Let researchers keep most of the equity in university spin-outs

## Summary Universities that take UK public research funding would have to offer spin-out founders standard, investor-friendly terms: a small equity stake for the university, a low royalty, a quick signature and no veto over later investment. This should raise growth by getting more university discoveries into companies sooner and making those companies easier to finance. ## Objective UK universities often take large equity stakes, typically 15–50% historically, along with royalties and control rights. Negotiations are often slow. These terms deter founders and venture investors, delay company formation and leave spin-outs undercapitalised. The policy would work mainly through **investment**, by raising the volume and speed of private equity finance into university spin-outs. It would also work through **productivity**, by speeding the diffusion of research into commercial products. ## Measures 1. **Equity cap.** The university's stake would be capped at 10% of fully diluted equity at incorporation, before any external investment. The cap would be 5% for software, data or AI companies with no patented technology. 2. **Royalty cap.** Total royalties to the university would not exceed 2% of net sales, with no stacking across licences. 3. **Signing deadline.** The university would sign the standard licence within 60 days of the founders' written request. 4. **No blocking rights.** The university would hold no veto, consent right or anti-dilution protection over later funding rounds. Pro-rata participation rights would be permitted. 5. **Researcher take-out.** If the university has not filed a patent, licensed the invention or agreed a spin-out within six months of formal disclosure, the inventors could license it themselves on the same terms. 6. **Patent cost fee.** Universities could charge a published fixed fee for patent costs. The assumption is that it would not exceed documented costs, would be payable in cash or deferred to the first funding round, and could not be taken as extra equity. 7. **Coverage and enforcement.** - The terms would be a condition of all UKRI research council grants (UK-wide) and Research England funding (England only). - Devolved funders would be invited, but not required, to adopt matching conditions. - UKRI would administer the scheme. Non-compliance would put an institution's Higher Education Innovation Funding eligibility at risk. - Where a co-funder's contract (industry or charity) sets different terms, that contract would prevail for that project. ## Timing and phasing - **2027-28:** consultation, publication of the standard licence and amendment of UKRI grant terms. - **2028-29:** the conditions would apply from 1 April 2028 to all spin-out and licence agreements signed after that date. - **2029-30:** first compliance returns through the HE-BCI survey. The six-month take-out route would become active for disclosures made from April 2028. - **2030-31 to 2032-33:** steady state, with all new UK spin-outs from publicly funded research covered. Roughly 150–250 a year are assumed. ## Cost and financing There would be no new programme spending. Administration and monitoring, assumed at about £2m a year, would be absorbed within UKRI's existing budget. All figures are in cash terms. | £bn | 2027-28 | 2028-29 | 2029-30 | 2030-31 | 2031-32 | 2032-33 | |---|---|---|---|---|---|---| | Gross cost | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | No financing would be needed. Universities' lost equity and royalty income would fall outside central government, because universities are classified to the private sector. That income is modest relative to the sector's total income. ## Delivery - **Legislation:** none needed. UKRI would set the conditions under its existing grant-making powers in the Higher Education and Research Act 2017. - **IP ownership:** the Patents Act 1977 would be unchanged. Inventor take-out would operate contractually, through a university obligation to license to its inventors. - **Responsible bodies:** the Department for Science, Innovation and Technology would own the policy and UKRI would deliver it. **Main delivery risks:** - Universities could cut technology transfer office capacity as income falls, slowing patent filing. - There could be disputes over whether a university has "acted" within six months. - Companies could be misclassified as "software with no patents". - Rules could diverge between England and the devolved nations. - Universities could avoid the conditions by shifting work into co-funded projects. - The rules could strain the finances of already pressured institutions. ## Relation to the baseline The March 2025 forecast makes no specific assumption about spin-out terms. It includes government R&D spending in line with the plans existing at that time. The baseline already includes the voluntary University Spin-out Investment Terms guidance. That guidance followed the 2023 Independent Review of University Spin-out Companies and points to around 10% or less, and lower for software. Only the following changes should be analysed: - making these terms mandatory and enforceable; - the 2% royalty cap and 60-day deadline; - removing blocking rights; - the researcher take-out route.

