Starting a New Venture-Decision Time

Transcription

1 Starting a New Venture-Decision Time The question: Form a business now OR continue to grow the science and development within the university. This is a cost-benefit analysis and you re definitely not ready until you ve done the analysis Costs: Formation, rent, equipment, supplies, office overhead, salaries, insurance, accounting, legal, registrations, fees, travel, entertainment, license costs, loss of academic discounts, loss of steady income stream Benefits: Limited liability, IP is less costly, capital is less costly, satisfaction of getting it going 1

2 Starting a New Venture-Types of Companies The Sole Proprietorship One owner Everyone else who works in the company is an employee, not an owner Owner has unlimited liability Duration is limited to life of the proprietor Simplest to start Pick a name for the business-own name or a trade name File the business name with the county clerk ($10) Get any licenses or permits you ll need Get an Employer Identification Number from the IRS Open a business bank account-don t co-mingle funds Obtain General Liability insurance Select an accountant 2

3 Starting a New Venture-Types of Companies Partnerships Multiple owners Share profits, bear the expenses and the losses Has to be re-organized if the partner list changes Partners have proportional shares of liability All non-partners are employees Start in same fashion as sole proprietorship, plus Draft a partnership agreement Each partners capital contribution Allocation of profits, losses, expenses & draws Each partner s authority and duties Voting rules Dispute resolution steps 3

4 Starting a New Venture-Types of Companies The Limited Liability Corporation (LLC) Harder to be held personally liable Personal assets harder to reach by creditors Minimal record keeping compared to a C corp Choice of being taxed as a partnership or corporation Can be as few as one member Early investors favor this so losses can be passed through investor s personal income tax return Start with same steps as sole proprietorship plus Appoint a registered agent File certificate of formation with Sec y of State Draft an operating agreement Ownership and operating procedures Separate personal assets from those of the LLC 4

5 Starting a New Venture-Types of Companies S Corporation-works essentially like an LLC, and is rapidly declining in use due to ready availability of LLC formation C Corporation Has perpetual existence Is treated as a natural person for legal purposes Very difficult to hold stockholders liable for company obligations or liabilities Earnings and losses do not pass through to investors Ownership is in the stockholders, not the executives, employees, directors, creditors, contractors, customers, or suppliers, unless they own shares of stock Highly flexible in creating different classes of equities 5

6 Starting a New Venture-The C Corporation This form of company is preferred by UTSW for the license Is subject to highly detailed state & federal corporate statutes, while LLC s are subject to the provisions of their operating agreements Complicated to set up and organize File certificate of incorporation with Sec y of State Name a registered agent Pick a stock structure Draft articles of incorporation and corporate by-laws Draft shareholders agreement Draft voting rights agreement Create a Board of Directors and recruit directors Select an entrepreneur if not already done Entrepreneur can be interim CEO or first regular CEO 6

7 Types of Investments Personal savings and credit cards Family, friends, colleagues High Net Worth individuals Family offices Angels & angel networks Venture capital firms & other financial firms All of these are dilutive, meaning you trade money for stock Non-dilutive sources of capital are grants from government agencies or non-profit organizations Patient advocacy groups Foundations Institutions 7

8 Types of Equities Common stock Preferred stock Convertible debt Options Warrants Note that none of these equities can be publicly bought or sold until the IPO 8

9 Issuing Equities First the newly formed corporation authorizes a stated number of shares Out of the authorized pool of shares, different equities are issued Common stock is generally issued first, to the founders Common stock might be issued to the licensing university Such stock is referred to as founders shares but this is not a legal term-they are just common stock unless agreed otherwise A valuation is placed on the new company, which is divided by the total issued shares, which yields the price per share Shares are assigned a par value in the filing papers, but that is a purposely very small number and does not control the valuation and initial share value. 9

10 Issuing Equities-The Seed Round Common shares can be issued in the early life of the company to family, friends and colleagues for cash or value ( sweat equity ) Common shares might be acceptable to angels (sometimes called the angel round ) Angels, foundations, or others might be willing to loan money to the company in the form of convertible debt (notes or debentures) Convertible debt can have a negotiated right to be converted to common or preferred stock under agreed circumstances Options can be created to reward the initial CEO or to key employees Warrants can be created to act as an incentive to future investors 10

11 Issuing Equities-The Series or Venture Rounds Series A First round of financing after the Seed Round Typically an angel network or a VC firm In exchange for significant investment amounts, preferred shares of stock are sold Preferred shares have preference legal rights If the company goes bankrupt, preferred shares are repaid before common shares (but preferred shares are repaid after creditors of the company) Preferred shares may have greater voting rights at shareholder meetings Preferred shareholders may have the right to nominate one or more directors to the Board 11

12 Issuing Equities-The Series or Venture Rounds Preferred shares may have anti-dilution rights Registration rights Tag-along rights Drag-along rights There can be any number of Series Rounds, but rounds beyond Series E are not typical Series grow in size if the company is doing well With each new financing round, shareholders percentage ownership of the company will shrink (dilution) but generally the share price is rising, which may offset the dilution in value 12

