Founders Memorandum of Understanding

Founders Memorandum of Understanding

This non-legally binding Memorandum of Understanding (MoU) outlines the terms for the incorporation and formation of [new company name], a new spin-out company from Imperial College London. This MoU is intended to set out the intentions of the Parties regarding the structuring of The Company and some specific rights and obligations of the Parties with regards thereto.

Parties

All inventors/generators of Intellectual Property (IP) are expected to receive founding equity in The Company. (If this is not the case, list the inventor/generators of IP to be licensed to The Company that have chosen not to receive the benefit of founding equity below. This will need to be recorded in writing between the inventors/generators of IP waiving their equity and Imperial Enterprise via an Equity Waiver Letter which can be shared on request)

List of inventors/generators of IP waiving their eligibility to receive founding equity shares (as per the relevant signed equity waiver letter):

(NONE / LIST AS APPROPRIATE)

List of Founding Inventors, meaning inventors of the founding IP to be licensed that are participating in [new company name]:

(NONE / LIST AS APPROPRIATE) (together the “Founding Inventors”)

List of Non-Inventive Founders, meaning non-inventors who are participating in The Company:

(NONE / LIST AS APPROPRIATE) (together the “Non-Inventive Founders”) (altogether the “Founders”)

List of individuals adopting a management role within the Company:

(NONE / LIST AS APPROPRIATE) (together the "Management")

List of inventors not participating in the company but receiving founding equity shares:

(NONE / LIST AS APPROPRIATE) (together the "Non-Founding Inventors")

Imperial College Innovations Limited ("Imperial College")

List of inventors not participating in the company with shares to be held by Imperial College:

(NONE / LIST AS APPROPRIATE, indicating % equity to be held by Imperial College for each inventor, (together the “Non-Founding and Non-Shareholding Inventors”)

The Founders and Imperial College and "the Management" are mutually supportive of the goal of forming a new spin-out company from Imperial College London to commercialise a [short description of technology/product] being commercialised by the Founders "the Management".  The Founders bring their sector networks and expertise, Imperial College London brings entrepreneurial support and guidance to Founders, an innovative ecosystem, exemplary research facilities and project funding (where applicable) and Imperial College bring the IP (developed by the Founding Inventors, Non-Founding Inventors, Non-Founding and Non-Shareholding Inventors, and any inventors who have decided to waive their right to equity, in the course of their employment and study at Imperial College London) and the company structure and "the Management"t bring their networks and management experience to this venture.

The Founders have reviewed The Company spinout package of information provided by Imperial College and signed the Spinout Intent Letter.

Background

The Company is developing;

-      TECHNOLOGY [insert description]

-      ITS APPLICATIONS [insert description]

-      GENERAL INTENT OF NEW CO [insert description]

-      EXPECTED SOURCES OF REVENUE IN SHORT TERM AND LONGER TERM [insert description]

Objectives to meet in order to initiate the procedure for company formation

The Founders will take responsibility for all aspects of incorporation, fundraising, recruiting, managing and growing The Company with support from the Industry Partnerships and Commercialisation Spinout Project Manager leading the spinout opportunity and the broader entrepreneurial ecosystem support available at Imperial College London.  The Founders have signed the Spinout Intent Letter (provided as part of the spinout support package).

The Founders agree that they will carry out the following activities prior to Imperial College licensing the IP into The Company :

Agree and sign this non-binding MoU

Prepare and update [new company name] business plan (a template will be supplied, but you are free to use an alternative template as long as the same basic information is supplied)

Continue to develop and update the financial plan (to be included in the business plan, or provided separately) to detail;

a.  the funding needs of [new company name] and the finance required to get to a value inflection point (defined as a point in which investors will put more money in or the receipt of revenue sufficient for an extended period of solvency);

b.  the first 2 years revenue projections

Evidence of:

a. the continuous pursual of appropriate fundraising objectives to support the pre-revenue period of activity as detailed in The Company business plan as approved by Imperial College or

b. first customer engagement (a product/service order or compelling evidence of an expected order)

