Health Innovators - "Launching & Funding a Healthcare Innovation: Legal & Business Considerations"

Intellectual Property
Considerations
1. IP Basics: Types and Uses
2. Patents: What and How
3. U.S. Patent Law: What’s Going On?
4. Start Up Companies: Practical Patent Tips
Stephen Altieri, Ph.D., J.D., Morgan Lewis
@health2innovate, #healthinnovators, @CooleyLLP, @davidharlow, Stephen Altieri

Patents:
• Coverage: “new and useful process, machine,
manufacture, or composition of matter”
• Length: Utility (and Plant) ─ 20 years from date of
filing (Design ─ 14 years from patent grant)
• How: USPTO examination, quid pro quo
Copyrights:
• Coverage: “original works of authorship” (e.g. literary,
dramatic, musical, artistic works)
• Length: in general, author’s life + 70 years
• How: Copyright Office: © (or upon “fixation”):
IP Basics: Types and Uses

Trademark:
• Coverage: any word, name, symbol, device, etc.,
used, or intended to be used, in commerce to
identify and distinguish goods or services (e.g.
logos, product names, etc.)
• Length: 10-year terms with 10-year renewal terms
• How: USPTO examination: ® (or common law: TM)
Trade Secret:
• Coverage: information providing economic value
that is not public domain and that has been
reasonably kept secret (e.g. formulae, programs,
etc.)
• Length: indefinite (as long as secret)
• How: keep it secret

PATENTS:
Chemical entity,
formulation,
method of
medical
treatment, etc.
TRADEMARKS:
sildenafil citrate =
VIAGRA®,
COPYRIGHT:
Label look
and feel,
instructions
fore use
TRADE SECRET:
Special Marketing
Strategy?,
Manufacturing
(unlikely for pharma,
though)

• What to cover?-
• Drug/biologic composition (“An antibody having affinity to .
. . ”)
• Methods of medical treatment (“A method of treating lung
cancer . . .”)
• Provisional Patent Application:
• a low cost and “free” year (for term)
• need to balance early filing with thoughtful disclosure
• Inventorship: “conception” of inventive features, not
necessarily “doing”
• Inventorship and authorship are often different
• Patents require convincing the Patent Office that the
claimed invention is new, useful, and nonobvious (this is
“patent prosecution”).
Patents: What and How

Patents: What and How
Cost is directly proportional with time!

• “First to File” – filing date, not invention date, dictates
the world of available prior art (and hence patentability)
• an early filing date is important, “race to the Patent Office”
• Supreme Court is more involved  more uncertainty
• § 101 – Patentable Subject Matter:
• Prometheus (diagnostics),
• Myriad (DNA, natural substances),
• Alice (computer implementation of abstract ideas)
• Patent Office struggling to implement these Supreme
Court decisions
U.S. Patent Law: What’s Going On?

• Assess the “prior art” – i.e. that which is already known –
before filing
• File a provisional early enough to get the invention date
but not too early that the invention is incomplete
• Use the provisional year to refine the invention (e.g. more
data, more layers to the invention)
• Freedom to Operate:
• A patent is NOT a right to practice an invention
• An invention can be a patentable improvement over an
earlier patent, but still infringe the earlier patent
• Patentability vs. “Freedom-to-Operate”
• Classic example: the wheel patent and the car patent
Start Ups: Practical Patent Tips

• All inventions should be assigned to Company, and
nondisclosure and non-compete agreements should be
considered.
• Conduct periodic reviews of potential inventions
• Key scientific personnel and patent counsel
• Require Invention Disclosure Forms
• Incentivize employees to keep good records, capture
inventions and assist with patent filings
• Timely provide Invention Disclosure Form to patent counsel
• Conduct periodic portfolio reviews (e.g. quarterly) to
ensure IP aligns with commercial goals
Practical Patent Tips

Practical Patent Tips:
Lifecycle Management and Portfolio Building
Composition of
Matter Patents (e.g.
New Chemical Entity)
Earliest filed / Earliest
Expiring
Medical Uses
(Methods of
Treatment)
Related Compounds
(“Back Ups” / “Next
Gen”)
Formulations/Crystal
Forms/Combination
Therapies, Treatment
Regimens, etc.
Latest Filed/Latest
Expiring
Time
Scope

