Ontology engineering

uilding a businessComing to termsDavid H Oden, Jeffrey A Wolfson & Christina W MarshallBefore taking other people’s money to finance your venture, it pays to fully educate yourself about the strings attached.© 2010 Nature America, Inc. All rights reserved.You’ve found an investor who’s willing tomake a substantial investment in yourbiotech company—that’s great news. Butafter the handshake, the next thing is tonegotiate the term sheet outlining the structureof the transaction to ensure a true meetingof the minds.Term sheets should always be used in complexinvestment transactions—especiallythose involving venture capital investors orother institutional investors. The term sheetsets forth the key terms of the proposedtransaction. A good rule of thumb is that theterm sheet should address any provision thatcould kill the deal.If you skip on drawing up a term sheet,then during the drafting and negotiation ofthe investment documents there may be noclear record of the parties’ understandingson key issues. In the long run, this will causeconfusion and discord, and any subsequentdocuments will probably take more time andcost more to draft and negotiate because theparticipating parties may be unwittinglyusing the definitive documents to negotiate—orrenegotiate—key terms. Worse still,well into the process, it may become apparentthat you are unable to reach agreementon one or more deal-killer terms and thetransaction may collapse (Box 1).In the following article, we guide youthrough the key steps in drawing up a termsheet. Getting this right is important to ensureyou remain in control of your company andreceive your share of returns.David Oden is a partner and Christina Marshallis an associate at Haynes and Boone LLP,Richardson, Texas, USA. Jeff Wolfson is apartner at Haynes and Boone LLP, Washington,DC, USA.e-mail: David.Oden@haynesboone.com,Jeff.Wolfson@haynesboone.com andChristina.Marshall@haynesboone.comBox 1 Potential deal killersDuring negotiations with an investor, you can encounter several hitches. These issues killmore deals than the U.S. Securities and Exchange Commission.• Company technology undervalued by investor(s) or overvalued by founder(s).• Valuation too dependent on issuance of meaningful patent protection.• Partner(s) in joint development arrangements insist on absolute control of patent rights.• Licensing exclusivity in which the partner or licensee in market is not incentivized tocommercialize.• Investor(s) or partner(s) insist on control of bet-the-company litigation.• Founder(s) will lose too much control of the company.• Deal requires clinical milestones that are realistically unreachable.• Future company flexibility is too limited, particularly in partnering and/ordevelopment deals.• Overly cumbersome approval process by investor(s) or partner(s) that could hinder rapidmarket response.• Liability for clinical trials or indemnification in partnering or joint development deals.Before the moneyAlthough some lucky companies areapproached by numerous venture capitalfunds, many have only one investor at atime. The availability and interest of venturecapital often depends on the boom and bustcycles of the biotech industry and the economyas a whole (Box 2). At times, companieshave been lucky to locate a single interestedinvestor, whereas at other times they havehad to fend off multiple investors or limitinvestment. If your transaction is with onlyone investor, it may be a bit simpler, fasterand less expensive, though not by much. Thedownside of having only one investor is thatthere will be fewer pockets to reach into forthe next financing. And, if the sole investordeclines to participate in the next round,you will be in the position of starting fromscratch to attract new ones.If your transaction includes multiple investors,more money and expertise may be availableto you. Additionally, there is a much greaterlikelihood that at least one investor familiar withthe company and its technology will be able toparticipate in subsequent financings. In thiscase, the investors will generally select one tobe the ‘lead’—the party primarily in charge ofdue diligence, negotiations and preparation ofthe definitive investment agreements. Duringdue diligence, the lead investor may examinemultiple aspects of your company, includingthe technical expertise of the founders and keyscientific employees, the market conditions andcompetition, the patent and trademark/brandingpositions of your company and clearanceover any third-party intellectual property (IP)in the space, the R&D pipeline and future patentprotection, the status and estimated cost ofupcoming clinical trials, the status of US Foodand Drug Administration (Rockville, Maryland)interaction and approval, the in-license andout-license agreements the company holds, theagreements with employees and consultantssuch as contract research organizations, andmany other issues.120 volume 28 number 2 FEBRUARY 2010 nature biotechnology