Incorporation & Legal Advice

It is strongly encouraged that the Founders engage with a law firm from the panel list on the incorporation of the company and for general legal advice on the spinout process. Doing so will help the process to move as quickly as possible and ensure the spinout formation completes lawfully. The template legal agreements provided by Imperial College have been iterated over years of feedback from multiple founders, company chairpersons, law firms and after an extensive review of Founders ChoiceTM completing in 2023 to remove remaining contentious issues. Crucially however, law firms on the panel list are experienced in dealing with universities and university-based spinouts and hence, experience has shown, do not have to be ‘brought up to speed’ with why universities have to have certain provisions and protections. [new company name] will be incorporated as a shell company with a recommended maximum of 100,000 ordinary shares allotted at a recommended par value of £0.00001 per ordinary share. Such founding equity shares will be issued to all Parties excluding Imperial College before the company “trades” (trading will increase the value of the shares) and the Founders "the Management" will not carry out any of the activities listed below during this time:

take money from anyone and put it into [new company name],

alter the capital structure or founding documents in any way,

create an option pool,

buy or sell (i.e. trade in any way), and

make irrevocable promises to anyone.

All shareholders acquiring shares by way of Employment Related Securities (please review the “Taxation” section for more information) will separately enter "Section 431 elections" as appropriate within 14 days of acquiring shares in [new company name]. No additional equity shares will be issued and [new company name] will not trade until the spinout process completes i.e. the IP Licence to [new company name] from Imperial College is fully executed and Imperial College becomes a shareholder of [new company name] by executing the Shareholders Agreement, and the Articles of Association are adopted by all shareholders. These safeguards will help ensure ERS Shareholders acquire their shares for at least the unrestricted market value. If the Founders are considering deviating from this strong recommendation, then they will ensure it has been communicated with Imperial College and that the Founders have taken appropriate legal advice.

In addition, there is a Research Tax Exemption that may protect eligible Imperial College London employees acquiring shares in [new company name] from personal tax liability arising due to the increase in value of shares attributable to the IP License. It is normally used for new companies that have not traded or had other investment made into them so that employees can pay the minimum amount for their shares. Please review the “Taxation” section for more information. [new company name] 's lawyers will be able to advise [new company name] in general terms about the application of the tax exemption and the timing and manner of the founding equity allocations so as to mitigate any personal tax risk for any ERS Shareholders (please review the “Taxation” section for more information).

By adhering to the advice in this MoU, any ERS Shareholders (please review the “Taxation” section for more information) can be issued equity and Imperial College can license the IP into The Company in full compliance with HMRC guidelines. At spinout formation, each of the Parties will be issued with the number of shares set out in the share cap table below (see section "Founding Equity Allocations" below) with a nominal value per share of £ 0.00001.

It is noted that [new company name] [insert company registration number] was incorporated on [date of incorporation] with X ordinary share(s) of £x/share for an aggregate of £XX. 

Initial company activity

Once spinout formation completes it is expected that the activity of The Company will be:

*Give more detailed description of activities in short term and targeted milestones (commercial & financial) over next few years:

E.G

Final prototype design                                     By ????

Fund raising of £XXX                                        By ????

Establish first sales                                           By ????

Revenue of £XXXX                                            By ????   

As revenue and profit build then [new company name] will look to establish a dedicated management team who will oversee further company development, but of course the increase in company outlay needs to be managed carefully to stay in step with available revenue.

Directors & Management

When [new company name] is formed the board will have a minimum of [number] directors and a maximum of [number]. There will be a minimum of [  six  ] board meetings each year.  The Parties will decide who the other starting Directors will be but they will not have a permanent right to appoint a Director. This is intended to avoid any potential future conflict between individuals negatively impacting The Company and allow The Company to continue to function.  The initial board shall be; [name]. For so long as Imperial College is holding equity, Imperial College will always have the right to appoint an Observer to the board and to receive Board packs (including minutes) for the purpose of monitoring and reporting whether an Observer is appointed or not.  Each Party who is not a Director may also send a single non-voting observer to board meetings as long as their individual shareholdings are 5% or greater of the issued shares. Appointment of further directors shall require approval of the shareholders (as set out in the Articles of Association and/or Shareholders agreement).  The quorum for the board will be more than 50% directors and resolutions are to be passed by simple majority. 