© 2011 Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306
The content of this packet is an introduction to Cooley LLP’s capabilities and is not intended, by itself, to
provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome.
Launching & Funding a
Healthcare Innovation:
Unlocking the Legal
Complexities of the Healthcare
Industry
Launching the
Startup
John Hession
Cooley LLP
January 2015

www.cooley.com
John Hession
 Before: Former High School English Teacher, Former
Sales Rep for Burroughs, Office Products Division
(Legion of Honor, Top 10% in National Sales), Former
Carpenter in Ireland
 Now: business and legal advisor representing emerging-
growth, technology-rich companies from cradle, through
financings, through strategic alliances, technology
licensing, through culmination (i.e., Liquidity = Sale of
Company or IPO)
 Also an Angel Investor over the last 10 years (6 Venture
Funds; 7 companies) – now invests in his 3 daughters
(twins, Kathleen & Maureen, & Meghan), all in medical
fields (dermatology physician, oncology nurse, speech
pathologist)
@health2innovate, #healthinnovators, @CooleyLLP,
@davidharlow, Stephen Altieri

www.cooley.com
My Representative Experiences
 280+ Acquisitions: representing Buyers & Sellers: Silknet Software ($4.2B
sale); Excel Switching ($1.2B sale to Lucent); i-Prospect ($50M, bought by
Aegis plc); Eigner ($22M, bought by Agile); Netlink ($185M, by Cabletron);
ISSCO ($90M, bought by CA); Clinical Data (public-to-public acquisitions of
Icoria and Genaissance, sold to Forest Labs for $1.2B)
 320+ VC & Angel Financings: representing either companies or VC
investors: Powerspan ($60M); Aileron Therapeutics ($40 M); TyRx
Pharma ($20M Clarus); Tetraphase ($40M);Turbine ($15M, Highland &
Polaris); Polaris ($16M investment in Meridio, Northern Ireland); TD
Capital ($5M, Contour Semiconductor); Powerspan ($30m, Rockport,
NGEN et al.); AMP Resources ($25M, by Highland Capital); Autonomics
($6M by Kleiner Perkins)
 350+ Strategic Alliances: representing ALWAYS the smaller tech
company involving C.R Bard, STMicroelectrics, ON Semiconductor,
Medtronics, IBM, Microsoft, AOL, Tandem, Compaq, HP, Apple,
Samsung, EMC, Allied Signal, Pratt & Whitney, GE, Lucent, Alcatel,
Netegrity, Pfizer, Merck, Cleveland Clinic
 30+ Public Offerings: representing either underwriters or issuers:
Clinical Data, Integrated Genetics, Silknet, Excel Switching, CVC
Products, Netegrity, Integrated Software Systems, Tecogen, Dynagen

www.cooley.com
 Cooley represents over 5,000 emerging companies in all
industries, including software and information technology,
telecommunications, semiconductors, life sciences, medical
devices, nanotechnologies, Web 2.0,
 Ranked #2 nationally from 2002 to date in representing venture-
backed companies in financings: ranked #1 in each of Southern
California, DC/Virginia, Colorado, and #3 in Boston
(VentureSource)
 Extensive experience in all aspects of practice: corporate
formation, venture financing, employee incentives, intellectual
property protection, employment and severance matters, mergers
and acquisitions, bankruptcy and litigation
 Provide business counseling to entrepreneurs, reflecting relevant
industry experience and personal and firm-wide knowledge base
Emerging Company Expertise

www.cooley.com
Cooley’s Venture Capital Expertise
 Expertise in every type of transaction, as well as throughout the all stages
 Current on—and influence—the emerging trends in market terms of venture
capital financings
 Corporate and securities law expertise in IPOs and mergers and acquisitions
enables effective negotiation of venture financing documents with such
liquidity events in mind
 We Close 320+350+ private VC financings each year (1.5 per
business day) – and we also represent 835 venture funds
 Areas of Focus
 Early seed rounds
 Venture Preferred rounds
 Mezzanine financings
 Structuring transactions
 Term sheet negotiations
 Document review and negotiation
 Due diligence and closing

Total Deal Volume and
Aggregate Dollars Raised
Overall deal volumes and aggregate dollars raised
decreased from Q2, but remained at historically strong
levels.

