VentureHealth has launched its online equity crowdfunding platform for life sciences companies. It provides accredited investors with opportunities to invest in innovative medical technology that ultimately saves lives and improves patient care.

“Ultimately, we hope that this model could help change the landscape for biomedical financing,” said cofounder Andrew Farquharson. “Since our focus is on breakthroughs in healthcare, success translates to dramatic improvements in clinical outcomes.”

The company uses a “carried-interest” model, which means that it only sees returns if its portfolio companies do, rather than a broker/dealer commission-based model. Farquharson said this approach is in line with traditional venture capital funds and means VentureHealth has a strong incentive to only select the most promising opportunities.

The goal is to increase the supply of capital to exciting biomedical companies and make it easier for individual investors to put money into this sector, which is generally reserved for venture capitalists. Venture capitalists, however, are turning their interests elsewhere, which presents an issue for startups, companies, scientists, and entrepreneurs.

Fenwick & West recently released a study on the state of the life sciences funding and found that it has fallen by more than $5 billion over the past five years.

“The life science venture financing environment remains challenging, with an increasingly short supply of capital despite factors such as aging world populations and rising living standards in developing countries that will help support long-run demand for life science innovation,” said partner Matt Rossiter. “While funding from corporate investors, wealthy individuals, and disease foundations is helping to fill some of the gap, entrepreneurs that plan to seek venture capital financing would do well to carefully consider factors, such as capital efficiency and a faster path to exit, that can increase the odds of raising scarce funding.”

VentureHealth is stepping in to address these problems. Farquharson and cofounder Mir Imran have extensive experience in medical investing. Farquharson spent two decades building, restructuring, and acquiring life sciences companies, and Imran has founded more than 20 life sciences companies and holds more than 200 patents. They previously founded InCube Ventures, a life science venture capital firm focused on solving unmet clinical needs for large patient populations. As crowdfunding and online investment platforms grew in popularity and gained legitimacy, they saw an opportunity to bring investment opportunities to interested individuals.

Channel Medsystems, a startup developing “next-generation cryoablation technologies,” raised $875,000 on VentureHealth as part of its $9.7 million Series B round.

Healthfundr is another recently launched equity-based crowdfunding platform for health startups although it focuses on opportunities in health IT, digital health, and diagnostic and medical devices. In contrast to the life sciences sector, digital health is taking off, and funding is actually on the rise. There is a lot of buzz surrounding digital health right now as changes in national policy affect care providers and mobile technology opens up a whole new world of possibilities. These areas are new and exciting, but life sciences and biomedical tech are crucial parts of the healthcare ecosystem, and they aren’t (and can’t) go anywhere. If funding slows, chances are medical innovation will too, and that’s a pretty scary thought.

VentureHealth is based in San Jose, California.

Photo Credit: Shutterstock

That’s British Columbia, just north of Washington State in Canada, where Vancouver ranks as the ninth top startup ecosystem globally.

“BC has had legalized crowdfunding for a decade,” super-angel Mike Volker said last night at the Vancouver Enterprise Forum event on crowdfunding. “It’s the only place in North America, and there are no restrictions, no limits.”

Volker has been an angel for 30 years and currently runs two mutual-fund like investment pools that invest in startups. One is set up “normally” for accredited investors, and one uses a unique instrument to British Columbia: an “offering memorandum,” which allows a startup to sell its securities to anyone, regardless of their relationship, wealth, or minimum value of securities being purchased.

Crowdfunding for startups is now legal in the U.S., and you can actually market your equity online now, but only to accredited investors. The Crowdfund Act opened some doors, but only that one percent of the population can participate. That’s an unfortunately small crowd.

Source: John Koetsier

Mike Volker on a panel at VEF (second from left)

And even when it works, crowdfunding for equity in the U.S. has onerous reporting requirements, which could cost up to $10,000 or more for a raise of only $100,000.

The only requirement in British Columbia? Audited financial statements. Approximate cost: perhaps $3,000.

That’s something that U.S. crowdfunding sites like Fundable would love to be able to offer, but cannot legally today. And that doesn’t look likely to change soon, given the massive amount of SEC regulation that currently encumbers the JOBS Act and the Crowdfund Act. In fact, some crowdfunding investors say that the way the SEC has implemented the new law has actually made investing harder, not easier.

