Virtual Shares: A New Model for Research–Startup Partnerships

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1. How are virtual shares used in a research–startup collaboration?
2. Why use virtual shares?
3. How do virtual shares compare to traditional models?
4. Why this matters for deep tech
5. Expert Perspectives
6. What to watch out for

You’ve probably heard of “virtual shares” or phantom shares in the context of employee reward plans, often called a VSOP (Virtual Stock Option Plan). In that setup, employees receive a payout at exit instead of actual ownership.

In research–startup collaborations, it’s the same instrument – just played in a different style. Kind of like playing jazz music with a trumpet, rather than classical. 🎺

Instead of rewarding employees, virtual shares in research collaborations are used to align institutions and startups. They let founders access research expertise, IP, and infrastructure without upfront licensing fees or giving up control, while still giving institutions a return if the startup succeeds.

Let’s look at how the model works, why it matters, and what both sides need to keep in mind.

1. How are virtual shares used in a research–startup collaboration?

In this context, virtual shares are a contractual agreement for a future financial payout, typically triggered by a liquidity event (e.g. sale of the company or public offering) or profit distributions. They are not actual equity and confer no ownership or voting rights in the company.

Here’s how it works:

• The institution and startup agree on a virtual share amount (e.g. 10%)
• If a trigger event occurs, such as an exit or dividend, the institution receives a payout as if it had held that percentage of shares, including dilution from future financing rounds.
• Until that point, the startup retains full control, and the institution has no legal ownership, no voting rights, and no shareholder obligations.

Example: A medical imaging startup uses a research institute’s patented algorithm and receives technical support. In return, the institute receives a 10% virtual share. If the company is acquired for €20 million, and assuming no further financing rounds, the institute would receive €2 million. No real shares are issued. No shareholder agreements. No control or approval rights. Pure cash returns for the institution.

Virtual Shares: Myth vs. Reality

2. Why use virtual shares?

In Europe, 90% of research never becomes a startup. While not every idea is venture-scale, a major bottleneck is how research institutions structure early collaborations.

Most research institutions still use the traditional spinout model: IP licensing fees, early equity stakes, and retained governance rights.

This model typically includes:

• Licensing fees to access IP and recoup previous investment
• Equity stakes issued before the company is investor-ready
• Governance rights such as board seats or vetoes to retain institutional control

These structures are often designed to minimise institutional risk, but for early-stage startups, especially in deep tech, they introduce friction that slows progress and weakens long-term viability. Institutions maintain a tight grip on their startups, which signals they don’t trust their founders to succeed.

With the traditional spinout model, founders often face:

• Lengthy negotiations
• Complex governance structures
• Cap tables crowded with non-operating shareholders
• Investor pushback due to early obligations

Virtual shares can remove that friction. They act as the upfront licensing payments, instead of tapping into an early startup’s non-existent cashflow. As phantom equity, they don’t come automatically with any governance or voting rights. Virtual shares just provide a financial payout if the company succeeds, whether through an exit or future dividends. The institution’s return is preserved, but it’s tied to outcomes, not early ownership.

This model reflects a mindset shift: trusting founders to build the company, rather than controlling them from day one.”This model reflects a mindset shift: trusting founders to build the company, rather than controlling them from day one.”

Travis Todd, Head of Startups at Fraunhofer HHI

Example: Silicon Allee at Fraunhofer HHI has replaced the traditional license or equity-for-IP model with virtual shares. Startups receive 12 months of support – including access to labs, IP, and technical expertise – while Fraunhofer HHI holds a virtual stake that pays out only if the startup exits or pays dividends. The model lowers early barriers and links institutional returns to long-term success.

3. How do virtual shares compare to traditional models?

4. Why this matters for deep tech

Deep tech startups rely heavily on early partnerships with research institutions. They need:

• Access to patents, datasets, and prototypes
• Use of specialised labs and infrastructure
• Collaboration with domain experts
• A reputational boost from aligning with credible institutions

Traditional models typically involve upfront cash payments so that institutions can start recovering their investment from day one. But this model assumes the startup is immediately revenue-generating – which isn’t realistic for most deep tech ventures. Accepting virtual shares instead represents a cultural shift: deferring financial return until the startup is in a position to deliver it.

