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Funding the Startup:Dilutive Capital
Angel, VC, and Corporate Funding
Stephen Snowdy, PhDAnsley Ventures
• Illustrative example to learn basic concepts and vocabulary of private equity
• Differences between the dilutive funding sources
• What the investors will be looking for
• Current environment for private equity
Topics
Introduction
• Past 9 years as a healthcare venture capitalist
• PhD-Neurobiology, University of North Carolina, Chapel Hill
• MBA-Finance, University of North Carolina, Chapel Hill
• Bachelor of Chemistry, University of Florida
• US Navy Special Forces
The Set Up
• Professors Cornea, an optical engineer, and Professor Stroma, an ophthalmologist, have co-invented a new contact lens that they claim will arrest myopia progression in children.
• They have formed a new company called iSee, Inc.• iSee is just a shell corporation, with each of the PIs owning 50% of the company
FoundingCommon Shareholders Shares % Fully DilutedStroma 5,000,000 50.0%Cornea 5,000,000 50.0%
Preferred Shareholders
Total 10,000,000 100.0%
The License
Professors negotiate with university that university will own 10% of the new company in exchange for license to the technology.
Founding LicensingCommon Shareholders Shares % Fully Diluted Shares % Fully DilutedStroma 5,000,000 50.0% 45.0%Cornea 5,000,000 50.0% 45.0%University 1,110,000 10.0%
Preferred Shareholders
Total this Round 10,000,000 100.0% 1,110,000 100.0%
10,000,000 Pre$ Shares 10,000,000 New Shares 1,110,000 Post$ Shares 11,110,000
The First Venture Round
What are the investors looking for?
• Large market• High-quality supporting data• Very strong domestic and international patents• No obvious issues with regard to freedom to operate• Meaningful impact to patients or health care economics• Known regulatory path with reasonable trial structure likely• Low hurdle to payer acceptance• Definable endpoints/milestones to get to selling point
Founding Licensing Series A PreferredCommon Shareholders Shares % Fully Diluted Shares % Fully Diluted $ Shares % Fully DilutedStroma 5,000,000 50.0% 45.0% 15.7%Cornea 5,000,000 50.0% 45.0% 15.7%University 1,110,000 10.0% 3.5%Option Pool 4,000,000 12.6%
Preferred Shareholders Lowpre Ventures $2,000,000 11,110,000 35.0%Value Partners $1,000,000 5,555,000 17.5%
Total this Round 10,000,000 100.0% 1,110,000 100.0% $3,000,000 20,665,000 100.0%
10,000,000 Pre$ Shares 10,000,000 Pre$ Shares 11,110,000 New Shares 1,110,000 Pre$ Value $2,000,000
Post$ Shares 11,110,000 Pre$/Share $0.18
Post Shares 31,775,000 Post$ Value $5,720,072
The First Venture Round-$2,000,000 Pre-money value, with 12.6% options post-money-$3,000,000 Raise-Series A Participating Preferred Stock with 1X Liquidation Preference
Founding Licensing Series A Preferred Series B Preferred Exit-$40 Million-All up front
Common Shareholders Shares % Fully Diluted Shares % Fully Diluted $ Shares % Fully Diluted $ Shares % Fully Diluted Liquidation Preference ParticipatingStroma 5,000,000 50.0% 45.0% 15.7% 13.1% $4,589,562Cornea 5,000,000 50.0% 45.0% 15.7% 13.1% $4,589,562University 1,110,000 10.0% 3.5% 2.9% $1,018,883Option Pool 4,000,000 12.6% 10.5% $3,671,650
Preferred Shareholders Lowpre Ventures $2,000,000 11,110,000 35.0% $1,333,333 4,236,666 40.2% $3,333,333 $14,086,895Value Partners $1,000,000 5,555,000 17.5% $666,667 2,118,334 20.1% $1,666,667 $7,043,449
Total this Round 10,000,000 100.0% 1,110,000 100.0% $3,000,000 20,665,000 100.0% $2,000,000 6,355,000 100.0% $5,000,000 $35,000,000
10,000,000 Pre$ Shares 10,000,000 Pre$ Shares 11,110,000 Pre$ Shares 31,775,000 $35,000,000 New Shares 1,110,000 Pre$ Value $2,000,000 Pre$ Value $10,000,000 Available for Distribution
Post$ Shares 11,110,000 Pre$/Share $0.18 Pre$/Share $0.31 Post Shares 31,775,000 Post Shares 38,130,000 Post$ Value $5,720,072 Post$ Value $12,000,000
The Second Round and Exit
-Second round is an up-round-Acquirer offers $40M cash, all up front-1X liquidation preference of $5M leaves $35M to distribute
Comparison of Dilutive Capital Types
Angel Venture Corporate
Valuation Mid Low High
Stage Seed Early-Late Late
Amount $50K-$2M $250K-$30M $5M-$30M
Pro ValuationControl
ExpertiseConnectivity
ValuationExpertise
Con Little operational helpLimited $Attractiveness to CEOs
Dilution, controlUrgencySwing for fences
Lock-upIPNo-bidUnknown conflicts
Working with investors
-Key is to build long-term relationships with investors
-Get to know them LONG before you need the money
-Be patient; kiss many frogs
-Look for investors with experience in your area
-Try to connect with the most senior people possible
-Lots of sensitivity right now with regard to regulatory and reimbursement
Current Environment for VC
1990 1995 2000 2006 2007 2008 2009 2010 20110
20
40
60
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100
120
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Venture Dollars Raised NIH Budget
Capi
tal R
aise
d by
Ven
ture
Fir
ms,
$B
NIH
Bud
get,
$B
Current Environment for VC
Scale Venture Partners-No more healthcare investing
Prospect Ventures-No more healthcare investing
Highland Capital Partners-Cutting back healthcare investing
CMEA-No more medical device investing
De Novo-Will not raise additional healthcare fund
Versant Ventures-Reducing healthcare practice (half?)
What Happens Next?