The proposal would make standard spin-out terms a condition of UKRI and Research England funding for agreements signed from April 2028: a university equity cap of 10% (5% for unpatented software), a 2% royalty cap, a 60-day signing deadline, no university veto over later rounds, and a right for inventors to license an invention themselves after six months. The voluntary USIT guidance is already in the March 2025 baseline, so the extra impulse is small. It is modelled as a privately financed rise in total gross fixed capital formation (IF), feeding business investment (IBUS), of about £85m a year in cash by 2032. Faster diffusion adds slightly to trend output (TRGDP), and real GDP (GDPM) is moved directly because it is exogenous in the March 2025 code. There would be no direct Exchequer cost; the fiscal effects are second-order, with extra R&D and EIS relief claims set against receipts on slightly higher output.

### Interpretation The proposal would make a standard set of investor-friendly spin-out terms a condition of UKRI research council grants (UK-wide) and Research England funding (England only). The terms would apply to every spin-out and licence agreement signed from 1 April 2028: - the university's stake would be capped at 10% of fully diluted equity at incorporation, or 5% for unpatented software, data or AI companies; - total royalties would be capped at 2% of net sales; - the university would have to sign within 60 days; - it would lose any veto or anti-dilution protection over later rounds; - inventors could license an invention themselves if the university had not acted within six months of disclosure. The 2027-28 consultation year would have no economic effect, so the modelled horizon starts in 2028. The counterfactual is the OBR's March 2025 Economic and fiscal outlook rolled forward to November 2026. That baseline already contains the voluntary University Spin-out Investment Terms (USIT) guidance, which points to stakes of around 10% or less. Only the move from voluntary to mandatory terms, the royalty cap, the 60-day deadline, the removal of blocking rights and the take-out route are new. The impulse is therefore much smaller than the headline terms suggest. Many of the largest research universities already sign USIT-style deals, and the equity cap would bite mainly on outlying and life-sciences agreements. No OBR exogenous variable describes spin-out terms, and there is no tax rate or spending line to move. The costing therefore treats the policy as a small, privately financed rise in investment. This is entered as additions to total gross fixed capital formation (IF), which flows into business investment (IBUS) through the identity IBUS = IF − GGI − PCIH − PCLEB − IH − IPRL. A small supply-side gain is entered through trend output (TRGDP). The March 2025 code holds real GDP (GDPM) exogenous and lets the change in inventories (DINV) absorb any gap between output and expenditure, so the output effect has to be imposed on GDPM directly. The sizes of the shocks are as follows. The IF shock starts at about £3m a quarter (chained-volume terms) in 2028Q2 and builds to about £17m a quarter, or about £85m a year in cash, by 2032. The GDPM shock builds to about £52m a quarter (+0.008%). Of that, about £32m a quarter (+0.005%) is also added to TRGDP as higher potential output. The investment block's user cost of capital (COC), tax-adjustment factor (TAF) and desired capital stock (KSTAR) are not shocked, because spin-out terms change no economy-wide tax parameter. The KSTAR elasticity is, however, used to check the size of the investment response. ### How it works through the OBR model 1. **Better terms would raise the expected return to founding and backing a spin-out.** A university's equity, royalty and control rights act like a private tax on a spin-out's future returns, paid by founders and investors. On the central assumption, making the caps binding would lower the average university stake at incorporation by about 3 percentage points, from about 13% to about 10% across all deals. The 2% royalty cap would trim the take on life-sciences licences, and removing vetoes and anti-dilution rights would simplify who owns what. Together these raise the expected after-take return to founders and early investors by about 4–5%, while the 60-day deadline and take-out route cut the cost of delay. Venture investors discount heavily for slow negotiations and awkward share structures. Standardisation therefore lowers the hurdle a marginal project has to clear, even where the headline stake barely changes. 2. **More spin-outs would be formed, and formed sooner.** The costing assumes about 7.5% more spin-outs a year at steady state from 2030, or about 15 extra on a base of about 200. Formation would be brought forward by two to three months as the 60-day clock replaces open-ended negotiation. A trickle of previously shelved inventions would also be commercialised through the six-month take-out route. Each cohort keeps raising follow-on money for several years, so gross equity funding of UK spin-outs builds to about 8% above baseline by 2032. That is about £0.28bn a year on a baseline of about £3.5bn. The build-up is gradual because only agreements signed after April 2028 are covered and companies take years to reach their larger funding rounds. 