Spinout Entrepreneurship

Sometimes called an employee spinout, private sector spinouts are a very common form of entrepreneurship involving employees turned entrepreneurs. 

As it turns out, the majority of founders have previous work experience to drawn on and many use ideas that they encountered while working for a former employer (Sørensen & Fassiotto, 2011). An employing organization is like a fountain for an employee-turned-entrepreneur to drink from.

According to Yeganegi et al. (2024; p. 6) a private sector spinout is a startup that is:

"an independent venture, founded by a recent former employee (or group of former employees) of an existing firm (i.e., parent), that transfers significant valuable resources from the parent to the new venture."

For example, Zoom is a spinout of Cisco because its founder and many early employees were formerly Cisco engineers, many of them part of its Webex division which also competes in the virtual meeting space.

Spinouts are expected to have advantages over other types of startups because of the valuable knowledge, networks, and routines they learn from their employing organizations (Agarwal et al., 2016). But for these reasons, spinouts may also face hostility from their parent organizations (Walter, 2024), which can take many forms including litigation for breach of non-compete and no poach agreements.

Nonetheless, parent organizations can benefit from spinouts in several ways. One way is by developing a reputation innovation that helps them to attract better human resources. Another is by increasing corporate coherence by removing unrelated businesses that distract from the company's strategy. Finally, parent organizations can learn from their spinouts through spillbacks of people and ideas, contributing to competitive advantage (Kim & Steensma, 2017).

Recent bans on non-competes (e.g., U.S. 2024 and Ontario 2022 bans) are expected to reduce barriers for spinout entrepreneurs who create new ventures that compete directly or indirectly with their parent organizations.  

There exists significant confusion regarding the difference between "employee spinouts" and "corporate spinoffs." This is largely due to the ambiguous use of these terms in both business practice and academia (Yeganegi et al., 2024).

The Core Distinction: At a basic level, spinouts involve employees who leave to launch startups (creating new ownership), whereas spinoffs are corporate units turned into independent companies (distributing existing ownership).

1. The Employee Spinout

An Employee Spinout (or simply "spinout") is the result of independent decisions by employees to leave their jobs and start a new venture. These are "employees-turned-entrepreneurs."

• Ownership: Neither the parent organization nor its investors typically receive shares. The new venture is owned by the founders and their new investors.
• Relationship: Because they are often unauthorized, they can face hostility. Parent firms may sue for IP infringement.
• Success Rate: These are often highly successful (e.g., Zoom, Intel) because founders transfer deep industry knowledge.

Historical Example: The Traitorous Eight

The most famous example is the Traitorous Eight, who left Shockley Semiconductor to found Fairchild Semiconductor, effectively birthing Silicon Valley.

2. The Corporate Spinoff

A Corporate Spinoff is a top-down strategic decision (Agarwal, Audretsch, & Sarkar, 2007). Managers decide to turn a subsidiary into a separate legal entity.

• Ownership: This is a divestiture. Owners of the parent company receive shares in the new spinoff on a pro-rata basis.
• Example: When eBay spun off PayPal, eBay shareholders received new shares in PayPal.

Video: The Story of the Traitorous Eight

Related Theories

Explore the frameworks behind the "Strategic Leap" from employee to founder:

1. Knowledge Transfer

Knowledge Spillover Theory How industry expertise "leaks" from parent organizations to fuel the birth of new ventures.

2. Conflict

Strategic Disagreements How internal friction and divergent visions regarding innovation force the necessity of a spinout.

3. Human Capital

Human Capital Theory Leveraging years of firm-specific experience and specialized skills as a competitive advantage.

4. Agency

Agency Theory Analyzing the cost of friction when high-performers' interests no longer align with the parent firm.

Sources

Adams, P., Bahoo-Torodi, A., Fontana, R., & Malerba, F. (2024). Employee spinouts along the value chain. Industrial and Corporate Change, 33(1), 90-105.

Agarwal, R., Campbell, B. A., Franco, A. M., & Ganco, M. (2016). What do I take with me? The mediating effect of spin-out team size and tenure on the founder–firm performance relationship. Academy of Management Journal, 59(3), 1060-1087.

Kim, J. Y., & Steensma, H. K. (2017). Employee mobility, spin‐outs, and knowledge spill‐in: How incumbent firms can learn from new ventures. Strategic Management Journal, 38(8).

Sørensen, J. B., & Fassiotto, M. A. (2011). Organizations as fonts of entrepreneurship. Organization Science, 22(5), 1322-1331.

Walter, S. G. (2023). Spin-outs’ knowledge legacies and parent hostility: a competitive dynamics view. Small Business Economics, 1-21.

Yeganegi, S., Dass, P., & Laplume, A. O. (2024). Reviewing the employee spinout literature: A cross‐disciplinary approach. Journal of Economic Surveys, 38(1), 137-167.