Healthcare Fundraising 101

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Are you thinking about what you need to fund your company? Where do you start? Funding is not one size fits all. Every company has to approach their pathway to funding with a unique approach. Join our fundraising experts for an in-depth discussion of what options you have for funding and how to decide which paths are right for you and your company. Well have a specific focus on life science focused companies and technologies and the funding choices available for them.

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  • 1. FundingOp*onsforLifeScienceCompanies May 6, 2014

2. ThePanel JeremyHalpern Partner,Nu@erMcClennen&Fish jhalpern@nu@er.com @startupboston YuminChoi Partner,HLMVenturePartners ychoi@hlmvp.com @yuminvc PaulHartung PresidentandCEO,Cognotpix,Inc PHartung@cognop*x.com 3. FundingtheCompany Assumingyouplantobe ahighgrowthcompany Whatareyourfundingop*ons? 4. Entrepreneurshipcomesinmanytypes 4 NORMALGROWTH COMPANY HIGH GROWTH COMPANY EXTREME HIGHGROWTH COMPANY SOCIALVENTURE COMPANY Includes all service businesses Exploiting a local market need Team has great jobs Growth by adding resources one by one Exit will be based on value of cash flow (mature biz.) Growth profile ultra-scalable Team focus is exit Revenue $40M+ with lots of room for growth (5 yr.) Based on $20M+ investment Exit targeted to IPO or by large M&A event Goal is to fulfill a social need Has mission orientation Team needs to support mission Growth profile often one resource at a time Exit much harder to find fit Company can grow fast (on-line) or has a scalable system Team often motivated by exit $10m revenue in 5 yrs & market size allows significant additional growth Capital efficient total investment $2-4M Exit by M&A 5. CloseUp:ExtremeHighGrowthvsHigh Growth 5 Capital Needs Time High Risk Low Risk Formal Venture Capital M&A or IPO Crystallize Ideas Demonstrate Product Early Scaling Growth Sustained Growth Angel Group (or Micro-cap) Syndication Angels or Accelerators or Micro-cap funds Angels or Accelerators or Micro-cap fundsBusines s Angels Market Entry M&A Later VC Rounds Extreme High Growth High Growth Friends, Family & Founders Friends, Family & Founders 6. HighGrowthCompanyCharacteris*cs Disrup*veInnova*onwithStrongvalueproposi*on Correla*onbetweenLargeUnmetNeed:Solu*on HighMarginProduct(Ra*oofRevenue:COGS) Some*mesMassiveVolumeProductswhereinnova*onisincremental HighRateofRevenueGrowthoversustainedperiod Scalable(FixedcostisalowpercentofRevenue) Nomajorbarrierstocon*nuedgrowth(ex.blockingIP;geography; regulatory) Repeatablesalesanddistribu*onmodelwithmanycreditworthy customers LargeTotalAddressableMarket(TAM) Defensibleinnova*onabletowithstandcompe**onandchanging condi*ons [Capitalecient] 6 7. ReturnonEquityReturnonDebt Income HighReturn NONPROFIT ORGANIZATION CapitalSourceView 7 Debt- Pay it back Fixed Amounts Equity Ownership stake % of Future Value Charity$$ Impact/TaxWriteo NORMALGROWTH COMPANY HIGH GROWTH (COMPANY) EXTREME HIGHGROWTH (COMPANY) Risk / Return SOCIALVENTURE COMPANY 8. MatchFundingSources 8 NORMALGROWTH COMPANY HIGH GROWTH COMPANY EXTREME HIGHGROWTH COMPANY SOCIALVENTURE COMPANY