Founding Equity Allocations

The Parties have agreed that the founding equity split for [new company name] will be 95% : 5% in favour of the Founders.  Imperial College Innovations Limited is a wholly owned subsidiary of Imperial College London and will hold all the Imperial College London shares. The share of the founding equity allocated to Imperial College will remain fixed at this percentage as [new company name] raises equity funding up to a cumulative total of £5m, or 20m, (the "Non-Dilution Protection").

The Founders waive any right to benefit from any returns Imperial College London receives in respect of the equity held by Imperial College, as they are receiving founding equity in their own right, as per the Rewards to Inventors Scheme.

In relation to the shares held by each Founder, the Founders [ will / will not  ] put in place vesting provisions at formation. [insert terms of vesting]

The Parties agree that a share option plan will be put in place to incentivise future management, directors and staff of [new company name] and any options granted will vest against agreed milestones over a three-year period.  The Founders will determine the size of the option pool. The board will determine the detailed rules of the option scheme subject to the limitations stated below.

The percentage of the fully diluted share capital allocated to the option pool will be allocated from the 95% founding shares allocated to the Founders. i.e. the 5% of the founding shares allocated to Imperial College will remain at this level based on the actual number of shares in issue at that time, until the Non-Dilution Protection threshold is exceeded. The mechanism by which Imperial College remains at the agreed equity level is through the issue of top-up shares in events where new shares are issued to existing or new shareholders, such as upon investment or when options are exercised and converted to shares. Imperial College will not be issued top-up shares if options are unallocated (i.e. simply set aside) or allocated (i.e. set aside for a particular existing or prospective shareholder).

 Based on this the Parties have agreed that the founding equity split will be as per the table below.

[insert cap table] (using the separate Excel sheet named ‘Cap Table – option and investment non-dilute example’. In addition, please refer to Appendix 4 for example scenarios related to how shareholder equity position changes with respect to investment and if Options are vested (for illustrative purposes only). N.B.  where Imperial College is holding dilutable shares, it will be diluted using the same mechanism as for the Founders.)

 None of the founding shareholders shall be entitled to transfer or otherwise dispose of any of their shares for two years from the completion date except in the case of an acquisition. However, Imperial College may at any time gift its shares back to [new company name] should it determine the potential for reputational harm against it.

 All shares will be issued at a nominal price and prior to injection of any investment or contracts being put in place. The Founders shall be issued with “Ordinary Shares” and Imperial College shall be issued with “T Ordinary Shares” which shall have identical rights to Ordinary Shares save that they will benefit from the "Non-Dilution Protection" described above.

 A dividend policy will be put in place to benefit the shareholders pro-rata, further details on the terms are in Appendix 1 (Rights attaching to shares).

 Further information pertaining to rights associated with shares is contained in Appendix 2 (Proposed Covenants), Appendix 3 (Conditions of issue and transfer of shares).   

Funding and Investment

Founders will ensure that [new company name] has the required funding to undertake the activities described earlier. The Founders will determine the terms of any equity investment subject to the Non-Dilution Protection described above.

In practice a clause will be added to the Articles of [new company name] (based on standard anti-dilute clauses in the British Venture Capital Association template documents).  The result being that [new company name] issues Imperial College with additional shares at each funding event and approval/issue of options to keep the Imperial College shareholding at the agreed minimum equity threshold.  This Non-Dilution Protection will fall away once the cumulative investment hurdle of £[  5m, or 20m  ] in [new company name] has been exceeded. After this point any shares issued for this future investment will dilute equity holdings of all existing shareholders (including Founders and Imperial College) pari passu.

In all investment rounds the percentage shareholdings of the Founders’ equity will be diluted (reduced) proportionally to their shareholdings. Note that of course the actual number of shares each shareholder holds will not reduce. 

At formation, or shortly after if terms are already agreed, it is expected that [investor's name] will invest £XXX on the following terms.  [insert summary of investment terms]

 Documentation pertaining to equity investment will be shared with Imperial College. All investments must comply with the money laundering regulations and rules of the Financial Conduct Authority. The proceeds from investment must be used for [new company name] ' s working capital requirements to be approved by the board.

