you will make OTD your partner in pursuing your entrepreneurial vision: we
are eager to be your sounding board, to address your questions, and to guide you
through the process of launching a new company. Please take the next step and stop by
OTD anytime to discuss your startup ideas. We encourage you to explore the potential
of entrepreneurship and become part of Harvards expanding startup ecosystem.
Isaac T. Kohlberg
Senior Associate Provost
Chief Technology Development Officer
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Why Start a Company?
When launching a new company, there are a Licensing: Likelihood of interest from
number of factors to take into consideration. existing companies in licensing the
The reality is that only some inventions may technology.
be suitable for the creation of a startup
Funding: Availability of capital to build
company. Innovations may progress more
and grow the business, together with
quickly in a focused startup than in an
the interest, capabilities, and track record
academic lab or a large company. Along with
of likely investors.
the invention team, OTD helps in analyzing
several factors to determine whether a Commitment: Level of commitment and
startup is the most appropriate path to involvement of the inventors.
commercialization: Support: Presence of a true business
Demand: Potential of the core technology champion for both the technology and
to provide a solid platform for multiple the new venture.
markets or product opportunities. Management: Experience, passion, and
Competition: Identification of other drive of the startups executive team.
companies that offer similar solutions.
OUR MISSION
OTDs mission is to make the fruits of Harvard research more accessible outside the
University, including underserved communities, and to ensure that society benefits from
Harvard innovations by fostering their swift, professional, and effective development
and commercialization.
To this end, OTD seeks to foster a spirit of innovation and entrepreneurship among the
faculty, harness the power of Harvards substantive intellectual property, and advance the
development of new discoveries made by the faculty for the good of society. Aspects of
our mission relevant to starting new companies include:
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OTDs knowledge of what it takes to start a company is
based on firsthand experience and was vital to our ability
to get our NewCo off the ground. They were with us every
step of the way, offering valuable guidance and feedback.
G k H an S . H ota m isligil
J.S. Simmons Professor of Genetics and Metabolism
Chair, Department of Genetics and Complex Diseases
Harvard School of Public Health
3
OTD was masterful in the initiation phase of the
licensing process. Even more important, as our
research progressed, they developed packages for
a follow-on license that enabled the company to
secure a major strategic corporate partnership.
G r ego ry L . V e r dine
Erving Professor of Chemistry
Department of Stem Cell and Regenerative Biology
Harvard Faculty of Arts and Sciences
4
Key Considerations
Below are items to consider when deciding whether or not to start a NewCo:
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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 file a patent application on the invention before it comes public.
A major asset of a startup company is its intellectual property. After public
disclosure, obtaining a patent, particularly outside the United States , may no
longer be possible.
6 PURSUE FUNDING
Commercializing technology typically requires external capital. Introduce the
company to venture capitalists, angel investors, and, perhaps, friends and family.
OTD assists in making connections with entrepreneurs, angel investors, and
venture capitalists.
6
Funding Sources
When starting a company, generating funding Friends and Family: It may be possible to
to support the business is perhaps the single secure a small amount of funding from
most important task at hand. Before embark- friends and family to launch the business
ing, it is necessary to determine how much while additional funding is sought.
funding is required and from where it will
Small Business Innovation Research
come. Here are some factors to consider in
(SBIR): Apply for research grants. The U.S.
determining how much funding is necessary:
government provides innovation research
Time to market (that is, how long before grants to small companies, which can be
initial sales) great sources of initial capital. SBIR grants
Employee salaries and benefits can only be provided to a company, not
Space directly to an academic lab. For more
Equipment information, visit www.sbir.gov.
Travel
Angel Investors: Individuals or groups that
Legal fees
invest their own money in early-stage
Funding for the company may come from companies. New England has a number of
one or more sources, including sales, grants, angel investor groups, including Launchpad,
and investors. For example: CommonAngels, Hub Angels, and Boston
Organic Growth: Grow the business slowly Harbor Angels. For a listing of angel groups in
based on sales, without the need to raise the region as well as other useful information,
external funds. Organic growth can be visit www.angelcapitalassociation.org/
a reasonable strategy for certain NewCo directory.
ventures. Typically, however, university Venture Capitalists: Venture capital firms
innovations are at such an early stage manage and invest the funds of other
of development that additional funds investors. OTD is familiar with venture
are necessary to move them from the lab capitalists in New England and beyond, and
to market. can help to establish connections within
these firms. More information can be found
at www.newenglandvc.org.
In 2005, Dr. Andrew Myers and colleagues in Harvards Department of Chemistry and
Chemical Biology published results of their research on new classes of antibiotics aimed
at drug-resistant infections. OTD worked closely with Dr. Myers to actively evaluate and
pursue multiple commercialization alternatives. Extensive market, IP, and competitive
analyses were completed, leading OTD to initiate early development plans for a NewCo,
including the commercialization strategy and the assembly of an initial investor syndicate.