Percentage of Up, Down
and Flat Rounds
The percentage of up rounds across all deal stages reached more than
83% of deals, a level not seen since 2011.

Median Pre-Money Valuation
BY SERIES ($ MILLIONS)
Median pre-money valuations slightly decreased from the prior
quarter, with the exception of Series D+ transactions.

Median Pre-Money Valuation
BY SERIES ($ MILLIONS) continued

Tranched Deals BY
QUARTER
The percentage of deals structured in tranches rose
slightly in Q3 from the prior quarter.

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Entrepreneurship in 2015
Good News Headlines
 Still demand for new products & services that
improve outcomes, lower costs, and reimbursed
 Revenue generating companies can succeed
 Significant inefficiencies in healthcare
 Pharma’s IP pipelines are drying up
 Life sciences extend beyond healthcare
 Healthcare IT companies are getting funded - less
capital needed & they will benefit from healthcare
reform
 “Wellness” companies are hot – if results happen

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Why be an Entrepreneur?
 Autonomy
 Enjoyment of building something
 Interest in changing the world
 Potential for financial security
An innovator addressing an unmet need in
the market despite having limited resources

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Five Symptoms of “Founder-itis”
 I have a great invention
 Everyone needs it
 It’s patentable !!! {So there must be a
market}
 Investors are certain to give me money
 I have everything it takes to build a Big
Company
Arrogance = Great Vision, Lousy Hearing

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Combination Therapy for “Founder-itis”
 The A-Team
 Address an unmet need
 Provide a validated solution
 IP is King – ALWAYS HAS BEEN, WILL BE
 The ABC$ of Entrepreneurship
 Surround yourself with honest, market-
intelligent advisers: from advisory board
to lawyers

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Address an Unmet Need
Number 1 Question: Who cares and
who will pay for it?
Will it save someone money?
Will it be reimbursed?
Will it displace existing options?

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Intellectual Property is Still
King
 Document everything properly
 Beware of public disclosure – “The Publish or Perish”
Syndrome can result in peril for a business idea
 Contact Tech Transfer Office (TTO) early
 Compare to existing patent databases
 Try to determine if it has value
 Trade secret vs. patent protection
 Patenting rules have changed recently
 Obviousness
 Ability to challenge
Most patents are claims, . . . not companies

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Most IP in Academia is
Unproven
“Obvious
low hanging
fruit”
“Promising, if
only….”
Valuable
ideas that
lack proof of
concept
“Dogs”
~10%
% of IP Assets Type of IP Asset
~60%
~30%
*Based on interviews with Technology Transfer Managers
Path to Commercialization
Easy to commercialize
No commercial value
Proof of concept
needed

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Intellectual Property Issues
 Early Invention Disclosure is Critical
 Work with the Tech Transfer Office
 Develop an Integrated “IP & Business
Strategy,” not just “claims processing”
 Avoid the Publish or Perish Syndrome if
you want to build a Business
 You will Perish if your disclosure becomes
“Prior Art” – the natural collision between
protection and publication

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What can you do now?
Laying a foundation for the future
 Build a network
 Attend corporate oriented conferences
 Learn to sell: Yourself, Your Idea =
Passion
 Become an expert in something
 Disease focus
 Read Nature Biotechnology etc.
 Become familiar with patents in your field
 www.uspto.gov & Google patents
 Meet great lawyers & VCs with better networks
 Understand the competitive landscape

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Source: Between Invention and Innovation: An Analysis of Early-Stage Technology Development, ATP –NIST, Lewis Branscomb,
Kennedy School of Government, Harvard Univ., November 2002. http://www.atp.nist.gov/eao/gcr02-841/gcr02-841.pdf
The Commercialization Gap
Highly promising medical advances do not reach patients
because of failures in the commercialization process
Basic
Research,
Invention
“Valley of Death”
Proof of
Principle,
Commercial
Validation

