Becki DeGraw on spinouts, IP licensing & clean exits | Wilson Sonsini Startup Legal Basics

**Jason Calacanis** (0:06)
Welcome back to This Week in Startups. We're doing our Startup Basics series. What is it?
All the basics you need to know to run your company. Legal, accounting, marketing, you name it. We go over it here. AI, a new one. thisweekinstartups.com/basics to see the entire library. I'm so lucky to have Becki DeGraw from Wilson Sonsini, WSGR on my team. She's my attorney and she helps me explain the basics to you. Welcome back to the program, Becki DeGraw.

**Becki DeGraw** (0:35)
Thank you so much. It's always good to be back. Always fun time to be here.

**Jason Calacanis** (0:38)
We always have a good time.
I wanted to talk to you. I came up with today's topic, spin outs. Spin outs, spin outs, spin outs. Every week, every two weeks, some founders leaving a company, they built something inside the company. The CEO says, wow, that's a very interesting project. Let them work on it for six months, 12 months. And it has an absolute interesting success, but not breakout, and it doesn't belong inside the first company. But the founder, the co-founder, or an executive wants to go pursue it. So say, sure, you can spin it out. You can spin it out. Second case, hey, we want to get hired, but maybe Washington DC doesn't exactly want us to sell a company and the shares in it. So we're going to do an IP license and we're going to spin it out that way. Two different situations, very different. Let's start with the first one, which keeps happening to me. I literally have three of these on my plate this month. And every time, I've got to, the one co-founder who's leaving, there's too much equity, the holding company took too much equity, and then every CEO is just saying, why can't I even get 80% of this new company? This isn't fair. We should own 90% of the company and the co-founder leaving should get 10%.
Tell us a little bit about spin-outs, why they happen, and then what's the best practice.

**Becki DeGraw** (2:02)
Yeah. I mean, you laid the groundwork perfectly. That is what the situation will receive the spin-outs most often. Why, the why behind it might be, right, it's faster to start with that technology that has already been built and tested and validated. And like you said, may not just fit within that existing entity. It may not be, it may be distracting to what the goal is there. From the existing entity's perspective, if they're not going to use that technology or that asset going forward, and they don't really want to put the funds to it or the resources toward it to scale and grow because it's maybe not in the direction of their strategic vision of where they want that company to go, it may be more valuable to them to say, all right, well, you're interested in this. If I spin it out and I agree, I'll transfer X, Y, and Z over to you, you go grow it, or maybe I'll get some benefit from that. That's really the why behind it.
These things take all kinds of shapes and sizes. Another example that we see all the time is university, right? So you've got folks working at the university to do R&D, and then they're like, well, we're on to something. That is also a spin out type situation where instead of negotiating with a company, you're negotiating with the university in terms of what are the terms going to look like, of how am I going to get that IP into a new co and be able to start a new venture. But there's a lot of considerations that go into how we would think about these and how we would structure them.
They are so fast specific.
First thing I'll say is this is going to be pretty high level and a lot more of you should think about this and you should think about that. Here's a few different ways to go about it rather than, well, when you do this, you should do this and you should do that. I don't know what it should look like because there are just so many different sizes and how these things take form.

**Jason Calacanis** (4:12)
When this happens, sometimes it's at a big company. Google has famously spun out Waymo, very famous Microsoft back in the day, this little site Expedia that was internal. Now, that can be for economic reasons or the thing's getting so big and the existing management team is getting distracted by it. And Waymo needs to be out there on its own raising capital to validate its, from what I understand, the back channel I got was, hey, we need to validate this valuation. And in order to get AI talent to work on a self-driving company, we're up against Anthropic or SpaceX, XI, or OpenAI. We need a currency where people can say, oh, this is going to be a trillion dollar company. So there is a real reason to spin it out. I like to run a little test when I talk to the two founders. I say to them, what's an amount where if this thing spun out and it became a unicorn, you would feel great about the terms that we got to. And typically, I tell people, have the existing company keep 20 percent, let the new team keep 80 They want to go 51, 40, whatever. And sometimes it's 25, 75, 30, 70 It is specific because maybe the thing's making zero dollars and losing money, sometimes it's making some money. So there's all kinds of provisions you can do.