Creative Angel Investment Repayment Scenarios

We are developing a pharmacuetical product. Ideally we would pass certain milestones using angel investment from a government incubator program to get us to the point where a large pharma company would be interested in partnering with us. At that point we would expect a current and future milestone payments, and royalties.

The Angel usually focuses on liquidating / sale transactions, not license / royalty arrangements.

One idea would be to have the Angel agree to X% (20%?) of any milestones and/or royalty payments, with a cap of 5x return in total. Another would be a 'Put' whereby the Angel may force the Company to purchase their shares at a fixed price, or a "Call", where the Company has the right to purchase at a fixed price or fixed total price.

Just wondering if anyone has run across other ways to set this up?

Answers

Keith Perry Director of Global Accounting • January 22, 2013

Using a convertible-equity structure with a cap is one common method, but it sounds like you want to (on their behalf) guard against them converting to stock but having an illiquid asset at that point, which explains the put/call approach?

I'm more a fan of the revenue-share approach (item 1) than the put/call approach (item 2); I've done the former but not the latter.

This is notably why the community moves away from Lifestyle buisnesses...no exit and great cashflow for the company doesn't give venture investors returns.

david waltz Assistant Treasurer • January 23, 2013

Isn't option 1 the thing they do not prefer - periodic payouts rather than a "clean exit"? This is borrowing from other industries such as power, mining, etc., but is the pharma contract "ironclad" enough that it would stand as collateral for a secured debt financing? If so, there would be an immediate payout that would take out the angel how they like and other investors happy with a payment stream would be involved going forward.

Kent Thomas Founder • January 24, 2013

You may find angel investors who are willing to do the milestone payment / royalty share but not if you put a cap on their return, why would they? What you are proposing is to ask someone to make a high risk investment to help your company succeed but take a limited upside on the benefits received - that isn't what equity investing is about. In my experience, angel investors are not typically good candidates to fund a Pharma business, especially in today's environment. As though the risk of success isn't enough alone, there is an even greater risk that the angel will not have sufficient capital to finance the company through enough of Phase 1 and possibly Phase 2 testing to get a large company to buy or license the IP, leaving the company and its investors with nothing. Good Luck!

Carley Ferden Analyst • January 28, 2013

Creative Angel Investment is a nice project, but before investing in any company the investors would desire for the returns. Whether it is Pharma or real estate agency. So, share some information on the return of the investment.
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Subhash K Founder • August 12, 2013

I have a question related to how revenue sharing to investors is treated for accounting purposes. Revenue share is NOT a debt, hence cannot go into the books as interest payment.
It can be treated as dividends but I see a couple of issues:
a) Assume the business takes 3 years to turn cash flow positive and you agreed to pay 10% of your Revenues as revenue share to your investors. But since you haven't turned positive in year 1, 2 and 3, you cannot technically announce dividends to your investors in these years.

b) In countries such as India, dividends attract tax(around 15%). Extra burden!!

Can someone provide me an explanation/creative way to handle revenue sharing?

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Creative Angel Investment Repayment Scenarios

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