Incubator

What is an incubator?

Incubator (in German Inkubator) describes an institution that supports founding projects and young companies in the very early phase over a longer period. In English the institution is also called a start-up incubator or business incubator; under public sponsorship it is often called a Gründerzentrum (start-up centre) in German. The focus is on premises and infrastructure such as laboratories or workshops, advice on company formation and public funding, and access to networks. Many incubators ask for no equity in return, but a usage fee below market level.

Incubators often start before a marketable product exists, in some cases even before the company is formed. Sponsors are universities and research institutions, municipalities and economic development agencies, corporations and private operators. The cooperation rests on a usage or rental agreement, a support agreement and, for spin-offs from academia, an agreement on intellectual property rights. For a later funding round, what matters above all is whether these contracts clearly leave the rights to technology and shares with the company.

Services and length of stay in an incubator

The offer ranges from office and laboratory space on reduced terms, through shared equipment, to advice on business model, choice of legal form and funding applications. Added to this are events and contacts with companies in the region and with early-stage investors. The support is less standardised than in a programme with a fixed curriculum. Fixed cohorts and a joint end date are the exception; admission is rolling.

The length of stay is usually limited to a few years in the usage rules. This is intended: projects with long development cycles, for example in medical technology, materials research or hardware, need time and equipment before they generate revenue. For planning, it follows that costs rise on moving out. A financial model that permanently assumes reduced rents and free equipment is not reliable for investors.

Sponsorship models and terms of incubators

Public and university-affiliated incubators

Public sponsors generally ask for no shares. Reduced rents and services provided free of charge can, however, be state aid, that is, advantages from public funds. They are then often certified as de minimis aid. This is small-scale aid for which EU law sets a ceiling per company within three years; every certificate counts towards this ceiling. The certificates belong among the company's documents because they must be stated in later funding applications (see state aid law).

Private and corporate incubators

Private operators finance themselves through fees or through equity they receive for their services. In a GmbH (German limited liability company), services cannot be contributed as a contribution in kind. The incubator therefore generally takes shares against a cash contribution, often at nominal value, that is, at the amount on which the share is denominated. It provides its services on a contractual basis. Whether the difference between nominal value and actual value has tax consequences must be examined in the individual case. Corporate incubators often combine support with rights of first refusal or acquisition rights in favour of the corporation, which can narrow the circle of later buyers.

Intellectual property rights and spin-offs from academia

For spin-offs from universities and research institutions, the most important question is who owns the technology. Inventions that employees make within the scope of their employment can be claimed by the employer under the German Employee Inventions Act (Arbeitnehmererfindungsgesetz); special rules apply to universities. Software has its own rule: if employees write it in performance of their duties, the economic rights of use in principle belong to the employer (Section 69b of the German Copyright Act, Urheberrechtsgesetz, UrhG). For students and scholarship holders without an employment relationship with the university, neither allocation applies. In mixed teams, different legal positions therefore apply to individual contributions.

If the company does not take over the intellectual property rights itself, it receives a licence, that is, a contractual right of use. Investors examine this licence closely in due diligence, their thorough review before investing. They clarify whether the licence is exclusive, permits sublicences, how long it runs and whether the licensor can terminate it on a change of control (change of control). The consideration for the university often consists of licence fees, an equity stake or both. Usage agreements for laboratories and equipment also occasionally contain clauses on rights to work results. Investors in later rounds expect the essential rights to lie with the company, either by assignment (IP assignment) or by a reliable exclusive licence.

Practical example: a university spin-off in an incubator

Three people develop a sensor method for quality control in plastics processing at a university. Two of them are research staff, the third is a doctoral student with a scholarship and no employment contract. For two years the team uses the university incubator, with office space, laboratory access and advice, without giving up shares. In the second year it forms a GmbH.

• The patent on the core method was filed by the university, because the invention arose from the work of the two employees.
• The evaluation software was written by the doctoral student. Since she is not employed by the university, she grants the GmbH the exclusive rights of use by contract.
• An exclusive licence with the right to sublicense is agreed with the university. The consideration consists of a revenue-based licence fee and an option for the GmbH to acquire the patent later at an agreed price.
• A right of termination for the university in the event of a change of control is excluded, so that a later sale does not fail because of the licence.
• In the financial model, market-rate rent and laboratory costs are assumed from the move out of the incubator.

Three years later the company raises a Series A, the first larger funding round with professional investors. The investors examine these points one by one. Because the chain of rights is documented, the incubator period remains a side note in due diligence. Had the agreement on the software been missing, it would have had to be made up before closing of the round.

Distinction: incubator, accelerator, company builder and spin-off

• Accelerator: time-limited programme for a group of teams, usually in exchange for a minority stake and aimed at follow-on financing. The incubator supports earlier, for longer and with an emphasis on infrastructure.
• Company builder: founds companies from its own ideas and holds high stakes. The incubator admits projects with their own idea and takes at most a small stake.
• Spin-off: the carve-out from an existing organisation. Many spin-offs from academia go through an incubator; the term, however, describes the process, not the support.
• Coworking space: rents workstations without a selection procedure and without substantive support. An incubator selects the projects and supports them.

Common mistakes

• Chain of rights not documented. Contributions from university employees, students and external helpers are subject to different rules. If a seamless transfer is missing, it is made up under time pressure at the latest before a funding round.
• Shares for services without consideration. If shares are given in exchange for premises and advice, the consideration must be quantified. A share that looks cheap in the early phase is worth many times as much at a Series A.
• Acquisition rights of a corporation overlooked. Rights of first refusal or acquisition rights in favour of the sponsor can deter other interested buyers and prolong a sale process.
• State aid not recorded. If the de minimis certificates are missing, later funding applications cannot be completed fully and correctly.
• Costs after moving out underestimated. A plan that carries forward reduced terms shows too low a cost base and too long a runway.
• Staying too long without a market test. The protected environment is no substitute for paying customers. Investors look at whether the project gathered evidence of demand during the incubator period.

Frequently asked questions

What is the difference between an incubator and an accelerator?

The incubator supports earlier and for longer, usually without a fixed end to the programme and with an emphasis on premises, equipment and advice. The accelerator is a programme of a few months, admits teams together and aims at follow-on financing, often in exchange for an equity stake.

Do incubators take shares in the company?

Public and university-affiliated incubators generally do not. Private and corporate incubators partly ask for shares or acquisition rights. For university spin-offs, an equity stake for the university can be part of the agreement on intellectual property rights.

How long does a company stay in an incubator?

Usually a few years, limited by the sponsor's usage rules. Projects with long development times use the full period more often than software companies, which generate revenue earlier.

Must the company already be formed to be admitted to an incubator?

No. Many incubators admit teams before formation and support the formation itself. At the latest when intellectual property rights are to be taken over or investors are to take part, a GmbH is generally formed.

Does an incubator affect the valuation?

Not directly. The valuation of a later round depends on revenue, growth, technology and team. Indirectly, what counts is whether the incubator period left behind clean contracts and reliable evidence of demand.

The Roemer Capital view

The incubator period lies before the rounds we support. It nevertheless has an effect later when a company with running revenue prepares a financing from EUR 1 million. Together with the company's law firm, we then clarify whether the rights to technology and software lie completely with the company. We also record whether the sponsor holds shares or acquisition rights and which state aid is documented.

In the financial model, we replace reduced terms with market-rate costs and recalculate the runway. We present a university licence in the data room with term, fees and termination rights, so that investors do not have to sort it out only in due diligence. In this way the founding history becomes a verified part of the equity story.