Financing Issues for medtech startups Term Sheet Essentials. Michel Jaccard

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1 Financing Issues for medtech startups Term Sheet Essentials Michel Jaccard

2 Introduction Growth financing Debt or equity? Pros and Cons / Risks and Rewards Why equity financing is preferred for early stage financing Absence of collateral Control rights and privileges for investors Exit prospects (tax gains) Quasi equity / mezzanine / convertible loans

3 Introduction Typical investors profiles Family & Friends (debt / quasi equity / equity) Scientific grants ([convertible] debt) Commercial lenders / banks ([convertible] debt) Corporate funds / industrial partners ([convertible] debt, equity [JV]) Business angels (equity) Venture capital funds (equity) Private equity houses (debt + equity)

4 The rounds Financing rounds Seed - F&F, BA «A», «B», «C», «+», pre-ipo «Special rounds» Flat rounds Down rounds Washout rounds Bridge financing between rounds

5 The exit IPO (shares) Trade sale (shares, assets) Distressed sale (assets, shares) Liquidation (assets, shares) MBO (shares) Mergers

6 The process of investing Start of discussions NDA? Business plan Management interviews Start of due diligence Term sheet / LOI Valuation IP due diligence Decision to proceed Negotiation of «definitive agreements» Exclusivity / Break up fees?

7 The process early discussions NDA: what? why? Business plan: how detailed? Management interviews: key decision factor Term sheet?

8 The process due diligence Due diligence: what? why? Term sheet / LOI: what? why? Valuation Methodologies DCF NAV EBIT multiples Importance

9 The process - negotiations Decision to proceed or not: break up fees? «Definitive agreements» Shareholders Agreement Voting, board representation, privileges attached to shares, protective provisions Investment / Subscription Agreement Purchase of (new) equity / debt, reps & warranties, antidilution protection Employment Agreements Esop, good leaver/bad leaver

10 The term sheet - Purpose «set the stage»: Valuation Ownership / Control Protective provisions / privileges Conditions precedent to closing Allow due diligence to start Secure exclusivity / no shop, reimbursment of costs

11 The term sheet Offering terms Issuer: NewCO, a Switzerland corporation (the Company ) Securities: Series A Preferred Stock (the Series A Preferred ) Valuation of the Company: CHF 2,000,000 pre-money Amount of the offering: Up to CHF 750'000 Consideration: [Cash][Cash and cancellation of indebtedness] Number of securities: 30,000 shares Price per share: CHF 25 Investors: Investor1 and Investor2 or affiliated entities, and other investors acceptable to the Company

12 The term sheet - Staging Milestone payments: The purchase price will be payable as follows: At the initial closing, the investors will pay an aggregate of $1,000,000 (the Initial Amount ). Upon completion of the performance milestones set forth in Exhibit B, the investors may in their discretion invest additional amounts (the Commitment ) as set forth in Exhibit B. If, in the sole and absolute judgment of the investors, a performance milestone has not been satisfied, then the investors may either (i) waive the failure and pay the amount, or a portion thereof, set forth opposite such milestone on Exhibit B, such payment to be conditioned upon the receipt by the investors of a written commitment by the Company to use its best efforts to complete the applicable milestone by a specified date and to satisfy such other conditions as the investors may require, (ii) elect not to make such milestone payment but reserve the right to make subsequent milestone payments, or (iii) terminate the Commitment without any further obligation or liability on the part of the investors.

13 The term sheet - Privileges Dividends: Dividend rate: 8%. Cumulative. Senior to Common. Liquidation preference: Amount: Original purchase price plus accrued dividends. Senior to common. Deemed liquidation: A sale of all or substantially all of the Company s assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company. A deemed liquidation may be waived upon the election of the holders of a majority of the outstanding shares of preferred stock.

14 The term sheet Board Representation The principal stockholders of the Company will agree to elect to the board: Two Series A designees as the Series A directors. The first Series A designee will be chosen by investors holding a majority of the Series A Preferred held by all investors. The Series A designees will initially be Investor Director 1 and Investor Director 2. One common stock designee as the common stock director. The common stock designee will be chosen by founders holding a majority of the common stock held by all founders. The common stock designee will be the Company s CEO. The common stock designee will initially be Founder Director 1. Two mutual designees, as approved by (i) founders holding a majority of the common stock held by all founders and (ii) investors holding a majority of the shares held by all investors. The mutual designees will initially be Ind Driector 1 and Ind Driector 2.

15 The term sheet Protective provisions Protective provisions: Consent of the holders of at least 66.67% of the Series A Preferred will be required to: alter any provision of the articles of incorporation or the bylaws if it would alter the rights, preferences, privileges or powers of or restrictions on the preferred stock or any series of preferred; increase or decrease the authorized number of shares of preferred stock or any series of preferred; authorize or create (by reclassification or otherwise) any new class or series of shares having rights, preferences or privileges with respect to dividends or liquidation senior to or on a parity with the Series A Preferred or having voting rights other than those granted to the preferred stock generally; approve any transaction or series of transactions deemed to be a liquidation of the company; approve any merger, sale of assets or other corporate reorganization or acquisition; approve the voluntary liquidation or dissolution of the Company; increase the size of the board;

16 The term sheet Protective provisions (cont d) Protective provisions: Consent of the holders of at least 66.67% of the Series A Preferred will be required to: encumber or grant a security interest in all or substantially all of the assets of the Company in connection with an indebtedness of the Company; acquire a material amount of assets through a merger or purchase of all or substantially all of the assets or capital stock of another entity; declare or pay any dividend or distribution or approve any repurchase with respect to the preferred stock (except as otherwise provided in the articles of incorporation) or the common stock (subject to customary exceptions); or increase the number of shares authorized for issuance under any existing stock or option plan or create any new stock or option plan.

17 The term sheet Antidilution protection What? Why? Value of investment over time Types: Full ratchet Weighted average Exceptions ESOP Pay to Play

18 The term sheet Transfer of Shares Lockup on Founders shares Right of first refusal Limitations: Internal allocation and estate purposes De minimis Within classes of shares only Co-sale / Drag-along Trigger %, majority Equal treatment? Tag along Trigger %, majority Equal treatment?

19 The term sheet Other provisions Information rights Reporting Equal treatment? Employee matters Employment terms Esop «good leaver / bad leaver», non compete / garden leave Exclusivity Binding provision Usefulness? Confidentiality Binding provision Usefullness?

20 The term sheet Key issues Valuation / ownership / dilution (Personal) Reps & Warranties by Founders Bad leaver consequences Board composition and governance

21 The term sheet key success factors Founders Be prepared Choose your fights Employment Investor s fit and commitment Don t settle easily Listen and propose Investors You are prepared / You send the term sheet Let the Founders start the fight(s) Listen to the Founders emotions Think long term

22 Questions? Michel Jaccard

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