New Venture Lab: Equipping Christian Entrepreneurs

Question

Can you please share more information on exactly how a "spin-in" works in terms of its deal structure?

Answer

Spin-ins (also called venture development deals), tend to be very specific and therefore there is no typical spin-in structure, but having said that, they will tend to have these key provisions:

 

1. Equity-based investment
2. Call with pre-determined value
3. No shop
4. Discounted put option
5. Limited term until expiration

#1: Equity-based investment - Let's assume Company A is the big company that wants to invest in a smaller, developing company (Company B) because someday they want access to the technology of Company B.  As part of the spin-in deal, Company A would typically invest cash in Company B like a normal strategic venture investment where Company A gets a certain amount of equity ownership in Company B in exchange for the cash investment.  So far nothing fancy has occurred.

 

#2:  Call with pre-determined value - This is where a spin-in deal starts to get fancy.  What this says is that Company A can "call" or unilaterally decide to "buy" Company B at any time they want after Company B has surpassed certain milestones and often only after a certain amount of time has elapsed (so that Company B has a chance to build some significant value.)  This is similar to a capped first right of refusal.  In other words, if Company B really comes up with something special, Company A benefits because they can "call" or buy Company B at a price they agreed to up front as part of the investment.  This would typically be expressed as a multiple of revenue or a multiple of earnings (such as EBITDA) in the preceding 12 months (often called either Trailing Twelve Months -- and abbreviated TTM -- or it is sometimes called Last Twelve Months -- and abbreviated LTM).  Sometimes there is a broad range assigned to these values rather than a narrow range.  On Cisco's deal with Nuova in 2006, the spin-in deal went something like this:

• Cisco invested $50 million in Nuova with a pre-negotiated deal for another potential $42 million follow-on investment if certain product development milestones were met
• Cisco secured an 80% ownership position in Nuovo, while Nuovo employees held the other 20%
• Cisco got a call option to purchase Nuova for between $10 million and $578 million depending upon its TTM performance at the time of the spin-in

#3: No shop - A "no shop" clause means Company B cannot try to sell out to anyone else other than Company A during a specified time frame or unless Company A decides to pass on the deal.  This gives Company A the exclusive rights to the deal for a certain amount of time.

 

#4: Discounted put option - Not all spin-in deals will have this feature.  This gives Company B the option to force Company A to buy them as a minimum (discounted) price.  This again, is usually based upon TTM performance of some sort or potentially a minimum floor price that Company B gets no matter what - it all depends on what has been negotiated.

 

#5: Limited term until expiration - There are typically beginning and ending time frames or terms associated with each of the key provisions such as any follow-on investment, the call option, the no shop and the discounted put option.