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Alan Shalleck - NanoEntrepreneurial Residual Ownership - Ripping Off the Nanoentrepreneur
Last Updated: Saturday, 29-Mar-2008 14:10:15 PDT
Alan B. Shalleck
July 13, 2006
NanoEntrepreneurial Residual Ownership - Ripping Off the Nanoentrepreneur
This month I'm breaking away from nanoenhanced alternative energy options to address a subject that is very dear to my heart, nanoentrepreneurial residual ownership. I'm referring to the percent ownership the founders and technical/business creators of a nanotechnology company retain after the VC's and other vultures finish funding their nanotech company. A quick survey may surprise you. Group nanoentrepreneur residual ownership levels, in promising US nanotech ventures, average under 5%! Nanoentrepreneurs start with dreams and 100% ownership and, after rapacious funding rounds, are left with single digit interests in their own work product. This is an unconscionable rip off of the opportunity to profit from one's work by these non-operational "funding groups." It's theft … disguised as mutual self-interest.
What set me off was a specific extreme example. I have in NanoClarity, using my NALA Rating system, evaluated nanocompanies for projected long term sustainable profitability. Among the highest rated companies is a VC funded nanobio venture called Kereos in St. Louis, Missouri. Kereos is a leader in multifunctional nanomolecules designed for rifle shot tumor detection (in 50 minutes) and rapid specific tumor destruction with little or no side effects. Kereos is moving product into clinical trials and raised $39 million dollars from VC's and institutions late last year to fund these clinical tests. Kereos projects as a success story. But the story of the original founders is not so happy.
A May article in NanoBioTech News quoted the two founding Washington University Professors, Gregory Lanza, MD, Ph.D. and Samuel Wickline, MD, who are the co-inventors of the Kereos technology as follows: "We will own together less than 5% (it's actually much lower) of Kereos, and we have also conceded our share of the University Royalties to fund the company. The VC's own the vast majority of the stock, and the Barnes (a recent Hospital investor) also has a preferred equity interest. We own effectively very little of our own invention and its perfection. However, in the end, patients will benefit from the commercialization of the advances and … and that's what's really important." I'm told, in addition, that the existing management of Kereos, including options, cumulatively owns only a single digit percentage of the company. This article made me sick.
More than a few other VC funded nanocompanies have founders and inventors in similar low residual equity positions. Founders (I was once one myself) work night and day over many years to build a dream, and to capitalize on unique insights and skills in nanoscience and productization, only have those that sit in judgment on Sand Hill Road, or in Boston, NY, San Francisco, Austin, Baltimore/Washington and other financial centers … who don't even invest their own money … they have third party money … rip off the ownership of nanocompanies because they are the only funding game these days for nanotechnology.
I have no problem with a nanotech funding group earning a large share of the profits for putting up secondary level monies. (Venture Capitalists no longer put up initial capital. They have forgotten what the word Venture means.) Their right to a fair return is an oxymoron. However, using a funding schema of multiple sequential funding rounds to abscond with 90+% of a new venture so that they can provide returns of 10X investors money in five years … on the backs of, and taking the shares of, the inventors and creators of superb and inventive nanoproducts strikes me wrong. I think it stinks. Nonetheless, the nanotech industry is caught in this VC-based rip off funding system because the alternative public markets for funding nanocompanies haven't developed as projected (I've written previously about the lack of public markets inhibiting nanotech industry growth) leaving the VC's as the only alternative available in the space. Be aware of the consequences of this de facto monopoly.
All existing nanoentrepreneurs and "would be" nanoentrepreneurs please pay attention.
If you elect to go the vulture … I mean the VC … funding route for your company, be prepared to lose control of your company, to work for young MBA's (who have little or no practical business experience. I teach them so I'm talking from experience) and to own, residually, virtually nothing of your own company. Without initial advice and diligence, you will be soundly ripped off (except for a bone or two) by these VC "wise guys."
Go into funding negotiations with your eyes open and be prepared, from the "get-go," to fight for what is rightfully yours … the benefits (financial and other) of your own determination, creativity, and sweat. Be prepared to walk away from the table if the offered terms of financing get really bad. I promise you that they will. The egos and consciences in the VC world have no boundaries. Many of the senior VC's never worked for their cohorts. They built companies, sold them for huge profits and now, as VC's, are willing to fund you with terms they would never have accepted when they were operating executives. Be aware, though, that there are private non-VC funding alternatives today that didn't exist a year ago. Large amounts of risk accepting money are available for a good opportunity (even a nanoventure) in the hedge fund community and from those private individuals who have profited from the spectacular returns of these hedge funds. We can steer you to those sources.
Remember, also, to structure your company from the beginning to protect and retain a significant interest in your work product. Set a bottom line ownership percentage that you can live with after all projected funding is completed. 15%? 20%? 25%? 30%? Then create a class A stock reflecting that ownership and insert an ownership anti-dilution clause that will guarantee to your team that residual amount, regardless of the number of rounds and amounts subsequently raised. Finally, add a "B" Class of common stock for all the VC's and other funders to fight over. Be prepared to walk from the table if any VC prospect objects to your "A" stock anti-dilution provision. There always is another funding group prepared to live with 70 - 80% of your company!
If you follow my advice or modify your existing structure to reflect it, you should never have to admit to anyone, like the founders of Kereos did, that your company was ripped off and that non-financial considerations were more important. You risk everything in a venture for the prospect of a superb financial future. Don't let anyone take that prospect from you.
©Copyright 2006 NanoClarity LLC
Alan B. Shalleck is the President of NanoClarity LLC (www.nanoclarity.com).
- Describes the complex realities of nanotech in simple, understandable terms.
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- Debunks the hype (and there is going to be a lot of hype!)
- Answers most your questions regarding nanotechnology and nanoinvestment.
He can be reached at firstname.lastname@example.org