Introduction Procedure for Setting up and Managing a Spin-out Company 1. Northumbria University s strategic plans for Business and Engagement and Research actively support and encourage the commercialisation of research and intellectual property rights. The objectives of its Business and Engagement Strategy seek to increase the University s enterprise income through the commercialisation of its intellectual assets and the growth of its collaborative activity with industry. Similarly, the goals of the University s Research Strategy look to maximise the impact of its research on society and the economy. 2. The University is positive about the setting up of spin-out companies as a means of commercialisation and encourages its staff to consider whether to engage in such activity; however, setting up a spin-out company requires significant energy and often requires considerable on-going commitment. It is essential that staff understand the demands a spin-out will make on them, and that they are clear, and able to demonstrate, the potential benefits that are anticipated from the endeavour. 3. This procedure outlines the various steps involved, and support available, when setting up and managing a spin-out company at Northumbria. The procedure involves three phases: the development phase, the approval phase and the establishment phase. Each phase contains a number of steps which need to be completed in order to fulfil the process. The process for closure and disposal of a spin-out company is also identified in this document. 4. From the outset, the procedure requires the formation of a project team to test the concept, write a business case and develop a business pitch aimed at achieving University approval. Once the company is set-up, there are a number of reporting requirements to fulfil at various intervals. In order to maintain University engagement, ensure appropriate governance is in place and support trading in the first year, the initial project team will develop into an operational team to maintain contact, provide business mentoring and monitor activity. This Procedure supports and accompanies the University s policies on Intellectual Property and External Working.
Spin-out Companies other Commercialisation Models 5. Forming a spin-out company is one of the ways in which an academic or university can arrange for the further development and commercialisation of its intellectual and technological assets. 6. The term spin-out refers to the university s intellectual property being spun out from an academic environment into the commercial arena. Typically, a spin-out company is a convenient label for a company that: is incorporated by an academic or a university acquires IP from the university with a view to developing and commercialising that IP acquires funding from outside investors, usually in return for shares in the company has several shareholders who (by the time outside investment has been obtained) may include the university, the key academic(s), possibly any senior manager(s), and the investor(s) is (at least in its early days) a small-to medium-sized enterprise whose assets, other than IP, may be limited. 7. There are a number of advantages to setting up a spin-out, which include: The university (through the academic) is closely involved in the development of the IP (technology / knowledge), which gives more value to the IP and the Company The spin-out is a conduit for an enthusiastic academic entrepreneur The spin-out can enhance the University s reputation The spin-out provides a vehicle to licence a platform technology across a number of fields The spin-out is based on IP (particularly know-how) which would be very difficult to licence and value may be lost through other commercialisation routes. 8. There are three different mechanisms from which Northumbria staff members can benefits financially through establishing a spin-out company: (a) they can receive dividend payments from their shareholding should the company declare a dividend; (b) they can receive a lump sum payment on sale of shares should the company be sold; and, (c) they can receive income from providing consultancy to the spin-out through the University. This latter mechanism occurs only where the consultancy is over and above the normal agreed workload. 9. Along with its shareholding, the University may require a directorship in the spin-out company and may exert other minority shareholding rights such as a right to have an observer attend Board Meetings, and to receive regular financial reports. 1
10. A staff member cannot simultaneously be a full time member of University staff and an employee of a spin-out company. Staff members can, however: Be a shareholder in the spin-out company Act as a Non-executive Director of the business Undertake paid consultancy for the spin-out 11. Conflicts of interest can arise with University staff also holding shares in a spin-out company. It is the responsibility of the staff member to bring any conflicts of interest to the attention of the University as they arise. The University s Disclosure and Conflicts of Interest Policy (which is currently being finalised) will provide more guidance on this issue. 