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$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
FederalR&DFunding(Millions)
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
SeedStageVCFunding(Millions)
R&D
Seed
Investments
Gap
Seed Stage Capital: The Reality
Federal Funds for Research and Development vs. Seed Stage VC Funding
Sources: National Science Foundation and PWC Money Tree@health2innovate, #healthinnovators, @CooleyLLP,

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Validated
IP
Clear
Market
Potential
Ready to
Commer-
cialize
Early-stage
IP
Unclear
Market
Potential
Incomplete
Technology
Validation
What Market
Wants
Higher Risk,
Unproven
Lower Risk,
Proven
What Academia
Offers
Translation from Lab to Market
= Translational Development
Bridging the Gap:
Translational Development

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Translational Development
“Lab”
“Market”
Basic Research
(Academic & Research
Centers)
Clinical Development
and Commercialization
(licensees and spin-outs)
GAP
Translational
Development stage
1-2 years, $250K-$2M
Trajectory of
Asset Value
Large step-up in value
when usefulness is
proven
*Source: Nature Biotechnology June 2003

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Adapted from: Between Invention and Innovation, Lewis Branscomb
Funding Commercialization
Basic
Research
Early-Stage
Technology
Development
Product
Development
Functional
Invention
Translational
Development
Proof of
Concept
Newco or
License
NSF, NIH,
Corporate
research
STTR/SBIR,
Academic
Incubators,
Philanthropic
Organizations
SBIR, Angels,
Venture Capital,
Strategic Corporations
Frequently funds this stage
Occasionally funds this stage

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 Strong “Passionate” Leader
Vision and ability to attract and
retain talent
 Team & Advisers
Industry experience and
expertise
 Rapidly Growing Market
New entrants rapidly gaining
market share
 Viable Business Model
Sound growth assumptions,
capital efficiency
What Investors Look For:
 Provable Science, Protectable IP
Commercial viability
 Examples of Customer
Validation
Qualified and referenceable
 Exit Opportunities
Multiple likely acquirers

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What I Look For: the Entrepreneur
 Integrity, Honesty, Self Awareness
 Passion, Energy, Enthusiasm
 Leadership, Ownership of Initiative
 Experience or
 World-class understanding of the problem to be solved
 Intellectual rigor / objectivity
 Self confidence to accept coaching, without losing sense of
direction – Good Eyesight but also Good Earlobes
 Bias towards action (with appropriate levels of analysis)
 Orientation towards customers and patient problems, rather than
fascination with science and technology
 Ability to recognize, and hire to, your own weaknesses
 Ability to attract world-class talent

Angel Financings, 2015
 Vibrant Marketplace Along Rte. 128 & 495
 Equity Structuring Looking Like VCs
 Capital-Raising Capabilities & Limits??
 Support for Future Rounds of Capital??
 Active Involvement, Mentoring, Tough Love
 “Participating Preferred” = Big Issue on Sale
of Company Below Certain Threshold
 Convertible Debt deals with “capped” pre-
money valuations

Angel Financings, 2015
 Valuations are sometimes less dilutive than VC
financings -- BUT not entirely true these days
 Pre-Money Valuations range from $2.5M to $7.0M
 BUT . . . Angels will fund efficient uses of capital under
$5 million – not “Big Play Biotechs”
 Proactive mentoring and counseling by active Board
members behaving like quasi-consultants (former
CEOs, COOs, VPs)
 Vibrant marketplace for IT & software prospects: cost of
capital is less {much more difficult for Medical Devices]
 Start-up financings require less $$$
 Copycat Capital?: Angel financing terms increasingly
“look & smell” like VC terms
 Angel Syndication is VERY common in this market

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Annual Sources of Start-up Funding
Venture Capital ~ $.3 billion
State Funds ~ $.5 billion
Angel Investors ~ $20 billion
Angels: 90% of outside
equity for start-ups?
Friends & Family ~$60 billion
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
$22
1
Sources: MoneyTree, NASVF, multiple studies on informal capital

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Potential Angels in
the United States
4,200,000
3 study
Estimates of
Informal
Investors
Investors
in angel
groups
Center for
Venture
Research -
Active
Angels (est.)
U.S.
Millionaires
1,000,000
225,000
12,000
2009 Report from Spectrem: $1 millionaires down in 2008 27%, those with $5 million down 28%