13 Venture Capital Firms (VC s) Have significant money available to invest Finance amounts ranging from $10,000,000 to $40,00,000 at Series A In downstream rounds can round up a syndicate of large investors (usually other VC s) to put together $50M-$500M or more Will not invest in an LLC, only a C-corp structure They will only purchase preferred shares and they negotiate a LOT of preferences Usually end up controlling the company, both in votes and in directors 13

14 VC s VC s make their money three ways 1. They charge their own investors 2% of the value of the portfolio they manage 2. They keep 20% of the increase in value of the portfolio per year 3. They make a profit on the increase in the value of the shares they purchase from the company, which they realize at th time of an Initial Public Offering (IPO) Once there is an IPO, all of the shares convert to common stock and they can be freely bought and sold to anyone on a public stock exchange. 14

15 Exemplary Therapeutics Term Sheets Non-Binding Term Sheet for Colossal University LICENSORS LICENSEE PRODUCT TERRITORY MILESTONE PAYMENTS Equity: SALES ROYALTIES DEVELOPMENT PLANS UT Southwestern Exemplary Therapeutics Gene editing therapies using trna-aav or related technologies Global See Exhibit A Founder shares: 1,500,000 shares equity granted at company creation (15% fully diluted) On Net Sales <$100mm: 2% on Aggregate Annual Net Sales On Net Sales $100mm - $1.0B: 3% on Aggregate Annual Net Sales On Net Sales >$1.0B: 5% on Aggregate Annual Net Sales Founding Investor Inc. (FII) will take on future costs up to $5M not funded by grants as a lead is developed by Alfred Einstein, and will also facilitate potential partnerships for the advancement of the Product. After a lead is identified FII will help raise Series A to fund a proof of concept large animal study followed by IND enabling work. 15

16 Term Sheets Description Cash Amount Upfront Licensing Fee $10,000 Signing and Program Initiation: Reimbursement of IP expenses $30,000 (exact amount TBD) Signing and Initiation Total $40,000 Upon dosing on the 5 th patient in any Ph. I trial $500,000 Clinical Development: Upon dosing of 5 th patient in any Ph. II trial $1,500,000 Upon dosing of 5 th patient in any registration trial $3,000,000 Clinical Development Total $5,000,000 First Commercial Sale in United States $5,000,000 Approval: First Commercial Sale in Europe $5,000,000 First Commercial Sale in Japan $2,500,000 Approval Total $12,500,000 First time aggregate worldwide Net Sales for a single product from selected disease project exceeds $100,000,000 in any calendar year $10,000,000 Sales Milestones First time aggregate worldwide Net Sales for a single product from selected disease project exceeds $500,000,000 in any calendar year First time aggregate worldwide Net Sales for a single product selected disease project exceeds $1,000,000,000 in any calendar year $25,000,000 $40,000,000 Sales Milestones Total $75,000,000 16

17 Term Sheets This Term Sheet is to facilitate discussion and is not intended to be an offer or a legally binding contract. This Term Sheet does not describe all of the terms and conditions (material and non-material) which would be included in one or more definitive license agreements regarding a possible transaction (the Definitive Agreement ). No party intends that the preliminary terms contained herein represent the final agreement as to the transactions discussed herein. The arrangement described herein is subject to, and conditioned upon, negotiation and execution of a definitive and final agreement. Neither party shall have any obligation with respect to the proposed transaction unless and until the Definitive Agreement has been authorized by and executed and delivered by an authorized officer of each of the parties. A party is free to withdraw from the negotiation of the transactions described herein prior to the execution of such definitive and final contract without liability or obligation. Any actions taken by a party in reliance on this Term Sheet shall be at the party s own risk. 17

18 Translating the Term Sheet into a Capitalization (Cap) Table Founders Ivestment Founder Shares Stock Option Plan Total Shares Fully Diluted Ownership Alfred Einstein 5,200,000 5,200, % Colossol University 1,500,000 1,500, % Founding Investor 2,000,000 2,000, % Lab Members Tom 50,000 50, % Dick 50,000 50, % Harriett 100, , % Management Charlotte the CEO 100, , % Stock Option Plan 1,000,000 1,000, % TOTAL $ - 8,700,000 1,300,000 10,000, % 18

19 Pre- and Post- Series A Cap Table (Pro Forma Table) Premoney $60,000,000 Series A $/sh $ $$$$$ Financing $40,000,000 $$$ Postmoney $100,000,000 $ Equityholder Name Common Stock Series A Conversion Total Fully Diluted Shares Fully Diluted % Series A Financing ($) Series A Shares Fully Diluted Shares Fully Diluted % Founders Alfred Einstein 5,200,000 5,200, % 5,200, % Colossol University 1,500,000 1,500, % 1,500, % Founding Investor 2,000, ,248 2,814, % 2,814, % Venture Capital Firm $40,000,000 8,499, % Lab Members Tom 200, % 200, % Dick 250,000 2% 250, % Harriett 50, % 50, % Post doc 1 50, % 50, % Post doc 2 12, % 12,00 0.1% Postdoc 3 50, % 50, % New CEO 500, % 500, % Available Options 188, % 188, % Option Pool Increase 1,935, % 1,935, % TOTAL 8,700, ,248 12,749, % $40,000,000 8,499,607 21,249, % 19