License agreement

When all the Parties are confident that the proposed business is viable, has a clear business plan, is confident that it can attract financing or generate revenues rapidly, and the IP is released for licensing after the completion of due diligence conducted by Imperial College London, the existing IP will be exclusively licensed to [new company name] via a royalty bearing license agreement. The commercial terms of the license will be provided by Imperial College to the Founders in accordance with the Imperial College London IP Policy and associated guidance.  The license provides the correct legal title to IP required by [new company name], in return [new company name] will pay the license holder (Imperial College) a fee for the IP which is subsequently shared with the inventors of the IP to be licensed to [new company name] and Imperial College London (minus any patent costs) as per the College Rewards to Inventors Scheme. Note that the IP will always be licenced and never assigned to The Company at spinout formation.

Service consultancy/non-executive director appointment agreements, Imperial College London's Conflict of Interest policy and Register of External Interests and Annual Declaration policy for Imperial College London Staff Members

If the Founders or "the Management" will not be employed by [new company name], then Service / consultancy agreements and / or non-executive director letters will be put in place between the Founders, "the Management" and [new company name] which may include customary provisions for non-disclosure, non-competition, confidentiality, assignment of IP rights and termination. The nature of the agreement put in place between [new company name] and each Founder will depend on the nature of the Founder’s role within [new company name]. Typical examples are included within the table below:

Regardless of the type of contract put in place with [new company name], it should specify the nature of the engagement and clarify ownership for IP generated under said contract.  It is important to have this clarity on IP ownership for various reasons:

When new IP is developed, the contract will separate out whether it was created as part of the Founder’s employment with the College or whether it was done in their capacity of providing services to [new company name]. This has a clear impact on whether a future license from College to [new company name] is required, or whether the IP is owned by [new company name];

It is in the best interests of [new company name]. If one of the Founders develops some IP without a contract in place and then leaves [new company name], that will leave [new company name] in an extremely disadvantaged position with respect to its freedom to operate;

Investors and acquirers require clarity on IP ownership to ensure that [new company name] has clear freedom to operate with regards to IP.

The College’s preferred route for external consultancy work for Imperial College London Staff Members is through Imperial Consultants (ICON) to enable any contractual risks and liabilities to be managed appropriately.  If the work is not through ICON, The Company must sign the College’s Waiver for Private Work; this is a requirement of the EI Policy. The Waiver must be appended to the consultancy agreement and the Waiver referred to within the agreement itself, specifically stating:

Before the Commencement Date, the Consultant must:

arrange for the authorized Company signatory to sign the Waiver for Private Work set out in Schedule and deliver such Waiver for Private Work to their Head of Department at Imperial College London, and

have obtained approval from their Head of Department at Imperial College London.

It is advisable to seek legal advice before signing personal consultancy agreements with [new company name] if they are not arranged by ICON. The same EI Policy applies to College staff accepting Directorships with [new company name] and Directors should also agree a consultancy agreement if they intend to work with The Company.

In addition, for Parties that are Imperial College London Staff Members, attention is drawn to the College's Register of External Interests and Annual Declaration policy that can be found on the College webpages (direct link is:  https://www.imperial.ac.uk/human-resources/procedures/external-interests/). 

 Imperial College London Staff Members wishing to participate in a spinout (including those individuals not party to this MoU ([name 1], [name 2], etc / None) must first seek approval from their Head of Department (HoD), ensuring any impact on their capacity to perform their current academic and teaching duties is assessed. As per the Guidance for HoDs and line managers for reviewing and/or approving requests for External Interests, requests should be considered alongside an individual’s role at College and the responsibilities assigned to that role; both from a capacity point of view and also the nature of the external interest, to determine how it will impact on the delivery and relativity of the individual’s duties and serve their and College interests, and ensure it does not create an unmanageable conflict of interest (see Conflict of Interest Policy).

Formal approval should be sought via ICIS (Imperial College Information Systems) in line with College’s External Interests Policy (EI Policy).The Waiver for Private Work should accompany this in instances where service agreements have been arranged externally to ICON. Only once HoD approval has been provided, the Imperial College London Staff Member is able to sign the commercial agreement at the appropriate time alongside the other documentation to be signed at spinout formation. Whilst HoD approval is not guaranteed until formally signed off via ICIS, Imperial College London Staff Members should obtain email confirmation of approval from their HoD and promptly share this with Imperial College.

 In general, Imperial College London Staff Members are strongly advised to notify their HoD as soon as the possibility of participating in an External Interest such as a startup arises, keeping the HoD updated on formation timelines. Following these recommendations will help enable the HoD to formally sign off on the External Interest via ICIS without potential delay as they will have been kept up to date with proceedings throughout. 

