Incorporating your biotech startup is a lot of fun. Or is it? Regardless of how you find the process to be, it is one of the main things you need to do when building a biotech startup. Things you need to pay attention to include the legal setup and corporate structure, IP protection, and cool team assembly. Here’s how to get it done.
Learn How to Protect Your Intellectual Property (IP)
Intellectual property (IP) is often the most valuable asset a startup possesses. Protecting your innovations through patents and trademarks secures your position and attracts investors and partners. The first step is to ensure that your technology is patentable and that the necessary filings are made early in the company’s lifecycle.
A strong IP portfolio demonstrates to potential investors that your technology is both unique and defensible. Consider engaging a patent attorney who specializes in biotechnology to help you navigate the complexities of patent law, such as ensuring patentability, managing licensing agreements, and avoiding infringement issues. This is particularly important if your innovation has roots in academic research, as university-based discoveries often come with IP challenges due to pre-existing agreements or licensing arrangements.
Moreover, biotech startups need to think globally about their IP strategy. Securing patents in key markets like the United States, European Union, and Asia can protect your innovations from being copied and help you access global markets. It’s also important to ensure that your IP strategy aligns with your business goals, including future partnerships and licensing opportunities.
Assemble the Founders and Key Personnel
Building a biotech startup requires a strong team with complementary expertise, vision, and commitment. Identifying the right co-founders and team members early on is important for both operational success and attracting investors. Potential founders may need to have a complementary mix of skills, such as scientific knowledge, business acumen, and industry experience.
Key Considerations for Founding Teams:
- Defining Roles and Responsibilities: Early on, it’s useful to define each founder’s role in the company clearly. Whether it’s managing operations, handling the science, or leading the business strategy, everyone should know what their responsibilities are. This should help avoid future conflicts and ensure smooth operations.
- Equity Stakes and Commitment: Determining how equity will be distributed among founders and key personnel can be a sensitive issue. You may want to agree on equity stakes early and have clear agreements in place. Many startups use vesting schedules to ensure long-term commitment, making sure that founders and employees only earn their equity over time.
- Attracting Top Talent: As the startup grows, you will want to attract experienced personnel who can fill gaps in expertise. This might involve hiring experienced biotech executives or seeking out advisors who have experience in scaling biotech startups. Offering equity incentives can be a powerful tool to bring on high-caliber team members, especially when resources are limited.
- Industry Mentorship: Aligning with seasoned mentors from the biotech or venture capital sectors can provide invaluable strategic advice, introduce potential investors, and help navigate common pitfalls. Having credible advisors on board can also enhance your startup’s appeal to investors.
Feel free to check our guide on how to assemble a cool team for your biotech startup.
Find the Right Legal Expertise
Choosing the right attorney is another important step when incorporating a biotech startup. A lawyer with specialized knowledge in the biotech industry can guide you through the complex legal landscape, ensuring that your company is protected from potential risks and is structured for future growth. Biotech startups face unique challenges such as intellectual property rights, regulatory compliance, and securing venture capital, all of which require expert legal counsel.
Why You Need Specialized Legal Advice:
- Biotech-Specific Knowledge: Biotech startups deal with highly regulated sectors, from clinical trials to FDA approvals. An attorney who understands the biotech ecosystem will help you navigate these regulations and prevent costly legal issues down the road.
- Corporate Structure and Contracts: Your lawyer will help establish the proper corporate structure for your startup, whether that’s an LLC or a C Corporation, which is preferred for attracting venture capital. They will also ensure that the company’s contracts—whether related to employment, partnerships, or intellectual property—are properly drafted and legally binding.
- Intellectual Property (IP) Protection: Your attorney will play an important role in securing and maintaining your IP rights. This includes filing patents, trademarks, and protecting trade secrets. Engaging a patent attorney early ensures that your innovation is fully protected, especially if you’re working with university-developed technologies.
- Navigating Funding and Investor Relations: Biotech startups often rely on external funding. A lawyer with experience in venture capital financing can guide you through funding rounds, drafting term sheets, and negotiating investor agreements to secure the best deal for your startup.
