Universities are sinking spinouts before they can swim - Robert Gelb

The other week, I heard a story about a leading university in Scotland’s response to a statement about equity. Wanting 20-40 per cent of a spinout company without any cash investment, they were told that Stanford often asked for 5-10 per cent at the most. Their response? “Well, it sounds like Stanford has a lot to learn.”

The arrogance in that statement is indicative of a wider problem that Universities have in Scotland and the UK in general. It leads to a perception that their pre-incorporation efforts justify saddling a newly minted spinout with 20-40% of dead equity.

For a new company (with a few notable exceptions), equity's value should be allocated based on the future opportunity that transaction affords the company. For example, employee pools enable an incentive to attract top quality talent, or an investment provides cash to take rapid action that's otherwise not possible through revenue alone. If a co-founder leaves a team, there would be an expectation of a return of significant equity, favouring increasing future opportunities over recognition of past performance.

So, what ongoing value does a university provide?

Robert Gelb is a serial founder and startup advisor, the managing editor of Campfire.scot, and runs the creative IP management startup Organic Suspension.

I'm not saying a university cannot or does not provide ongoing value, nor that IP should be valued at 0, but how often is that question asked when planning a spinout?

Instead, as is often discussed, there's an attitude that the value of the IP alone is worth such a high premium. It flies in the face of the commercial reality that the ability to execute—rather than the idea or IP—is the difference between success and failure.

From bureaucratic challenges to founders themselves sounding the alarm about UK universities insisting on almost three times the equity that EU universities and approximately three times the equity by US colleges, there's widespread concern about the state of UK spinout equity. Widespread that is, aside from within many universities themselves.

Universities can learn from other successful spinout ecosystems that provide more support for less equity. If they want a larger chunk, they should either invest directly or agree to multi-round pro-rata rights to preserve optionality.

Dead equity kills high-growth companies. High-growth companies often need multiple rounds of funding. Future investors want to know the founding team has adequate incentive to stick around as the stakes get higher. When you combine dead equity and toxic rights held by a university team that rarely has power venture commercial experience in startups and scale-ups, you risk dissuading high-growth, experienced investors from even coming to the table.

40 per cent of £0 is still £0.

In a commercial setting, a premium is paid for team and commercial traction (no matter how early), not an idea. Aside from IP, what actual tangible, commercial value will a university provide? Direct access to customers? Partnerships? An ability to get a product into a market faster than a competitor?

If you're taking 20-40%, what are you doing to support and make this company a success to justify that figure?

If you can't answer that question, you shouldn't be using the unique nature of how spinouts develop to sink a company before it learns to swim. If you're offended by the question, you probably shouldn't be playing in the startup space at all.

​Robert Gelb is a serial founder and startup advisor, the managing editor of Campfire.scot, and runs the creative IP management startup Organic Suspension.