12. Below are two examples of further models of developing enterprise activity and commercialising intellectual property. Careful consideration should be given about whether setting up a spin-out company is the most appropriate approach before a decision is reached: Consultancy Service, Contract and Collaborative Research Services and CPD 13. University staff can provide services to clients from within the University. Services that can be commercialised in this way include the provision of contract and collaborative research, consultancy services and Continuing Professional Development (CPD) or training. For further information about these speak to your AD for Business and Engagement or the Business Development Manager located in your faculty. Help can be provided to structure the service offering, costing and pricing activity, the negotiation and provision of contracts and invoicing. Licence Agreement 14. A licence agreement occurs where an external company is given rights to exploit Intellectual Property belonging to Northumbria University in return for a fee and/or royalty payment. Although in principal this is a simple form of exploitation, it is often necessary to go through detailed negotiations and there is usually a significant time period before income is generated. Shareholding and Financial Rewards 15. An academic who founds a spin-out company is entitled to shares in that company under the University IP Policy. 16. The Intellectual Property Policy for Northumbria University identifies that: A number of parties are likely to have legitimate expectations of obtaining shares in a new company, these could include: the academic inventors; other founders of the proposed business; the University; and external investors. The University supports the general principle that academic staff may hold equity in such companies. The apportionment of the initial shareholdings will be determined on a case-by-case basis, based on discussions and negotiations between the relevant parties. The University s shareholding 2
interest in such a company may be transferred to a subsidiary company in the future. The University will normally start from a position of 50% ownership. 17. An academic who holds shares in a spin-out company has the potential to gain financial reward from the eventual sale of their shares and/or from profit dividend declared by the company. 18. Whilst all spin-out companies have different strategic goals, they can be considered somewhere on a spectrum between revenue-maximising and valuemaximising. In other words they seek to generate the maximum income from their assets or they seek to grow the value of the company. 19. In a traditional patent-based, IP spin-out company, the commercialisation objective is often seen as bringing a new innovation to market. This may involve a number of investment rounds and eventually the sale of the entire company (referred to as shareholder exit). In this type of value-maximising company, a shareholder receives his / her reward for the effort and risk taking when the shares are eventually sold. 20. In an income-maximising company, the aim is to generate a high level of surplus or profit and distribute this to the shareholders. If a company makes sufficient profit - greater than it needs to invest in the next year to fund its operation and growth - then it can distribute the profits to the shareholders pro rata to their shareholdings. 21. In practice, there can be a combination of both these strategies and there is potential to benefit from both. However, spin-outs can also be unsuccessful, and there is potential that a dividend is never declared and the spin-out does not find a suitable investor or buyer. Opportunities for Personal Development and Training 22. Participating in spin-out activity can be both rewarding and stimulating from a personal development perspective. The increased importance of demonstrating impact means that such activity can also align with personal research development aims. The University will help and support individuals involved spin-out companies as much as possible. There are a range of general and specific training opportunities which may be relevant to individuals interested in this commercialisation route. 23. Research and Business Services (RBS) provides an annual training programme which includes a basic introduction to Intellectual Property and outlines the University s IP Policy and its approach to commercialisation opportunities through licensing and spin-out companies. Staff interested in establishing a spin-out company should attend these sessions. 24. There are a number of further training areas which may be appropriate, depending on the nature of involvement in the proposed spin-out company. These could include: 3
The role and responsibilities of a company Director Small business accounting and finance How to raise investment for a new business Specialist intellectual property knowledge such as in design or the creative industries. 25. For more information on training in relation to the commercialisation of research, or the exploitation of intellectual property rights please contact the RBS Enterprise Manager. 4
