April Edition 2024

71 acceptable dilution and market benchmarks and increase by a factor of 1.5 to 2 on a round-to-round basis, however, in the current market situations flat or down rounds are not uncommon. Especially in start-ups, coming to a viable valuation constitutes a crucial but also challenging task for all parties involved as these young businesses are not yet profitable and do not have a significant corporate history. The risk of failure and the probability of a (total) loss of investment are therefore substantial and need to be taken into account. Deal Terms and Recent Developments The main (legal) documents in a VC-led financing round (“VC Transaction”) include an initial term sheet, cap table, investment agreement (IA) and shareholders’ agreement (SHA) as well as ancillary documents such as managing director service agreements or ESOP/VSOP terms. Timing-wise, from negotiating the term sheet till the signing of the final legal documents a period of 3 to 4 months is common, provided however, that this depends heavily on the individual transaction (e.g., extensive due diligence by investors, large cap table with conflicting interest between investors etc.). After signing, the funds will be made available in 4 to 6 weeks. Deal Structuring For entrepreneurs, it is important to at least have a basic understanding of the structure and deal terms corresponding with a VC Transaction. In the biotech sector, investments are most often subject to the achievement of operational and regulatory milestones. It is of importance to set realistic milestones and define them as clearly as possible, whilst allowing for sufficient flexibility for waiver or adjustment. From a founders’ perspective it should be avoided to issue all shares at once to the investors if a payment in tranches is agreed upon. It is recommended to try to negotiate higher subsequent valuations and capital increases instead. Economic terms / Control terms Generally speaking, the terms of a VC Transaction can be grouped into economic (“money”) terms and control (“power”) terms. Economic terms relate to provisions in the legal documents essentially guaranteeing a certain return for the incoming VC investor, whereas control terms decide on the distribution of responsibilities and competencies among the different bodies of the company. Besides the investment structure, the most relevant economic terms relate to (i) prorata rights, (ii) antidilution protection, (iii) vesting and liquidation preferences. Control provisions deal with veto rights of investors (through

RkJQdWJsaXNoZXIy MjgzNzA=