Considerations for a spin-out company
Setting up a spin-out is a demanding activity and the effort required will affect the time you spend on your academic activities. You will have to learn to work with business managers and perhaps investors, whose objectives may be different from your own, in order to develop your commercial opportunity into a spin-out company, then build that into a fully-fledged business. It is not an option for the faint hearted!
It is very important to realise that not all research will suit becoming a platform for a new business. Successful spin-out companies are based on ‘Market Pull’ rather than ‘Technological Push.’ QUBIS Ltd was established in 1984 to proactively seek, identify and evaluate the commercial potential of research and resources from Queen’s. QUBIS Ltd staff will help you to evaluate the commercial possibilities arising from your research and to determine whether a market-led spin-out business opportunity actually exists.
Many start ups fail by not validating their ideas early on with real-life customers. In order to mitigate against that, aspiring entrepreneurs need to get out of the laboratory and search for the real ‘pain points’ and unmet needs of potential customers. Only with these identified and validated, can the entrepreneur find a proper solution and establish a suitable business model.
Business and management skills will be needed for the spin-out process, as well as for running the subsequent business. It is important to identify a source of such skills early on. This may involve discussions with outside entrepreneurs who will take on a role within the new company to help it grow. QUBIS Ltd has extensive experience of the wide range of programmes and networks that can help to provide connections to potential outside entrepreneurs as well as the skills needed for the new business venture.
If you intend to remain an employee of the University, you will need agreement from your Head of School to participate in a spin-out. If you take a directorship in the new venture, you need to be aware that with that come some potentially onerous legal responsibilities. Before deciding to spin out you must understand these and decide whether the benefit is worth the potential risk.
What you need to do:
- Determine the product or service that the company is going to provide.
- Validate the market opportunity for that product or service.
- Identify the best business model to bring your product or service to market.
- Decide on the owners of the company, decide on who is going to work in the company and what role they will perform.
- Determine how much funding will be required to get your new company through to a break- even position and where you are going to obtain that funding.
How QUBIS Ltd can help
QUBIS Ltd has assisted Queen's staff and researchers in setting up over 100 spin-out companies since its formation in 1984. It's able to contribute in four main areas:
Market validation & business model development
Early market validation of a commercial idea and the identification of a suitable business model are critical to the success of any spinout. Our pre-accelerator programme is designed to assist in this early stage of venture creation. Contact the QUBIS Ltd team for further information
QUBIS Ltd can also help with the preparation of an outline business plan which will provide the basis on which your investors will construct their proposals.
Company structure
QUBIS Ltd staff have been involved in the creation of many spin-out ventures and will assist in developing the structure the new company in terms of debt/equity, shares, share options etc. This will also involve licensing of University IP or know-how to the new venture in return for equity, clarifying IP ownership in advance of any future funding round or exit process.
Management Team
Through the spin-out process and the subsequent running of the business, it is important that the team has a clear leader. This may be a researcher or one of the investors whose primary role is to drive the new venture forward.
It is very important to establish a leader at an early stage. This early leader may eventually become the CEO of the company.
Investment
Many spin-out companies will need a cash investment in order to operate and grow. Investment capital is available from a number of sources: Bank Loans, Business Angels, Seed Capital, Venture Capital Institutional Capital, Corporate Venturing. All of these sources will want something in return for their investment (e.g. interest, assets, equity) and have different skills and expertise to offer.
The most suitable source of funding will vary, depending on needs and the stage of the company’s development. QUBIS Ltd can advise you on the advantages and disadvantages of each source and are well placed to make introductions at the appropriate stage of development.
As a company grows, it is likely to issue more shares to new shareholders to attract cash investment and people. Each time this happens, existing shareholders may find their percentage shareholding reduced unless a shareholder uses previously agreed pre-emption rights to buy more shares and thereby maintain a percentage shareholding[2] .
Queen's equity allocation model
An equity allocation model is in place to help avoid protracted negotiations as to relative proportions of equity to be allocated between the University and its staff founders. The starting point of this model is to align it with the University’s existing 50/50 royalty share policy. In the same way that the IPR policy holds, this applies solely to the share between the University and its staff - and does not seek to constrain any equity negotiations with external parties.
The equity allocation does not impact on investor discussions and helps avoid skewing internal considerations as to the route to market via licence or spinout.
The model is designed to take into account the significant contribution and additional effort from founders and reward that. Indeed the core principles underlying the model are to skew benefit towards effort and to apply sufficient flexibility to ensure fairness.
The purpose of the model is to minimise lengthy negotiations and provide clear guidelines. It is not intended to significantly shift the equity proportions between the University and its founders - nor for that matter equity outcomes in relation to external investors.
Company constitution
The spin-out company will be a limited liability company incorporated under Northern Ireland law. A limited liability company protects the owners from creditors. It will be a separate legal entity that can sue and be sued in its own right. It will consist of:
Shareholders – These will include the researchers, the University and the investors. Shareholder liability will be limited to the amount each shareholder has fully paid up on their shares. The number of shareholders will increase and respective percentage holdings will change with every round of funding.
Board of directors – The directors (of which there must be at least one) will be appointed by the shareholders and are responsible for strategic management of the company. They will be personally liable for their actions as directors. They will elect one of their number as Chairman.
CEO – The CEO will be a member of, and will be appointed by, the board of directors. The CEO will generally be given power by the board to run the company on a day-to-day level.
Directors’ responsibilities
A limited company must have directors. Directors must not continue trading when the company is insolvent. They must keep accounts which reflect the company’s financial condition accurately. Directors are like trustees of the company and must not benefit personally at the company’s expense. Directors are PERSONALLY LIABLE for the activities of the spin-out company.
Advisers
The company will need various professional advisers to assist it in its business - lawyers, accountants, banks, HR advisers, business support networks etc. QUBIS Ltd can help in identifying appropriate advisers to suit the scale and nature of the business.
It is important that the company has appropriate legal representation of its own. As founding individuals you should also seek personal legal representation in your capacity as shareholders in the new venture.
Insurance
The spin-out will need to obtain a number of insurance policies including directors’ and officers’ insurance, building and contents insurance, employer’s liability insurance, public liability insurance and product liability insurance.
Tax
There is a wide range of taxes and tax schemes relevant to the various aspects of the spin-out company. These include Company, Individuals, Value Added Tax, Capital Gains Tax, Corporation Tax, Income Tax, National Insurance, Enterprise Investment Scheme, R&D Tax Credits, Enterprise Management Incentives, Inheritance Tax.
These change frequently, as do the best ways of managing the tax liabilities. Up-to-date professional advice is essential.
Access to University facilities and technical services
To support early stage spinouts, the University provides a framework in relation to the provision of University facilities and services. The rationale behind this is a) to support the development of those companies that the University has a significant investment in during their early genesis (on a market investor basis), b) to reduce transaction costs and to provide consistent and transparent treatment of such companies across the University’s estates and facilities; and c) to encourage other shareholders to likewise aid early (and mostly pre-revenue) spin-out outs.
This framework is intended to guide and assist Faculties apply general principles consistently, and to inform spin-outs of the support they may benefit from in their early stages. Ultimately the application of the details of these arrangements will be subject to the agreement of the Faculty and any legal, space or financial constraints placed upon them. The decision of the Faculty Operations Director will therefore be final on these matters.