The article below appeared in the June 2011 issue of Technology Transfer Tactics. Click here to subscribe.

Many universities now have programs in place that seek to encourage entrepreneurship among students — with services ranging from targeted curricula and on-campus mentors to office space. But Clarkson University in upstate New York has embarked on something entirely new: It is offering tuition aid in exchange for equity in student start-ups. Called the “Young Entrepreneur Award” program, it welcomed its first participant this year — freshman Matthew S. Turcotte, who founded his website development firm North Shore Solutions when he was 16 years old.

“The student applies as a traditional applicant, and we determine their financial and merit-based scholarships as we would for any student,” explains Marc Compeau, director of the university’s Center for Entrepreneurship. “We end up with a number, and determine that they would have to pay ‘X’ themselves based on those criteria. Then, they apply to our program as a secondary application. We decide what the value of the company would be, and come up with a percentage of [equity] exchange to get the student down to zero dollars.”

The university attorneys first drew up the foundation of a legal agreement, he explains. “It’s very brief, and when I first read it I realized it was very favorable for the student,” says Compeau. “It gives the student lots of opportunities to get out, if in the future the company gets in trouble and they want the ability to walk away.” The equity percentage is adjusted each semester, he adds, noting that as the company progresses the university continues to buy in.

“I thought it was great idea,” says Compeau, who sees benefits for the university beyond the financial potential of equity participation. “The biggest benefit for the university is this: Imagine filling our freshman business classrooms with these students,” he offers, noting that the “Young Entrepreneur Award” is just part of the support Clarkson offers student entrepreneurs. “We work with about 15 to 20 first-year students, and their first-year experience is to build a company, applying principles of marketing, finance, and human resources as they develop,” he explains. “They put together a business plan; we have had some students get as much as $30,000 [in financing]. They created five companies this year.”

Making the deal

The journey that brought Turcotte to Clarkson began with his meeting Clarkson President Tony Collins. “I did a press release about my company shortly after we launched, and did a news interview with a local news station that the president happened to see,” Turcotte says. “I was going to be doing a campus tour a couple of weeks after it aired, so when I went up to visit Clarkson they set up an arrangement whereby we would meet.”

President Collins called Compeau and told him he was hosting Turcotte. “He said, ‘I want you to come and convince him to come here — whatever it takes,’” Compeau recalls. “I met with him, enjoyed our conversation, and told the president we needed to do some creative work. The president came up with his plan, and we told Matthew we wanted him to be our prototype. We offered, and he committed.”

“The fact that the university was interested in my business and wanted to work with me was unique; from what I’d seen, it hadn’t been done before,” says Turcotte. “The university has a vested interest in the business and really wants it to succeed, because if my business does well the university gets a small portion.” The school’s creative offer of a tuition-equity swap was a deciding factor for Turcotte. He notes that “a lot of universities provide office space, alumni support, and mentoring, which I get as well — but in addition I receive the tuition aid.”

“Lots of schools do those traditional support activities like mentoring, but what made us stand out was the tuition discount exchange for equity,” adds Compeau. “What the students see us doing is going beyond the traditional support role. With us having an equity position, we have significant interest in doing whatever we can to make the business viable.”

Could it work elsewhere?

Other tech transfer executives agree the program is probably unique, but are not sure it is easily transferrable to other universities — or for all types of businesses. “Since I work in the biomedical space, we don’t have many students actually getting involved in start-ups,” notes Rick Silva, PhD, director of the TTO at the University of Colorado Denver. Another limiting factor, he adds, is that “the internal accounting within a large university like CU would be extremely difficult to pull together. There is a lot of structure and policy in the Bursar’s office here, and the tuition dollars that would be surrendered would come out of somebody’s pocket.” To pull it off, he says, such an arrangement would require “being subsidized by a joint engineering-business MBA program, where a B-school endowment ‘keeps whole’ the university stakeholders in the tuition revenues.”

“I agree,” adds Kate Tallman, director of technology transfer for the UC Boulder and Colorado Springs campuses. “The easiest path would seem to be a charitable endowment that would pay for any tuition breaks.”

“I hadn’t heard of this new program,” notes Kristin Rencher, director of technology development at Oregon Health & Science University. “I’m not familiar with any other university doing this, but that doesn’t mean there aren’t others out there.”

However, she continues, “I don’t think this is tech transfer per se. The entrepreneur is bringing the technology into the university and, unless they have the student assign new IP developed while in college to the university, there will be no true tech transfer activity. There will be knowledge transfer — a very good thing — and many other potential benefits. It’s a ‘spin-in’ rather than a ‘spin-out.’”

So far, so good

Whatever the “spin,” both sides of the new Clarkson program say they are pleased with how the first year has gone. “It’s exceeding our expectations for sure,” says Compeau. “I thought initially it was going to be a burden, but it’s been my favorite part of the job.” As for Turcotte’s company, “it grew sales in the first quarter by 500%, and actually reduced expenses,” he notes.

“When I was 16, we did about $10,000 the first year; the second year we were close to $30,000, and now we’re on track for six figures this year,” says Turcotte.

He credits much of this growth to the assistance the university has provided. “I have my own office space where I can work, and now we will be in a new location in a business incubator,” he says. “There will be a lot of young companies together, and it will be the location for all future student businesses. Hopefully they will work together, share new ideas, and perhaps even start new companies together.”

His plans for the summer include developing a vision for future expansion. “The deal is to work with them over the summer to help grow the business while I’m out of school,” he notes. “Ultimately, we want to make this company a leader in web design in the northeast, but we’re also looking at expanding to other things, like developing online apps and software.”

For Compeau’s part, he says he has learned some valuable lessons in this first year. “The students need a lot more guidance than we expected, and that’s okay,” he says. “They come in having built a company, and are very protective of what they’ve built and very proud — but we want to teach them to stretch their goals a bit. One real challenge with Matt was to get him to think bigger; it took some time to build that confidence.”

Future tuition-for-equity agreements, he adds, may be a bit more challenging. “It was easy with Matt to determine the arrangement, but as companies get more complex we will include our CEO and perhaps lean on some university trustees with valuation experience,” he says. “Matt’s company was basic, and pretty simple, and the revenue stream at the time was not significant — although it was phenomenal for a 17-year-old kid.”

Due to privacy concerns, Campeau could not reveal the specifics of the tuition for equity arrangement with Turcotte, noting only that in any future deals “I cannot foresee a situation where we would go beyond a 20% ownership stake.”

Compeau is clearly excited about the future. “I can’t wait to see what we end up with for next year — who these people are and what great ideas they have,” he says. He’s already begun hearing from applicants, he adds, noting that part of the process will involve them submitting a YouTube video.

“It was a great opportunity for me,” says Turcotte. “I couldn’t afford otherwise to go to a university like Clarkson; them covering tuition has really been great, and I can invest some money that would have gone to tuition into the company. They helped me to grow my business, and ultimately turn my vision into reality.”

Contact Compeau at 315-212 0709 or compeaum@clarkson.edu; Rencher at 503-494-0673 or rencherk@ohsu.edu; Silva at 303-724-0222 or Rick.Silva@cu.edu; Tallman at 303-492-5732 or kate.tallman@cu.edu; and Turcotte at 315-771-7743.