LEEDS BECKETT UNIVERSITY Guidelines to starting a spin-out business
ENTERPRISE & INNOVATION ACADEMY GUIDELINES TO STARTING A SPIN-OUT BUSINESS These guidelines have been written for staff at Leeds Beckett University to guide you through the process of creating a spin-out. Please note: There are many areas of company formation which require up to date guidance from professional advisors, such as Legal, Taxation, accountancy and financial expertise. This guidance is available to assist you in considering the spin-out process, however Enterprise & Innovation Academy staff are not qualified to give professional advice, and you should seek your own independent advice in the creation of a new venture. This guide is offered without liability for any errors or omissions. 1. Starting a spin-out company Applications are invited for bids of up to 10,000 of HEIF funding to help develop enterprise ideas. Setting up a spin-out can be time consuming and take staff away from core teaching and research activities. Business and management skills will be required for spinning out and you will need to work with business managers and investors whose objectives may be different from your own. You will also need to then run the business once it has been spun out. Not all research is suited to becoming the platform for a new business. Enterprise & Innovation Academy staff can support you in assessing the commercial opportunities arising from your idea or research. If you intend to remain an employee of the University, you will need various consents from the University to participate in a spin-out, for example as a nonexecutive director. There are potentially onerous legal responsibilities attached to being a director of a limited company. Before deciding to spin-out you must understand these, and decide whether the benefit is worth the potential risk. Initial questions to consider: 1. What will the company do? 2. What is the market for the product? 3. Who will own and work in the company? 4. What funding will be required? 5. Where can this be sourced from? You should also consider whether you are prepared to dedicate the time and energy required to create a successful spin-out business, consider the skills you have, and what complimentary skills you will need to bring in to make the business a success, and who will be available to do the less exciting work: Insurances, finance, premises, recruitment and meetings. 2. Enterprise & Innovation Academy Support The Enterprise & Innovation Academy can support you throughout the process of creating a spin-out. We offer workshops, guidelines and mentoring for: Business Planning Business Strategy Access to Finance BUSINESS PLANNING The Enterprise & Innovation Academy can support you in preparation of the business plan (a template is available on the Enterprise & Innovation Academy website), which will provide the basis on which your investors will construct their proposals. We can also advise you on how to structure the new company. To help define exactly what the spin-out is to do and whether spin-out is the right commercialisation option for you, please discuss or complete the spinout Questionnaire (available via the Enterprise & Innovation Academy website). Enterprise & Innovation Academy staff will be happy to go through the questionnaire with you if this is useful. IDENTIFYING MANAGEMENT AND INVESTORS It is important to decide who will lead the spinout process at an early stage. This could be the academic staff member, an alternative identified manager, or the investor. The Enterprise & Innovation Academy has existing networks of lawyers, accountants and investors that we have worked with previously and who we can introduce you to.
3. Process Please refer to the spin-out questionnaire available on the Enterprise & Innovation Academy website. If you are interested in creating a spin-out this provides you with useful questions to consider. You may wish to discuss this with your Enterprise Champion, Business Development Manager, or Associate Dean for Enterprise. Alternatively please contact the Enterprise & Innovation Academy directly. 4. University Permission If you wish to proceed, you will need to consider the University s rules about its employee s holding external appointments and conflicts of interest. This is because you may become a shareholder, director, and/or consultant to the spin-out. By completing the spin-out questionnaire and submitting this to the Enterprise & Innovation Academy for consideration by the approvals panel, we will then be able to support you in obtaining appropriate permissions for this activity. Subject to initial approval of your spin-out proposal you will then be allocated Enterprise & Innovation Academy support to help you to develop a full business plan and company structure for the spinout, including the suggested equity split. Once this is in place, this will require approval by the Director of Enterprise, the Dean for Research and Enterprise, the University s Finance Director and the University s Corporate Governance team. 5. Equity share In exchange for the resources and permissions that the University provides to a spin-out company, it would expect to retain a significant shareholding. The Enterprise & Innovation Academy can advise about the division of equity between the University, academic and the investors. In division of equity a number of factors will be considered, including: role of the academic investment required level of support provided by the University prior to spin-out on-going association with the University The division of spin-out equity between all those involved is a key issue and must be addressed early in the proceedings. 6. Licences If the spin-out intends to use any intellectual property owned by the University it will need appropriate licenses to the intellectual property (patents, copyright, know-how etc). The licence will not be free of licence fees and royalties. However, the licence terms will be sympathetic to the circumstances of the new company, particularly during the early stages of the business. 7. Raising Investment Finance In order to raise investment, you will require a detailed business plan, although occasionally the initial approach to investors may be based on a short executive summary. Please use the Business plan template available on the Enterprise & Innovation Academy website. The Enterprise & Innovation Academy also provides regular presentation workshops and can advise specifically on pitching for investment. Investors often seek to generate profits well above the level of their initial investment, because of the risks associated with investing in early stage ventures. Private investors and venture capitalists often have investment preferences in terms of sector (e.g. health, technology). Some investors will also choose to be closely involved in the running of the business, which can bring valuable skills to the developing company. Typically an investor will seek confirmation of all the main assumptions set out by the company in its business plan. Particular areas of interest will be patents, details of the financial plan and evidence of market interest. Responding to due diligence enquiries can be time consuming and requires patience. 8. Documents Required Heads of agreement: Sets out the key provisions of all aspects of the spin-out company and provides a summary upon which lawyers can build full documentation. Shareholders/Investment agreement Details shareholdings between the founding academics, the University, management, and investors, and sets out protections for each party. The Enterprise & Innovation Academy can provide a standard shareholders agreement as a useful starting point. Licence agreement Authorising the company to use specified intellectual property owned by the University which the company wishes to use and which the University is able to make available to the company.