Virtual shares provide a more founder-compatible alternative. Startups get what they need without giving up decision-making power or ownership too early. This can accelerate spinouts, and aligns with investor expectations.

5. Expert Perspectives

Institution perspective

At Fraunhofer HHI, we use a virtual shares model so startups can access our research, expertise, and facilities without giving up control. My background in Berlin’s startup ecosystem means I know how much this flexibility matters for founders — and for getting research out of the lab and into the market.”

Travis Todd, Head of Startups at Fraunhofer HHI.

Investor perspective

In deep tech, founders should ideally retain 50 – 60% post seed ownership to remain motivated and incentivised for the long term. When universities or technology transfer offices start out with 10–20% real equity (or more), founders are often diluted below that threshold, which can weaken incentives and reduce investor appetite.

Clean cap tables matter because oversize institutional stakes, veto rights, or governance influence can complicate decision making and deter future capital. In my opinion, investors worry less about the mere presence of an institution and more about whether its stake is disproportionate or comes with restrictive rights.

At the same time, having a respected university or research institution visible on the cap table can enhance credibility and signal quality to investors. Many institutions also value some recognition for their role in the tech/IP development.

This is where virtual share models are attractive. They give institutions meaningful economic upside if the company succeeds, without cluttering the cap table or introducing governance complications. In some cases a hybrid model can be particularly effective: for example, the institution might take a small (let’s say 2–5%) dilutable equity stake for visibility, while the bulk of its participation comes through virtual shares.

This structure preserves founder incentives, keeps the cap table clean, ensures institutions benefit from successful outcomes, and strengthens investor confidence – a win for all parties involved.”

Eltonjohn D’souza, Deep Tech Investor, Redstone VC

Founder perspective

“Honestly, the virtual share model saved us a lot of time. We avoided the drawn-out negotiations and the admin tangle that can come with more traditional structures, and we were able to align incentives without “messing up” the cap table. That’s been huge in keeping it clean and straightforward for our next rounds. If I could give one piece of advice to other founders, it would be: consider this model — and definitely read Venture Deals. That book will make you really good at spotting why these decisions matter.”

Amir, Co-founder of hoopooh.

6. What to watch out for

Virtual shares work best when the terms are clear. Here’s what both sides should keep in mind:

For founders:

• Clear trigger events – Define exactly what counts as a payout (IPO, acquisition, dividend) to avoid disputes.
• Fair percentage – Align the virtual share value with the actual contribution of the IP or support provided.
• Specific IP scope – List the exact patents, datasets, or know-how covered to prevent later confusion.
• Investor fit – Confirm early that the agreement won’t scare off future funders.
• Tax planning – Get legal and tax advice to avoid surprises at payout.

For research institutions:

• Realistic IP valuation – Use market benchmarks to set a fair percentage.
• Progress tracking – Without equity, agree on regular updates to stay informed.
• Payout calculation – Decide upfront whether it’s based on gross sale price or net proceeds.
• Early exit safeguards – Consider minimum payouts if the startup sells quickly at a low price.
• Compliance – Ensure the model meets institutional and funding rules.
• Think Strategically, and Longer-Term – Taking less revenue now for a big payout later can be a win-win.

In conclusion

Virtual shares represent a shift from control-based partnerships to outcome-based ones.

They ask institutions to take a long-term view: to be compensated only if the venture succeeds, while removing friction and governance burdens in the meantime. For founders, they offer access to much needed research and advanced technology without structural risk.

In deep tech especially, where the journey is long and capital-intensive, this shift could be critical.

It’s a small legal instrument, but a big leap in thinking. 💭

This model is already in use at Fraunhofer HHI by Silicon Allee, where virtual shares are helping bring more research-backed ventures to market. Find out more here.