The Founders who are Imperial College London Staff Members confirm they have discussed the opportunity with their HoD, approval in principle has been provided and confirmation of such has been provided to Enterprise. Furthermore, if not already, the Founders who are Imperial College London Staff Members will formalise the approval with their HoD via ICIS.

Taxation

 Where shares are acquired by reason of a person’s employment, the shares are deemed to be Employment Related Securities (“ERS”) for tax purposes and will fall under rules which can charge employment income tax (often via PAYE, with National Insurance Contribution (“NIC”) and, if applicable, Apprenticeship Levy (“AL”) additionally due) on the occurrence of certain events.

 Part 7 of the Income Tax (Earning and Pensions) Act (“ITEPA”) provides rules for the taxation of ERS. In the context of a typical spinout company, these rules act to ensure that where:

A researcher is employed by a Research Institution (“RI”) and acquires shares in a spinout company; and

The RI puts value into the spinout company by transferring IP,

then a charge to Income Tax and NIC could arise when:

Shares are acquired for less than market value, or

There are post-acquisition benefits that increase the value of shares.

The Research Tax Exemption (“RTE”) acts to prevent such income tax charges arising where they would arise because of the transfer of IP by the RI to [new company name]. The RTE is available where all the following are satisfied:

An agreement is made for the transfer of IP from one or more RIs to a company (the spinout).

A person acquires shares (or an interest in shares) in the spinout before the IP is transferred or within 183 days of the transfer.

The right to acquire shares (or interest in shares) is available by reason of employment by the RI or the spinout.

The person is involved in research in relation to the IP that has been transferred.

Where the RTE is available, an income tax charge will not arise to ERS Shareholders because of the following:

The value of the shares in the spinout when they are acquired to the extent it is attributable to the transfer of the IP, and

Where shares are acquired after any IP transfer, the value of the IP will not be reflected in considering whether they have acquired shares at an undervalue.

Further, where the RTE is available, ERS Shareholders are each deemed to have entered a Section 431 (“s431”) election at the time the shares are acquired. This means that any restrictions on the shares will be ignored for tax purposes and the shares unrestricted market value (“UMV”) (ignoring the value attributable to IP and the effect of restrictions) will be taxed at the date of acquisition. There will be no further income tax or NICs when the restrictions are lifted or the shares sold and the ERS Shareholders should be able to claim capital gains tax treatment on any subsequent disposal of their shares.

Therefore, the grant of the exclusive IP license to [new company name] is being structured so that it falls within the RTE for income tax purposes. 

 Where the RTE is available, if [new company name] has other sources of value (apart from the value conferred by the exclusive IP licence) when the ERS Shareholders acquire their shares (where the shares are deemed as ERS by virtue of the shareholder’s employment status), then this value will be taken into account for income tax purposes.  If the ERS Shareholders acquire their shares for less than UMV but they enter into a valid s431 election on acquisition, the ERS Shareholders would be subject to an income tax charge under PAYE, with NIC and AL applying to the difference between the price paid and the UMV at acquisition, to the extent the shares are Readily Convertible Assets.

Where the RTE is not available, no employment income tax or NIC charges should arise at the time the shares are acquired for tax purposes provided that the ERS Shareholders pay UMV to acquire their shares. If the ERS Shareholders acquire their shares for less than UMV, an employment income tax charge arises on the difference between the UMV and the total consideration paid by them.  A tax valuation exercise will need to be completed to confirm the value of the shares before and after the transfer of the IP (see next paragraph), even if no other source of value is added to [new company name] other than the IP transfer.

Therefore, if any of the Imperial-employed ERS Shareholders has or will potentially acquire shares for less than the UMV (e.g. due to the participation of [new company name] in the activities listed in the Incorporation section prior to acquisition of their shares or IP is transferred to [new company name] and the RTE is not available to them), [new company name] will obtain a professional third-party valuation of [new company name], which will confirm the UMV of such shares and the valuation will promptly be shared with Imperial College in full before the spinout process completes for the purposes of calculating liabilities (if any) under the indemnities on income tax and national insurance described below.  The accountant valuation statement should provide:

an independent statement confirming the value of [new company name]’s shares (ideally this would be par value);

a list of the papers and process carried out to give the valuation. Imperial College does not need to see the working e.g., a balance sheet.

