Spin Out

Spin Out

A spin-out, also known as a spin-off or a starburst, refers to a type of corporate action where a company "splits off" sections of itself as a separate business.

The common definition of spin-out is when a division of a company or organization becomes an independent business. The "spin-out" company takes assets, intellectual property, technology, and/or existing products from the parent organization. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks; thus, at the moment of spin-off, the ownership of the original and spun-off companies are identical. However, shareholders may then buy and sell stocks from either company independently; this potentially makes investment in the companies more attractive, as potential share purchasers can invest in only the portion of the business they think will have the most growth.

Many times the management team of the new company are from the same parent organization. Often, a spin-out offers the opportunity for a division to be backed by the company but not be affected by the parent company's image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment.

In most cases, the parent company or organization offers support doing one or more of the following:

• investing equity in the new firm,
• being the first customer of the spin-out (helps to create cash flow),
• providing incubation space (desk, chairs, phones, Internet access, etc.) or
• providing services such as legal, finance, technology, etc.

All the support from the parent company is provided with the explicit purpose of helping the spin-out grow.