From academia to industry: The role of university spin-outs in women’s health innovation

University spin-out companies offer a means of commercialising valuable intellectual property (IP) and technology generated through university research. As part of Bristows’ Spotlight On: Women’s Health and Innovation article series, we take a look at spin-outs in the context of women’s health and the key contractual considerations needed to enable exploitation of the IP involved.

Over recent years, there has been significant growth in spin-out activity from UK universities, with venture capital (VC) and private equity funded companies taking innovative technologies to market. Investment in UK university spin-outs has increased from £1.1bn in 2014 to £5.3bn in 2021¹. In 2023, UK spin-outs raised £1.66bn in equity funding, representing 9.5% of all equity raised by UK companies, and placing the UK second only to the US in terms of total investment in spin-outs globally². Notably, entrepreneurs in the women’s health space have played an important part in driving this growth, particularly with women’s health representing an area which has historically lacked innovation and struggled to attract investment from traditional financial institutions.

Syrona Health, a spin-out from the University of Cambridge, is a clear example of a success story in this context. The FemTech start-up was launched by two Cambridge entrepreneurs, Anya Roy and Chantelle Bell, and provides telemedicine, diagnostics and self-management tools in areas such as endometriosis, polycystic ovary syndrome (PCOS), menopause and fertility. Their venture was supported by Accelerate Cambridge, the University of Cambridge’s start-up “accelerator”, at a programme held in 2019 at the Cambridge Judge Business School. The company has since raised £2.6 million in funding³ and provides services to the NHS and the Department for Environment, Food & Rural Affairs, as well as to a strong roster of private sector clients.

As Syrona Health illustrates, spinning out a business from a university can be a highly effective way of bringing academic innovation to market. However, the commercial and legal considerations needed to spin out a business from a university research context often differ from those commonly required when establishing a business via a more traditional model. One of the key considerations is determining who owns the IP related to the spin-out company’s business and ensuring that the company has appropriate rights to use such IP. IP ownership is likely to vest in the university if the university’s time, money and/or resources were used to develop the IP and therefore the spin-out will need to secure an assignment of, or more commonly, a licence to, the relevant IP in order to carry on its business. In this article, we explore some specific terms of an IP licence in the spin-out context and consider the key pinch-points in university spin-out negotiations more generally, given the parties involved.

Parties and priorities

Agreeing the terms of a university spin-out (including the IP licence) can be challenging due to the differing nature, and in turn, priorities of the parties involved. There is often a tension between the university’s need for academic freedom and the spin-out company’s desire to control and protect the IP on which it is based. There may also be conflicts of interest for founders who have a role in the company and continue to be affiliated with the university. Typical priorities and motivations of the parties may include:

• For the university: obtaining appropriate financial reward (whether via equity and/or licence terms); societal impact; continued academic freedom for inventors and the university’s wider research function; conforming with the requirements of internal IP policies (including rewarding those involved who do not take an equity stake in the spin-out); ensuring compliance with the conditions of third-party funders; and maintaining ethical standards and boundaries, particularly considering the status of universities as charitable entities;
• For the VC fund: realising a return on investment through an exit (whether an acquisition or IPO); growing the VC fund’s ability to attract further funding; receiving adequate access to existing IP from the university and third parties to ensure the spin-out’s business plan may be successfully executed; obtaining sufficient control over decision making; and gaining access to improvements from the spin-out and/or university; and
• For the company founders/inventors: receiving financial reward via equity holding on exit; continued income from salary or via a consultancy agreement; social impact and realisation of individual entrepreneurial goals; continued academic freedom; and control over the direction of the spin-out’s business and the future development of the technology.

Of course, a compromise must be reached between the various parties’ interests and across the deal as a whole. In particular, parties should consider the investment terms and licensing terms in conjunction, for instance balancing the equity share in the spin-out against the financial terms of the IP licence.

To achieve this in practice, founders, universities and investors alike may benefit from The University Spin-out Investment Term Guide (USIT Guide). The guide was launched in April 2023 with the support of leading UK research universities, VC funds and industry groups. Rather than providing detailed drafting suggestions, the guide sets out reasonable ‘market-standard’ positions for initial term sheets. By following such guidance, parties may find they can accelerate negotiations, reduce costs and prevent disagreements which could lead to the deal being unreasonably delayed or even abandoned.