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Equity Capital Markets Large,
Complementary
2008 Angel
Investment
source: UNH CVR
EarlyStageLate
$19.2B
55,480 deals
Mostly early stage
2008 VC Investment
source: NVCA/PWC/Thomson
Reuters
Mostly later stage
3,808 deals
$28.3B
440 Seed

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Who are Sophisticated Angel
Investors?
• Make equity investments – generally not loans
• Often successful, exited entrepreneurs or retired
business persons
– Active investors
– Invest both time and money in companies
• Accredited investors - SEC definition
• Invest their own money
• Generally invest in local companies
• Motivated by returns, but also community
development, love of mentoring entrepreneurs
• Kauffman/ACEF: Invest at least $20K in businesses
not run by family

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Potential Angels in
the United States
4,200,000
3 study
Estimates of
Informal
Investors
Investors
in angel
groups
Center for
Venture
Research -
Active
Angels (est.)
U.S.
Millionaires
1,000,000
225,000
12,000
Report from Spectrem

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Survey of Angel Group
Investments
Source: ACEF, SVB and Dow Jones VentureSource Angel Group Data Surveys – verified w/ ent calls
Healthcare
25%
Information
Technology
35%
Other
6%
Energy/
Utilities
2%
Business
Financial Svcs.
18%
Industrial Goods
5%
Consumer Svcs.
6%
Consumer
Goods
3%

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Snapshot of a Startup: The
Recipe
 The Market “Rules”: market need, customer
pain point, willing to pay for solution,
technology or service advantage
 Intellectual Capital = Barrier to Entry
 Human Capital = Good Teams overcome
hurdles
 Working Capital = investors who understand
your market, and have pockets to finance you
through troubled times

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The IP Recipe
 Form of IP Protection = Barriers to Entry
 Patents: biotech, life sciences, telecom, hardware
 Trade Secrets: above and below
 Copyright: mostly software, digital media, print
 Noncompetition, No solicitation,
Nondisclosure and Assignment of
Agreements with founders, scientific and
technical employees
 Understand the market strategy and how IP
impacts that strategy

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Deal Terms That Really Matter
 Pre-Money Valuation
 Board Composition
 Participating Preferred
 Anti-Dilution Protection
 Class Voting/Veto Rights
 Cumulative Dividends (over 5 years)
 Drag Along Rights

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Other Important Deal Terms
 Basket (“Pool”) for Management Shares
 Noncompetition, No solicitation Agreements
 Employment/Severance Agreements for
Founders and Management
 Vesting, Buy-Back of Founders’ Stock
 Pre-emptive Rights, Co-Sale & Rights of First
Refusal on Management, Founders’ Shares

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. . . Deal Terms That Don’t
 Mandatory Redemption
 Registration Rights
 Piggy-Back
 Demand
 Short-Form S-3 Rights (Maybe)
 Legal Opinions

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Board Composition
Investor Representation Often Tracks $$$
Management Needs Representation too
Importance of outside directors critical
5 Directors Is often the magic number
Follow the “Martini Rule” for VCs on
Board
Ask me about the “Martini Rule”

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Serving as a Director, Advisor
 Should I serve as a Director or Advisor to a Start Up
Company?
 What’s the Real Risk? Getting Sued?
 Employment Practices, Job Discrimination
 Securities Laws: Sued in a “Cram Down”
Round; Breach of Fiduciary Duty
 These are AVOIDABLE & REMOTE RISKS for
private companies !!!
 Is D&O insurance necessary ?

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Serving as a Director, Advisor
 What’s my Compensation?
 This Ain’t No Gravy Train, Gomer
 Cash Fees are non-existent – don’t ask
 Equity is Your Just – and Only Reward
 Non-Qualified Stock Options (Ordinary Income, 39%
Tax Rate, plus 5% State OI Rate)
 Restricted Stock (Capital Gains – 15% Tax rate)
 Get Restricted Stock Cheap – a 25% Tax Delta !!!
 Typical compensation for outside director = .75% to
1.5% of fully-diluted stock, vesting over 3 years
(monthly), full acceleration on acquisition, depends
on stage of company

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Liquidation Preference
 Return of Capital invested
 Investor Receives Priority over Management
 Option to Recoup Principal Amount or
Choose to Convert Preferred
 Economic Effect in Event of Acquisition or
Sale of Company
 Issue: Do Founders Get Liquidation
Preferences Too? Did they invest Real
Dollars?