“In their attempts to make this happen the SEC has made it very complicated for portals and brokers,” Volker said. “You need a broker, so he needs a commission, and then the broker has tremendous responsibilities such as validating criminal record checks. It’s basically like a mini-IPO, and I predict it’s not going to do very well.”

But be careful what you wish for, American investors.

In spite of its availability in BC, the offering memorandum has not resulted in a flood of funding, crowd or otherwise. In fact, Volker says, it’s pretty much gone unnoticed:

“Everyone in BC can do it, and most BCers don’t know it.”

Perhaps that’s because it was too early, too bleeding edge. And perhaps now in the age of Kickstarter and Indiegogo it has a much better chance. There are certainly interesting places to use it and entrepreneurs who would find it useful.

“You can use the offering memorandum if you have investors lined up who don’t meet the angel investor qualifications,” Volker says. “It’s also useful if you’ve raised $400,000 via angels and now you want to bring on micro-angels or cherubs and add a little more.”

photo credit: marfis75 via photopin cc

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Over the past three weeks, I bumped into three different entrepreneurs who put their equity into a fortress 100,000 feet underground with 16 guards and an atomic bomb.

If you read the previous sentence and thought that’s a reasonable precaution to save the company’s identity and keep control, I’m glad you’re reading this post.

Just a quick reality check: You can keep all the company’s equity to yourself, but you’ll have zero progress and revenues. Learn how to give. This lesson can affect not only your startup journey but also your relationships with other people and many other aspects of your life.

The most important lesson I learned from the startup journey is to share –- ideas, feelings, and equity.

You are one, two, or even five founders who thought of a great idea and are willing to execute to win. The most fundamental core engine of every startup is the team. I don’t need to preach that, I’m sure you’ve heard it from other people.

The idea will be changed many times anyway, but the team is the key ingredient of converting any idea into a real product. When you’re at the beginning of your startup journey, your most important resource is great human beings.

Do you really want someone great to join your company only because of a huge salary and benefits? No!

Actually, you probably don’t have the money anyway; you want her to join the company because she is connected to you and your vision and is eager to build that vision. So my first point is that great human beings are worth the equity. They’re the best investment you can make.

Second, you have great tools to help control the equity you’re giving; one example is vesting. You’ve got a great guy who is willing to join your startup for five percent equity, and vesting allows you to divide that five percent over a period of time (for example, three years). As long as he is part of the company, he’ll get 0.13 percent of the company’s equity each month.

Is your paranoia level still high? Of course there are many legal tools you can use to mitigate your risk; in the near future I’ll have a more detailed post about legal tools in the startup world.

Third, equity is great tool that can help you construct the company’s advisory board effectively and bring the expertise you don’t have within your team. Members of the advisory board often invest in the company and pull the right strings to help generate business leads.

Bottom line: You can use equity to attract the missing puzzle pieces of expertise to your company, get industry experts on board to help you grow your business, and most importantly, get the right people attached to and involved with your startup. It doesn’t matter how many times I repeat that mantra; you’ll have to go through the startup journey yourself to learn the lesson of sharing.

Yaron Tal has been working on turning ideas into marketable products for more 12 years. Currently, Tal is CTO of security company 6scan and blogs at Startup Internals, where this post originally appeared.

Image credit: Mincemeat/Shutterstock

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

This is a guest post by startup lawyer Jennifer Berrent

When launching a startup, legal issues often get brushed aside in order for founders to focus on building the product. But making the wrong legal decision early on in the process of starting your company may lead to thorny problems in the future.  Frequently, issues can be avoided by taking action in three key areas: choose the right entity, allocate equity and protect your intellectual property.

Choose the right entity

Once you are ready to move forward with an idea, you should formally form your startup as an entity.  One important benefit of setting up an entity is that you can protect yourself from liability, since, in general, only the assets of the entity (rather than your personal assets) would be at risk. Depending on your business, either a C-corporation or a limited liability company (LLC) would likely make most sense.  Almost all companies that are going to seek venture capital financing elect to be C-corp.

However, more and more companies that expect to have early and significant cash flow are electing to start out as LLCs.  You should discuss which entity is right for you with your tax and legal advisers.

