Equity: The distribution of ownership of a company.
Initial Public Offering (IPO): The first time company shares are sold to the public. It allows the company to raise money from public investors.
Valuation: Determination of a company’s worth or value.
Resource: Glossary: Startup and Venture Capital Terms You Should Know – By Techrepublic. There are many similar lists of terms you can look up as needed.
FAQ: How do shares work in a biotechnology startup?
Answer: As the business owner, you and your original partners start with all the shares of the business (all the equity). Later you may sell some of the shares to others to raise money, giving them some of the equity.
Angel investors typically are the next group to invest in helping you develop the concept. As this is the highest risk, they get more shares for their investment. You have to give them enough shares to make it worth their taking the risk. The effect this has on your ownership of the company is called “dilution.”
Venture capitalists invest after the concept is developed and provide funds to support further research and development and clinical development. Their investment further dilutes the shares.
Tip: Creating and Giving Shares
Avoid a common pitfall of not having enough shares to give potential future investors an incentive to invest by following the following advice:
- Be careful not to overvalue past work.
- Give specific numbers of shares as equity rather than a percentage.
- Use vesting, whereby someone must wait to get their shares. Avoid overusing acceleration of vesting as an incentive.
- Comply with federal and state securities laws.
- Look into the pros and cons of filing a Section 83b election with the IRS early as it may save you taxes later.
Resources on Financial Management and Shares
Anderson A. Startups and Stockoptions. Hopkins Biotech Network. March 15, 2014.
What Is an 83b Election and Why Should Startup Founders Care? by DW Tremaine, LLP. Startup Law Blog.
Financing 101 for Bioech Startups by Alzheimer’s Drug Discovery Foundation