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What’s the ideal deal structure to secure funding for biotech startups?

By 30.01.2025All

What’s the ideal deal structure to secure funding for biotech startups?

As the biotech funding environment evolves, particularly in early seed and Series A rounds, companies are adapting their business models.

Approaches for startups like early platform deals and build-to-buy transactions, considered unfavorable, are gaining in popularity due to a tougher funding environment and increased investor risk aversion.

We hosted a panel with three of our domain partners, Vischer and Walder Wyss, to learn more about the legal aspects of these deal structures.

Meet the experts

Matthias Staehelin, Partner at VISCHER

Matthias chairs Vischer’s Life Sciences group, is a Board member, and has helped entrepreneurs, business angels, and companies in the life sciences field for 30 years.

He moderated the discussions, asking questions and offering additional input at key moments.

Alexander Gutmans, Partner at Walder Wyss

In the areas of healthcare and life sciences, Alexander is a leading practitioner of M&A, private equity, venture capital, and financing, as well regulatory matters.

He provided insights into build-to-buy transactions.

Christian Wyss, Partner at VISCHER

Christian is active in the fields of life sciences and information technology with an additional focus on technology transfer and license agreements, research, development or marketing co-operations, and financing rounds.

He provided insights into early platform deals.

The two deal structures on the rise

This is a great opportunity to explore how biotech and pharma can work together more effectively. By understanding the intricacies of these two deal structures, we can help both startups and larger players navigate the challenges of collaboration and achieve better outcomes.

Matthias StaehelinPartner at VISCHER

Market conditions and risk aversion among investors are among the reasons that traditional paths to growth, such as IPOs, are increasingly rare in Europe.

This is driving the need for alternative funding strategies for early-stage companies. Two types of deals are gaining more and more traction in the biotech industry: build-to-buy transactions and early platform deals.

Build-to-buy transactions

Build-to-buy transactions are when an investor collaborates with an innovator to fund and guide the development of a new product that the investor has the contractual right to acquire later.

Alexander GutmansPartner at Walder Wyss

Build-to-buy transactions combine three distinct elements into a single agreement: equity investment, a research and collaboration partnership, and an acquisition or licensing option.

Build-to-buy is not just about investment. It’s about locking in a target and fostering long-term collaboration. The pharma company gains an in-depth understanding of the startup’s science, operations, and team, while the startup benefits from the guidance and resources needed to advance its projects.

Alexander GutmansPartner at Walder Wyss

There are downsides to this deal structure. Startups may face restrictions that limit their freedom to pursue additional partnerships, as the pharma partner often holds significant veto rights. Also, if the option to acquire isn’t exercised, the startup may find itself in a challenging position, needing to pivot back to standalone operations while securing new funding.

Early platform deals

Early platform deals are a research collaboration and license agreement with a pharma partner in the preclinical or first clinical phase.

Christian WyssPartner at VISCHER

Unlike the build-to-buy transaction, these agreements are not focused on an immediate exit. Instead, they emphasize partnerships that allow startups to license or co-develop their platform technologies with larger pharma companies while maintaining operational independence.

Early platform deals are a way for startups to gain credibility and proof of concept while keeping the freedom to pursue other opportunities. This flexibility makes them particularly attractive for young companies that want to stay agile and explore multiple avenues for growth..

Christian WyssPartner at VISCHER

There are downsides to this deal structure as well. As more deals get closed, the risk of conflicts between partners increases, especially if their interests overlap. Startups have to carefully negotiate agreements so their long-term goals aren’t hindered by the expectations of their first partner. Also, pharma partners often retain significant oversight, which can limit a startup’s autonomy over resource allocation and certain aspects of its research.

About build-to-buy transactions and early platform deals

1. Strategic objectives

Why should a startup sell its crown jewel early on?
Alexander:
A young biotech company needs to secure funding. This can come through equity investment or a research and collaboration agreement where the pharma partner funds R&D. Due to risk aversion from many investors, build-to-buy transactions are becoming more popular and easier to close.