Allocate equity

Startups often have more than one founder or associate who contributes early on to the success of the enterprise.  It is critical to have a clear understanding among founders, other early contributors and key employees regarding how the ownership of the entity will be allocated. This not only prevents misunderstandings that can erupt into messy legal battles, but also assures investors that claims of ownership from early business partners will not impact the value if their investment.

Not only does a frank and early understanding of the ownership of the entity avoid future problems, but if done correctly, vesting and other mechanisms can provide incentives to achieve critical desired goals.

Ideally, you should form your company and issue shares to founders, key contributors and employees as soon as possible to steer clear of any costly taxes or payments involved in acquiring the stock later when valuations may be higher.

Protect your intellectual property

Make sure that all intellectual property is owned by the company. Obtain licenses of any property obtained from third parties, such as a university. Have all founders, collaborators and future employees sign an assignment of invention agreement and a non-disclosure agreement, assigning any IP related to the business — whether developed before or after formation — to the company. You want to avoid disputes over ownership, as well as a potential competitor from a disgruntled employee or consultant down the road.

In order to make sure these agreements are enforceable, you must provide some consideration  in the form of cash or equity. An important and sometimes overlooked step is to document any and all agreements, and properly issue equity.

By taking care of these critical legal matters now, you free yourself and your business partners to concentrate on turning your startup into the thriving company you envision.

Jennifer Berrent is a partner at WilmerHale in the Corporate Practice Group and Emerging Company Group.

She has been working with emerging companies in particular for more than 15 years and is focused on serving as trusted advisor to entrepreneurs and the NYC entrepreneurial community.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Equity-based crowdfunding platform EarlyShares has raised $1.15 million in its first round of funding, so other businesses can raise funding too.

Ever since the JOBS Act passed in April, crowdfunding has been the cool kid on the block. Startups that provide opportunities for people to make micro-investments in small businesses are bum-rushing the field, and each has a distinct angle.

EarlyShares allows businesses to raise money by selling equity shares to small investors. Unlike Kickstarter or IndieGoGo, which follow a  donation-based crowdfunding model, EarlyShares gives people the opportunity to make actual investments in companies and, potentially, see returns.

Before they can solicit money, businesses must withstand EarlyShares’ 14-step verification process to ensure they are a legitimate enterprise.

Companies at any stage can use the site, whether they are just starting out or are a middle-of-the-road company looking to create a new product or expand into new markets. Of the businesses currently on the platform, only 40% are startups. The rest are existing businesses with client bases and revenue that have struggled to secure venture capital or financing from banks.

“There is no bank lending anymore, and a lot of these companies are too small to get attention of VC firms or angel firms,” said co-founder Stephen Temes in an interview with VentureBeat. “Investment from these guys can require giving up a tremendous amount of control. It is not only selling equity, it is selling their soul.”

Businesses publish profiles with relevant information and how much they are hoping to raise. EarlyShares hopes to build out a diverse selection, from technology startups to organic dog food companies. Users can go on the site and search through a roster of companies to see which strike their fancy. They have the opportunity to invest up to $10,000 a year, or 10% of annual income, with no more than $2,000 per investment.

The money is held in escrow until the goal is achieved, at which point it is released. If a company does not reach its fundraising goal, the money is returned to the investors. If a liquidity event occurs, investors see a return. EarlyShares will take 5-8% commission depending on the size of the raise and only if the raise is completed.

Participating businesses will also have access to tools and resources to help them succeed. EarlyShares will have a customer service department and make business strategy and PR resources available.

EarlyShares launched in 2012 and is based in Miami, Florida. The team has visited 24 cities in 24 weeks to spread the word about this opportunity and seek out blossoming businesses.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

It takes money to make money. Deciding where to find the first funds to get a startup off the ground is one of the most important decisions an entrepreneur has to make. We asked 12 startup founders what  advice they would give an early-stage entrepreneur who’s considering debt vs. equity. (Share your own thoughts in the comments.)

Consider sweat equity first

Other sellers include IVP, SilverLake, Union Square Ventures, Google, Reid Hoffman board member Jeffrey Katzenberg and folks like former executive VP Owen Van Natta, General Counsel Reggis Davis, COO John Schappert and CFO Dave Wehner.

