Assume that you are employed by a venture capital firm. Your job is to seek out investment opportunities. You have located a company that you believe is a good opportunity to invest in. The facts are as follows:

The company is XYZ Pharma. It has one product, BPX. BPX has recently obtained FDA approval and XYZ Pharma began very limited sales based on limited production by a contract manufacturer. With a very small sales force, it has been selling what it has produced. XYZ Pharma spent a large portion of its cash reserves getting FDA approval for BPX. BPX is a blood pressure therapeutic with claims it treats blood pressure better than existing products in certain scenarios.

Since this is a market space with many competitors, there is no guarantee that BPX will obtain enough market share to be profitable. However, you have consulted with multiple pharmacy researchers employed in your firm and they believe that BPX has real potential. Your firm has strong expertise and experience in pharmaceutical investments.

XYZ Pharma is not profitable, but their pro forma projections are that will be profitable in 38 months. Based upon your market research and the opinions of the pharmacy experts you consulted with, you believe the pro forma figures are attainable and profits will meet your firm requirements. XYZ Pharma is looking to raise $6.9 million for a 40% interest in the company. The company is currently run by the founders. The founders are brilliant scientists who invented BPX, but they have no marketing or manufacturing experience or expertise. The founders will own 30% of the company after the $2.9 million investment. An assortment of investors with small shares make up the remaining 30%. There is a six-person board.

The founders want to remain in the company and have their life savings tied up in it. They will continue to have value to the company due to their technical expertise. However, they overrate their value to the firm.

Additional funding will be needed at future dates if XYZ Pharma grows like it hopes. You believe that the best outcome for your firm is an IPO for XYZ Pharma, but the founders seem opposed to this idea.

1. State a very basic reason why investment in XYZ Pharma is an appropriate type of investment for your firm as opposed to other firms who may lack certain expertise. [10 %]

2. State why XYZ Pharma is at a stage that is appropriate for venture capital (VC) investment. [10 %]

3. What would be the appropriate term for this stage of financing round seeking $6.9 million? [5 %]

4. What would be the appropriate term for this stage of the company seeking $6.9 million? [5 %]

5. Why would the ownership lineup of percentage ownership be attractive to a potential VC investor? [10%]

6. List out the terms you would want in a term sheet if your firm wanted to negotiate an agreement to invest. [60%]

BONUS: Generally, VC investors do not want investors who come along later to be able to buy the stock of the company at a better price than they paid. Why might they be willing to pay a higher price than earlier investors? (potential 10%).