Key IP licence terms

Although many provisions will not be unique to this context, negotiating the terms of an IP licence for a university spin-out may focus on different issues to other deals as a result of the specific priorities of the university, the spin-out and the investors. We consider below some of the provisions which commonly prove more contentious in university spin-out negotiations, and explore how a compromise between the parties may be reached in practice.

Reservation of rights

For the university, obtaining a reservation of rights is key to ensuring the academic freedom of its research and teaching activities. In practice, this may be resisted by the spin-out and/or the investors, both of whom will want as much exclusivity as possible. Typically, the parties will agree that the university may reserve a perpetual, worldwide, royalty-free licence to carry out academic research and teaching, but whether it may reserve rights beyond this level is negotiable. For example, the university may seek to reserve the right to undertake clinical studies (in particular, Phase I) using the licensed IP. From the perspective of the spin-out, this can be addressed in various ways in the IP licence, for example by: requiring the university to obtain approval from the spin-out prior to commencing the clinical studies; restricting clinical research to being undertaken by the academic founders involved in the spin-out only; or requiring the spin-out and university to consult and undertake clinical studies in collaboration.

Improvements

Improvements to the licensed technology may substantially prolong the life of the IP and prove highly valuable (though this is usually difficult to predict at the outset). The spin-out will want to ensure that it has access to improvements to ensure the value of the IP does not rest too heavily with the university, while the university will want to restrict the scope of improvements caught under the licence. This can be achieved by, for example, limiting the definition of university-generated improvements to developments which have a non-severable relationship to the initially-licensed IP (i.e. only catching improvements which, if exploited, would infringe upon a claim within the scope of the initially-licensed IP) and/or developments associated to the principal inventor(s) of the initially-licensed IP. Access to improvements can also be time-bound according to a fixed period (two years is common) or for the duration of the period of a sponsored research agreement from the spin-out to the university.

Diligence

Once the technology has been licensed-out, the university will want to ensure it is exploited fully for both the obvious commercial reasons, but also in order to maximise the social impact of its research. Consequently, the university may seek diligence provisions (potentially with termination for breach and reservation of rights), annual payments and/or minimum royalties. An alternative approach is for the university to seek to limit the scope of the IP licence (e.g. to particular fields of use) or to grant co-exclusive rights with conversion to exclusivity once certain diligence provisions have been met. The spin-out company should be wary of triggering unintended termination and, as such, will need to ensure appropriate protections are also included in the licence. Such protections may include precursor steps for missed diligence milestones (e.g. time extensions, monetary payments, expert determination) and/or a remedial plan for the spin-out.

Sublicensing

Whether sublicensing is permitted, and if so on what terms, may also prove controversial in negotiations. The university will want to incentivise the spin-out to invest in the development of the technology and prevent it being “shelved”, to maintain oversight in relation to the return on the technology, and to limit any reputational and/or financial risk. These will need to be balanced against the spin-out’s desire to maintain maximum flexibility and the ability to maximise returns across both territories and fields of use. Most commonly, the parties will agree to permit sublicensing but with fairly extensive restrictions. At a minimum, the sublicensee should be bound by the key terms of the head licence and the spin-out should be obliged to notify the university prior to executing the sublicence. However, the university may seek to include further restrictions, such as limiting permitted sublicensing to only one tier, prohibiting sublicensing to certain entities and obliging the spin-out to pay the royalties in the head licence.

Final thoughts

University spin-outs can offer an effective mechanism to commercialise research outputs, particularly in life sciences and technology. Navigating the varied and sometimes conflicting priorities of universities, investors and founders can prove challenging, but resources such as the USIT guide can help facilitate a smooth negotiations process. In the women’s health space, university spin-outs are playing an increasingly important role in bringing research-driven solutions to market, particularly as regards FemTech products. The model’s ability to deliver tangible improvements in areas such as women’s health is clear, and hopefully spin-outs will continue to address gaps in care and treatment that have been historically overlooked and underfunded.