In this thought piece, QUBIS CEO Brian McCaul explains the complexities of equity stakes in university spinouts — and why clarity matters in a changing policy landscape.
QUBIS is pleased to note that it remains in the top 10 of spinout-active university TTOs in the UK. This is no small undertaking given that this top ten – including the usual candidates such as Oxford and Cambridge – accounts for over 50% of all spinouts over the review years, and the relative sizes of our research bases.
The review also raises some interesting points about how equity stakes are calculated when academic institutions are involved in spinout companies. This is timely, given the recent debate and recommendation of the Spinout Review and the promulgation of the USIT terms. Queen’s and QUBIS have adopted these recommendations and are applying the provisions.
This is a retrospective review and, therefore, picks up deals constructed before the Independent review of spinouts. Moreover, given the way Companies House records this data, and as the review acknowledges, "The confirmation statement provides a snapshot of a company’s shareholders at the time of filing but does not necessarily account for changes to shareholdings that occur between filings", it is notoriously difficult to disaggregate the spinout vs. investment shares. The report illustrates this with an example of a company spinning out, splitting equity between founders and the institution, and then raising external investment within a year.
This acknowledgement hints at the complexity of tracking equity stakes over time, especially in rapidly evolving situations like spinouts. However, the initial point about the potential overlap between QUBIS's roles as IP equity holder and TTO investor remains significant.
Specifically, there's a discussion about how shareholdings are counted when both an institution and its technology transfer office (TTO) own shares. The document highlights that when an academic institution and its TTO own shares, those shareholdings are generally counted in aggregate as the institution's equity stake. However, it also notes that stakes held by "captive funds" like Cambridge Innovation Capital (CIC), which are received in exchange for external investment, are excluded from this calculation.
Here's where things get interesting, particularly when considering organisations like QUBIS. The Beauhurst report analysis misses a crucial point: What happens when the institution (QUBIS) is both the IP equity holder and the TTO investor? It is difficult to differentiate between what QUBIS received for the spinout and what it bought as an investor.
The ‘initial’ QUBIS equity position is often a temporary or holding position to facilitate opening a bank account ahead of an allotment of shares in return for IP. This additional share issue is likely only captured at the first Confirmation Statement and reflects the initial share capital structure, although it still doesn't capture share option pools. The creation of a share option pool is a key part of structuring the initial cap table as in the majority of instances, additional key team members will need to be recruited and incentivised in order to drive the company forward.
Some of the above may help to explain the discrepancy we are seeing between the equity holding percentages quoted in the report being larger than the actual figures from our own analysis, which are much lower than those quoted. And, crucially, in reality, our real historical figures are already more aligned with the USIT model!
Why is this important?
In some senses - as we move to adopting the new USIT model - this is all water under the bridge. However, understanding how these equity stakes are calculated is crucial for accurately assessing the initial holdings of organisations like QUBIS to ensure compliance. If the lines are blurred between what's received for the spinout and what's bought as an investor, there's a potential for overstating the initial holding. This could have implications for valuation, future investment, and overall understanding of the institution's role in the spinout's journey.
It's a complex area, and it's clear that a nuanced approach is needed to capture the dynamics of equity ownership in these scenarios accurately. But we are keen to see how the transparency and impact of the spin-out review plays out over time and to retain our position as one of the most active creators of deep tech businesses in the UK and as one of the most active deep tech funders in Northern Ireland.