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Spinning Out

What is a spin-out company?

A spin-out company can be defined as a new, small, company formed to exploit IP developed during the course of an individual's employment in a larger organisation (e.g. a university).

  • A successful spin-out requires:
  • Time
  • Skills and Resources
  • Mundane Work
  • A Measure of Luck.

The Cascade Fund Guidelines to Researchers - Starting a Spin-Out Company

The University of Reading will seek to spin-out its technology into a new company if it is seen to be the most appropriate route to commercialisation after careful consideration by all relevant parties. For example if the technology has a broad application, requires further development, can leverage funding and if the individuals involved are fully committed to the process.

There are many different types of companies including consultancy and fees for service, high-technology, organic growth and lifestyle businesses. If the proposed activity involves the use of specialist skills and equipment from a research group on campus it may be more suitable for development as an on-campus business service than a spin out company.

If you are interested in forming a company to exploit some aspect of your work, please talk to a member of the Intellectual Property Management Team in the first instance.

Please also see the Code of Practice on Intellectual Property (PDF-186KB) and the internal document Guide to the Commercial Exploitation of Intellectual Property (PDF-100KB)

Starting the spin-out process ?

Approvals procedure

A decision to form a spin-out company requires the approval of the inventor(s), their Head of School, TTAG, and Strategy and Finance Commitee (if the University is taking shares in the new company). IP, owned by the University and required by the spin-out, will normally be licensed to the new company in the first instance. The Intellectual Property Management will work with the inventors to take them through all the appropriate steps.

Directors

Depending on the circumstances the University may require the right to nominate either a director or observer to the Board of the company. To be a director of a company, a member of University staff will require the approval of the Vice Chancellor. It is important to note that company directors have very specific legally binding obligations and responsibilities in the management of their companies. They must also act in a way most likely to promote the success of the business and benefit its shareholders.

Shareholders

The shareholders of the company will normally include the inventor(s)/founders, the University and any investors. The allocation of shares to the parties involved will be decided on a case by case basis. As the company grows through the introduction of further investment, the percentage of the company owned by both the inventor(s) and the University will decrease (this is known as dilution).

When the University realises value from its shareholding, the inventor's School will receive a share of the proceeds as defined by the Code of Practice on Intellectual Property (PDF-186KB)

The business plan for a spin-out

There is no one correct way to write a business plan, although there are conventions and standard sections. The Intellectual Property Management is available to help inventors with the business planning process and there are many web-sites that offer advice on business plan writing.  A business plan is not a fixed document. It will require revision and updating at regular intervals as the company develops. By the time a company is ready to receive a substantial investment it will need to contain financial statements and projections of future cash flow that can only be completed by a professional accountant.

In general, a business plan will be brief (less than 20 pages, excluding appendices) and will contain the following sections:

Executive summary – this has to be short and accurate. It is said that many potential investors do not read beyond this point so it is essential that the summary covers the key points of the plan and draws the reader's attention

Management Team – the management team is key to the success of a business. This section needs to identify key players (C.V.'s can be included as an appendix). Commercial experience, research excellence, grant income, team size and international collaborations should all be emphasised.

Scientific background – this should be very brief and should be suitable for the layperson. The use of jargon should be avoided.

The opportunity – this should list the Unique Selling Points (USPs) of the business proposition, that is what makes the business unique and what will make it a success. This section should also discuss how the technology will be developed to produce a product and what the company will do.

Intellectual Property – patent portfolios, other IP (copyright, designs etc). Pipelines should be discussed here (future products in development).

Market size and structure – it is necessary to consider what the market is, how much it is growing by, and what market share could realistically be obtained. If there are potential customers lined up then it is useful to have letters of intent to attach to the appendix.

It is often worth trying to raise a small amount of early funding to get a sector expert to produce a market report which can form the basis of this section (and can be attached as an appendix).

Competition analysis – who are the competitors and what are the company's potential strengths and weaknesses compared to the competition.

Technology Development – what is required to bring the first product to market and what the next product(s) will be.

Business Development – this section should consider how the company will develop throughout the next 5 – 10 years. Milestones and Gantt charts, scenario planning, SWOT and PESTLE analyses can be included here.

Financial information – this section should include the level and timescales of any investment required. Profit + Loss forecasts, cash flows and balance sheets are needed here.

Exit route – this section describes how investors and share-holders will realise profit from their investment. Normal exit routes include trade sales (purchase of the company by another company) and IPO's (flotation on the stock market).

Management team - a business survives or fails on the strength of its management team. Most investors consider the management team above all else when deciding whether or not to invest in a company. A university will rarely have the staff with the breadth of expertise required to fully staff a spin-out and so will look outside the university to complete the management team. Key roles which are often externally filled include Chair (leads the board), Chief Executive Officer (CEO; the day to day head of the company), Chief Financial Officer (CFO; responsible for the finances of the company), members of the scientific advisory board (who advise on the scientific direction of the company) and non-executive directors (who advise on all aspects of the company management via the board). In the early days, full-time senior management may not be needed.

All inventors need to consider their role in a spin-out company very carefully. In the case of members of academic staff it is necessary to consider how being part of a company will affect your academic role. Starting a new company takes a lot of time, can be very stressful and often will have an uncertain future. There are also tax and legal implications associated with a role in a spin-out company. All these issues can be discussed with the TTO and with independent financial and legal advisors.

When putting the management team together it is important not to forget the technical development team. This could include the founding scientist or former post-doctoral researchers for example. Spin-out companies do not often have the funding to pay scientific and technical staff high salaries so it is important to consider what other options could be offered to your staff – employee share schemes, bonuses, healthcare, pensions etc to incentivise staff and help with retention.

Funding and legal issues

Finding funding

There are many different sources of funding available, ranging from a few thousand pounds to a million or more. Funders include government grants through research councils and the Technology Strategy Board (TSB), friends and family, banks, Angels and Venture Capital sources. The Intellectual Property Managment can advise on funding sources.

All forms of funding, except for grants, require repayment. The amount of repayment required (debt plus interest or profit) will reflect the nature of the funding, the amount of money requested, the length of the investment and the risk that the funder is taking. Banks, Venture Capitalists and Angels may require warranties or security. In all cases, a robust business plan and a competent pitch (a short oral presentation) are required.

Legal issues

A number of legal steps and documents will be required with a new company. These include registering the company name and directors at Companies House, a shareholders agreement, articles of association, and licence agreements (for use of University intellectual property). All parties to the negotiations are strongly advised to seek independent legal advice. It is important to factor the cost of legal advice into the business plan (for example many VCs will require their legal costs to be met out of the investment made).

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