The efforts of OTD led to the launch of Tetraphase Pharmaceuticals in 2006 with $25 million
Series A financing to capitalize on this groundbreaking technology from Dr. Myers.
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Presenting to Investors
Presenting the idea along with the supporting What is the state of the intellectual
research to investors is an important step in property? Is the technology well
the startup process, and one that requires protected? Will IP be needed from
thorough preparation. When scheduling a other sources?
meeting with an investor, be very clear about Who is the competition? Investors expect
its purpose. An informational or exploratory that there is competition in every market
meeting may be acceptable, but be sure that area; claims of no competition are
the investor understands that this is the generally met with disbelief. What is the
intent of the meeting. If the purpose of the competitive advantage? Why would
meeting is to request funding, and the customers prefer the product or solution
presentation team is not properly prepared, being offered over another?
then subsequent meetings (and funding) are
Who is on the executive team, and what
unlikely. Include the following information
are their roles? Why should someone
in the company pitch:
invest in this team?
What problem does the technology
How does the business model relate
address?
to the sales strategy and pricing?
How does the technology provide
What are the expense and revenue
a solution?
projections for a five-year period?
What market is being pursued?
What are the key company milestones?
What is the addressable market? Do not
inflate data; if the idea is for a particular How much money is being requested?
market segment, provide data for that How long will it last? How will the funds
segment only. be spent?
- Market size The presentation should be interesting and
- Target customer engaging. Tell a story and use examples.
- Market segment If potential customers or partners have
provided feedback, include examples.
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OTD negotiated a fair and reasonable licensing
agreement with the NewCo that formed out of my
lab. They were extremely helpful to us both in the
initial stages of forming a company and beyond.
A nd r ew G . My e r s
Amory Houghton Professor of Chemistry and Chemical Biology
Department of Chemistry and Chemical Biology
Harvard Faculty of Arts and Sciences
9
Financing Terminology
Equity: The ownership interest of the company that is held by various parties.
Initially, the founders typically own 100 percent of the company. A license
agreement with Harvard and equity financing (in which someone provides
funding in exchange for a percentage of the company) often occur early
in the formation of a NewCo. At that time, the owners of the equity are the
founders, the investors, and Harvard. The investor group will typically want
40 to 60 percent of the company, though the percentages can vary based
on a number of factors, and may be less for individual investors.
Option pool: A percentage of stock options set aside for special purposes.
Sometimes, investors require that about 20 percent of the companys options
be reserved to attract key employees.
Convertible debt: Funding that can be converted into shares at a later funding
round. Sometimes convertible debt is a good funding alternative. However, the
company immediately has debt on the balance sheet, and a valuation still must
be set in case additional funding rounds are not needed.
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Preferred shares compared to common shares: Investors typically take
preferred shares, and the founders and employees hold common shares.
Preferred shareholders may have additional rights. For example, preferred
shareholders have the right to get a multiple of their investments back
(often one times the amount, but it can be higher) before any distribution
to other shareholders. This can be illustrated with a simple example in which
the preferred shareholders (investors) invested $5 million, they hold 50 percent
of the equity, have a 1X preference, and the startup is sold for $25 million.
In this case, the investors will first get $5 million, and then the remaining
$20 million is split according to the equity percentage of the shareholders:
$10 million to the investors, and $10 million to the common shareholders.
Only some of the provisions and terminology of a financing term sheet are
referenced here, and these are not necessarily fully defined. More in-depth
listings, definitions, descriptions, and sample term sheets can be found on the
Internet. A mentor who is a seasoned entrepreneur is also an excellent source
of guidance. When negotiating a term sheet with investors, the companys
principals should hire an attorney with relevant experience to represent them.
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OTDs understanding of and insight into the
formation of startup ventures were key to the
successful formation and launch of our company.
David A . W eit z
Mallinckrodt Professor of Physics and of Applied Physics
Harvard School of Engineering and Applied Sciences
12
Company Considerations
Legal representation: OTD is not in a include one individual from the company,
position to provide legal advice, nor does one or more investors, and independent
this document purport to lend legal advice. industry representatives.
Seeking counsel may be of great benefit in
Management team: Consider each founders
making the various decisions related to
role in the management team. Generally, a
starting a company. An attorney with
faculty member will have an advisory board
experience in business entity formation
role, and a postdoctoral or PhD student may
and equity considerations can be a reliable
be the chief technology officer or the vice
and trusted advisor.
president of research and development.
