Universities should take minimal stakes in software spinouts, according to a new set of guidelines released by a group of the world's top universities.

Academic institutions should take just 5% to 10% equity stakes in the software startups they spin out from their institutions, according to a new guide to negotiating spinout deals launched by TenU, a global collaboration of technology transfer offices from 10 universities.

The recommendation is part of the newly released University Spinout Investment Terms (USIT) Guide, which is designed to create a framework for best practices in negotiating software spinout deal terms.

Software spinouts should grant a higher portion of ownership shares to founders compared with other sectors because intellectual property often plays a negligible role in the success of software companies, say the drafters of the guide.

It is the people developing the software who are most crucial and they should be incentivised to stay at the company through equity stakes, says Simon Hepworth, TenU president.     

The recommendations also emphasise the importance of finalising deal terms quickly so that the software can come to market quickly. The guide advises that as soon as a term sheet is received, it should take no longer than three months to sign and finalise all IP licence and company documentation.

Venture capital firms played a large role in drafting the recommendations. UK investors Octopus Ventures, Cambridge Innovation Capital and Oxford Science Enterprises were among the contributors. Six university innovation offices and five VC firms contributed to drafting the guidelines.

The equity share recommendations are based on investors’ expectations that founders own at least 50% of shares in their companies at a series A fundraising round.

VC investors say the framework gives them more certainty to invest in pre-seed software companies. The percentage of equity that universities take in spinouts varies across institutions, ranging from anywhere between 2% and 40% or more.

“Investors hate uncertainty,” said Ian Lane, partner of Cambridge Innovation Capital, on a panel at the TenU innovation Summit in London this week. “If it is uncertain whether a university will take 2% or 40%, it is hard” to invest, he said.  

The long time it can take to negotiate spinout deal terms can dissuade founders from taking the spinout route, which could drive more technology transfer offices to adopt more standardised terms.

Adrian Toutoungi, partner at law firm Taylor Wessing, who helped draft the recommendations, said many founders are questioning the benefits of going through the long process of spinning out a technology when they can go the startup route instead. The USIT Guide gives founders confidence they will not be taken advantage of by the university, he said. 

Kim Moore

Kim Moore is the deputy editor of Global Venturing and produces video for the website.