The rest of the paper is organized as follows. We discuss the pertinent literature in Section 2 and introduce our baseline model in Section 3, which we use to illustrate ourmain results on the R&D investment by the incumbent firm, and on the start-up formation process.We then extend our setup in Section 4, where we illustrate the effects for the key message of the paper of a richer modeling approach allowing for the case of start-ups forming as spin-offs of the incumbent, for the impact of non-compete clauses, as well as for the possibility of ex ante wage compensations and ex ante contracting. Section 5 concludes. The derivations for the baseline model are in Appendix A, while all proofs are in Appendix B.