Type of company: When incorporating, Other team members may be needed with
choose among an S-Corp, C-Corp, or strong domain expertise, sales experience,
Limited Liability Company (LLC). Companies and marketing know-how. Investors are
that plan to take an equity investment usually interested in a company with a
should generally be established as a strong management team; they are unlikely
Delaware C-Corp. to fund even the best ideas if the right team
is not in place.
Board of directors and the advisory board:
Establish an advisory board early in the Space, insurance, and payroll: Make
launch process. An advisory board should be decisions about workspace, insurance, and
three to four people who can provide payroll right away so that the team can
guidance in areas with which the founders concentrate on building the product and
are not familiar; for example, raising money, the business. Consider hiring an operations
hiring, sales, product development, and person or an assistant to manage these
manufacturing. A board of directors should items, renting shared office space, and
outsourcing payroll.
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Equity Considerations
When starting a company, the co-founders may take equity in lieu of cash. This type
should agree about how to split the equity. of payment may seem useful before money
A conversation of this nature should take has been raised, but take note it can be
place early in the process, and agreement extremely difficult to establish a fair amount
should be formalized. Is the contribution of of equity in exchange for such services.
each founder equal? Is the risk the same for
How much equity should be set aside for
each founder? For example, is one founder
the advisory board and for the board of
leaving a job to work full-time and unpaid
directors? Typical amounts are one-quarter
at the company, while another is continuing
to one-half percent for advisory board
in his or her current job until the startup is
members, and one-half to one percent
able to raise money?
for directors.
It is also important to consider reverse
There are personal tax implications for
vesting, where each founders equity
founders, depending on how equity is
percentage becomes available over time.
granted. It is vital that you get legal advice
If all the founders get all of their equity on
on these tax implications before incorporat-
day one, and six months later one founder
ing the company and issuing shares. Choose
leaves while other founders continue to work
legal counsel that has experience working
for several more years, the equity will not be
with startup companies.
fairly distributed. Reverse vesting allows an
individual to receive stock immediately, Harvard expects equity and other consider-
which may be beneficial for tax reasons, but ation, including royalties, in exchange for a
still maintains vesting requirements, such as license to the IP. This equity is a minority
length of employment, to be met. position and can include anti-dilution
provisions. Harvard does not invest money
Consider if equity can and should be used to
directly in startup companies.
pay for outside services. Legal counsel,
marketing, and accounting professionals
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Some Resources for Entrepreneurs
OTD: The Office of Technology Development MIT Enterprise Forum: A forum that offers
is responsible for Harvard-owned intellectual numerous events for entrepreneurs around
property and takes an active role in working New England (no affiliation with MIT is
with faculty, graduate students, and postdoc- required).
toral entrepreneurs within the Harvard
Cambridge Innovation Center: One of
community.
several places that provide shared office
TECH: The Technology and Entrepreneurship space for early-stage companies.
Center at Harvard works with undergradu-
TechStars: A mentorship-driven seed-stage
ate students to support and encourage their
investment program that runs in Boston and
entrepreneurial ideas, and runs an annual
other cities.
business plan competition.
Dogpatch Labs: Created by Polaris Venture
HBS Entrepreneurship Center: The Arthur
Partners to connect entrepreneurs and help
Rock Center for Entrepreneurship at Harvard
founders conceive and launch startups.
Business School is a resource for HBS
students interested in company formation. Betaspring: A mentorship-driven startup
accelerator program for technology and
Harvard Innovation Lab: Launched in 2011,
design entrepreneurs based in Providence, RI.
the Innovation Lab is a resource for student
entrepreneurs throughout the Harvard
Blogs
community.
Numerous blogs exist that are great sources
Harvard Startups: A Yahoo! group that
of information for the aspiring entrepreneur.
provides resources for entrepreneurs and
Browse the selection below for an introduc-
business individuals to post questions,
tion to the ever-growing blogging world.
information, jobs, and more. Mainly targeted
at Harvard alumni. www.robgo.org
www.platformsandnetworks.blogspot.com
Commercializing Science and High www.founderresearch.blogspot.com
Technology: An HBS class that is open
www.bostonvcblog.typepad.com
to students throughout the University,
www.avc.com
one of several such entrepreneurial classes
at Harvard. Student teams work on www.feld.com/wp
commercialization strategies for Harvard www.steveblank.com
research lab technologies.
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Key Factors for Success
This guide provides an overview of the startup process and the relevant aspects of starting
a business. Of course, there are many additional sources of information. However, OTD is a
good place to start our team can provide sound advice and guidance.
Be sure 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 someones attention and motivate
him or her to ask for more information.
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.
In Cambridge In Longwood
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These logos represent a few of the many Harvard startups that OTD has helped launch.
QSTREAM
Harvard University Office of Technology Development
www.otd.harvard.edu
In Cambridge In Longwood