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Participating Preferred
Investor Gets $$$ Back & Then Participates in
All Residual Amounts on an “As-Converted”
Basis!!! So-called “PIG Preferred”! THIS IS
THE BIG KAHUNA Issue!
Potentially Disastrous Impact on Founders’
equity if Acquisition Price Does Not Yield a
Decent Return to the Investors
Issue: Entrepreneurs seek an “IRR Hurdle”/
“Multiple of Capital” Threshold Such that
Investor Forfeits This Right

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Participating Preference
 Participating preferences are “receding”
 many are uncapped (always receive return of
capital), some are capped at 2x-3x or receive as-
converted participation
 evidence of liquidation preference also paid on IPO
 participation features among series can create
conflicts and lead to anomalous results
 Resetting or washing out old preferences is the
biggest challenge
 Participating Preferred is disappearing for “hot” deals

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Super Liquidation Premiums
 Investor receives a Multiple of Capital
return on investment [2x-4x]
 Super Preference is quid pro quo for
healthy valuation
 Multiple is paid on Acquisition,
forfeited on conversion (IPO)
 Vanishing Preferences: Super Premium
implodes on Acquisition with Stated
Return on Investment

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Anti-Dilution Protection
If Subsequent Rounds of Financing are Dilutive as to
Price, Investor Gets to Reprice the Old Money at
Today’s Dilutive Valuation
Ratchet Formula: If Company Issues 1 Share at Lower
Price, Conversion Rate of Preferred is Reduced to
Lower Price !!!!
Weighted-Average Formula: Factors in Overall
Impact of Total Shares Issued in New Dilutive Round
and Adjusts Old Conversion Rate Based on Impact on
Total Capitalization

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Anti-Dilution Provisions
 “Weighted-Average” is still market standard
 Full Ratchets appear in later rounds, below minimal
levels or within specified time frames
 Full Ratchet may appear in early rounds as quid
pro quo for higher pre-money valuation
 Full Ratchets in early rounds may haunt investors when
later round investors demand the same deal terms
 Cold Weather Syndrome: East Coast VCs used
ratchet anti-dilution more frequently than Bay
Area VCs!

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Special Anti-Dilution Formula
 Anti-Dilution = Risk & Valuation Adjustment
Mechanism, Post-Finance
 Special Anti-Dilution Adjustments:
--Failure to achieve Revenue Targets
--Failure to complete Product Prototype
--Failure to complete Management Team
--Failure to hit stated Milestones

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Class Voting Rights
Investor has Ability to Block Organic and Fundamental
Corporate Transactions
Mergers, Acquisitions, Sales of Stock or Assets
Issuances of Additional Preferred, senior or parity
Grant of Excessive Options to Employees, beyond a
designated “Pool” {12% to 20% of fully diluted}
Incurrence of Debt above some threshold
Sales or Transfers of Technology
Issue: Separate Class Voting Rights Should Disappear
if Preferred Holds Less than Certain % of Equity

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Cumulative Dividends
Built-In Return; Rates Vary from 6%--10%
Dividend Accumulates Until Paid on an Acquisition,
Redemption, Liquidation or Cash-Out Election Event,
Public Offering?
PIK Dividends: Payment-in-Kind, paid in more shares
of stock – potentially excessive dilution – we only see
in less than 5% of all investments
Issue: Dividend Should be Forfeited on Voluntary
Conversion or Public Offering Event - Investor Loses
the Built-In Return if Company Achieves IRR Better
Than the Dividend

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Drag Along Rights
“Merger Extortion Device”: Investor has ability to
compel a Liquidity event upon other stock-
holders: i.e., sale or merger
Stated percentage of Investors (maybe 51%--
67% of a round or all preferred) determine that
Company should be sold
Board determines that Company should be sold
Result: Minority stockholders are “dragged
along” in the sale process, a “Forced March to the
Merger Alter” -- with waiver of appraisal rights

