What biotech founders need to know about investment agreements
You’ve incorporated your company, secured your IP and hit a scientific milestone. Now you need capital! That means raising money, which comes with navigating a term sheet packed with unfamiliar terms: pre-money valuation, liquidation preference, drag-along rights and so on.
At our latest legal event, Walder Wyss broke down the key clauses of a biotech term sheet and explained what founders need to understand before they sign.
Meet BaseLaunch
Our mission is to further grow the biotech ecosystem in the Basel Area, one of the world’s premier life sciences hubs.
We provide groundbreaking startups with the funding, expertise and infrastructure they need to transform their ideas into industry-shaping solutions. So far, we’ve supported companies that have collectively raised over $1 billion in follow-on financing.
We also collaborate with industry leaders, domain experts and organizations to create opportunities for knowledge exchange and partnerships. Events like this are a key part of that vision, bringing together thought leaders to tackle the challenges and opportunities shaping the future of biotech.
Meet the speakers
Robert von Rosen
Partner, Attorney at Law, Walder Wyss
Robert set the stage and explained why you need to involve a lawyer early.
Christoph Burckhardt
Dr. iur., LL.M. (Harvard), Attorney at Law, Walder Wyss
Christoph walked through valuation mechanics, dilution math and preference rights using a sample term sheet for a fictional biotech startup.
Simon Olstein
MLaw, Attorney at Law, Walder Wyss
Simon covered governance, transfer restrictions and the exclusivity and cost clauses that founders tend to overlook.
The term sheet arrives
”You can draft a term sheet by yourself, but I would not recommend it. Usually the investors have their own term sheets. Have your lawyer involved at this stage, because even the non-binding terms can come around to bite you.
Robert von RosenWalderWyss
By the time a term sheet lands on your desk, you’ve likely spent months sharing your pitch, signing NDAs and going through early due diligence conversations. Now, the real negotiation begins.
Usually, between one and three months later, you’ll have a term sheet signed by both parties.
The term sheet summarizes the principal terms of the investment: how much is being invested, at what valuation, what rights the investor gets and how the company will be governed going forward.
Involve your legal counsel early
Most term sheets include boilerplate language stating that the document is non-binding, except for a few specific clauses (usually confidentiality, exclusivity, costs and governing law).
In practice, even the non-binding terms can sometimes get treated as settled once a term sheet is signed.
This is one reason why you should involve a legal counsel at the term sheet stage, not after.
Valuation and dilution: The numbers that determine everything
The valuation clause is the first thing most founders look at in a term sheet. Here are three terms you need to understand before you can evaluate any offer.
1. Pre-money valuation
The pre-money valuation is the agreed value of the company before the investment. This is a negotiated number, not a fixed formula. It reflects the strength of your science, your team, the IP you’ve secured and how well you can present your business case.
Question from the audience
Does grant money count toward the pre-money valuation?
Not directly. Receiving half a million in grants doesn’t automatically make your company worth half a million more. Banks, too, won’t count grants as revenue if you’re looking at debt financing. In short: grants strengthen your story, but they’re not a shortcut to a higher valuation.
2. Post-money valuation
The post-money valuation is simply the pre-money valuation plus the cash invested. If the pre-money is CHF 23 million and the investor puts in CHF 7 million, the post-money valuation is CHF 30 million.
This number matters because it sets the baseline for how ownership percentages are calculated after the round.
3. Fully diluted basis
When a term sheet refers to valuation “on a fully diluted basis,” it means counting all the shares that could exist if every option, warrant and convertible were exercised.
Tip:
Always draft a cap table to get a proper overview and to check what the valuation and ESOP (Employee Stock Option Pool) terms actually mean for your ownership.
Preference rights: Not all shares are equal
Some shares come with special rights, others don’t. Two shareholders can both own 20% of a company but walk away with very different amounts of money.
Three types of preference rights are most common.
1. Dividend preference
Holders of preferred shares receive dividends before any dividends can be paid to holders of common shares. Biotech startups rarely pay dividends in their early years, but the right is typically included as standard investor protection.
2. Liquidation preference
When a company is sold or liquidated, preferred shareholders typically recover their investment first. Only after their claims are satisfied do holders of common shareholders participate in the remaining proceeds.
This means the investor’s downside risk is reduced, while your payouts depend on the company exceeding the preferred amount. If the company sells for exactly the amount invested, the investor gets its money back and you may receive nothing, even though you still own a large percentage of the company.
3. Anti-dilution protection
If the company later issues new shares at a price lower than what the investor paid, anti-dilution protection may compensate the investor with additional shares.
