Top 10 corporate, tax and employment considerations for early-stage and spin-out biotech companies

This article is part of our Biotech Review of the Year - Issue 13 publication.

Launching and scaling a biotech company offers immense potential to drive meaningful changes to the health and lives of patients, but founders must navigate complex corporate, tax and employment challenges for their business to thrive. Companies can set themselves up for success by making key corporate and commercial decisions at an early stage. By prioritising strategic people practices – from equity incentives to global talent mobility – early-stage and spin-out ventures can also build resilient foundations for growth, fundraising, and long-term value creation.

Here are our ‘top 10’ dos and don’ts for early-stage biotechs to consider.

1. Founding equity

Allocating founding equity as between founders and any research institution contributing IP is a critical early decision. Equity allocation should reflect each founder’s expertise alongside past and anticipated contributions, including time commitment and ongoing involvement with the company. Founders should engage with the relevant technology transfer office early, to understand the research institution’s expectations. Founders should also consider adopting bespoke articles of association or a shareholders’ agreement to prevent founders from selling their shares to third parties and reclaim equity from founders who leave the company early or otherwise decrease their contribution below the levels initially anticipated. These legal structures help ‘lock up’ the company and protect its long-term integrity.

2. Tax considerations on incorporation / spin-out

The Employment Related Securities (ERS) tax regime can trigger employment tax charges when founders who are (or will become) directors or employees acquire shares at a discount to market value. Income tax (and potentially National Insurance contributions) arises on the discount at the time the shares are issued. Future employment tax charges can also arise if a founder’s shares are subject to ‘clawback’ provisions or other restrictions affecting the value of the shares. To mitigate future tax liabilities (at a time when the shares could be very valuable and the resulting tax liability very high), it is possible to elect to be taxed ‘upfront’ on the value of the shares as if no restrictions apply. As a result, it is generally advisable for founders to acquire shares early – ideally at incorporation – and to enter into a ‘Section 431 Election’ within 14 days of the shares being acquired. Academic founders involved in developing the underlying IP may benefit from academic spin-out relief, which excludes the value of the IP from any ERS charge that is triggered on acquisition of shares or on a later increase in the value of the academics’ shares when the IP is acquired by the company. However, it is important to note that this relief does not apply to non-academic founders.

3. Navigating the investment climate

Securing investment is increasingly difficult, so founders must present realistic, grounded business plans to build investor confidence. Founders should prepare for investor scrutiny and be ready to provide warranties in the transaction documents in relation to their business plan. Be prepared for delays in the fundraising process due to stakeholders’ internal approval cycles and negotiation timelines. Staying organised – especially with key documents like equity investment documents, collaboration agreements, employment and consultancy agreements – can streamline the due diligence process. A disciplined approach to planning and documentation can significantly improve fundraising outcomes.

4. Implement attractive employee incentives 

Early-stage biotech companies often struggle to match the salaries of larger corporates, making equity incentives a powerful alternative. Share options and growth shares can attract top talent by offering a stake in the company’s future success, fostering alignment and long-term commitment. These schemes can be tax-efficient and scalable if properly structured and compliant with Enterprise Management Incentive (EMI) or Company Share Option Plan (CSOP) rules. Beyond equity, offering unique benefits – like flexible work, wellness support, and enhanced leave policies – can differentiate a company in a competitive market. Post-pandemic, candidates increasingly value holistic benefits that support work-life balance.

5. Consider employment status 

Biotech start-ups often rely on flexible arrangements with consultants and advisors, but it’s crucial to correctly classify employment status. Misclassification can lead to significant tax liabilities under the UK’s IR35 regime, especially if contractors are effectively working as employees. Diverse models – such as freelance contracts, internships, and job sharing – can provide agility without overcommitting resources. However, companies must ensure contracts and working practices align with the intended status to avoid legal and tax risks. Tools like HMRC’s Check Employment Status for Tax (CEST) can help, but must be used with care and supported by clear documentation.

6. Protect business interests early 

Safeguarding intellectual property and commercial interests from the outset is essential for biotech start-ups. Contracts with employees and consultants need to be clearly drafted and should include robust intellectual property assignment and confidentiality provisions, alongside appropriate restrictive covenants. Equity schemes should also include leaver provisions to distinguish between ‘good’ and ‘bad’ leavers, protecting the company’s cap table and incentivising loyalty. For example, a ‘bad’ leaver may forfeit all equity, ensuring only active contributors benefit. By putting these safeguards in place early, companies can protect their IP and equity structure, preserving stability as the business expands. 

7. Governance and compliance

Post-investment, companies must comply with investor rights, undertakings, and potential veto powers, each of which require structured internal workflows. Reminding directors of these rights and restrictions during board meetings helps avoid procedural missteps. As operations expand, especially into clinical phases, governance demands will intensify, particularly around patient data. Both existing and future investors expect robust compliance systems, so budgeting for legal and operational support is crucial. Proactive governance builds credibility and ensures alignment with regulatory requirements.

8. Evolving people practices 

Whether a biotech company is starting out, scaling or preparing for exit, ensuring that HR practices evolve alongside the company is key to sustainable growth. Clear and considered employment policies and procedures reduce legal risk, attract talent, and support any subsequent due diligence process. For example, as the workforce grows, companies should introduce effective anti-bullying and harassment, sexual harassment, whistleblowing and 
anti-bribery and corruption policies. Family leave policies that offer enhanced pay should also be considered as a useful talent attraction and retention tool. Aligning people strategies with business goals builds a resilient culture and boosts investor confidence. Companies should plan for future talent needs, not just current demands, to maintain momentum. A forward-looking approach to workforce planning ensures readiness for both growth and transition events.

9. Leveraging success

A biotech company’s success no longer hinges solely on the traditional path of taking a candidate through clinical trials and exiting via IPO or acquisition – alternative strategies are also gaining traction. Out-licensing early-stage assets is increasingly viable as pharma companies seek out opportunities to invest in earlier-stage technologies. For companies that are developing multiple technologies, spinning out one or more of these separate technologies can attract targeted investment and unlock additional value. Monetising royalty streams from out-licensed IP offers another path to liquidity and growth. Founders should remain agile and explore diverse routes to maximise commercial potential.

10. Think global mobility 

Tapping into international talent pools can give biotech companies a vital edge in innovation and growth. Accessing global expertise enables cross-border collaboration and accelerates scientific progress. Companies should adopt inclusive immigration policies and flexible mobility frameworks to attract top-tier talent. Equity incentives must be tailored to work across jurisdictions, especially as UK companies increasingly adopt US-style share schemes. Embracing global mobility signals a commitment to excellence and positions companies for success in a competitive, international market.

Closing remarks

Successfully navigating the early stages of a biotech venture requires founders to make deliberate decisions across equity structuring, tax planning, governance and employment strategy. By addressing these foundational considerations, companies can mitigate risk, attract investment and foster a culture of innovation and compliance. Strategic people practices and global talent engagement further enhance resilience and position start-ups for long-term success. With the right frameworks in place, early-stage and spin-out biotechs can confidently pursue growth, impact and exit opportunities.