The Tri-stage Procedure for Establishing a Spin-out Company or Joint Venture at Northumbria Form a project team (EM to lead) RBS Enterprise Manager (EM) liaises with Faculty SMT Business plan and pitch to Faculty Incorporation documentation Legal Services and Governance require a copy of key documents. Development Phase Draw up a business proposition (EM to lead) Test business proposition (Marketing / Finance / Legal) (EM to coordinate) Approval Phase Faculty approval UE formal approval for a spinout UE approval Establishment Phase Establish a University operational team Annual Business Plan, Financial Forecast and quarterly account report to IPG and Faculty Management RBS Enterprise Manager to Support Copies of Annual Business Plan and Financial Forecasts to Governance Prepare business plan and pitch presentation E&F committee final approval RBS Enterprise Manager generates a consolidated report to UE IPG Review Business Plan and Presentation
Procedure for Establishing a Spin-out Company at Northumbria 26. There are three distinct sequential phases of activity involved in establishing a spin-out company at Northumbria, the development phase, the approval phase, and the establishment phase. The Development Phase 27. The first phase is the development of a viable business proposition the Business Plan. This must describe the key elements of a successful business (e.g. the product or service, its market, personnel, finance and funding) and must also explain the rationale behind developing a spin-out company as a route to commercialisation rather than any other mechanism. The following diagram outlines the elements of this phase. Form a project team (EM to lead) RBS Enterprise Manager (EM) liaises with Faculty SMT Draw up a business proposition (EM to lead) Development Phase Test business proposition (Marketing / Finance / Legal) (EM to coordinate) Prepare business plan and pitch presentation IPG Review Business Plan and Presentation
Form a Project Team 28. The project team is at the heart of the spin-out process, as it is with the development of any new business. Within the University it is essential to engage the full support of your Faculty Executive team, and that appropriate Service Departments test the proposal fully, to mitigate risk. 29. An effective project team is likely to include: a Lead Academic Entrepreneur, whose energy and enthusiasm will maintain impetus during the set-up and beyond; the Faculty Associate Dean for Business and Engagement, to bring a wider perspective to the use of a spin-out as a commercialisation vehicle; the RBS Enterprise Manager, to bring entrepreneurial knowledge, external contacts and potential investors and, if necessary, coach the Academic Entrepreneur; and the Faculty s Management Accountant, to ensure that the University s Finance Department is kept fully abreast of the project as it progresses. 30. Other roles to consider in the project team may include RBS Business Development Managers and Finance and Legal Services representation. Develop the Proposition 31. The development of the proposition and the subsequent business plan is an iterative process. The RBS Enterprise Manager will work with the Lead (and other) academic(s) to draw up a business proposition that includes: Any intellectual property or specialist capabilities upon which the proposition is based The market or business opportunities How the company will provide the product or service The resources needed to establish the company The potential return available from establishing a spin-out company A SWOT analysis and assessment of risks Timescales, including any external factors Suggested shareholding(s). Test the Business Proposition with Faculty and Service Leads 32. This step tests the proposition against core business areas legal, finance and market which will serve to strengthen the final business plan. 33. Co-ordinated by the Enterprise Manager, respective members of the project team will discuss the proposition with their Service Director or lead. Other members of the project team may join the meeting as appropriate. 34. Other meetings, for example with Estates or Campus Services may also be necessary in some cases. 1
35. Feedback generated at these meetings should be assessed and acted upon at subsequent team meetings. Issues that generate sufficient concern to halt progress must be addressed immediately. In this circumstance, if appropriate solutions cannot be found, then consideration should be given to alternative business generation models (see paragraph 12) or to abandoning the initiative. Prepare Business Plan and Pitch Presentation 36. Once outstanding issues have been addressed and solved, the proposition can be developed into both a formal business plan and a pitch presentation for the formal approval stage. Developing a Business Plan 37. All elements necessary in the development of a business plan should have been covered in the development stages. The business plan document is a summary of the information and will include market opportunity, information of the product or service, the proposed intellectual property management, and a full three year financial forecast. The proposed equity (shareholding) distribution must be included in business plan and spin-out request. The proposed equity distribution will be based on the IP Policy and various factors relating to the development of the spin-out, such as investment prior to spinning out (see also paragraph 75). 38. The RBS Enterprise Manager and the Faculty Management Accountant will help with the development of the Business plan. Developing a Pitch Presentation 39. This will be a synopsis of the proposal, highlighting the resource needs and the potential benefits that will arise. The RBS Enterprise Manager will help the Academic and Faculty team in the development of the presentation. Present to the Innovation Projects Group 40. Once completed, the Project Team will be invited to present the business plan to the Innovation Projects Group1 (IPG). The IPG will bring scrutiny to the various elements of the plan. The project team may need to review elements of the plan following feedback. 1 The Innovation Projects Group (IPG) meets bi-monthly to consider innovation activity on campus. It consists of key personnel from Faculties and Services with knowledge in the development of innovation. 2
