Life Sciences Outlook 2012 Dutch biotech companies ... - NautaDutilh

The evolving relationship between management and investors as companies mature: points of
tension and how to deal with those
A start-up run part-time by a professor or PhD holder may find an experienced investor and, in many cases,
will probably rely heavily on the investor’s advice and opinion. At this stage the company is not a real,
independent entity, but just a project. As the company becomes more successful and expands its investor
base, it becomes more of a stand-alone entity. Its investors may have conflicting interests, for instance on
the timing of an exit when they have different entry points or fund horizons. The company will have hired
more and more employees over time, and will have entered into various contracts and relationships with
government and other financing parties, clinical trial service providers and others, thereby expanding its
base of stakeholders and their interests.
From a Dutch legal perspective the management and supervisory boards are required to protect the
interests of the company and its business as well as those of all its stakeholders. While the interests of most
stakeholders may be aligned at the outset, tension may arise along the way. For instance, the interests of
investors looking for a full cash exit as soon as possible, usually through a trade sale to Big Pharma, may
be at odds with management’s ambition for the longer term success of the company’s business and its
continued stand-alone existence. A frequent interesting development in this respect is that, at some point,
management and/or investors will seek an experienced independent chairman of the supervisory board.
Such a chairman will more assertively voice the interests of the company as a whole, thereby offering more
of a counterweight to investors looking to take their money and run. In practice, however, such a chairman
is more likely to serve as a go-between and consensus seeker.
A few examples of issues on which management and investors may not see eye to eye
• Valuation: obviously a paramount issue at the time of the first financing round (valuation of the initial
business plan), during later rounds and, finally, at the time of the exit (when management may find itself
more and more aligned with early investors).
• Terms affecting management financially (e.g. liquidation preference and reps & warranties).
• Identity of new investors: having the right names on board is obviously key, e.g. by validating the pipeline
and attracting further financing rounds, alliances and even exits.
• Exit horizon and type of exit: where investors will usually seek a full trade sale, management may want to
pursue the options for the company to remain a stand-alone entity longer.
• Exit terms, e.g. management reps & warranties to the buyer in a trade sale exit; in an IPO scenario,
the post-IPO governance and level of independence.
Life Sciences Outlook 2012 Dutch biotech companies: from start-up to exit
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