Founder Series: Top Tips for University Spin-Outs (Part 2 – Intellectual Property)

Orrick's Founder Series offers monthly top tips for UK startups on key considerations at each stage of their lifecycle, from incorporating a company through to possible exit strategies. The Series is written by members of our market-leading London Technology Companies Group (TCG), with contributions from other practice members. Our Band 1 ranked London TCG team closed over 200 growth financings and tech M&A deals totalling $3bn in 2023 and has dominated the European venture capital tech market for eight years in a row (PitchBook, FY 2023). View previous series instalments here.

In Part 1 of Top Tips for University Spin-Outs, our Technology Companies Group set out their top tips to help startups navigate raising external financing for university spin-outs. In Part 2, we discuss the key intellectual property (IP) considerations when creating a university spin-out.

1. Conduct an IP audit. Understand what existing IP is necessary or useful for the spin-out company. Consider all IP, including IP created by:
   • The university.
   • The founders in their capacity as students or employees of the university.
   • The founders as part of a funded/sponsored project in conjunction with the university.
   • The founders or other individuals outside the context of their university studies or work.
   • The founders or other individuals in their capacity as employees of the startup.
2. Determine who owns that IP / IP mapping. Once you have identified all of the in-scope IP, you will need to understand who owns that IP. (See more on this in sections 3 to 7 below.)
3. University-owned IP. The university may own some or all of the identified IP. Many universities have IP policies which set out the university's position regarding the ownership of IP created under specific circumstances, including the scenarios set out in section 1 above and IP created by students or employees using university facilities or assets (e.g. university premises, facilities, resources or assets including any other university-owned IP or know-how).

   The university often owns IP created by a university employee. Review the university IP policy and any employment or other contract between the creator of IP and the university to confirm ownership. 

4. Funding body-owned IP. If any of the IP was created by a founder as part of a funded/sponsored project, the funding body may have rights to the IP (in addition to any rights the founder and/or university may have).

   Check the terms of any agreements with the funding body to understand what rights they have to ownership and/or use of IP generated in the course of the project, together with rights they may have to receive royalties or other payments for any exploitation of the IP by the spin-out. 

5. Founder-owned IP. Founders may own some of the IP in their personal capacity. It is common practice for founders to enter into written IP assignment agreements, to assign any IP they own to the spin-out.

   This typically includes IP created by the founders before and after the incorporation of the spin-out entity.

6. Third party-owned IP. A founder of the spin-out may have founded, or be an employee of, another company. Ascertain whether any of the IP created by the founder belongs to that company or to the founder.

   Generally speaking, as a matter of English law, any IP created by an employee in the course of their employment will belong to their employer.

   If it transpires that some of the IP that is necessary or useful for the operation of the spin-out is owned by another company with which a founder has a relationship, decide whether the IP should be assigned or licensed to the spin-out (see more on this in sections 8 to 10, regarding IP transfer options.) 

7. Spin-out-owned IP. Some IP may already sit with the spin-out. It is helpful to understand whether this is the case as part of a broader IP-mapping exercise to provide a complete picture of the IP ownership puzzle.
8. Decide whether IP will be assigned or licensed to the spin-out company. Once you have a full understanding of the relevant IP and who owns it, work with the various owners to decide whether it will be assigned or licensed to the spin-out company (see more on this in sections 9 and 10 below). In each case, agree on relevant commercial terms, including whether the assignor / licensor will have continued rights to use the IP and any new IP that is derived from the assigned / licensed IP.
9. Assignment. The preferred position for the spin-out may be for it to own all the IP it uses. This is certainly the case for core IP.

   Any IP assignment agreements should clearly set out the scope of the IP to be assigned.

10. Licensing. Some IP owners may not agree to assign their IP to the spin-out. In those cases, the founders will need to negotiate appropriate licence agreements between the licensor and the spin-out company.

    Any licence agreements should clearly set out all applicable licence terms, including amongst other things:

    • A clear description of the licensed IP.
    • The scope of the licence (for example, exclusive or non-exclusive, worldwide or limited to certain territories only, for all goods and services in all fields or for specified use cases only, etc.).
    • The applicable licence fees or royalties.
    • The licensor's rights to use the IP and any new IP derived from the licensed IP. Some universities have policies which set out the royalty rates (or shares in the spin-out) that the university will receive in the applicable circumstances.

Our Technology Transactions team can help you put in place the foundational contracts, policies and other legal documents to help you protect your ideas and maximise the value of your IP when seeking a new investment or licensing your technology. This includes founder and employee IP assignments, consultancy agreements, confidentiality agreements/NDAs, brand protection and trade mark registration and IP ownership audits. We also advise on specific issues during corporate transactions and fundraising rounds, whether it's negotiating an IP transfer or licence agreements or helping you navigate a technology related regulatory issue.

If you would like more details on any of the issues above, please contact Natasha Ahmed.