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Summary: Under current law, institutions of higher education can operate Centers for Technology Development and Transfer. These Centers provide the following: "An institution of higher education, subject to approval by its governing board, is authorized to establish centers to manage, transfer, market, or otherwise commercialize technology owned by it or in which it owns an interest" (Texas Education Code Section 153.003(a)). In other words, through researching, professors and students create intellectual property (IP) that start-up entities use to begin privately owned companies.
In exchange for the IP, institutions receive stock or equity in the start-up. Start-up companies are highly risky to investors and do not initially set a high value on the business due to its riskiness. As a result, start-up companies issue convertible promissory notes to the early investors. These notes allow the investing entity to convert the notes into equity if the company does well or allows the investors to be first in line to get paid back if the start-up does not succeed. Under current law, institutions of higher education are the only entity not permitted to receive convertible promissory notes.
As a result, HB 2051 allows institutions of higher education to function like other early investors by permitting the institutions to accept convertible promissory notes in lieu of their early stage investment. The convertible promissory note will allow the institution to convert the note into equity if the start-up does well and allows the institution to be first in line to get money back if the start-up performs poorly.
Analysis: HB 2051 protects the institution's IP investment, and ultimately the taxpayers, by allowing the institution to be first in line to receive repayment if the start-up does not function well. If the start-up does function well, the institution will continue to receive the return on investment. As a result, this legislation encourages institutions to continue providing their ideas to entrepreneurs in the free-market where they have the best possibility of thriving efficiently and creating jobs. We support passage of HB 2051.