Research and development

Research and Development

Limited Partnership

Money given to a firm for developing a technology that involves a tax shelter

Sponsoring company developing the technology with funds being provided by the limited partnership of individual investors

Good when the project involves a high degree of risks and significant expense

Risks and ensuing Rewards are shared

Research and Development Limited Partnership

R&D LIMITED PARTNERSHIPMAJOR ELEMENTS

Contract Sponsoring CompanyLimited Partnership

R&D LIMITED PARTNERSHIPCONTRACT

Specifies the agreement between the sponsoring company and limited partnership whereby the sponsoring company agrees to use the funds provided to conduct the proposed research and development that hopefully will result in a marketable technology for the partnership.

Key features: Liability for any loss incurred is borne by the

limited partner Tax advantages to both the limited partnership and

the sponsoring company

A party in a partnership agreement that usually supplies money and has a few responsibilities.

Limited partners have limited liability but not a total taxable entity. Any tax benefits of the losses in the early stages of R&D limited partnership are passed directly to the limited partners offsetting other income and reducing the partner’s total taxable incomes.

when the technology is successfully developed in later years, the partners share in the profits.

R&D LIMITED PARTNERSHIPLIMITED PARTNERS

acts as the general partner developing the technology

General partner - the overall coordinating party in a partnership agreement

has the base technology which they offer in the partnership in exchange for money but needs funds to further develop and modify it for commercial success

retains the rights to use the base technology to develop other products and in the future for a license fee

R&D LIMITED PARTNERSHIPSPONSORING COMPANY

Funding Stage a contract is established between the

sponsoring company and limited partners, money is invested for the proposed R&D effort terms and conditions of the ownership scope of the research are documented

Development Stage sponsoring company performs the actual

research, using the funds from the limited partners

R&D Limited PartnershipProcedure

Exit Stage commences when the technology is subsequently

successfully developed the sponsoring company and the limited partners

commercially reap the benefits of the effort3 Basic Types of arrangements:

Equity Partnership- sponsoring company and limited partners form a new, jointly owned corporation, limited partners’ interest can be transferred to equity in the new corporation on a tax-free basis

Royalty Partnerships- royalty based on the sale of the products developed from the technology is paid by the sponsoring company to the R&D limited partnership

Joint Venture- manufacture and market the products developed from the technology

R&D Limited Partnership

Benefits and Costs Provides the funds needed with a

minimum amount of equity dilution while reducing the risks involved

Restrictions placed on the technology can be substantial

Exit from the partnership may be too complex and involve too much fiduciary responsibility

Examples

Syntex Corp. raised 23.5 million in an R&D limited partnership to develop five medical diagnostic productsGenentech successfully develop human growth hormone and gamma interferon products from its 55 million R&D limited partnership that it raised 32 million through a second partnership six months later to develop a tissue-type plasminogen activator Trilogy Limited raised 55 million to develop a high-performance computer

Government Grants

Grants from the U.S government to small technology-based businesses

offers a uniform method by which each participating agency solicits, evaluates and selects the research proposal for funding

Federal agencies involved in the program develop topics and publishes solicitation describing the R&D topic it will fund

Small businesses submits proposals directly to each agency using required format which is standardized

Agencies evaluates the proposal on a competitive basis and makes reward through a contract, grant or cooperative agreement

Small Business Innovation Research(SBIR) grants program

Department of Defense (DOD) National Aeronautics and space Administration (NASA) Department of Energy (DOE) Department of Health and Human Services (DHS) National Science Foundation (NSF) U.S Department of Agriculture (USDA) Department of Transportation (DOT) Nuclear Regulatory Commission (NCR) Environmental Protection Agency (EPA) Department of Education (DOED) Department of Commerce (DOC)

Federal Agencies participating in Small Business Innovation Research program

Phase I Awards are up to 100,000 for six months of feasibility-related

experimental or theoretical research Objective: To determine the technical feasibility of the research

effort and assess the quality of the company’s performance through a relatively small monetary commitment

Phase II principal R&D effort for those project showing the most promise at

the end of phase I awards are up to 750000 for 2 years of further research and

development Money is to used to develop prototype products or services

Phase III does not involve any direct funding from the SBIR program funds from private sector or regular government procurement

contracts are needed to commercialize the developed technologies in Phase III

SBIR Grant Three Phases

Government Agencies participating publish solicitations which contains documentation on the agency's R&D objectives, proposal format, due dates, deadlines, and selection describing the areas of research they will fund

Submission of the proposal by a company or individual

Awards are granted to those projects that have best potential for commercialization

Patent rights, research data, technical data and software generated in the research are owned by the company or individual, not by the government

SBIR grants program Procedure

Five Agencies participate in STTR DOD, DOE, DHHS, NASA and NSF

SBIR vs. STTR program1. In SBIR program the principal investigator must have primary

employment with the small business receiving the award while for the duration of the project there is no employment stipulation in the STTR program

2. STTR requires research partners at universities or other nonprofit institutions with at least 40% of the research conducted by the small business and at least 30% conducted by partnering nonprofit institution while SBIR program has a maximum of 33% and 50% in consulting costs.

Small Business Technology Transfer Program (STTR)

Other grants are available to the entrepreneur at the federal, state and local levels

Many different forms, vary on the objectives of the level of the government involved and geographical area

incentive programs for developing technology and technology companies located in the particular state or providing jobs in labor surplus areas

Other Government Grants