Friends family, founders Debt Bank and other (Future) Crowd funding (portal style) Early on Accelerators Individual Angels Micro Cap VCs Seed from VC Later stages Venture Funds Strategic VCs Angel Syndication Friends family, founders Charity$$ Crowds (Kick- starter) Impact Angels (Future) Crowd funding (portal style) Angels Angel Groups Angel Group Syndication Angel List Micro-cap Funds (Future) Crowd funding (portal style) Increasingly Strategic Corporate VCs 9. Non-EquitySources Accelerators(some) Kickstartertypedona5ons Pre-ordersfromend-customers Creditfromvendors StrategicVCs StrategicNREs Distribu5onContracts CommonTheme:ProvidingearlycashinexchangeforabeHer commercialopportunity 9 10. EquitySources Accelerators(some) Friends&Family CommonTheme:Suppor5ngsuccessoftheentrepreneur;businesstermsvary PortalFunding EarlyAngels SuperAngels AngelGroups MicroVC Tradi5onalVC(1stRound) CommonTheme:Allarelookingfor sale(orIPO)oftheCompanyat4-10xoriginalinvestment Capitalgainstreatmentonallsaleproceeds Preferen5altreatmentonsubop5malexitversusthefounders 10 11. SourcesofEquityCapital Musthaveexitsforequitymodeltowork!! 2011USIPOs-$36B 2011USM&A-$57B 2011USPrivateEquity-$35B Exitsourcesextremelyvariablehealthofeconomy Allexits:indica*veoffuturecashowormarketcontrol IdeaStage Friends family, founders Grants Crowds (Kick- starter) Demonstrate Product& MarketInterest Accelerators IndividualAngels AngelGroups Accelerators MicroCapVCs MarketEntry& EarlyGrowth Crowdfunding (portalstyle) AngelGroups AngelGroup SyndicaSon AngelList Micro-capFunds EarlyScaling Growth MostVenture Funds Angel SyndicaSon Repeatable Growth MostVenture Funds StrategicVCs Angel SyndicaSon PrivateEquity 12. HighGrowthCapitalbyStage &Amount 12 Venture Stage Investment Size Friends & Family Vendors Angels Traditional VC Angel Groups Corporate Venturing Grants Customers Crowdfunding Portal Funding AngelList Micro VC Equipment Financing Founder 13. CapitalSources:Size&Cost Investment Size Investment Cost Traditional VC Micro VC Equipment Financing Angel GroupsAngels AngelList Corporate / Strategic Venture Customers Portal Funding Vendors Founder Friends & Family Crowdfunding Grants Venture DebtBank Loans Personal Loans Private Equity 14. SoWhatisEquityAnyway? Stock=righttoresidualeconomicinterestsuponsale/liquida*on+ stockholdervo*ngrights(usuallylimitedtoBoardofDirectorsandSaleof theCompany) PreferredStock=righttobepaidbeforeCommonStockPar*cipa*ng= originalinvestmentPLUSaproratashareofremainderNon-Par*cipa*ng =originalinvestmentORaproratashare CommonStock=whateverisletaterallothercreditorsandpreferred stockholdersarepaid Dividend=arighttoanaddi*onalamountuponliquida*onmeasuredasa func*onof*mexpercentageoforiginalinvestment.Ex.6.0%perannum OpSons/Warrants=Contractsallowingholdertopurchaseanamountof stockinthefutureatapre-determinedprice ControlRights=StatutoryandContractual 14 15. EquityTypeComparisons 15 SoloAngel SuperAngel AngelGroup MicroVC VC Valua*ons Highrela*veto stage Highrela*veto stage Lowrela*veto stage Lowrela*veto stage Medium Type-Likely (lesslikely) Common (Warrants) ConvNote (Preferred) Preferred (ConvNote) Preferred (ConvNote) Preferred BoardSeat Maybe 1ornone 1-2of5+/- Observer 1of5+/- Observer 