As the name suggests, a start-up is a business, usually carried on through a limited company, that has just started-up. It really is as simple as that. It will probably still be in the process of developing and refining its product or service, hopefully making a few sales, recruiting its first staff, possibly considering a first move from someone's garage or spare room to some 'proper' business premises, thinking about raising some investment for growth and generally beginning to make its way in the world. It will also be owned by its founder(s) who will have provided the business idea/know-how/intellectual property required to get the business off the ground.
A spin-out will look very similar but the crucial difference is that a spin-out won't just be owned by its founder(s): it will also have a minority shareholder which is quite often a university or other higher educational institution (HEI) (sometimes known as 'the parent'). In short, spin-outs occur when the parent moves some of its assets (often intellectual property) into a new company which is then run as a separate trading entity. The new company that is 'spun-out' brings with it some of the parent's assets and employees (or students, if the parent is an HEI) and those employees/students will generally be the founders. In the US, for example, the Securities and Exchange Commission (SEC) defines a spin-out as when the parent has a share in the equity of the newly-formed company.
In the UK at least, spin-outs are most common from HEIs and over the years I've been involved in many of them. However, I've advised on even more start-ups because all spin-outs are start-ups but not all start-ups are spin-outs.
So what are the effects of the difference between the two? The key effect is the time taken to get the new business up and running. Last week alone I met two new clients who are 'start-ups'. They both own the new business idea and the intellectual property needed for the business and in both cases we've already incorporated a new company with the founders as shareholders. Both start-ups can, if they wish, begin trading immediately, subject to opening a bank account and arranging insurance.
By contrast, spin-outs take much longer simply because of the fact that 'the parent' has to be accommodated and negotiated with, both in terms of (i) the basis on which they'll transfer their assets to the spin-out (usually by way of an IP licence); and (ii) the ongoing rights that their minority shareholding will give them. I blogged on 28 April this year about the need to have a shareholders' agreement and all of the advice in that blog applies in the case of a spin-out, which is simply a company with more than one shareholder. Most universities have a published spin-out policy which sets out the percentage shareholding that the university expects to have in the spin-out, and also sets out the university's key requirements for the IP licence. The founders should therefore have an idea of what to expect before spin-out negotiations begin.
For the last five years Morton Fraser has been providing legal advice to the winners of the Converge Challenge, a spin-out competition, and we're looking forward to meeting this year's winners at the awards ceremony in Glasgow in September. In the meantime, whether you’re the founder of a spin-out or a start-up, we can guide you through the legal issues and make sure your business is set up in such a way that you can concentrate on growing the top line.
Please call me on 0131 247 1260 or email me at firstname.lastname@example.org if you’d like a meeting.