Equity stakes, revenue shares and more: how universities are deriving value from their spinouts


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 take some additional financial benefit.

One increasingly common way of achieving this is for a university licensor to take a share of the revenue that the spinout receives from sub-licensing the licensed technology, particularly in the early years after a spinout has been established. Typically, the earlier the sub-licensing deal takes place, the higher the university’s share will be of the spinout’s revenue from sub-licensing. The university’s entitlement usually decreases as time goes on and the spinout has invested more in the technology. However, spinout companies often resist having to pay a share of sub-licensing revenue to the university licensor, and this revenue share is often limited to the first few years after the spinout has been established.

Another way that a university licensor may wish to benefit from the success of a spinout, particularly if the university does not have an equity stake, is to receive a payment on exit – in other words, if the shares in the spinout company are acquired by a third party, if the spinout’s business is sold or if there is an IPO. This is not a typical way for a university to share in the success of a spinout because it will be the shareholders of the spinout company who will receive the revenue from a share sale or an IPO, and not the spinout company itself (which is the one that has agreed to make the payment to the university). However, it is something that we have seen in recent times and something to monitor.  A more familiar alternative is for a university to have an option or warrant to purchase shares in the spinout after it is established, which can be exercised at a later date including up to the point of an exit.

In the case of an exit, it is now not unusual to see the spinout having a right to call for an outright assignment of the IP that the university has licensed to it, regardless of the way in which the university benefits financially from the sale or IPO (although following the assignment, royalty and milestone payments due under the licence may still continue).

Recent years have been a great success for investments in university spinout companies, particularly in the pharma and biotech sectors (see this recent On The Pulse article: BIA announces another record year of UK biotech investment). University licensors should continue to benefit financially from the success of their spinouts, providing a valuable income stream to allow them to fund more research and education which in turn will hopefully lead to more innovation and benefits for patients and society as a whole.