Corporates that have or are about to develop a new business model with the potential to be spun off as a separate venture are often faced with a dilemma. On one hand, operating the business model within the group hinders its further scaling, and on the other hand, a spin-off as a separate legal vehicle might not yet be possible due to structural or processual deficiencies.

Often, operating within the group is no longer appropriate because legacy processes, governance, reporting and project structures do not meet the requirements of the venture anymore and therefore hinder the further development of the new business model. A spin-off as an independent subsidiary or co-financed with an investor, corporate or other co-founders is often not feasible quickly enough for a corporate. Finding a solution for ownership and governance structures is a very complex and time-consuming process, especially when a corporate is spinning off a startup for the first time and frequently requires approval by the supervisory board.

This means that a corporate venture project is faced with a very difficult initial situation: the corporate structures no longer fit, but a spin-off is not feasible quickly enough. In the meantime, the venture should further grow traction, generate leads, develop its solution or, in other words, operate as a fully functional business.

In this situation legal sandboxes from third parties, which are independent shelf companies, provide a complete legal frame and setting for a new business model, ensuring operational continuity.

Components of a Legal Sandbox

A legal sandbox offers the following benefits to a corporate venture:

• Management under commercial and trade law, admin, accounting, etc.
• Appearance as the legal entity of the venture through the legal sandbox by means of a legal notice, company address, etc.
• Execution of all actions and activities requested by the client concerning the startup as the beneficial owner
• Invoicing, payment processing, accounting, and bookkeeping
• Ensuring compliance with all corporate, commercial, and tax laws and regulations
• External representation of the company through formal management of the legal sandbox, which is usually provided by the operator of the legal sandbox
• Assumption of all associated risks, including managing director liability
• Holding and provision of the venture's domain, brand, and accounts
• Recruitment of new employees with the advantage that they are outside the group governance salary scheme
• Budget management and control of available financial resources

Types of Legal Sandboxes for Corporate Ventures

In order to provide a fast go-to-market for our corporate venture projects, V_labs constantly maintains several separate shelf companies to be able to host different venture building projects simultaneously. When a corporate venture is placed into one of these legal sandboxes, a monthly usage fee, usually in the form of a legal sandbox fee, is applied.

V_labs offers three types of legal sandboxes for corporate venturing to meet the different needs of corporate ventures looking for a shell: ‍

1. Shared Sandbox

The corporate gets a company to try out different venture ideas within one legal entity. This is mostly used when a corporate wants to pilot different ventures in an early stage and get first market validation in stealth mode, but where the operational complexity of each venture is rather low, so they don’t need their own legal entity (yet).

2. Dedicated Sandbox

The corporate places each venture in a separate company (=legal sandbox). This is usually the preferred way when the ventures are already beyond market validation and at an operational stage with their own processes and services.

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3. Holding Sandbox

The sandbox acts as a holding company, which then spins-off various ventures as instructed by the corporate. This is the case when a corporate has a clear portfolio strategy and a big backlog of venture cases to spin-off.

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Procedure for Using a Legal Sandbox

The utilization of a legal sandbox by a corporate can be roughly divided into three phases. ‍

1. Transfer from Corporate to Legal Sandbox:

‍All processes and structures necessary for the business operations of the venture are transferred from the corporate sphere (where the venture was formally placed as a project) to the legal sandbox. This transfer includes legal aspects such as user, customer or service contracts, as well as all elements related to the external presentation (e.g. legal notice on a website, business address, etc.). In principle, IP rights can also remain with the corporate, as they do not necessarily have to be placed in the legal sandbox for the operation of the venture.

2. Hosting by Venture Builder:

Once the transfer is complete, V_labs takes over the operational, administrative and legal hosting of the corporate venture. This means that the legal sandbox acts as the legal sender of the venture and takes all associated tasks and responsibilities.‍

3. Transfer to Corporate:

The operation of a legal sandbox is usually an interim solution until the time comes to either establish an independent company fully owned by the parent corporate or found a joint venture together with a partner/investor. Alternatively, a corporate can also secure a call option by financing the legal sandbox through a convertible bond to become the owner of the former legal sandbox and then own and operate it instead of the venture builder. This solution is usually chosen when the operations of the venture in the legal sandbox are already quite extensive and a renewed transfer to another company would involve considerable transfer costs.

Sandbox Advantages  

In addition to cutting the cord from the rigid corporate processes that hinder the scaling of the venture, legal sandboxes offer the following essential advantages for corporate ventures:

• Stealth mode: The corporate venture placed in the legal sandbox shows no connection to the actual corporate, as the shelf company is a separate legal vessel owned by a venture builder. The stealth mode enables the venture to carry out outreach and sales activities with competitors or rivals of the corporate, for example.

• Lower ramp-up cost: By placing the venture in a legal sandbox, a corporate can avoid all the complicated admin work related to founding or spinning-off a new company.

• Speed: By using an existing shell with established structures and processes, a venture can become fully operational faster.

• More flexibility: By using a legal sandbox, a corporate gains a lot of flexibility. In case of failure, it can shut down the entire venture as quickly as terminating a service contract, whereas shutting down an entire company would take much more effort.

Overall, legal sandboxes are a valuable tool in corporate venturing to ensure the necessary transfer of new ventures into a functional legal and organizational shell as quickly and with as little risk as possible, without losing time by founding your own company. Legal sandboxes are a highly flexible instrument, that is applicable to various stages of ventures in development and to different business models. For V_labs and its corporate partners, legal sandboxes have proven their worth over the years and are therefore an essential part of our venture building services.

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