An estimate of the potential tax liabilities for the ERS Shareholders can be made by considering the total “best estimate” value in [new company name], multiplied by their equity percentage, multiplied by 40%. Examples of value (apart from the value conferred by the exclusive IP licenses) are: capital or grant funds received, the value of commercial contracts signed, and significant physical assets. 

By entering into the corporate documents, the Imperial-employed ERS Shareholders agree to indemnify Imperial College and Imperial College London on demand for any income tax and national insurance assessed upon it through the PAYE system to the extent to which recovery of these amounts from them is permitted by law.

Separately, by entering into the corporate documents the ERS Shareholders acquiring shares each agree to enter into a s431 election with The Company and/or Imperial College London, as appropriate within 14 days of acquiring their shares in [new company name], and promptly share these with Imperial College.  For best practice, even when the RTE applies this is still required for a ‘belt and braces’ approach.  Further guidance and downloadable forms for employee/employer to elect for s431 can be found on the HMRC website: https://www.gov.uk/hmrc-internal-manuals/employment-related-securities/ersm30450.

 Please note that these comments on taxation are based on current law and HMRC practice, which may change from time to time. The Founders, Non-Founding Inventors, and "the Management" are aware that Imperial College and Imperial College London are not advising them personally on the tax and national insurance consequences of their acquisition or holding of shares in [new company name]. If they are in any doubt as to their tax and national insurance position, they should obtain independent tax advice.

Warranties

 [new company name], Founders, Non-Founding Inventors, and "the Management"will be required to give some guarantees (known as 'Warranties') to Imperial College and in due course to any future investors.  This is normal practice as new shareholders and investors will not know the details of the IP and [new company name]'s operations so use Warranties as a way of ensuring there is full disclosure of all the facts as known at the time.  As it is an important point it is normal that there is a financial penalty against the individuals giving the Warranties if there has been any breach of the Warranties by acts such as dishonesty, concealment of facts or misrepresentation.  The usual penalties are 1 to 2 years' salary of the individual however at this stage given the Parties are all working together on forming [new company name] Imperial College propose starting at a lower amount of £10,000 per individual. The liability for [new company name] itself is £50,000.

The warranties listed below are not the only such warranties that will be required of the Founders, Non-Founding Inventors, and "the Management", but are indicative of some of the typical warranties required to start a business [  Warranties for the Non-Founding Inventors, and "the Management" are limited where indicated. 

That, other than the IP Rights licensed pursuant to the IP License there are no IP Rights within any of the Founders' [  and Non-Founding Inventors’  ] ownership or control that The Company might reasonably require to exploit the technology or execute the business plan. [  Non-Founding Inventors are excluded with respect to the business plan.  ]

As far as the Founders [  and Non-Founding Inventors  ] are aware there is no research work being carried out at Imperial College London the results of which:

  might reasonably be required by The Company to exploit the technology or execute the business plan; or

  could be used to develop technology competitive to the technology.

As far as the Founders, Non-Founding Inventors, and "the Management", are aware there are no IP Rights owned or controlled by a third party that would be, or are likely to be, infringed in the course of [new company name]'s execution of its business plan and/or exploitation of the technology. Non-Founding Inventors are excluded with respect to the business plan.

As far as the Founders, Non-Founding Inventors, and "the Management" are aware no third party is infringing or is likely to infringe the IP Rights in respect of the technology.

That the business plan represents the genuine intent of the Founders [  and the Management  ] with respect to the development of the technology and the business of The Company, and is based on sound and reasonable assumptions in relation to technical development, financial projections and the legal and regulatory framework under which The Company proposes to operate pursuant to such business plan.

Restrictive Covenants

 The Founders will be asked to give restrictive covenants intended to 'restrict' the Founders' ability to set up in competition to [new company name].  As with the Warranties these are also normal practice and designed to protect [new company name]and any future investors.  However, Founders that will remain Imperial College London employees would normally expect their ‘academic freedom’ to conduct non-commercial academic research in the same field as the business to be maintained.

Legal representation 

Each Party is responsible for securing its own tax planning advice and for securing personal legal advice in relation to this MoU and subsequent documentation that will be required to complete the formal set-up of [new company name]. 

