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What is best way to structure a product spin-off? How do you share the new equity?

When a company spins off a new product into a new startup and 2 of the original company equity holders leave to raise capital to launch the new startup, what equity percentage should be shared with the remaining equity holders. The new departing team wants to offer 10% claiming they will be doing all the work. Given that the company financed the R&D and original 30 customers, this seems unreasonable given that all partners are currently equal. Any suggestion on the best way to structure this spinoff.

4 Replies

Joe Albano, PhD
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Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
If the IP was developed by the original company, it seems that it would be the property of the original company ... and then you would be in a licensing or purchasing situation. But of course you spelled all of this out in your operating agreement ... right?
Irwin Stein
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
There are a myriad of ways to spin-off a product. I assume that the product belongs to the company and that spin-off company has little leverage. The company can raise its own capital and replace the two departing equity holders. The cleanest way is usually a royalty deal, assuming that patents are in place. I agree with Joe Albano, this is a common problem that have been anticipated and covered at the time the operating agreement was written. Also, a call to a tax specialist is a good idea. Things can get complicated from a tax standpoint'

Geoff DePaula
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Geoff DePaula Entrepreneur
I help self-funded companies save 15-50+% on TOTAL yearly health plan costs
New spin-offs are still getting equity in the original company so they will be getting "paid" for the revenue the old company makes as well...
Steve Everhard
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Steve Everhard Advisor
All Things Startup
I'm assuming you have no business interest in the spinoff or they wouldn't be spinning it off. Otherwise it could be structured as a subsidiary to ring fence the business activities and potentially provide tax advantages. Assuming they want a clean break and you agree, and you want no further operational involvement in the business then a spin out would be appropriate as long as they aren't competitive or part of an infrastructure you might want for your main business.

The equity you retain should be reflective of the risk of the spin out venture. You say they have 30 customers and I'm assuming they are existing clients of your main business. If those sales (assuming they are actually paying) open the market then you have a right to claim more equity as the risk to the spinoff in forming a business is lower, and it improves their chance of raising growth equity. If the customers were grandfathered in by the existing business and so the market case is not fully proven then there is significantly more risk for the spin out and your equity is lower. You have to form a judgement. I would say high risk would justify an 8-10% equity stake and lower risk 10-15%. You're going to get diluted but that is fine because as time rolls forward your influence on them will diminish anyway.


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