3. **Only part of the extra funding would be new business investment.** Half of the extra money is assumed to be genuinely additional. The other half would displace venture capital that would otherwise have gone to other UK start-ups, because fund allocations are largely fixed in the short run, although overseas investors supply much of the later-round money. About 60% of what spin-outs spend is research and equipment, which the national accounts record as gross fixed capital formation. That gives about £85m a year of extra IBUS in cash terms by 2032, about 0.025% of a baseline of about £340bn. The investment block's desired-capital equation, KSTAR = exp(log(MSGVA) − 0.4 × log(COC) + 2.43), provides a cross-check; MSGVA here is market-sector gross value added. Suppose the university take plus negotiation frictions are worth about 10% of the cost of capital for spin-outs. The −0.4 elasticity then implies desired capital in this small segment about 4% higher, close to the roughly 4% net rise in segment investment assumed here. The assumed response is therefore roughly what the OBR's own cost-of-capital elasticity would predict for a segment this size. 4. **The investment impulse would lift output only slightly.** Investment has an import content of about 23% in the model (MIF = 0.234 × IF). So about £13m of the £17m a quarter of extra investment by 2032 is spent on UK output. With a modest multiplier and Bank Rate unchanged, the demand effect on GDPM is about 0.003% by 2032. This is imposed directly; otherwise DINV would mechanically fall to offset the extra investment and measured output would not move. The effect is tiny because spin-out investment is only about 1% of business investment, and a few percent more of that barely registers in a £3.8tn economy. 5. **Faster diffusion would add a little to potential output, mostly after 2032.** The extra research capital built up by 2032 would be about £0.25bn after depreciation of about 15% a year. It is assumed to earn a social return of about 50% including spillovers, worth about 0.003% of GDP. Earlier product launches, from faster formation and the take-out route, add about 0.002%. TRGDP and GDPM are therefore both raised by about 0.005% by 2032 for this supply component, leaving the output gap (GAP) reflecting only the 0.003% demand effect. Spin-outs typically take seven to fifteen years to reach meaningful revenues, so most of the productivity payoff from the 2028–32 cohorts would arrive beyond the horizon. 6. **Household income and spending would edge up.** Extra wages in spin-outs and the wider economy raise real household disposable income (RHHDI). The consumption (CONS) equation passes about 0.10 of income growth through in the short run and, via its error-correction term, about 0.44 in the long run. Founders' larger shareholdings are unquoted and tiny relative to about £8tn of household net financial wealth (NFWPE), so the wealth channel is negligible. Universities belong to the non-profit sector, whose spending is counted in CONS. They would lose about £20m a year of royalty and share-sale income by 2032, partly offsetting the gain. CONS ends about 0.004% above baseline. 7. **The labour-market effect would be about 1,000 skilled jobs, mostly redeployed.** Market-sector employment (EMS) responds to market-sector output with a short-run elasticity of about 0.17 and almost one-for-one in the long run. Total hours worked (HWA) are set off-model, so the costing applies a rule of thumb instead. That rule says unemployment falls by about 0.3–0.5 times any rise in the output gap, which is the Okun relationship. The additional spin-outs would employ about 1,000 people by 2032. These would largely be researchers and engineers who would otherwise work elsewhere, so the unemployment rate (LFSUR) falls by only about 0.001 percentage points. 8. **Prices would be unchanged to three decimal places.** A tighter labour market usually lifts wages and then prices; this is the Phillips channel. In the model it enters through the unemployment term in the private-sector average earnings equation (PSAVEI), at −0.0096 per percentage point, and with LFSUR barely moving this is negligible. The small productivity gain slightly lowers market-sector unit labour costs (ULCMS), offsetting what little demand pressure there is. The consumer expenditure deflator (PCE) is therefore flat throughout. 9. **Gilt yields and Bank Rate would not move.** Public sector net debt (PSND) would be about £0.19bn lower by 2032, about 0.005% of GDP. Rules of thumb put the effect on the 20-year gilt yield (RL) at a few basis points per 1% of GDP of debt, so the yield effect here is well under 0.01 basis points. With inflation and the output gap unchanged to the third decimal place, the Monetary Policy Committee would have no reason to alter Bank Rate (R). ### Key assumptions - **Counterfactual baseline:** The baseline is the March 2025 EFO rolled forward to November 2026 and extended to 2032 at real growth of about 1.7% and CPI inflation of about 2%. The voluntary USIT guidance is already included. The costing rests on these baseline levels: - nominal GDP of about £3.4tn in 2030 and about £3.8tn in 2032; - real GDP of about £645bn a quarter in 2032; - nominal business investment of about £290bn in 2028, rising to about £340bn in 2032; - PSND of about £3.6tn (about 95% of GDP) at end-2032. - **Spin-out base:** About 200 new spin-outs a year, within the proposal's 150–250 range. They raise about £3bn a year of equity in the mid-2020s (Beauhurst Spotlight on Spinouts), carried forward to about £3.5bn by 2032. - **Incremental bite relative to USIT:** The average university stake at incorporation falls by about 3 percentage points across all deals, because many institutions already comply. The royalty cap binds mainly on life-sciences licences. Blocking and anti-dilution rights are removed in the minority of deals that still carry them. - **Formation and funding response:** About 7.5% more spin-outs a year (about 15) at steady state from 2030, with formation two to three months faster. Gross spin-out funding is about 8% (about £0.28bn) above baseline by 2032. - **Additionality of venture finance:** 50% of the extra funding is net new UK investment; the rest displaces finance for other start-ups. - **National-accounts treatment:** 60% of spin-out spending is capitalised as research and equipment investment. This gives an IF shock of about £17m a quarter in chained-volume terms by 2032; each listed shock entry is an increment added to the earlier ones. - **Cost-of-capital cross-check:** KSTAR has an elasticity of −0.4 to COC, as coded. The university take plus frictions is treated as worth about 10% of the segment's cost of capital. - **Demand multiplier:** The import content of investment is 23.4%, as coded, and the domestic multiplier is about 0.8, with no monetary offset. - **Supply-side return:** The social return on R&D is about 50% and the R&D capital stock depreciates at about 15% a year. This gives a TRGDP gain of about 0.005% by 2032. - **Delivery profile:** Nothing happens in 2027. From April 2028 the terms apply only to new agreements, and the first-year gain is halved to allow for transitional disputes and technology-transfer office restructuring. The take-out route bites from late 2028, and steady-state formation is reached in 2030. - **Tax reliefs:** The enhanced R&D intensive support payable credit is worth about 27% of qualifying spend, with qualifying spend about 70% of spin-out research spend. EIS relief of 30% applies to about 10% of the extra funding, half of it additional. Claims are paid about a year in arrears. - **University income:** Lost IP income is about £5m in 2029, rising to about £20m by 2032, mostly royalties and early share sales; larger equity losses fall after 2032. - **Monetary-policy reaction:** Bank Rate (R) is held on the baseline path and RL is unchanged. The in-model coefficients are comparatively firm: the import content of investment, the consumption elasticities and the −0.4 cost-of-capital elasticity. They also matter little here, because the impulse is so small. The result hinges instead on judgements from outside the model. The largest is how much the mandatory terms add to the voluntary USIT baseline. If USIT compliance is already close to universal, the equity cap changes little and the investment and output effects could halve. If many life-sciences deals still carry stakes of 20% or more, they could roughly double. Next come the formation and funding responses and the additionality assumption. Evidence on how inventor terms affect start-up rates is thin but suggests they can matter a lot. When Norway removed academics' ownership of their inventions in 2003, university start-up and patenting rates fell by roughly half. If venture finance were fully additional, the IBUS effect would double; if it were fully displaced, the IBUS effect would be close to zero. The supply-side return and diffusion lags are the least anchored assumptions. Doubling the assumed social return would add only about 0.003% to 2032 GDP, but most of the gain sits beyond 2032 either way. The main downside risk is that universities respond to lower income by cutting technology-transfer capacity. That could offset much of the formation gain and push the net effect towards zero. Under any of these alternatives the fiscal effect stays within about ±£0.2bn over the horizon. ### Headline results The macroeconomic footprint would be very small and back-loaded. Business investment would be about 0.005% above baseline in 2028, rising to about 0.025% by 2032 as successive cohorts of spin-outs are formed and raise follow-on rounds. Real GDP would be 0.001% higher in 2028 and about 0.008% higher by 2032, equivalent to about £0.3bn of nominal output in that year. Just over a third of the 2032 gain is demand from the extra investment; the remainder is a supply-side gain from faster diffusion of research. Consumption would follow income with the usual lag, reaching about 0.004% above baseline by 2032. The unemployment rate would be about 0.001 percentage points lower from 2030, reflecting roughly 1,000 extra skilled jobs that are largely filled by redeployed researchers. The consumer expenditure deflator would be flat because the faint demand pressure is offset by slightly lower unit labour costs. The 20-year gilt yield and Bank Rate would be unchanged. The profile is still rising at the end of the horizon because spin-outs take a decade or more to mature, so the policy's main economic case lies beyond 2032.