CONSULTANCY AGREEMENT The company may wish to secure access to the services of the founding researchers. The arrangements between those individuals employed by the University and the company need to be approved by the University, via the Enterprise & Innovation Academy. MANAGING DIRECTOR S SERVICE CONTRACT This contract will be supplied by the company s lawyers and, whilst it does not need University approval, it is advisable to ensure the University has no objections to it. MEMORANDUM & ARTICLES OF ASSOCIATION These documents are standard company documents which set out the nature of the company s business and its operations. These will be supplied by the company s lawyers. SHARE OPTION SCHEME All spin-out companies are likely to establish an incentive scheme at some stage. There may be advantages in setting up a share option scheme at the spinout stage. 9. Final Approval The necessary documents will be signed by the academic, the University, the external investors and any other shareholders. In order to optimise the taxation position of the company and those involved current legal and tax advice must be followed. 10. Other areas for consideration Advisors The company will need various professional advisers to assist it in its business. These will include: Lawyers Human Resource Advisers Accountants Public Relations Firms Banks The Enterprise & Innovation Academy can help you to identifying appropriate advisers. DOCUMENTATION In terms of documentation, it is important that the company has appropriate legal representation of its own when putting in place necessary agreements. As founding individuals you should seek personal legal representation in your capacity as consultants to the company and also as shareholders. If the company is not yet formed, you must consider who is will pay professional advisors prior to engaging them. INSURANCE Spin-out companies will need to obtain a number of insurance policies including: directors insurance; building and contents insurance; employer s liability insurance; public liability insurance and product liability insurance. TAX There are a number of tax schemes relevant to a spin-out company. Tax advisors will be able to guide you appropriately through these. Company Value Added Tax Corporation Tax National Insurance R&D Tax Credits Individuals Capital Gains Tax Income Tax Enterprise Investment Scheme Enterprise Management Incentives Inheritance Tax COMPANY STRUCTURE The spin-out company will be a limited liability company incorporated under English law. A limited liability company protects the owners from creditors; it will be a separate legal person that can sue and be sued in its own right. It will consist of: Shareholders These will include the academic, the University and the investors. Shareholder s liability will be limited to the amount that each shareholder has fully paid up on their shares. Board of Directors The directors of the company (of which there must be at least one) will be appointed by the shareholders. The directors are responsible for strategic management of the company and will be personally liable for their actions as directors of the company. The Directors elect one of themselves to be the Chairman.
Managing Director The managing director will be a member of, and will be appointed by, the board of directors. The managing director will generally be given power by the board to run the company on a day-to-day level. Company secretary The company secretary reports to the directors and is responsible, along with the directors, for the records of the company, including: notices and minutes of meeting, company house returns etc. The company s lawyers or accountants will quite often be the company secretary. The rules of the company will be set out in the memorandum and articles of association. These include: the number and type of shares which the company can issue; the rights of shareholders; and the powers of directors. The directors must manage the company in accordance with the articles and the law. DIRECTORS RESPONSIBILITIES The legal responsibilities placed on each director protect creditors from the owners. A limited company must have directors; directors must not continue trading when the company is insolvent; directors must keep accounts which reflect accurately; the company s financial condition; directors are like trustees of the company, and must not benefit personally at the company s expense. SHARE DILUTION 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 reducing unless a shareholder uses previously agreed preemption rights to buy more shares and thereby maintain a percentage shareholding. ACCESS TO FINANCE The spin-out company will need cash in order to operate and grow the business. Cash is available from a number of sources: Bank Loans Business Angels Seed Capital Venture Capital Institutional Capital Corporate Venturing All of these sources want something in return (e.g. interest, assets, equity) and have different skills and expertise to offer your spin-out. The best source of funding will vary and the Enterprise & Innovation Academy can advise you further. Directors are PERSONALLY LIABLE for the activities of the spin-out.