The Approval Phase 41. Once the spin-out has been developed, it is submitted for formal approval: Business plan and pitch to Faculty Faculty approval Approval Phase UE formal approval for a spinout UE approval E&F committee final approval Present to the Faculty Executive 42. The project team will meet with the Executive Dean and Faculty Executive to present the business plan. The Executive Dean will subsequently become the UE sponsor of all papers in support of developing the spin-out company. Paper to the University Executive requesting the creation of a spin-out 43. The Enterprise Manager will draft a paper for the Executive Dean (supported by the Project Team), making a request to University Executive for a spin-out company to be formed. Paper to the Employment and Finance Committee to form a spin-out 44. Any feedback from the University Executive review of the proposition must be acted upon prior to submitting a paper and full business plan to the Employment and Finance Committee for approval to set up a spin-out company. 3
The Establishment Phase 45. The University has a vested interest in the success of the spin-out company in which it has a stake and bears a risk (mostly in opportunity loss and reputational risk). The procedure for managing spin-out businesses balances resource input (including University staff time) with the need for appropriate oversight of the spin-out portfolio. Incorporation documentation Legal Services and Governance require a copy of key documents. Establishment Phase Establish a University operational team Annual Business Plan, Financial Forecast and quarterly account report to IPG and Faculty Management RBS Enterprise Manager to Support Copies of Annual Business Plan and Financial Forecasts to Governance RBS Enterprise Manager generates a consolidated report to UE Incorporation and Documentation 46. Once the University Employment and Finance Committee has granted approval for the University s participation in the spin-out company, the plan can be implemented and the company can be incorporated. Depending on the circumstances this may be undertaken by the University s Legal Services. There will be a number of key documents which will need completing. These are likely to include: Incorporation certificate Articles of Association Shareholders Agreement IP Licence 4
Facilities or service agreement (if access to facilities or equipment is necessary). 47. A full set of these documents must be approved and retained by Legal Services 48. If the company is incorporated by Northumbria University Legal Services it is recommended that the academic entrepreneurs (and any other individuals receiving shareholding or acting as a Director or Officer with the company) receive independent legal advice. University Operational Team 49. Following the establishment of the spin-out company, the Project Team will be re-constituted as the Spin-out Operational Team. It may be appropriate for new members to join the Operational Team. The Operational Team in the University ensure that key relationship and contractual issues are maintained and that appropriate reports (see below) are delivered to the University Executive, the Faculty Executive and the Employment and Finance Committee. Reporting Requirements 50. The operational team will liaise with the spin-out company to ensure that the University receives appropriate progress reports. Annual reports 51. The spin-out company Board of Directors shall produce a Business Plan covering a minimum of the two subsequent financial years. The narrative of the plan will include the business objectives, actions to achieve those objectives and resources required to achieve the objectives. The financial information within the plan shall include (as a minimum): Report on previous year trading activity Forecasts for two years including: o A cash flow statement giving an estimate of the working capital requirements o An indication of the amount of profit considered prudent to retain, for the purpose of meeting the working capital requirements The amount out of the profits of the previous Financial Year that are available for distribution to shareholders A monthly projected profit and loss account An operating budget (including capital expenditure requirements) A balance sheet forecast. Quarterly reports 52. The spin-out company Board will provide quarterly accounts to the appropriate Associate Dean of Faculty (Business and Engagement) and RBS Enterprise Manager to include: A narrative statement on achievements of milestones and objectives in the previous quarter A financial report against the forecast in the business plan. 5
