Equity Stakes, Revenue Shares And More: How Universities Are Deriving Value From Their Spinouts

Publication Date11 February 2021
SubjectCorporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Shareholders
Law FirmBristows
AuthorMs Claire Smith and Louisa Jacobs

On 20th January 2021, the Royal Academy of Engineering's Enterprise Hub published an excellent analysis of the UK's academic spinout landscape (Spotlight on spinouts: UK academic spinout trends). The Academy's report reveals some very interesting data on UK academic spinouts, breaking the numbers of spinouts down by UK university, geographical area and sector, showing who is investing in spinouts and how much they are investing, and presenting information on the survival, acquisition and IPOs of these companies over time.

Equity stakes

There are many ways in which universities and other research institutions derive commercial value from spinout companies, and taking an equity stake is only one. The Academy's Report shows that out of 546 spinouts incorporated since the start of 2015, there were 256 in which the university or its technology transfer office did not hold an equity stake.

Other ways for universities to derive value

In the pharma and biotech sectors, universities typically license intellectual property into spinout companies and, in addition to or instead of taking an equity stake, universities still commonly follow the traditional model of deriving value from their spinout companies through the receipt of upfront fees in the short term, royalty payments and/or a share of revenue in the longer term and milestone payments based on markers of success in the middle term and longer term (e.g. payments based on the approval of a clinical trial application, the grant of a marketing authorisation or the hitting of specific sales targets).

If the spinout is likely to exploit the licensed technology via a sub-licensing model, potentially via multiple sub-licensees in different fields then, in addition to royalties, a university licensor is likely to want a share of other revenue that the spinout company receives from its sub-licensees, such as any upfront or milestone payments (see more on this below).

Deriving value from an early exit

When licensing IP into a new university spinout, the parties always have in mind the potential for a future acquisition (whether by way of share sale or business sale) or an IPO of the spinout, or indeed a high value sub-licensing deal. At the outset, it is often uncertain when or if these events might take place, but the parties will have in mind the possibility that they might take place in the first few years after the formation of the spinout. In these cases of early exit, the university may be particularly keen to...

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