Why would big pharma opt for this structure?
Alexander:
Two reasons: First, it locks in the target at a pre-agreed price that’s “cheap” compared to a later auction with competitors. Second, the collaboration gives pharma deep insight into the target, far beyond standard due diligence. Working together on R&D builds confidence in their decision to exercise the option to acquire the target.

What about the strategic objectives for an early platform deal?
Christian:
For big pharma, early platform deals come with less initial commitment and lower financial investment, while they still gain access to potential new products. Being involved early gives them a seat at the table and prevents valuable assets from going to competitors. It also significantly reduces risk. Instead of rushing due diligence in a few months, they can collaborate with the biotech for years, learning about the team, science, and products in depth. Lastly, early engagement often means better terms. Prices tend to rise with development success, so getting in early usually leads to better deals from the pharma company’s perspective.

2. Valuation and pricing

How does pricing and valuation work?
Alexander:
In build-to-buy transactions, the equity portion is typically small compared to the non-dilutive funding for research. For example, I’ve seen equity make up only one-eighth or one-tenth of the overall funding. Interestingly, the research and development funding often comes in tranches, linked to the option’s extension. This allows the pharma company to “buy” more time, but it comes at a cost. If the option isn’t exercised, that non-dilutive funding is essentially a sunk cost for the pharma company, though they retain the equity. It’s a calculated bet.

When negotiating an R&D agreement, do early-stage companies prefer to secure equity investment alongside it?
Christian:
It depends. In my experience, only about 25% of early-stage collaborations involve equity. If it aligns neatly with a financing round, it makes sense to seek equity. If it doesn’t fit into the fundraising plan, it can become a burden to negotiate additional funding alongside the partnership. Securing a collaboration often provides enough positive momentum in the market because it demonstrates that a big pharma company sees value in the startup’s technology.

Matthias:
It seems early-stage collaborations rarely involve equity. These are more transactional—pharma funds researchers, the results go to the startup, and the IP usually remains with the startup. In contrast, the build-to-buy model still leaves the IP with the startup, but the option gives pharma a foothold in equity, now or later, at a predefined price.

3. Tax and competition law

What makes each model attractive from a tax perspective?
Alexander:
There’s a lot of flexibility. Pharma companies want the option to choose between buying shares, assets, or licensing. For example, for shareholders in Switzerland, tax-free capital gains are only possible with a share deal, not with asset purchases or licensing. To address this, I’ve seen deals structured with different prices for each option. Meaning, a share deal might have a lower purchase price compared to an asset deal to offset tax inefficiencies.

Christian:
Early platform deals typically focus on licensing, which doesn’t allow for tax-free capital gains. Rarely, companies will spin out part of their operations into a new entity and sell that entity instead of licensing, though this raises significant tax questions. Another hybrid solution, more common with Swiss companies, is to demerge the business before the option exercise. One part goes to big pharma, while the other remains independent. On paper, it’s a share deal, but economically, it mimics a licensing transaction. It’s complex, but viable.

Why should startups feel comfortable collaborating with a big pharma partner that has competing research activities?
Christian:
Big pharma is highly conscious of IP contamination risks. The biggest catastrophe for them would be losing an expensive internal project due to legitimate claims from an external source. This fear incentivizes them to handle collaborations carefully and ethically. For example, if they have one internal program targeting multiple sclerosis (MS) and a collaboration also targeting MS, they often work on both because the chances of success for either program are slim. Ownership of IP is typically negotiated upfront. Generally, if a pharma company invests significant resources, the IP transfers to them. If the project is terminated, the IP often reverts back to the startup through a reversion package.

Alexander:
In build-to-buy transactions, the same rules apply. However, since the option is tied to a single project, there’s less risk of parallel projects and contamination.

So, internal competition isn’t as big an issue as one might expect?
Christian:
If the usual rules are followed, the risk of an internal competing project isn’t much higher than that of another pharma company independently developing a similar project.

Alexander:
Additionally, funding decisions in pharma are often tied to internal budgets. They must weigh whether to pursue a project internally or pay millions to collaborate with a biotech startup. This also is a natural incentive to play it right.