Aggregate Reports to University Committees 53. The Enterprise Manager will provide a composite quarterly report on all of the spin-out companies in which the University has a shareholding, based on the reports provided to the Associate Deans (Business & Engagement), to the University s Research and Innovation Committee, to the Business and Engagement Committee and an annual report to the University Executive. Disposal or Closing of a Spin-out Company 54. Companies have a life-span. Some achieve longevity while others are shortlived. The mergers and acquisitions industry demonstrates that companies can be bought and sold; and not all survive. Although closure of a company is sometimes seen in a negative light, the University seeks to promote the positive benefits arising from engaging in this activity whether or not financially beneficial outcomes are generated. The University will adopt a strong commercial position in negotiation; however, if neither the University nor the academic shareholders see any further value in keeping it open, then it may be appropriate to close a spin-out company down. 55. Legal and accounting advice in relation to any proposal to dispose of or close a spin-out company should be taken from Legal Services and from Finance and Planning. 56. Once the decision to close has been taken, the following steps need to be followed when a spin-out company is disposed of or closed/wound up. 6
Company Board recommend disposing of or closing the company EM prepares an options paper for IPG Disposal or closing Phase IPG recommendation to dispose of or close Paper to UE recommending disposal of or closing company UE Decision and recommendation to dispose of or close Paper to E&F noting disposal of or closing company 7
Recommendation for Disposal of or Closure of a Spin-out Company 57. The University will not normally be a majority shareholder (otherwise the company would be a subsidiary of the University), so the recommendation to dispose of or close a company will come from the company board of Directors or from a meeting of the shareholders. Options Paper for IPG 58. Once notified by the relevant University board member of the spin-out, the RBS Enterprise Manager will write an options paper for the IPG to consider the proposal to dispose of or close the spin-out company. As the spin-out company was, to some extent, initiated by the University, there may be residual IP licences issues that need to be dealt with. Presentation to IPG and discussion of Options 59. The options paper is presented to the IPG by the Enterprise Manager and the various options discussed. If the IPG agrees with the company board s proposal for disposing of, or closing, the company then a paper outlining the reasons is submitted to the University Executive. Paper to the University Executive recommending Disposal of or Closing the Spin out company 60. The paper to the University is sponsored by the Faculty Executive Dean and authored by the RBS Enterprise Manager and IPG Chair. It will include a brief background to the spin-out company and its business, the reasons that the goals were not achieved (if relevant) and the recommendation to the UE that its board representative agrees with the other directors on the company board to dispose of, or close, the Company. Paper to the Employment and Finance Committee noting the Disposal of or Closing the Spin-out company 61. The UE Sponsor authors a brief paper to the E & F Committee based on the UE paper noting the UE decision in order for E&F to be fully informed of the activities of spin-out companies. 8
Glossary of Terms Dilution 62. Dilution occurs when new shares are issues to generate new investment. Existing shareholders stakes are diluted pro rata to the new shares being issued. For example: 63. The company is formed with 100 shares issued to the academic founder and University Two founders Academic 50 shares University 50 shares 64. The company issues 50 new shares to accommodate a new investor who invests in the company. Three shareholders Academic 50 shares University 50 shares Investor 50 shares 65. The University and the Academic still have 50 shares each but their shareholdings have been diluted from 50% to 33.3% of the shares. 66. In this example it is perhaps useful to note that neither the academic nor the university receives any of the invested money. This is paid to the company for use by the company. Exit (sometimes Shareholder Exit) 67. An exit is where a shareholder can realise or release the value of its shareholding through selling their shares to another party. This can happen when the whole company is sold to a third party or when a new investor enters and wishes to amalgamate shareholding. Intellectual Assets 68. Intellectual Assets is a term used to include intellectual property and wider assets from which value can arise. There is no fixed definition of this term but it is generally held to include: 1. Registered rights patents, trade marks and registered designs. 2. Copyright an automatic right that does not need to be formally registered. 3. Products and services may contain trade secrets or know-how 4. Relationships and resources assets created as a result of partnerships and trading 5. Approvals and endorsements the reputation of the institution is also an asset 9