### Costing the policy - **Gross static cost:** £0.0bn over the horizon. There is no new programme spending, and the £2m a year of administration and monitoring would be absorbed within UKRI's existing budget. Public sector net borrowing (PSNB) therefore does not change mechanically. Universities' lost equity and royalty income falls outside the public sector because they are classified as private non-profit institutions. - **Extra R&D and EIS tax-relief claims (behavioural cost):** +£0.05bn. The additional spin-outs are typically loss-making, research-intensive small firms that claim the enhanced R&D intensive support payable credit, worth about 27% of qualifying spend. Part of their funding attracts 30% Enterprise Investment Scheme relief. Claims lag spending by about a year, so this cost builds to about £0.02bn a year by 2032. - **Receipts lost on lower university spending (reduced IP income):** +£0.02bn. Universities would forgo £5m to £20m a year of royalties and early share sales during the horizon, trimming their spending and the tax collected on it. The larger equity losses on post-2028 cohorts would arrive after 2032. - **Demand feedback (IT / NIC / VAT on extra activity):** −£0.11bn. The demand-driven rise in output, reaching about 0.003% by 2032, adds about £0.38bn of cumulative nominal GDP. This is taxed at about 30%, below the economy-wide average because loss-making spin-outs pay little corporation tax. - **Supply-side receipts feedback (higher potential output):** −£0.14bn. The rise in trend output, reaching about 0.005% by 2032, adds a further £0.38bn of cumulative nominal GDP. This is taxed at about 36%, closer to the average tax take, with most of it arriving in 2031 and 2032. - **Debt-interest saving (lower debt):** −£0.01bn. Marginally lower debt, at an effective interest rate of about 4%, saves a few million pounds a year by 2032; gilt yields do not move. - **Net cumulative PSNB change:** −£0.19bn. This is the sum of the rows above. Borrowing would be about £0.08bn a year lower by 2032, about 0.002% of GDP, which is effectively fiscally neutral. ### Debt path The cumulative £0.19bn reduction in borrowing would leave public sector net debt (PSND) about £0.19bn lower at end-2032, against a baseline of about £3.6tn (about 95% of GDP). The debt ratio falls by slightly more than the debt saving alone implies, because a higher nominal GDP denominator also pulls it down. Nominal GDP in 2032 is taken as about £3.8tn and would be about 0.008% higher, with prices unchanged. The two effects on the ratio are: - the lower debt numerator reduces the ratio by about 0.005 percentage points (−£0.19bn ÷ £3,800bn); - the larger denominator reduces it by a further 0.008 percentage points (95% × 0.008%). Together the PSND-to-GDP ratio would be about 0.013 percentage points lower in 2032. On the OBR's standard approach the proposal would be fiscally neutral: it carries no Exchequer cost, and the small growth dividend would slightly more than pay for the extra tax-relief claims. The OBR would probably judge the growth effect too small and uncertain to score at all. On that more conservative basis the measure would cost about £0.07bn over the horizon through relief claims and lost university-related receipts. Either way, it would leave no material structural hole.