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Drag Along Rights
 Investor control group compels other
stockholders to sell along in acquisition
 Stockholders forfeit ability to vote against
merger, surrender appraisal rights
 What level must control group own to
trigger Drag Along right?
 Less than Majority?
 “Drag Along” right implodes on acquisition
above a stated IRR

www.cooley.com
Preemptive Rights,
Rights of First Refusal
 Investor Can Participate in Future Rounds if
Company Decides to Issue More Stock
 Preemptive Right: Investor Can Maintain %
Equity Interest in Company
 Right of First Refusal: Investment Syndicate
Can Scoop Up All Future Financings and
Prevent Company from Attracting Fresh Money
& New Blood
 Right of First Offer: Company Goes to Current
Investors First with Proposed Valuation; If
Investors Don’t Buy Can Go Outside Syndicate

www.cooley.com
Basket For Management Pool
Get Agreement From Investors: Certain % of
Capitalization Set Aside as Option Pool for
Future Employees or to Reward Existing Talent
Share Equally Dilution Presented by “Basket”
or Option Pool -- On Pro Rata Basis -- by
Investors & Founders
Pool or Basket Typically Represents 12%-15%-
18% of Total Fully-Diluted Capitalization, Post-
Financing – but usually comes out of pre-money
!

www.cooley.com
“Pay-to-Play” Provisions
Investor Does NOT Receive Benefit of Price
Anti-Dilution Protection if Investor Does Not
Play for Full Pro-Rata Share in any New
Dilutive Financing
Incentive for Investors to Play in Dilutive
Financings and Support the Company
Ensures that Investment Syndicates will
Remain United in Support

www.cooley.com
Pay-to-Play Provisions
Various scenarios for Pay-to-Play
Provisions:
 Lose anti-dilution protection for specific down
round
 Lose anti-dilution protection for all future
rounds
 Crammed down into Common Stock
 What constitutes “pro rata” share?

www.cooley.com
Non-Competition Agreements
Investors are Backing People & Ideas -- Want
Assurances Key Employees Will Not Leave to
Form Competitive Venture
Time Periods for Post-Employment Non-
Competition: 12–18 months (beyond that =
unenforceability risk)
Consideration Needs to Support a Covenant Not
To Compete (NB: No Noncompetes in California)
Issues: Should Noncompete expire if Person is
Terminated Without Cause, or Downsizing?

www.cooley.com
Vesting & Buy-Out Of Founder
Investors Require Founders or Managers with
Cheap Equity To Give Back Some Shares and
Be On a Vesting Schedule -- If Person Leaves
Before Stock is Fully Vested, Portion of
Equity Can be Repurchased at Original Cost
Issues: How Much Vested at Time of
Investment?
 What Happens to Shares if Terminated w/o
Cause or Voluntarily, Death/Disability?
 Vesting Period: Annual/Quarterly/Monthly?
 Buy-Out Price?

www.cooley.com
Registration Rights
 Investor Obtains Liquidity by Participating in a
Public Offering or Demanding Liquidity by
Forcing Company to Go Public
 Piggy Back Rights: Investor Can Include
Common Shares if Company Does IPO
 Demand Rights: Investor Can Compel
Company to Go Public Even if Management
Does Not Want To
 Form S-3 Short-Form Rights: Secondary
Offerings for Investor-Only Liquidity

© 2011 Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA 94306
The content of this packet is an introduction to Cooley LLP’s capabilities and is not intended, by itself, to
provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome.
Launching the Start Up
Let’s get Started

www.cooley.com
What is the Secret Sauce?
 Intent
 Opportunity
 Capability
 Identity

www.cooley.com
YOUR INTENT
 What do you want to do with your life?
 What is your passion in business?
 How can investors harness your energy,
vision & expertise?
 Understand that building a business is
building long-term relationship
 Trust, Integrity, Acute Listening Skills are
Universally Required