Zynga is hoping to avoid a situation where tons of folks start selling at the same time when the six month lockup following the IPO expires, a move that could put a hurting on their stock price.

The company toots its own horn a few times in the S-1. “We are the world’s leading provider of social game services with 240 million average monthly active users, or MAUs, in 175 countries. We have launched the most successful social games in the industry in each of the last three years and have generated over $1.85 billion in cumulative revenue and over $2.35 billion in cumulative bookings since our inception in 2007.”

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

(Editor’s note: Jason Cohen is an angel investor and the founder of Smart Bear Software. This story originally appeared on his blog.)

As we bring on new employees at my new venture, I’ve been struggling with the question of how much equity (shares) should I give a new employee or partner.

I’m not alone. It’s one of the most frequent questions in start-up forums – and it’s doubly complicated when the company is young and according to typical financial assessment the shares are “worth nothing?”

The question gets even muddier when the new hire is getting a salary. Typically that salary is less than market with the balance given in the form of equity, but again how do you compute that when the stock is, today, of no value?

With WPEngine recently I had yet another question to answer: “What if I took $X/mo salary, then how much equity would you part with? What about $Y/mo?” Hard to know, but an important question for a bootstrap startup to answer.

Here’s a simple framework for how to come up with those numbers.

When someone works for less salary than they deserve (meaning: what they could make elsewhere), I think of that as a cash investment they’re making in your company.

Here’s why: Suppose a new hire just quit a job paying $10,000/month and agrees to take $3,000/month for a year with you, after which time (assuming the company does as well as everyone hopes) she’ll be raised back up to $10,000/month. So for $36,000 you’re getting someone who should have made $120,000.

She gave up $84,000 in potential earnings, but that’s what a startup is, sacrificing cash now for a chance at a ton of cash later. Of course she needs to own P% of the company so she can share in those potential earnings, but how do you compute P?

Now consider this scenario: That same new hire quit her old job but demands the same $10,000/mo from you. You agree, but since you can spend only $36,000 this year, you raise the balance ($84,000) as an angel investment. The angel will of course demand Q% of your company for this extremely risky loan, but how do you compute Q?

Financially, these two scenarios are identical, therefore P must equal Q. In both cases you give up a percentage of your company so that you can spend a specific amount of cash to get a specific person. Whether it’s the hire herself who’s investing her loss in cash or an angel fronting the cash, you’re trading P% of the company for an amount of cash.

This is the key, because Q — what an institutional investor would accept — is a well-understood system. So if that’s the same as P, we’re done. So what kind of return does an angel investor need to make on their $84,000?

Investors in early-stage startups need large potential returns to compensate for the fact that most of those investments will be lost. If you like thinking about this in terms of “annual return,” they need between 40 percent and 60 percent compounding annual return. (Remember, this isn’t like a bond or savings account paying X percent every month, this is a one-time payout years from now that almost surely won’t happen at all.)

Usually this is stated as a rule of thumb: “3x return in 3 years, or 10x return in 5 years.” That formulation rings true to almost every investor I’ve met, from angels to VCs.

So let’s apply it to our example. If the company were sold in three years the investor would like to make $250,000; if sold in five years the investor needs $840,000.

Now the question is: How much money could the company be worth in three or five years? Clearly you’re about to pull a number out of your ass, but that’s OK because we’re just going for ballpark figures. In the case of WPEngine, I’ve been saying $5m in three years or $25m in five years.

To make $250,000 out of $5m the investor would need 5 percent; to make $840,000 from $25m the investor needs 3 percent. Of course the numbers don’t match because, again, I pulled those potential valuations out of nowhere.

But the exercise has proved fruitful because now you know that this new hire needs something like 3-5 percent for this to be a fair trade. That’s a much tighter range than you had a few minutes ago.

Remember, though, that when you’re very small, new hires should mean more to you than just financial investment. This might be a good method for computing compensation for employee #10, but hire #1 ought to also be able to substantially affect your chance of success, by changing the slope on the revenue curve, by adding expertise or skill you didn’t have before, by opening new markets, etc.

And if that’s happening, they’re contributing more than just the balance of a normal salary, they’re changing the risk profile of the company, and that deserves compensation too.