ERSM100040 - University Spin-outs

A typical spin-out situation

Circumstances whereby a spin-out company is set up are described in ERSM100030. Here is an example to illustrate the process.

Example 1: University of Utopia

Researchers at the University of Utopia, Thomas and More, have been conducting research in a specialist area. There is an IP-sharing agreement between them and the University, which ensures they receive half of all income and gains from developing their research. Such payments would be subject to deduction of tax under PAYE and NIC.

When it looks like there may be a commercial application, the University decides to set up a spin-out company to develop it further. It subscribes for 20 shares in the new company at par (£20). The University then transfers the IP as it stands into the spin-out company, with a proviso that it reverts to the University if further development is not fruitful. A further 30 shares are allocated to Thomas and More for which they pay £30 and waive their rights under the IP-sharing agreement.

At the time of acquisition the value of the shares might be greater than the par value because of the potential of the IP. On the other hand the spin-out may fail – it is dependent on whether the research ever develops sufficiently to have commercial application.

Common variants

There are various approaches to setting up the spin-out:

  1. Thomas and More could set up a shell company in preparation for the research spin- out. Utopia University would then be transferring IP into an existing company; or
  2. Utopia University could use an intermediate company to manage its technology transfers. This company would hold the IP on behalf of the University, set up all spin-out companies and be involved in obtaining initial funding, or
  3. the research could be carried out jointly with another university or a commercial business, with IP being owned by both; or
  4. there could be one agreement whereby Utopia University agrees to transfer its IP to the spin-out, Thomas and More acquire shares, and funding is introduced simultaneously.