A university spin-out is a startup that is formed to “spin-out” and commercialise intellectual property (IP) developed through academic research at a university. These startups are usually founded by the researchers responsible for the underlying work and are often supported by the university’s commercialisation structures.
Whilst a spin-out from a university is an exciting opportunity for the founders, such transactions can be complex from a legal perspective, and involve multiple legal issues for the spin-out and its founders, some of which are set out below.
Process
The legal process for spinning out IP from a university will most likely start with a term sheet. A term sheet is a non-binding document that sets out the key commercial and legal terms of the spin-out in simple language – it is a way of ensuring that there is high-level agreement between the university and the founders of the spin-out prior to the drafting of the final, legally-binding documents.
The university will most likely provide you with the first draft of the term sheet, and this is the time that you should seek legal advice. Whilst the term sheet is not legally-binding, it forms the basis for the drafting of the final, legally-binding documents, and it is often difficult to deviate from the agreed term sheet without reopening negotiations more broadly.
IP licence vs. IP assignment
It is important for founders to understand the difference between an IP licence and an IP assignment – most spin-outs include both IP licences and assignments.
Under an IP licence, the university retains ownership of the IP, but it grants the spin-out the exclusive right to use the IP on agreed terms. In the context of a spin-out, an IP licence is often granted by the university so that the spin-out can test whether there is sufficient investor and/or customer interest to commercialise the IP prior to the IP being assigned to the spin-out by the university.
An IP assignment is a transfer of the ownership of the IP from the university to the spin-out – once this occurs, the relevant IP is owned by the spin-out. Universities will usually only agree to assign IP to a spin-out once certain milestones are satisfied. These milestones are normally focused on the spin-out satisfying the university that it has the ability and resources to commercialise the IP, such as a business plan and funds (whether through a funding round, non-dilutive grants or otherwise).
Other IP considerations
Founders should ensure that the spin-out results in the company having all the legal rights it needs from the university to commercialise the IP – for example, does the spin-out need a licence to some of the university’s “background IP” (e.g. IP that was created prior to or independently of the IP being licenced or assigned to the spin-out)? The university may also impose restrictions on the spin-out’s ability to sublicense IP (e.g. no sub-licensing to third parties without the university’s consent), particularly when the IP still belongs to the university. This may slow down the spin-out’s ability to commercialise the IP, so founders may wish to negotiate exceptions to such restrictions.
Whilst the IP is being licensed by the university to the spin-out, the spin-out and the university will need to agree which party owns any improvements to the IP. If it is agreed that improvements are owned by the university, such IP should form part of the licensed and/or assigned IP.
Finally, if the IP is assigned to the spin-out, the university may require that the spin-out licenses the IP back to the university for research and education purposes. If this is the case, the key terms of this licence should be contemplated in the term sheet.
Compensation for the university
Commonly, the university will seek compensation for licensing and/or assigning the IP to the spin-out, which may include one or more of the following:
- equity: a shareholding interest in the spin-out;
- upfront payment: initial amount due to secure the licence or assignment;
- milestone payments: lump sums due upon events such as obtaining regulatory approval, first commercial sale or hitting certain sales targets;
- royalties: regular payments based on a percentage of sales or revenue;
- sublicensing fees: amounts due if the spin-out licenses IP to a third-party; and
- fee reimbursements: for example, for patent applications and registrations.
If it is agreed that the university will receive a shareholding interest in the spin-out, the term sheet should require that the university becomes a party to a shareholders agreement with the spin-out and its other shareholders (including the founders); the term sheet should also include the key commercial and legal terms for the shareholders agreement. Universities will often seek certain protections in the shareholders agreement (e.g. a board seat or an observer right, specific information rights), and it is in the best interests of all parties for such protections to be agreed at the same time as key terms of the spin-out.
Multi-founder teams should also ensure that there is alignment between the founders in relation to the terms of the shareholders agreement prior to negotiating the key terms of that document with the university – it is almost impossible to negotiate with the university when the founders are not in agreement.
It is unsurprising that the strong research and development culture in Australia’s universities has created exciting and innovative IP, and university spin-outs offer the chance for that IP to be commercialised. To put the spin-out in the best legal position to proceed with that commercialisation, it is important that the legal documentation clearly and thoroughly sets out the rights and obligations of the both the spin-out and the university.
If you need assistance with a university spin-out, please contact a member of Addisons’ Venture Capital & Startups team.