Should we consult competition lawyers before entering a deal?
Alexander:
Absolutely. These deals are often classified as joint ventures under Swiss and European competition laws, making them subject to merger control. I’ve seen cases where we engineered shareholder agreements to avoid triggering these laws, but it’s essential to consult legal experts to navigate these complexities.

Christian:
Yes, this also applies to early platform deals. For example, in the U.S., the HSR filing threshold is approximately $120 million. If a deal exceeds this value, filing is required. Specialized providers can help determine valuations, but if you think a deal might reach that threshold, it’s worth addressing it early.

4. Key legal risks and documentation

How do you structure agreements to balance governance, veto rights, and steering to minimize friction?
Alexander:
In R&D agreements under a build-to-buy model, the terms are straightforward. The pharma company funds R&D, and there are typically no milestones or royalties since everything is geared toward exercising the option. The governance framework is similar to standalone R&D agreements. The key difference lies in the shareholder agreement. Pharma companies want far-reaching veto rights to control the target and protect the option. They don’t want changes without their consent, and share transfers are entirely restricted during the option period. Once the option period ends, these protections fall away, and the pharma company becomes just another shareholder, like the VCs or founders.

Christian:
One critical element is having robust escalation mechanisms for disagreements. Startups often have only two or three levels of hierarchy, while pharma might have 10 to 15 levels, making it difficult to escalate issues to the right decision-makers. But even more important than building the mechanisms is addressing issues proactively, way before formal escalation is required.

5. Execution and collaboration management

On paper, those agreements seem straightforward: pharma provides funding, the startup handles R&D, and everyone wins. What are some common problems in practice and how can they be avoided?
Matthias:
The pharma development world and the startup biotech world collide. When things go according to plan, there’s no issue. But as costs rise, timelines stretch, or disagreements arise, conflicts can erupt. Pharma often asserts control, arguing, ‘We’re paying, so we should decide.’ This can reduce the startup to an outsourced research facility with limited operational freedom.

Alexander:
Governance rules and sophisticated escalation procedures look great in theory, but in practice, it depends on bargaining power. Pharma might fund the project, but biotech contributes the know-how and IP. Cultural clashes are common. Pharma often sees biotech as inexperienced, while biotech views pharma as slow and overly resource-intensive. These are fundamentally different cultures working together. For startups, flexibility is crucial, as things often take longer and cost more than expected. Startups need clear points where they can force pharma to commit. Being “left at the altar” is a significant risk, but without that clarity, they can’t move forward independently.

Christian:
To avoid that, I think the key success factors are great science and great scientists. On both sides! Enthusiasm for the project is critical.

Alexander:
I’d add that on the pharma side, you need a strong internal champion. Whether it’s a person or a group, they must believe in the technology and advocate for it within the company.

Alexander asks Matthias: “Do you see build-to-buy transactions as the future or are they just an old thing with a new name?”

Matthias:
A build-to-buy transaction essentially adds an option for exit to an early-stage collaboration. This needs so much internal support within pharma, not just from alliance management but also from finance. They have to reserve budgets for commitments that haven’t even been written yet. CFOs hate that. Writing a conditional check for three years is complex, and while these deals work in special cases, the flexibility of early-stage collaborations, where startups stay free, is also worth money.

6. Termination or Exit

How do you prepare for an exit?
Alexander:
A successful exit means the pharma company exercises the option, buys the startup, and the deal materializes as planned. That’s the ideal outcome. If the option isn’t exercised, the relationship often ends. The research and development funding typically stops, and what’s left is the pharma company’s minority shareholder position in the startup.

Christian:
A successful exit in an early platform deal could mean the pharma company retains the asset, or the startup sells to another buyer. Managing change-of-control clauses is critical. You want to ensure these clauses don’t force you to choose between continuing the platform deal and pursuing an exit.

More legal knowledge for startups

If you want to learn what a well-planned legal strategy looks like, read this article:

And if you’re a biotech startup unsure of what matters in your legal landscape, this article is for you:

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