1-2of5+/- Observer Audited Financials No No No(reviewed) Yes Yes Nega*ve Covenants No Some*mes Yes Yes Yes Preemp*ve Rights No Some*mes Yes Yes Yes Ver*cal Exper*se Some*mes Rarely Some Usually Always 16. EquityTypeComparisons 16 SoloAngel SuperAngel AngelGroup MicroVC VC ExitHorizon (from$in) 7years 5years 4years 5-7years 4-5years ExitRange $20m+ $40m+ $50m+ $100m+ $250m+ 17. StructureofanEquityDeal CompanyandInvestorsagreeonapre-money valua*on(PM)whichleadstoapricepershare Investorsputin$X Investorsthenown:X/(X+PM)ofthecompany Example: PM=$1M X=$0.5M Investorsown0.5/1.5=33% Remember:NewissuanceNOTtransfer 17 18. UnderstandtheFundingPath Weretalkingabout1stfundinghere Whatistheprobablecompletefundingpicture? Thisisonlyfunding Anothersmallroundthenprobablesmallexit Bigmoneyneededbeforeexit Eachfundingeventshouldoccurataninec5on point Hopefullyatapointwhereriskisremoved IncreasedPM=so-calledupround 18 19. UnderstandtheFundingPath,cont. Whatifthingsarentgoingsowell? FlatordecreasedPM=so-calleddownround MoremoneycominginwithoutincreasedPM meanseveryonegetsdiluted,but DependingonanS-diluSonprovision entrepreneurmaycarrymoreburdenthanthe investors 19 20. WhataboutConver*bleDebt? Manyseed-stagecompaniesuseaninstrument calledConver5bleDebt.Huh? Conver5bledebtisnottradi5onalbankdebt Convertsexistfortwomajorreasons InvestorsandEntrepreneursndithardtoagreeon aPMvalua5on Some5mesquickerandcheapertodocumentthan equitydeals(butnotreally) 20 21. Conver*bleDebtprovidesOp*onality ConverSbleDebt=unsecureddebtobliga*onoftheCompany thatmaybeconvertedintoequityoftheCompany. ConversionTrigger=QualiedFinancingusuallyatsome minimumamountoffunds(ex.$500,000) IfNotesstaysasDebt=Getbackprincipalandinterestahead ofotherequity(behindothercreditorstypically) IfNotesConvert=Convertamountofdebtandinterestinto equityatthevalua*oninthenextround aterapplica*onofaDiscount(oten520%) subjecttoamaximumvalua*onamount(theCap) 21 22. BasicStructureofConver*bleDebt Investorloans$toCompanyan5cipa5nganotherroundoffunding Investmentaccruessmallinterest Whenthefundingoccurs,investment+interestconverttoequity, usuallyatadiscount(5-20%typically) Example: Investorsloan$200KtoCompany 20%discount Asofconversion,interestof$10khasaccrued NextRoundPM=$2m ConversionAmount=1/(1-0.2)*$210k=$262,500 AtConversion,Noteholdersreceive262.5K/(PM+262.5K+NewMoney) 22 23. Conver*bleDebtComplica*ons! Whendoesthedebtconvert? WhathappensifPMofnextroundishuge? Doestheinvestorhaveanysayinthings? Whatifthereisanequityinvestmentthat doesnttriggerconversion? Whathappensifitneverconverts? WhathappensifCompanygetsbought? 23 24. Conver*bleDebtSolu*ons? CapsandFloors Maydefeatpurposewithsignaling Defaultconversionpriceandsecurityat maturity Quicksalepreferences(ex.2x) Governanceprovisions CarefulagenSontoconversioncondiSons 24 25. Conver*bleDebtWorsethanEquity? MulSpleliquidaSonpreference(circa2008) Ex.$500kofNoteswithcapat$2mPM NextRoundat$6mPM IssueNoteholders3xnumberofshares 3xsharesequals3xliquidaSonpreference!! Withoutaoor,eecSvelyFullRatchetAnS-diluSon PreferenceOverhang InpriorexampleNoteholdersbought$262,500ofpreferencefor $200,000. AllotherSeriesAHoldersbought1:1preference NotJustaPriceAdjustment 25 26. www.TheCapitalNetwork.org