Professional investors will almost always insist on some preference rights. They’re essential protective provisions. The exception is very early-stage investments from business angels, who may not always require them.
Governance: Who really makes decisions?
When you raise capital, you’ll inevitably have to share control of the company. The governance section of the term sheet determines how decisions are made at the board and shareholder level.
Board composition
An investor may appoint a board observer who attends meetings and receives all information but does not vote. Board observer rights are a common negotiation point: investors often want them to contribute strategic expertise without formally taking on a voting role.
Investor director approval rights
While board resolutions are passed by majority vote, investors typically seek veto rights or qualified majorities over key decisions. The scope of these veto rights or qualified majorities is one of the most negotiated parts of the term sheet. Investors push for broad coverage and you should try to narrow the list and set operational thresholds.
Shareholder-level protections
Investors may require approval from a majority of preferred shareholders for certain actions: changes to the articles affecting preferred shares, capital increases, new share classes, transfer restrictions, liquidation, mergers and dividend payments. From a founder’s perspective, it’s critical to understand how these rights can affect control and flexibility.
Information and reporting rights
Swiss law grants shareholders only minimal access to ongoing company information, but investors will insist on more in-depth reporting. There’s little room to negotiate these rights, as they’re considered essential. It’s best to plan in advance how you’ll provide regular, detailed financial reporting.
Question from the audience
As an early startup strapped for cash, how much negotiation power do you actually have?
It depends on how unique your IP and business case are. If you have something truly differentiated, you’ll attract competing investor interest, which gives you leverage. Accelerators like BaseLaunch can help by introducing you to multiple investors and strengthening your position.
Transfer restrictions: Who can sell what and when
The shareholders’ agreement will, as part of the term sheet, include provisions that control who can sell shares, when and under what conditions. That protects the stability of the cap table but also affects your ability to exit.
Right of first refusal (ROFR)
This is standard in almost every financing round. Before any shareholder can sell shares to a third party, the company (first priority) and the investor (second priority) have the right to buy those shares instead.
- The company’s ability to exercise this right is limited by available cash and legal caps on holding its own shares.
- Investor shares aren’t always fully subject to the same ROFR constraints. Investors typically try to negotiate certain carve-outs. The scope of the ROFR is often adjusted to ensure investor flexibility while preserving a degree of control for the company and the founders.
- Customary carve-outs (for example, transfers to family members or for estate planning) should be reviewed carefully for founder flexibility.
Tag-along rights
If a shareholder or group of shareholders intends to sell shares to a third party, all other shareholders get the right to co-sell a proportional part of their shares on the same terms and at the same price.
If the transaction would result in the buyer holding more than 50% of the company, the remaining shareholders can typically sell all of their shares, not just a proportional part.
Drag-along rights
If the board (including the investor director) and a majority of preferred shareholders approve a sale or acquisition, all other shareholders are required to sell their shares on the same terms and conditions.
The drag-along right overrides the right of first refusal. While this ensures that a sale can’t be blocked by a minority shareholder, founders should understand that liquidation preference still determines payout order.
Negotiation tip:
Push for higher approval thresholds (such as a supermajority or unanimous consent) to prevent a small group of investors from forcing a sale. You can also define minimum price or buyer-quality criteria for triggering the drag-along right, which can help safeguard your company’s mission and ensure a fair valuation.
Exclusivity clauses
It’s standard for a term sheet to include an exclusivity (or “no-shop”) clause. Once signed, neither the company nor the founders are allowed to hold discussions with other potential investors or provide information to third parties about a potential investment.
The typical exclusivity period runs four to eight weeks, though the exact duration is to be negotiated.
From the investor’s perspective, exclusivity is essential: they’re about to invest significant time and money into due diligence and legal drafting. They need assurance that the founders aren’t simultaneously negotiating with a competitor.
From the founder’s perspective, keep the window as short as possible. A long exclusivity period with no deal at the end costs you time and momentum.
Cost reimbursement clauses
A standard clause in most term sheets requires the company to reimburse the investor’s reasonable expenses related to the transaction. This typically includes intellectual property due diligence costs and legal fees for the investor’s corporate counsel.
A cap on these expenses is usually agreed upfront and the company doesn’t pay these costs before the deal closes. Instead, the investor provides the capital first, and the company reimburses the agreed expenses from the newly invested funds after closing.
”The term sheet is much more than a preliminary document. It sets the framework for governance, shareholder rights and investor protections. The impact of certain provisions can easily be underestimated during early negotiations.
Simon OlsteinWalderWyss
If you want to learn more about term sheets, legal due diligence and employee incentives, read our practical guide from an earlier Walder Wyss event.
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