Welcome to day two of our Biotech Week Boston blog takeover, during which As Prescribed will shine a light on our lawyers working in the City on a Hill, who contribute their local perspectives to the counsel our global life sciences team provides on the business, transactional, regulatory, intellectual property, litigation, and related issues our clients encounter throughout the product lifecycle.

Fundraising is one of the key activities in the lifecycle of an emerging company: many CEOs of emerging companies have stated that they are always in financing mode. Given the high cost of bringing life science products to market, raising funds is especially challenging in the biotechnology sector.

Being well prepared for the initial financing round will make this important process much easier to navigate and will place emerging companies in a good light with potential investors—which is crucial given the high degree of competition for funding. Below we provide some tips to help biotechnology companies prepare for their initial financings.

Ensure Corporate Documentation Is in Order and Prepare Data Room

Before providing corporate documents to potential investors, ensure that the documents are fully executed and complete. Confirm that all formation documents are dated and signed by all the relevant parties and that all necessary consents and assignments are in hand. Investors should be provided with all of the applicable documents that they would expect to review for an early-stage company.

These documents would include formation documents, founders’ agreements, shareholder agreements, stock issuance agreements, confidentiality agreements, material contracts (including any technology licenses), and employment-related agreements (including invention assignment agreements). These key documents should be organized in an electronic data room, where potential investors will have the ability to view them during their due diligence process. 

Prepare a Compelling Business Plan/Pitch Deck

A company’s business plan should express why the company makes a great investment opportunity for potential investors. A good business plan should convey a technological understanding of the company’s products, the market potential and go-to-market strategy for the products, and a detailed milestone-based budget and timeline that accounts for any needed governmental approvals (such as regulatory agency review times).

The business plan should also provide background information on the members of the management team, highlighting how the team is the right team for developing the company’s technology.

Determine Proposed Pre-Money Valuation and Required Funding Amount

Investors will need to know the proposed pre-money valuation for the company and the total amount of funding being sought. The pre-money valuation should be realistic and be based on the stage of the company’s technology and other relevant market considerations.

If the pre-money valuation is unrealistic, potential investors may decline to engage. The amount of funding intended to be raised should be linked to the achievement of a specific milestone from the company’s business plan, as potential investors will want to understand how far their investment will take the company. Consideration should also be given to what pre-money valuations and funding amounts the company would be willing to accept.

Develop an Understanding of Key Financing Types and Terms 

To better engage with potential investors, become familiarized with the various financing types and the key terms of such investments—e.g., the differences between priced (seed stock or preferred stock) and unpriced (SAFE and convertible promissory note) financings, and the key negotiation points associated with each type of financing round.

This education will be useful when negotiating term sheets with potential investors and engaging with attorneys.

Research Potential Investors 

Before reaching out to potential investors, make sure to do sufficient research to understand their investment theses. Most investors have specific investment sectors (and even subsectors) and stages of development at which they invest in companies, and as such not all investors will be the right investors for every company.

Look for investors whose investment theses align with the company’s stage of development. In addition, seek to understand where potential investors are with respect to the lifecycle of their funds, as it is important to ensure such investors have sufficient funds to commit to potential future financing rounds.

Later this week, we will wrap up our Biotech Week Boston As Prescribed takeover with a post from partner Stephen Altieri on considerations for efficient patent protection for emerging biotech companies.