Founders ‘should take vast bulk’ of software spin-out equity

A new framework for software spin-out negotiations has been launched by UK universities and investors to streamline deals.

TenU, a group of leading university technology transfer offices, launched the University Spinout Investment Terms (USIT) Guide in 2023 to identifying what a positive spin-out and investment deal should look like.

Following a review by University of Oxford vice-chancellor Irene Tracey and Andrew Williamson, a managing partner of the University of Cambridge’s in-house venture capital fund, the government recommended it as a starting point for negotiating spin-out deals for life sciences.

TenU has now joined with a group of investors and professional services firms to launch the USIT for Software Guide which focuses specifically on software spin-outs – those based on source code that may involve data, database rights and copyrights, and often no patents.

It hopes the blueprint will lead to faster deals with less friction and rapid upscaling, to help replicate the success of some of the country’s most successful spin-outs, such as Solexa, Oxford Nanopore and Synthesia.

The guide offers recommended terms which are intended to be used as reference points on everything from board seats to transaction time frames.

In the face of shorter development times, relatively low initial funding, and the need for rapid growth, it recommends that founders should take between 90 per cent and 95 per cent equity in software spin-outs.

“Software businesses evolve through relentless engagement with customers, understanding their new needs and spotting where the technical advantages of the software can deliver some distinctive performance,” the guide says.

“This different distribution of value between founding IP and accumulated founder-customer interaction contributes to the justification for different founding equity stake.”

Historically, UK universities have taken much larger stakes in spin-outs, sometimes as high as 50 per cent or more.

Following the Tracey review the government indicated that new guidelines would recommend a university equity share of between 10 and 25 per cent, and 10 per cent or lower in the case of software firms.

The idea is that academics and other founders will be able to keep a greater share of their inventions, which they can then sell to private equity firms and other investors to secure more funding and grow more quickly.

Simon Hepworth, director of enterprise at Imperial College London and chair of USIT for Software, said the guide demonstrated the university sector’s commitment to strengthening ties between technology transfer offices and investors to boost the economy.

“Maximising the real-world impact of cutting-edge university research is crucial to advancing the UK’s reputation as a world leader for innovation,” he said.

The recent government review of the sector found that UK university spin-out investment increased five-fold from £1.1 billion in 2014 to £5.3 billion in 2021.

TenU said a separate guide was needed for the software industry because it may not have the strict regulatory frameworks of life science companies, or the inherent need for significant capital investment.

Anne Lane, chief executive of UCL Business, said “speed is of the essence” for software spin-outs.

“The ability to agree terms to enable founders to get their software solutions to market quickly is essential,” she added. “Having this clear framework helps hugely in setting expectations on all sides and allows founders to do what they do best – create great software innovations that have real-world impact.”

patrick.jack@timeshighereducation.com