Exotic Financing in Life Sciences
The life sciences sector has not been immune to the impact of the world-wide economic downturn and the struggling financial markets. Even in today’s economic clitate, there are investors who are willing to invest while looking to minimize their risk. And of course the gap of valuations between investors and entrepreneurs are still substantial. As a result, companies are looking for funding outside of traditional streams. The lack of available funding has forced companies to be creative as they look to raise money to advance their programs. These creative transactions are referred to as “exotic financings”. Because these transactions vary greatly in structure and can be very complex, it is important to consider the risks and rewards when contemplating entering into such a transaction
We have seen a wide variety of unusual transactions with our life sciences clients. We are seeing companies that are strapped for cash enter into barter transactions to exchange one product or service for another. Monetization of certain intellectual property has also been used as a way for struggling entities to obtain cash needed for survival. Issuance of shares and/or stock options has been a popular way for early stage companies to obtain required services. In order to entice investors to enter into a deal, more and more "sweeteners" are offered to investors - driving the cost (effective interest rate) of the transaction through the roof.
In an effort to find cash for your business, consider collaborating with friends, vendors, customers, incubators and angel networks for potential sources of funds. Current business relationships can be leveraged to find non-traditional avenues for capital raises and project support. While entrepreneurs always prefer non-dilutive financing such as grants and licensing cash flow sources, it is common to have to look to outside investors. Once a potential transaction is in negotiations, it is crucial to understand all the terms of the collaborative agreement, including the ability of both parties to be able to fulfill all the terms of the contract. True costs of these transactions often carry heavy financial burdens and operational requirements, and should be carefully evaluated prior to entering into the deal. Potential tax ramifications of exotic financing transactions is another important item to consider as certain transactions can result in a taxable event for one of the parties without having a "sale". Make sure that you consult your legal and tax advisors to ensure that the transaction is structured in a way to bring you maximum value and limit your exposure.