14 legal questions every biotech startup should ask
How can Walder Wyss support founders and young biotech startups on their journey from spinning off from academic institutions to M&A?
By having legal representation from the outset, founders and young startups can ensure that their interests are represented in the best way.
In the beginning, founders need legal representation in connection with the company incorporation and often in connection with license agreements with university or other partners and with employment and consultant agreements.
Later on, founders need legal representation for agreements with investors, such as investment and shareholders agreements.
How would you advise early biotech ventures to manage their lawyers to avoid large bills?
Clear and efficient communication between a client and a lawyer is key. A good project organization with a clear allocation of responsibilities on both sides and a certain pragmatism also helps avoid unnecessary costs.
Lawyers experienced in this field have templates for various legal documents (i.e. term sheets, employment agreements, consultant agreements, employee participation agreements). Founders should ask their lawyers for such templates rather than drafting their own legal documents. Reviewing and amending legal documents prepared by founders is more time-consuming and costly than using templates provided by their lawyers.
It’s a good idea to get representation as early as possible since your lawyer can highlight key issues early in the process. Addressing such issues early on is usually less costly than having to correct them later.
Licensing agreements: What is the role of a Technology Transfer Office (TTO), and what terms can you expect?
The role of TTO offices is to represent the interest of universities when dealing with license agreements, collaboration agreements and other commercial agreements.
The process starts with a term sheet setting out the key terms of the license, which is followed by discussions on the detailed license agreement.
In license agreements, which are the most important agreements between universities and spinoffs, you typically find clauses addressing the scope of the license and financial terms (i.e. down payments, milestone payments, and royalties).
Today, most universities also ask for participation in the spinoff, either through shares or phantom shares.
At what stage should founders involve a lawyer?
Lawyers should already be involved in discussing and negotiating the term sheet. This document sets out the key terms of the license agreement and can’t be renegotiated in the detailed license agreement.
The key terms of the terms sheet and the following detailed license agreement are certainly the scope of the license, financial parameters and rules on sublicensing.
What legal mistakes are biotech founders making time and time again?
Not involving the right people early on.
At the very beginning of the process, founders, lawyers and other advisors, such as patent lawyers, should discuss and decide on the strategy to pursue in the discussion and negotiation with the university.
How does equity ownership of a university change potential investors’ view of the company? Is it different for investors from different countries?
It has become customary that universities request participation in the spinoff by receiving shares or phantom shares in the spinoff.
This is valid both for Swiss and foreign (i.e. American) universities. Investors have become accustomed to this position taken by the universities and know how to deal with it.
What legal aspects do founders negotiate with a VC firm?
The legal negotiations on the investment and shareholders mostly focus on representations and warranties in the investment agreement and corporate governance issues (decision making at shareholders and board level) as well as transfer and exit provisions (right of first refusal, tag-along right, drag-along right, initial public offering (IPO)) in the shareholders’ agreement.
What is the impact of intellectual property (IP) on the valuation of biotech startups?
In most cases, the IP is the key (if not the only) asset of the company. It’s the most important factor for the valuation of a biotech startup.
Intellectual property is a category of non-physical assets protected by law from unauthorized use. It’s the unique creation of the company and, though intangible, often a significant driver of value within a company.
IP valuation is the process used to evaluate the fair market value of IP assets. In the biotech sector, it’s often the true value of the business as a whole.
Because IP often represents the most valuable assets a business possesses, calculating an accurate valuation of the business depends on accurately valuing its intellectual property. Establishing the value of IP is critical for determining sales, licensing, financing and merger and acquisition (M&A) transactions.
Can out-licensing your own technology limit your options during future M&A or fundraising? What could be the long term consequences?
Out-licensing can be a very important step for a biotech startup.
It confirms the science and IP owned by the biotech company, especially if a big pharma company is the licensee. It’s also linked to the (first) income of the biotech startup through down-payment and potential milestone payments.
But it can limit the options of the biotech startup in future financing or M&A processes because a part of the rights are already given away through the license agreement and won’t be available anymore for future investors and purchasers.
The decision of an out-licensing is always carefully evaluated by the board of the biotech startup.
Fundraising: What differentiates the biotech sector from other industries from a legal point of view?
The differences are linked to the key asset of a biotech startup rather than the sector.
For biotech companies, the key asset is almost always science and IP, which is also reflected in the investment process (importance of scientific and IP due diligence) and in the legal documentation.
What kind of due diligence exists, and how can a biotech startup prepare for this process?
In a typical VC financing or M&A process, there is at least a science due diligence, IP due diligence and legal due diligence. Often financial and tax due diligence as well.
We recommend organizing the company files in a centralized, well-structured document storage (data room).
Since almost all due diligence is conducted virtually, it makes sense to scan and store scans of all signed documents for easier access and preparation of a virtual data room.
Are founders who are added to the company at a later stage considered differently from a tax point of view?
Yes, the differences are quite significant for founders residing in Switzerland.
The Swiss tax administrations are usually very strict. Only shares given out at the incorporation (or in close temporal proximity) are treated as founder shares, which don’t trigger income taxes or social security contributions at the acquisition or sale of the shares.
Shares given out at a later stage will be treated as employee shares. The acquisition and sale within 5 years triggers income taxes and social security contributions.
For more advanced companies: How do you prepare for a future IPO on NASDAQ? Is it better to plan the listing in the US or in Europe?
In 2021 we could observe a clear trend to do an IPO on the American stock market, i.e. on NASDAQ.
This trend was particularly driven by the strength of the American biotech public market in 2021 and in previous years.
The biotech IPO market started off blazing hot in 2021 with a record-breaking 100 listings with very high valuations. It remained in this condition until the autumn of 2021, when the market started to correct significantly.
When preparing an IPO on NASDAQ, our Swiss clients either opted for a listing of the Swiss shares or executed a so-called company flip, which led to the listing of American shares.
The second option was chosen more often as there are some advantages of listing American shares on the American stock market.
What advice would you give biotech founders at the beginning of their journey?
Your lawyer understands when you’re more focused on your innovations and products than documentation. Don’t be shy to ask for their help with the legal “stuff.”