Spin-outs

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This page provides general information on Spin-outs. For intellectual property considerations see Spin-outs — Intellectual Property.

Unlike a start-up, a spin-out is a venture which is given support by another entity (often by a university as part of a technology transfer program) in return for a considerable share in the company. This means that are a safer option for entrepreneurs starting their first venture by commercialising their research; however, that the supporting entity ends up owning a large stake of the company can cause problems further down the line as the company expands.

Contents 1 Definition 2 Creating a Spin-out 3 Equity Distribution and Share Dilution 4 References 5 Further Reading

Definition

Strictly speaking, a spin-out is a “divesture of assets (which might include products, research programmes and/or personnel) into a newly created corporate entity that is open to separate external financing”^[1]. Spin-outs from large companies allow them to diversity and make their research commercially viable whilst retaining the focus on their core business, something common in industries such as pharmaceuticals and biotechnology; university-based spin-outs on the other hand offer allow inexperienced entrepreneurs the opportunity to develop their business and entrepreneurial skills in a relatively controlled environment whilst providing a safety net to support them.

Universities are one of the most common sources for the creation of spin-outs and many run commercialisation or knowledge transfer programmes which offer considerable support to young and emerging entrepreneurs. It's worth noting that many successful companies have started out their lives as university spin-outs: Stanford University, for example, is perhaps one of the most prolific creators of spin-outs and has been involved in founding major companies such as Hewlett-Packard, Sun Microsystems, Cisco Systems, and Silicon Graphics^[2]. Closer to home however, there are a number of interesting spin-out ventures emanating from the Scottish Informatics and Computer Science Alliance (SICSA):

• The Virtual Landscape Centre (Stirling University) which uses Geographic Information Systems (GIS), 3D visualisation and virtual reality (VR) technology to present research on environmental history in a way that the public will find accessible and exciting.
• Calico Jack (The University of Dundee) which provides software for communication management.
• XanIC (The University of Glasgow) is commercialising a new semiconductor process technology that enables the design and manufacture of a range of high performance components that will enable new applications in the areas of imaging, sensing, communications, security and safety systems
• CardioDigital (Napier University) which provides unique signal analysis solutions for the medical device industry.

Creating a Spin-out

A spinout exists as a legal entity in its own right and is normally set up as a limited company whose shareholders will, at least in the first instance, include the founders (i.e. The researchers) and the university. As such, the company will require (in addition to the other members of its staff)^[3]:

• directors who are responsible for the strategic management of the company;
• a Chairman who heads the board of directors;
• a managing Director in charge of running the company on a day to day level; and
• a Company Secretary (often the company’s lawyers or accountants) who will be responsible for maintaining the records of the company.

As part of the spinout process, two important documents must be negotiated^[4]:

1. The Technology Transfer Agreement: which governs the usage of the Intellectual Property (IP) to be commercialised. This can be done in one of two ways:
   • the IP can be assigned to the spin-out company in its entirety; or
   • a licence can be provided which enables the company to make use of the IP. In this case, licences can be exclusive or non-exclusive, although the former is by far preferable since it means that the IP cannot be used by another business.
2. Subscription and Shareholders Agreement and Articles of Association: this governs the ownership of the company and how it will be run. It will include details of the number of shares to be subscribed, the equity which will be provided to the university as payment for its IP, agreements regarding the additional employment or consultancy activities of the founders, the assignment of non-university owned IP, the issuing of shares, and the appointment of the company’s directors.

These important documents will form the legal basis of the newly created company.

Equity Distribution and Share Dilution

It is fairly obvious is that the university from which the company is being spun-out will expect to own a significant share in the company, what is surprising is that the size of this stake is typically around 50%. The table below shows the breakdown of ownership for spin-outs created at the University of Glasgow; here the university’s 50% share is split between the department in which the research originates (benefiting the department itself) and the university as a whole, with the remaining 50% is allocated to the company’s founders.

Typically, however, as the venture grows, it will issue new shares in order to attract additional investment. As it is rare for a shareholder to agree to purchase more shares in order to retain their percentage stake, as the number of shares issued grows the percentage of shares held by each investor will diminish. The table below shows the effects of this dilution process on the percentage of ownership of each shareholder. Here when 50 extra shares are issued to investors in stage 2, bringing the total number of shares to 150, the university and the founder's shares each now only own on third of the business. In stage three, the issuing of 20 shares to the management further dilutes the ownership of the other parties, with the university maintaining only 29.4% of the total ownership of the company.

Whilst the share agreements of spin-outs do not allow the founders total control of the business, the control ceded to the university is rewarded by the considerable support offered. Additional investment from other sources (such as venture capitalists and business angels) can help to dilute the university’s ownership, as can the purchase of sales by the management; it is likely however, that the university will always remain a majority shareholder in the company, something which can on occasions cause problems.

References

1. ↑ Ledbetter, A. & Zipkin, I. (2002), 'Achieving venture returns through corporate spinouts', Journal of Commercial Biotechnology 8:4(339–347).
2. ↑ Ku, K. (2002), 'Stanford and Spin-outs', http://otl.stanford.edu/about/documents/KKStanfordandspin-outs.doc
3. ↑ ^{3.0 3.1} Introduction to ISIS, University of Oxford, (2007), http://www.isis-innovation.com/researchers/spinout.pdf.
4. ↑ ’’University Spin-Outs - Commercialising the Intellectual Property Rights in University Research Programmes’’, Legality.biz (07/10/2008), http://www.legality.biz/blog_files/ed4bc755101de7884e57a5d231a01b26-13.html
5. ↑ Intellectual Property and Commercialisation Policy, The University of Glasgow (24/07/2007), http://www.gla.ac.uk/research/aimsassessmentandpolicies/ourpolicies/.

Further Reading

• Richards, G. (2009)
  Spin-outs: Creating Businesses from University Intellectual Property
  Petersfield: Harriman House Publishing (Amazon.co.uk)

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