### Overall pattern In cash terms the proposal would leave household incomes essentially unchanged, at about £0 a year on average in 2032, because it neither taxes nor pays anyone. Its distributional effect is a transfer of expected future value. Universities are private non-profit bodies rather than households; they would give up about £0.12bn of expected equity and royalty value on spin-outs formed between 2028 and 2032. Founders and early investors would gain about £0.16bn. The difference is the extra value created by better-financed, faster-formed companies. The cash cost to universities during the horizon would be small, about £5m to £20m a year. As a share of income the measure is broadly neutral across the distribution. The wealth gains, however, are concentrated among about 3,000 academic founders and about 10,000 angel and EIS investor households, almost all in the top fifth by income or wealth. Once the change in borrowing is accounted for, the average household would be neither a material winner nor a material loser. Public sector net borrowing (PSNB) would be only about £0.08bn a year lower by 2032. ### Who gains - **Academic founders of new university spin-outs:** about £40,000 each in expected equity value, a one-off change in wealth rather than income, for about 3,000 founders of companies formed between April 2028 and 2032. A smaller, capped university stake would leave them with more of their companies, and so would the end of anti-dilution rights and lower royalties. Better financing would also make the companies more valuable. The average hides extreme skew: most spin-outs fail and most founders would gain little, while a handful could gain millions. - **Angel and EIS investors in university spin-outs:** about £4,000 per investing household as a one-off rise in expected wealth rather than income, across about 10,000 households. Cleaner share structures, capped royalties and no university veto over later rounds would make their stakes less exposed to deadlock and easier to refinance. Larger institutional venture funds would also gain, passing part of the benefit to pension savers. - **Staff in the additional spin-out companies:** about 1,000 jobs by 2032, a non-cash gain. These are research and technical roles in companies that would otherwise not exist or would be smaller. Most would be filled by skilled people moving from other jobs, so the gain is mainly in the type of work rather than in household income. ### Who loses - **No direct household losers; universities bear the cost:** universities would give up about £0.12bn of expected future value. They would lose £5m to £20m a year in cash during 2029 to 2032, against sector income of about £50bn. The cost would show up as slightly less cross-subsidy of research and teaching, or as leaner technology-transfer offices. Spread across about 2.9m students and about 0.5m staff, that is a few pounds per person, too small to show as a household row. ### Paying for it and bond markets - **Future taxpayers:** £0 a year, so neutral. Borrowing would be about £0.08bn a year lower in 2032. Divided by about 29 million households, that is about £3 per household a year, an ongoing annual amount rather than a one-off or a horizon total. It is below the threshold for a material effect, so it is treated as no ongoing gain or cost. - **Future taxpayers (lower debt):** public sector net debt (PSND) would be about £0.19bn lower by the end of 2032. Divided by about 29 million households, that is about £7 a household as a one-off total that future taxpayers would no longer have to service or repay. Under the fiscal rules this small saving would be banked. If returned through broad-based taxes, higher-income households would receive more in pounds. This is not a deficit-financed giveaway, so there are no hidden losers through borrowing; the cost falls on universities instead. - **Mortgage borrowers:** £0 a year, so neutral. The 20-year gilt yield (RL) is unchanged in the macro table, moving by well under 0.1 basis points. That is far too little to feed into new or refixed mortgage rates, so the bond-market effect is negligible. ### Across the income distribution The decile figures are about £0 in every decile, both in pounds and as a share of income. The policy changes no tax, benefit or price that ordinary households face, and the gains it creates are wealth rather than income. Within the horizon spin-outs pay no dividends and few founders sell shares, so even the winners see little cash. The averages do hide a small concentration at the top. Academic founders typically earn £50,000 to £100,000 or more and sit in deciles 8 to 10. Angel and EIS investors are overwhelmingly in the top decile. The founder gains are themselves extremely unequal: a few successful companies would capture most of the value. Lower-income households would be affected only indirectly, through slightly tighter university budgets, and by amounts too small to register. ### Caveats The incidence rests on three judgements. The first is how much of universities' forgone equity accrues to founders rather than investors. The second is how far the policy enlarges the total value of spin-outs rather than simply redistributing it. The third is how universities absorb the income loss, whether through research, teaching or technology-transfer staff. The figures are static, first-round effects. They exclude the tiny second-round macro effects shown above on jobs, prices and interest rates, and they mask very large variation among founders. They lean on Beauhurst spin-out data, HE-BCI survey returns on university IP income and HMRC statistics on R&D and EIS reliefs. They also lean on ONS household income distributions to place founders and investors within the deciles.