Timothy Mills, Ph.D., Managing Director Sanderling Ventures

1. Investing in BioMedical Start-ups at The University of ColoradoVenture Capital Financing of University-Based Start-up Companies Timothy Mills, Ph.D., Managing Director Sanderling Ventures Dave Drake Director of Business Development CU Tech Transfer Office

2. The Venture Capital Landscape • Venture funds focused on life science investments differ widely in their investment approach • Stage of Investment • Size of fund and hence size of target investment amount • Area(s) of investment focus • Sanderling Venture’s Approach

3. The Venture Capital Landscape • Venture funds have a finite life cycle, which determines their receptivity to new investment opportunities • Early stage venture funds must “swing for the fence” on each investment, unlike angel investors or corporate investors/licensees

4. Venture Mathematics • A successful venture fund must earn a compounded, cash-on-cash gross return in excess of 30% over its ten year term (22.5% net return) • The typical fund will be fully invested after 2-3 years • The analysis of valuation is driven by multiples (between 5x and 10x)

5. As a result, valuation is determined by reference to: • Amount of money to be raised, which is determined based on the funds needed to achieve the next set of milestones • Likely “pre-money” valuation of the next round, based on the step-up in valuation expected to be created by applying the proceeds raised in the current round of financing • The number of subsequent financing rounds required until liquidity (IPO or sale), and the funds likely to be raised in each round • Comparables are of limited utility – Each deal is unique

6. What VCs are Looking forProducts • A novel biological or chemical hypothesis • A well understood mechanism of action • Proof of principle • Significant unmet need • A strong IP position (both freedom to operate and power to exclude) • A strategy for partnering so that the risks associated with the timing of FDA approval can be passed on to someone else (although clear clinical endpoints are a plus)

7. What VCs are Looking forTools • Reducing the failure rate and/or increasing the efficiency of drug discovery or development • A technology that provides useful information which addresses an unmet need • A strategy for partnering/sales which takes account of the sales cycle and the need to differentiate oneself amidst the background noise, confusion, and competition

8. Start-Up PitfallsVenture Capital Nightmares • Undocumented commitments to co-founders or promoters who assist in arranging the initial round of financing • Unconventional corporate or capital structures • Equity arrangements that are not tied to future performance of services; everyone must have “skin in the game” • A management team lacking a critical skill set • An unwieldy or dysfunctional board of directors

9. Intellectual Property Pitfalls • All of the investors/institutions have not assigned their rights to the university • The university has not made patent filings on a timely basis in relevant markets for the technology • The technology’s inventors published their ideas prior to the filing of patent applications • The claims of the filed patent applications are not broad enough to cover the intended application of the technology • A non-infringement analysis (freedom to operate) has not been done

10. Intellectual Property PitfallsWhy is this so important? • Because universities typically provide • No representations or warranties • No indemnification • An “as is” transfer of rights to the underlying intellectual property • This translates to increased RISK for the venture investor

11. Other IP Diligence Traps • The original sponsor of the research retains “strings” restricting its commercialization • The new company requires access to biological materials, information, or other technologies not covered by the license • Only patents and tangible property can be licensed, not “know how” • The inventor’s activities are limited by pre-existing, third party consulting agreements

12. Licensing Pitfalls • Technology licensing arrangements that fail to contemplate the most likely business model and liquidity event • Failure to study the university’s income-sharing and conflict of interest policies • Failure to adequately and appropriately incentivize the inventors/scientific founders • Inability to have input on patent prosecution and intellectual property strategy for licensed technology

13. Key Licensing Termsthe economics • Royalty (typically on Net Sales) • How is it calculated? What is included/excluded? • Sublicense Royalty • Why so much higher than the Net Sales Royalty? • Equity • Who will manage the equity and what rights accompany the equity? • Minimum Annual or Minimum Royalty Payments • Do these change? How? Will they be reduced if patents don’t issue, certain claims are rejected, or generic competitors emerge? • Sponsored Research • Part of the deal?

14. Key Licensing Termsnon-economics • Scope of license • Field of Use restrictions • Exclusive/Non-Exclusive • Geographic limitations • Royalty anti-stacking provisions • Conditions put upon sublicensing • Sublicensee rules and restrictions • What if primary licensee breaches license? • Assignability in the event of a corporate change of control

15. Price Dividend Provisions Liquidation Preferences Redemption Conversion Automatic Conversion Anti-Dilution Provisions Voting Rights Protective Provisions Pay to Play Provisions Board Rights and Composition Information Rights Registration Rights Right of First Offer Right of First Refusal Co-Sale Rights Drag-along Rights Stock Restriction Agreements Deal StructureThe Term Sheet

16. Deal StructureThe Term Sheet • Employee Agreements • Indemnification Agreement • For Directors and affiliated entities • Legal Fees and Expenses • Conditions Precedent • Full and complete disclosure and due diligence • Negotiations • Exclusivity Period • Confidentiality • Status • Governing Law

17. A “typical” Deal Structure Post-Series A First Round Financing • University of Colorado • 1-15% • Management/ Board/Employee pool • 15-25% • Founders/Seed Investors • 15-25% • Venture Funds • Remaining unallocated amount

18. Deal Structure –VC Headaches • Disproportionate equity to the founders with no vesting requirement • Equity to people who don’t contribute value • Unwieldy “Dilution protection” provisions • Valuations at pre-venture rounds that are too high and set unrealistic expectations • Unnecessary, complex, “finders fee” expectations by pre-venture placement agents • Any previously-agreed to structure that imposes unpalatable conditions on future financings or deals down the road

19. Building for a Successful Venture Capital Financing • Choose the right fund to lead the deal • Choose the right people to run the company • Anticipate and resolve in advance potential “deal killers” • Make sure there’s enough cash runway • Clearly understand and be able to articulate the business model • Divide the equity in a sensible manner

20. Biotechnology and Therapeutics Biotechnology & Therapeutics Drug Discovery Tools Genomics Medical Devices and Instrumentation Medical Devices and Instrumentation Biologic Devices Drug Delivery Medical Imaging i-Health Healthcare Delivery Medical Information Technology Sanderling Investment Focus