Imperial College advise that [new company name] retain legal representation at an early stage with respect to the documentation and structuring of [new company name].  The terms herein reflect the outline commercial terms, but the Parties may agree to structure The Company in a different manner e.g. for tax efficiency. [new company name] is strongly advised to seek its own advice in this regard and Imperial College can provide names of suitable advisors should [new company name] require them.  As further described in paragraph "Incorporation" Imperial College STRONGLY advise using a lawyer from a panel of independent law firms who is experienced in dealing with universities and university based spinouts.

Shareholder rights and control of The Company 

Shareholder consent will be required for certain key decisions affecting the value of [new company name], its Shares and the corporate governance of The Company, these are summarised in Appendix 2.  In addition, the shareholders will have rights to acquire and sell shares as outlined in Appendix 3.  [new company name] will have an obligation to supply normal financial and operational information about [new company name] to Imperial College.

Confidentiality 

This MoU is written on the basis that its contents and existence are confidential and will not (except with the agreement in writing of the Parties) be revealed by any of the Parties to any third party, other than the Parties’ legal representatives or other advisors (who must also keep this MoU confidential), or be the subject of any announcement.

Governing Law

This Agreement shall be governed by and construed in accordance with the laws of England and the Parties submit to the exclusive jurisdiction of the Courts of England.

Nature of this Agreement

This MoU is subject to contract and, apart from the Confidentiality, Governing Law and this clause, is not intended to be legally binding, nor does it represent a complete summary of the contractual or commercial aims of the Parties, but expresses their desires and understandings subject to obtaining legal and other professional advice and executive approval.  If executive approval is given, this MoU may form the basis of negotiation of a detailed agreement, but no party is legally obligated to any other party unless and until such an agreement is signed by all Parties.

Signed by:

[signature]                                                 [date of signing]   

Imperial College Innovations Limited

[signature]                         [date of signing]

[name]

[signature]                                                   [date of signing]

[name]

[signature]                                                    [date of signing]

[name]

Appendix 1 - Rights attaching to Shares

Subject to the cash flow, working capital and investment requirements of [new company name], if in respect of the relevant accounting period [new company name] has profits available for distribution (within the meaning of section 830 of the Companies Act 2006), [new company name] shall procure that in respect of the accounting period of [new company name]commencing on the second anniversary of the startup formation (i.e. when the IP License and corporate documentation has been executed by The Parties), and each subsequent accounting period of [new company name], at least 30 per cent of such profits are distributed by way of cash dividends by [new company name] to all shareholders pro rata to the number of shares held regardless of their class.  In deciding whether in respect of any accounting period [new company name] had profits available for distribution, the Board shall be entitled to request, or at the request of a Shareholder shall procure, that the auditors from time to time of [new company name]shall certify whether such profits are available or not and the amount thereof (if any).  In giving such certificate the auditors shall act as experts and not arbitrators and their determination shall be final and binding on the Parties hereto.

Appendix 2 - Covenants

Shareholder consents. 

The prior written approval of holders of 75% of the shares will be required to:

Amend the Articles of Association or modify any shareholder rights,

Make any material change to the business plan and/or the nature of the business of [new company name],

Enter into of any transaction or agreement that is not in the ordinary course of business and/or on an arm's-length basis,

Issue any shares or obligations that may be convertible into shares or any share options,

Making any loan in excess of £10,000,

Giving any guarantee, obligation or indemnity other than in the normal course of business,

Acquiring any type of asset in or from another company or participating in a partnership or joint venture,

Disposing, assigning, licensing or leasing to any third party of any of the assets of The Company or the granting of any rights over such assets,

Winding-up [new company name] or the making of any application to the court to meet with creditors or making any insolvency arrangement,

Declaring and/or making a payment of a dividend,

Appointing any adviser to sell or negotiate to sell, any shares in [new company name] or enter into an IPO,

Enter into any lease, license or the purchase of any property not in accordance with the business plan,

Selling [new company name] or a controlling interest in [new company name],

Any capital expenditure greater than £25,000 outside the approved Budget,

Making any payment to any Director, Founder, consultant to or employee of [new company name] of more than £75,000 during any 12 month period,

Creating any debenture, guarantee, mortgage or charge over the whole or any part of [new company name]s property, assets or undertaking,

Incurring any borrowing, loans, advances or credit (with the exception of standard credit terms in the ordinary course of business)

Commencing or settling any litigation or arbitration by [new company name], and

Appointing or removing of directors to or from the board of subsidiary or Associated Companies of [new company name].

