Equity and Revenue Share
Equity Share between Founding Researchers and The University in a new spinout company
A spinout company is a legal entity, incorporated to specifically develop the commercial potential of University Intellectual Property (IP). University IP includes knowledge and inventions generated and developed by University staff, Postgraduate research students and some Undergraduate students (Inventors) with a broad reliance on University facilities.
Inventors who take an active role in the spinout company are called Founders. Founders are expected to commit to the company’s success and are therefore assigned a personal shareholding in a spinout company.
Inventors who will not have significant and ongoing contribution to the development and management of the company will not typically subscribe for shares, but will instead be rewarded through a share of any revenue received by the University upon assignment or license of the relevant IP. In certain circumstances (e.g. where there is no licence) these inventors may be issued with non-voting shares in the new company.
Spinout founding equity is typically divided between the founding researchers, externally recruited management (if any) and the University. The exact equity split is determined by numerous factors including, but not limited to: contributions to the founding IP, historic patent costs, previous investment from the IP Development and Commercialisation Fund (IPDaC) or Catapult funds, industry expectations, the completeness or incompleteness of the management team, the overall value of the founding IP and future expectations of share options, tax rules and any negotiated IP-royalties.
It is typical for the University, Founders (1-3 individuals) and incoming management to subscribe for incorporation equity and for share options to be created for future employees. Typical ranges for this equity are University: 20%-40%, Founders (collectively): 40%-70% and Management/options: 10%-20% based on the factors described above.
Additionally, the founding IP is typically licensed to the spinout company in exchange for suitable milestone and/or royalty payments. IP assignment is also permitted but typically requires evidence that the spinout has been well capitalised.
Additional cash investments from the IPDaC budget or Northern Gritstone are made on commercial terms - either as a loan, convertible loan or equity purchase.
There are a limited set of circumstances where the University would not expect to hold equity in the new business, for instance where the company is entirely unrelated to the area surrounding an individual's academic work.
Founders who hold shares in a spinout company will not automatically be eligible for additional or further remuneration under the revenue-sharing scheme for IP which is assigned (rather than licensed) into that spinout. Revenue share of assignment income with Founders is at the discretion of the Head of Impact and IP.
Founders may receive income from engagement in consultancy work via the normal University mechanisms.
Revenue Share between Inventing Researchers and The University from licence income
Income generated from licensing IP rights is shared between the inventors, central university and relevant faculty. The University recoups any costs of commercialisation of the IP, such as patent costs, IPDaC funding and legal costs before the revenue share is applied.
The UEB has approved the following split of net income:
|Balance remaining (over £100k)||30%||10%||60%|
Inventors may elect to receive their share of licensing income in their salary or they may re-invest the income in their research activities.
If the inventor share is taken as salary, then it will be reduced by the University's employers National Insurance (13.8% in August 2018) and by payroll deductions such as Employees NI (12% or 2% depending on earnings) and income tax (20%, 50% or 45% depending on earnings). Payments to overseas ex-employees still incur income tax and social security (NI) deductions.
Receiving the revenue share as research funding doesn’t not incur these deductions.
The same revenue share policy is applied for new licences negotiated with existing spinouts in which the academic already holds shares.
Who to contact
If you have any queries about the above then please contact your Faculty Commercialisation Manager.