| In order to help explain some of the concepts that will be contained in this Guide this section follows a company through several stages of its life cycle from establishment to its Series A funding round. This example should not be taken as representing a standard process or representing typical valuations or percentage ownerships. At each stage each case will be different and will need to be handled on an individual basis.
‘NewCo’ is a company spun out from an academic institution to exploit intellectual property developed by the scientist (the founder) whilst working as an employee of that institution. The academic institution has agreed to transfer (assign) its ownership rights in the intellectual property rights (IPR) to NewCo in return for a 50% shareholding in the business. It has also agreed that the founder who has carried out the research that led to the creation of the IPR should own the other 50% through a holding of founder shares (see paragraph 9, Section IV). The capital structure of NewCo is as set out in Box 1.
Box 1. Capital structure for NewCo following establishment of the company and assignment of intellectual property
| Start Up |
|
Number of ordinary shares
|
Cash or cash equivalent
invested at £1 per share
|
|
Founder
|
50
|
£50
|
|
Institution
|
50
|
£50
|
|
Undiluted share capital
|
100
|
|
The investment by the founder is satisfied by a cash payment and the investment by the academic institution is satisfied by the transfer of IPR to NewCo. However, individuals who are acquiring shares in NewCo and are also going to be employees should take tax advice before the shares are acquired because of recently introduced regulations in the UK.
With the help of the academic institution and the founder's network of contacts, NewCo then successfully attracts the investment of a venture capital company (seed investor) that specialises in investing in very early stage companies.
On the basis of the world-class reputation of the scientist, the strength of the IPR and the potential market for the products arising from the technology, the seed investor and NewCo agree that the pre-money valuation (see paragraph 2, Section IV) for its business is £200,000. From discussions between the seed investor and NewCo it is also agreed that the company needs to raise £200,000 to enable it to carry out some key experiments to establish the proof of principle for the technology and therefore enable it to raise its next funding round. The seed investor also requires that an option pool (see paragraph 21, Section IV) be established that could be used to help attract new staff to join NewCo. With these parameters agreed the capital structure of NewCo following the investment by the seed investor is as set out in Box 2.
Box 2. Capital structure following seed round
| Start Up |
|
Cash or cash equivalent invested |
Number of 'A' shares issued at this round |
Undiluted total ordinary shares and 'A' shares |
Options |
Fully diluted equity
|
Value of
shares
|
| Founder (s) |
£50
|
0
|
50
|
0
|
50
|
£100,000
|
| Institution |
£50
|
0
|
50
|
0
|
50
|
£100,000
|
| Seed investment |
£200,000
|
100
|
100
|
0
|
100
|
£200,000
|
| Option pool |
|
|
|
20
|
20
|
|
| Total |
£200,100
|
100
|
200
|
20
|
220
|
£400,000
|
|