Intellectual Property (IP) 69. The government s Intellectual Property Office (IPO) defines IP as the results from the expression of an idea. So IP might be a brand, an invention, a design, a song or another intellectual creation. IP can be owned, bought and sold. 70. Intellectual property includes both registered and unregistered Intellectual property such as trade secrets and know-how. Intellectual property includes: Patents Design rights Trademarks Copyright Domain Names Specialist knowledge Formulae, products and business systems Royalty Payment 71. A royalty payment is a percentage of gross or net profit or a fixed amount per sale to which a creator of a work (e.g. a patent and other intellectual property) is entitled, which is determined by contract between the creator and the manufacturer, publisher, agent, and/or distributor. Spin-out Company 72. A spin-out company is a company developed based on university capabilities or know-how and in which the university has equity (shares). It may or may not be based on specific protected Intellectual Property. The University shareholding will normally be a minority share; otherwise the company would be considered a subsidiary company. 73. A spin-out company often requires financial investment for external investors. The company may be formed before investment is made or may be formed as a vehicle for investment. 10
Spin-out Company Start-up Checklist for an Academic Founder 74. This is not exhaustive, but does include many of the crucial elements that will be needed to start your spin-out company. 1) What is the status and ownership of the IP? a) Are there multiple owners of the IP? b) Do you need Background IP owned by another party to make you IP valuable? c) Have you negotiated with the University the terms on which you will be able to use the IP? (start with the Enterprise Manager in RBS) 2) Have you completed your Business Plan and Financial Forecasts? a) Do you have confidence in your financial forecasts? b) Do you need to review your business development plan? c) Have you secured all the resources you identified in your plan? d) Have you taken tax advice regarding the implications for you of alternative investment strategies? 3) External Business Help and Advice a) Have you identified external business help and advice? 4) Equity (Shareholding in your new company) a) Have you negotiated the proposed shareholding agreement with the University (read the IP Policy and discuss with the Enterprise Manager in RBS)? b) Have you discussed the shareholding arrangements with any third parties (such as investors)? 5) Investors a) Are you looking for external investment? b) Do you need assistance in identifying and talking to investors? c) Do you have investors who need to undertake a due diligence exercise? 6) Insurance a) Have you identified the insurance your company will need? Employer liability Public and product liability Professional indemnity (if consulting) Directors and Officers indemnity insurance Buildings and contents b) Do you have an insurance agent? 11
Business Plan Template 75. The following provides an outline of the elements of a Business Plan: Introduction and Background What is the impetus to start a new business? Market opportunity What is the Market opportunity? Where does an unfulfilled market opportunity lie? What is the scale of this market? Competitor Analysis Who is servicing this market already and what do they offer? Product or Service What is the product or service that the spin-out company will offer? How will the product or service offered provide an improvement to the market over what is already available? Intellectual Property Is there Intellectual Property incorporated in the product or service? What steps have been taken to protect the intellectual property? What is the relationship between the intellectual property owners and the company? Management Team Who will run the company? Describe the roles and responsibilities Development Strategy What is the plan to set up the company and generate initial revenue? What is the business model? Marketing and Sales What are the routes to market? How will the product be marketed and sold? What are the projections for sales over the next 3 years? Finance and Funding What costs will be incurred setting up and running the company? What will the forecast profit or loss be for the next 3 years? How much capital is required to set up the company? From where will the investment capital be raised? Returns and Exit How will the return be generated? What is the potential return on investment that could be generated by this business? What exit opportunities exist or are planned for? 12
Sources of External Support 76. These sources change regularly; they are current at the time of writing: Praxis Unico http://www.praxisunico.org.uk/ Auril http://www.auril.org.uk/ Business and IP Centre Newcastle http://www.bipcnewcastle.co.uk/ Gov.uk https://www.gov.uk/browse/business/limited-company HM Revenue and Customs http://www.hmrc.gov.uk/startingup/ UK Business Forum http://www.ukbusinessforums.co.uk/forums/ Innovation Commons http://www.theinnovationcommons.co.uk/ Business-Enterprise Group North East http://www.be-group.co.uk/ North East Business and Innovation Centre http://www.ne-bic.co.uk/ North East Access to Finance - Experience Bank http://www.nea2f.co.uk/tag/experience-bank/ IP Group http://www.ipgroupplc.com/ North Start Ventures http://www.northstarventures.co.uk/ Version 1.0 Author Name [s] and Role Title Approval Date 28.10.13 Approved by: (Board/Committee/VCEG) Date for October 2014 Review Adam Dawkins Head of Governance Employment and Finance Committee 13