A significant proportion of new companies each year are created as a result of spin-out activity whether it is from a larger company, University or other institute of advanced research and education. A “spin-out” is the term used to describe a company, which is often set up to acquire and commercialise novel technology (and often a technical team) from the “parent” institution/company, ultimately to gain a life of its own.  Noted below are a number of key points to consider should you be thinking of getting involved with a “spin-out” deal.

Setting up Newco

A new company often needs to be incorporated which will ultimately be the spin-out entity (“Newco”). Legal and tax advice should be sought at an early stage to ensure that the founding shareholdings are structured in such a way that they are as tax efficient as possible. For example E.I.S. tax relief might be possible for some founders which could result in no CGT being payable on a successful exit when the shares are disposed.The technology

The technology is often the key asset of Newco. However, in order for the technology to be considered a valuable asset, the intellectual property rights (“IPR”) in the technology needs to be secured at the earliest stage possible. Ideally, Newco would be able to purchase the IPR outright from the parent and the IPR would be unconditionally assigned to Newco in return for cash and/or equity in Newco. However, in many deals the parent company will initially only grant a licence of IPR to Newco. The licence agreement will be a critical agreement for Newco as it will set out the extent of Newco’s right to use the IPR and the amount Newco will need to pay for the rights. The agreement will be scrutinised by any investors in Newco to ensure that Newco has the means of developing and/or commercialising the technology. Any eventual acquirer of Newco may take a keen interest in this agreement, so it is important to get it right.

The licence agreement

The following issues are often the most important provisions for Newco to negotiate:

• Exclusivity - the extent of exclusivity granted to Newco will have a direct impact on the value of Newco’s business.
• Scope – Newco will want to ensure that the scope of the licence is wide enough to cover Newco’s commercialisation plans. Newco will not want the licence to be limited to a narrow “field of use” or territory.
• Payment terms – Newco may not have access to extensive funds at the outset so the extent of any up-front licence fee or permitted holiday period will need to be considered. Newco will also need to negotiate the extent of any royalty payments, when the royalties will be due and whether the parent company requires an equity stake in Newco. In some cases it may be appropriate to cap the royalties payable.

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