Special Considerations for Corporate Spin-Offs

Corporate research and development initiatives can lead to many outcomes. Some of the most successful will become new additions to the company or even convince management to create a new company in order to pursue a market adjacent to the market served by the parent company. When this new company is created, the parent company will maintain a large stake in the new company (often a controlling stake) but will allow for outside investment or the distribution of equity to the management team that will lead the new company. This process of creating a new company with the resources of a corporate parent is called a corporate spin-off, and there are a few things about this process that make it different than other company formation projects.

The most important consideration in creating corporate spin-offs is allocating intellectual property. In the early phases of the project, the corporate parent will have created intellectual property before the decision was made to create a new company through a spin-off process. The balance that must be struck is between leaving too much intellectual property in the parent company so that investors or customers are not interested in doing business with the company created through the spin-off process and assigning the spin-off company too much intellectual property from the parent company so that the parent company loses some of its advantages in the marketplace.

Often, employees of the parent company will assume leadership roles in the company that is spun off. This can require careful negotiation around items such as how those individuals will allocate their time as between the parent company and the spin-off company and how they will be compensated for their work with the new company.

Depending on the extent to which the corporate spin-off will seek funding from sources other than its corporate parent, there can also be differences in the level of control the corporate parent maintains over the new company. The parent company may want to be able to retract the intellectual property it assigned to the spin-off company, but there will be a time after which having the ability to do so will deter any serious investors from partnering with the new company.

If you are contemplating founding a company or have recently founded a company and want to work with experts who can guide you through the critical early stages, contact us at info@barlowwilliams.law and we'll be happy to meet with you to discuss how we can help you achieve your business goals.