Starting a Spin-out Company
1. Initial decision to proceed
Refer to the Spin-out Questionnaire and discuss with your colleagues (and Isis if you wish) whether you want to start looking at the possibility of starting a spin-out company.
2. University permission
If you wish to proceed, because you may become a shareholder, director, and/or consultant to the spin-out, you will need to consider the University’s rules about its employee’s holding external appointments and conflicts of interest. You will probably need consent from: your Head of Department, your Head of Division, and under the University’s Policy on Conflict of Interest. Isis will guide you through all this. You may also require clearance from any external funders of your research.
Your Isis Technology Transfer Manager will present the business plan and proposed structure of the spin-out, including the suggested equity split, to the Isis Spin-out Review Panel, the Managing Director of Isis and the University Finance Director (also a director of Isis), who will either seek more information or approve the proposals.
3. University and founder researchers equity
The University expects to be a significant shareholder in the spin-out company because of the resources and permissions it makes available to the spin-out. Isis will provide advice about the division of the equity spilt between the University, the researchers and the investors. The University expects that its shareholding be the same as the founder researchers. There are a number of factors to be taken into account: for example, the roles of the individual researchers, the amount of capital required, the involvement of the University in reaching the stage where a spin-out is possible, and the importance of the association with the University. If there is a disagreement between the University and the researchers on this issue, the people involved will be asked to put their points of view to the University’s Intellectual Property Advisory Group, which will consider it and attempt to resolve an agreement acceptable and fair to all parties.
The division of spin-out equity between all those involved and the management and employees is a key issue and must be addressed early in the procedure. Since it will be a multi-party negotiation it is rarely easy. Having agreed their respective shareholdings, the researchers and the University can then negotiate together with the investors as to what percentage of the company they wish to sell to the investors for their cash investment. In practice it is rarely as simple as this and an iterative, three-way negotiation usually results. Isis has assisted in several of these negotiations and, although our responsibility is primarily to our own shareholder (the University), our interest in helping to complete the deal as rapidly as possible has proved helpful to the researchers spinning out.
The University’s royalty-sharing rules do not apply to Spin-out equity. If there are multiple researchers, their individual entitlements must be covered by agreed equity shares or in some other way.
4. Technology licence
If the spin-out intends to use any intellectual property owned by the University or Isis it will need appropriate licenses to the intellectual property (patents, copyright, know-how etc). The technology licence will not be free of licence fees and royalties. However, the licence terms will be sympathetic to the circumstances of the new company, due to the importance of cash to the spin-out in its early years.
5. Business plan
This describes what the business will do and how the investors will get a return. With some spin-outs the business is at too early a stage for numerical projections to be meaningful. In these cases the investment decision will be made on the basis of confidence in the researchers, proposed spin-out managers and the technology.
It is rare for the business plan which is initially prepared by the spin-out team to be identical to the final plan which is used by the company as it goes forward. Typically the plan goes through a series of iterations as new facts and ideas emerge and it is common for investors and managers to impact the thinking as the plan evolves.
Whilst it is good practice to prepare a formal plan with detailed financial projections, the initial approach to investors is often based on a short executive summary which should be one page in length. Some investors will expect to receive more detailed information in the form of a business plan presentation backed up by a more formal document.
Isis can provide templates for the business plan document and presentation. Presentation practice can be arranged through the Isis Angels Network.
6. Raising investment finance
Investors prepared to risk cash on early stage companies seek to generate profits well in excess of their initial outlay. They need high levels of return because they understand that due to the risks involved many of their investments will perform poorly.
Private investors and venture capitalists have investment preferences in terms of sector (e.g. biotechnology or nanotechnology), levels of available funds and methods of working. In particular some investors will expect to be very closely involved in decisions made by the developing company. Other discriminating factors are the capacity of some investors to invest larger amounts in subsequent investment rounds and the capacity to lead an investment round involving more than one investor.
Once an investor has indicated their interest in providing funds a process of due diligence will commence. Typically an investor will seek confirmation of all the main assumptions set out by the company in its business plan. Particular areas of interest will be patents, details of the financial plan and evidence of market interest. Responding to due diligence enquiries can be time consuming and a degree of patience will need to be exercised by all parties.
Heads of Agreement
This sets out the key provisions of all aspects of the spin-out company and provides a summary upon which lawyers can build full documentation.
This addresses the relative shareholdings between the founding researchers, the University, management, and investors, and the protections which each shareholder seeks. The University has a standard shareholders agreement which is a useful starting point in discussions.
Technology Licence Agreement
This will authorise the company to use any specified intellectual property owned by the University/Isis which the company wishes to use and which the University is able to make available to the company.
'Oxford' Trademark Licence
The University trading as Oxford University Press has trademarked the word “Oxford”. If the spin-out company wants to use the word “Oxford” in its name, it will need permission from the University which has a standard licence agreement. Isis can helping asking the University for the necessary licence.
The company will want to secure access to the services of the founding researchers. The arrangements between those individuals employed by the University and the company need to be approved by the University, via Research Services.
Managing Director's Service Contract
This contract will be supplied by the company’s lawyers and, whilst it does not need University approval, it is advisable to ensure the University has no objections to it.
Memorandum & Articles of Contract
These documents are standard company documents which set out the nature of the company’s business and its operations. These will be supplied by the company’s lawyers.
Share Option Scheme
All spin-out companies are likely to establish an incentive scheme at some stage. There may be advantages, relating to the option exercise price, in setting up a share option scheme at the spin-out stage.
8. Final approval and 'completion'
The necessary documents will be signed by the researchers, the University, Isis (if Isis technology is involved) the external investors and any other shareholders. In order to optimise the taxation position of the company and those involved current legal and tax advice is followed.