Board consent

Approving the annual Budget of [new company name],

Making any change to or departing from the business plan and/or Budget,

Adopting or varying any Employee Share Scheme,

Disposing or assigning to any third party or granting any rights over any capital assets of [new company name] with a book or market value in excess of £20,000,

Appointing and removing [new company name] auditors,

Making any change in the accounting policies of [new company name],

Altering [new company name]'s banking arrangements,

Any apointment of an employee or consultant or variation of terms where emoluments exceed £75,000 or more than 3 months' notice required,

Conducting any dealings between [new company name] and any of its directors, Shareholders or directors of any subsidiary of [new company name],

Entering into or amending any material supply or distribution agreement, and

Entering into or amending any material long-term contract, transaction or arrangement which cannot be terminated by six months' notice or less,

Appendix 3 - Conditions of issue and transfer of shares

Existing shareholders will have the right to participate in any new issue of shares of any class pro rata to their holding of shares.

All Shareholders will have co-sale rights such that if any founding shareholder or employee has an opportunity to sell any of his shares, the other shareholders must be given the opportunity to sell a pro rata proportion of the number of shares being sold by the founding shareholder or employee on the same terms and at the same price.

All Shareholders will have rights such that if any shareholder has an opportunity to sell any or all of its shares, the effect of which would result in a change of control of [new company name], the other shareholders must be given the opportunity to sell all of their shares on the same terms and at the same price.

If holders of at least 75% of all shares in issue agree to sell their shares, there will be drag along rights so that all remaining shareholders and option holders will be required to sell on the same terms, provided that the dragged shareholders will not be required to provide to the purchaser any representations or warranties except as to title or to agree to any other terms.

Appendix 4 - Example scenarios related to how shareholder equity position changes with respect to investment and if Options are vested (for illustrative purposes only)

The Cap Table below shows 3 events (founding equity, example investment and some options vesting) and how each event results in a change in the equity position of the respective shareholders. As can be seen in Event 1, 11,111 options have been created and set aside (but remain unallocated or exercised); as they have not been exercised and issued, Imperial College does not receive top-up shares and so its % holding of issued shares stays at the agreed 5%. In Event 2, an investment below the non-dilute threshold occurs which results in new shares being issued to the investor; because there is an issue of shares to the investor, Imperial College receives top-up shares (1,462) so its % holding of issued shares remains at the agreed 5%. In Event 3, 6,000 of the unallocated options are issued to Employee A. As such, Imperial College is issued top-up shares (316) so its % holding of issued shares remains at the agreed 5%. Imperial College are only issued top-up shares when new shares are issued to existing or new shareholders, such as upon investment or when options are exercised and converted to shares. Imperial College will not be issued top-up shares if options are unallocated (i.e. simply set aside) or allocated (i.e. set aside for a particular existing or prospective shareholder).

The Founders control the distribution of the bulk of the equity, and they should seek to negotiate an appropriate distribution with any Non-Founding Inventors; if the Founders cannot reach an agreement with Non-Founding Inventors then Imperial College London will appoint an arbitrator to decide an appropriate (dilutable) share for Non-Founding Inventors; this share will be held by Imperial College (for so long as Imperial College holds its own shares in the spinout) to avoid having company shareholders with whom the Founders have not reached an agreement; any proceeds from sale or dividend will be distributed by College direct to the Non-Founding Inventors. The arbitrator will be given guidance that 5% should be notionally allocated to all inventors and that the appropriate share for Non-Founding Inventors would be a fraction of 5% according to their inventive contribution. So for example a Non-Founding Inventor who contributed 50% of one of two patents forming the founding IP would receive 1.25% to be held by College.

To be completed if [new company name] is already incorporated. If a par value of £0.00001 was not used it is recommended that the shares are subdivided into ordinary shares of £0.00001/share, provided the company remains a shell and has not traded.

It is recommended that this is not the Consultant unless the Consultant is the only authorized signatory for [new company name]