www.cooley.com
YOUR OPPORTUNITY
 Size and seize your Market Opportunity
 Understand your market dynamics -- $1 billion
or $100 million, and how fast is it growing?
 How BIG do you want to become?
 Then understand the “cost of capital” required
to scale your business -- maybe angel
financing is better than venture financing
 Who is your competition – who is likely to
come into your space

www.cooley.com
YOUR OWN CAPABILITY
 What is your special contribution – your
unique capabilities?
 Understand your weaknesses, and what you
need to attract to fill gaps
 Need to have a sense of optimism – but also
a sense of honest self-assessment
 Integrity, Honesty and Courage are critical
attributes

www.cooley.com
YOUR IDENTITY
 Who is your team?
 Who does your team need – now and later?
 Understand what qualities you need in your
team members
 What qualities do you need in your Investor
 Example: The Cooley Boston Start Up Story -
collaboration, team behavior, desire to build
together, not motivated by money, Matching
of Value Systems

www.cooley.com
Common Mistakes of the
Entrepreneur
 Failure to Listen: great vision (eyesight), but
significant hearing impairment (no earlobes)
 Failure to Protect: Intellectual Property (if I paid for it
with cash or equity, how come I don’t own it)
 Failure to Smartly Divide: Division of Equity based on
head count, not contribution or commitment (“The
Equal Slice of the Pie Fallacy”)
 Failure to Identify: the right financing strategy: angels
now, build value, and go for larger financing later; use
of strategic partners and strategic providers
 Failure to Step Aside: bring in better talent for the
functional role you desperately need

www.cooley.com
More Common Mistakes of the
Entrepreneur
 Blind Love Affair with Technology: The Field of
Dreams Syndrome – if I build it, they will come
 No Passion: It is hard to motivate others, when you
lack the passionate vision – so get caffeinated
 Disdain for Sales & Business Development: People
with technical backgrounds often believe sales is all
B.S. and testosterone – good sales are rare >> they
sell away from price and focus on value and benefits
 The Captive Subsidiary Syndrome: sign up an
exclusive arrangement and you become the slave of
the large partner, never achieving independence
 Developing the Indirect Sales Channel: is very hard
work; you need to treat that indirect as if it were your
own sales force – do not abdicate responsibility@health2innovate, #healthinnovators, @CooleyLLP,

Health Data Privacy Regulation
David Harlow JD MPH
THE HARLOW GROUP LLC
blog • healthblawg.com
twitter • @healthblawg
@health2innovate, #healthinnovators,
@CooleyLLP, @davidharlow, Stephen Altieri

Photo: CC: http://www.flickr.com/photos/aigle_dore/6672141083@health2innovate, #healthinnovators,

HIPAA Highlights
PHI
CE
BA
Breach Notification
•Patients
•Government
•Press (>500)
Enforcement (OCR/AGs)
•BA Primary Liability
•Downstream responsibility
•Audits, Complaint
Investigations, Fines
TPO
BAA
NPP
Authorization/Consent
Security
•Administrative
•Technical
•Physical
•>> Risk Assessment
Privacy
•Minimum Necessary for TPO
•Patient Access
•Opt-In for Research,
Marketing, Fundraising

Wall of
Shame

Deidentification
Photo: CC: http://www.flickr.com/photos/hape_gera/3281625420

thedatamap.org

It’s not ALL about HIPAA

When is an app or a device regulated?
Guidance Index:
http://j.mp/FDAmeddevice
mHealth Guidance:
http://j.mp/FDAmHealth
Wellness – Low Risk Device Guidance:
http://j.mp/FDAwellness

FTC Breach
Notification Rule
for PHRs

State Rules on
Data Privacy
Including
“Sensitive” Health Data

Lockdown vs. Open Door@health2innovate, #healthinnovators,

Clear Expectations => No Surprises

The Inevitability of Digital Health

for contact info
txt dharlow to 50500
or scan the QR code
harlowgroup.net
healthblawg.com
twitter.com/healthblawg
david@harlowgroup.net
Thank You
@health2innovate,
#healthinnovators,
@CooleyLLP,
@davidharlow, Stephen
Altieri

Health Innovators - "Launching & Funding a Healthcare Innovation: Legal & Business Considerations"

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