Learn How to Choose the Right Corporate Structure
Selecting the appropriate corporate structure is an important step for biotech startups to operate efficiently and attract investors. While many startups begin as limited liability companies (LLCs), biotech companies typically transition to a C Corporation—at least in the U.S.—to meet the expectations of investors and facilitate future fundraising efforts.
Why C Corporation is Preferred:
- Investor Attraction: Venture capital firms and institutional investors generally prefer investing in C Corporations because of the stock structure and potential for issuing preferred shares. This structure allows for easier issuance of stock options, which are critical for attracting talent and raising capital.
- Tax Benefits: C Corporations offer flexibility in tax treatment, especially for reinvesting profits into R&D. For startups expecting to scale, this can be advantageous, as profits can be retained and reinvested without immediately triggering significant tax liabilities.
- Delaware Incorporation: In the U.S., biotech startups choose to incorporate in Delaware due to its well-established legal framework, which is favorable for corporations. Delaware courts are known for their expertise in corporate law.
LLCs vs. C Corporations:
- LLCs offer more flexibility in taxation and operations but are not ideal for attracting venture capital or issuing stock options.
- C Corporations provide a structured framework for equity distribution and fundraising, with benefits in governance and tax strategies that are more appealing to institutional investors.
By choosing the right corporate structure and incorporating early, your startup can avoid costly restructuring later and position themselves for growth and investment.
If you want to register in other countries, you will want to learn about the corporate structures that exist in those place. For example, in Europe, many startups opt for a Societas Europaea (SE) structure for cross-border flexibility, while in the UK, the Limited Company (Ltd) is popular due to its straightforward setup. Local regulations and investor expectations will likely play a significant role in determining the best structure for your startup.
Consider Operating as a Virtual Company
For biotech startups, operating as a virtual company in the early stages can significantly reduce overhead costs and mitigate financial risk. By leveraging a virtual model, you can focus on product development, securing intellectual property, and fundraising without the immediate burden of renting physical office space or hiring full-time staff.
Benefits of Operating Virtually:
- Cost Efficiency: Operating virtually allows biotech startups to cut down on substantial expenses such as office rent, utilities, and facility management. These savings can be reallocated toward research and development (R&D), which is often the most significant expense for a biotech startup.
- Flexibility and Scalability: A virtual company model offers greater flexibility, especially in the early stages when a biotech startup is still validating its technology or product. You can easily scale up or down without the constraints of managing a physical space.
- Access to Global Talent: Working virtually enables biotech startups to hire the best talent from around the world without being restricted by geographic location. In the biotech industry, where expertise is very important, accessing a global talent pool can provide a competitive advantage.
- Minimizing Financial Risk: Early-stage biotech companies often operate on tight budgets, and by maintaining a lean operation without a physical presence, they can significantly reduce financial exposure while they build their product pipeline and secure funding.
How to Operate Virtually:
- Outsource Non-Core Functions: Many startups outsource administrative tasks, human resources, and IT management to specialized providers. This keeps the core team focused on essential R&D and business strategy.
- Utilize Shared Laboratory Spaces: If your biotech startup requires lab work, consider using shared lab spaces or renting time in contract research organizations (CROs) to access necessary equipment without committing to a full facility.
By opting for a virtual model, biotech startups can maintain a lean structure and dedicate resources to critical areas like R&D and IP protection, setting the stage for long-term success.
Additional Considerations for Incorporating a Biotech Startup
Let’s take a few at a few other considerations that you might find of use.
Documenting the Development Journey
From experimental methods to research results, maintaining comprehensive documentation can help protect your IP, support regulatory submissions, and even serve as a defense in potential legal disputes. Clear documentation also demonstrates the credibility and reproducibility of your science to investors and partners.
Transitioning from Academia to Industry
Many biotech innovations stem from academic research, but transitioning to industry requires a shift in mindset. Unlike academic research, which often focuses on pure discovery, the biotech industry prioritizes reproducibility and commercialization. Validating your research with independent labs can enhance its credibility and position your startup for further investment.
Pathway to Clinical Trials
For startups developing therapeutic products, the pathway to clinical trials can be long and complex. Start by conducting a technical and commercial assessment of your product. Developing a Target Product Profile (TPP) can provide a clear roadmap for clinical development, aligning your scientific goals with market needs. Partnering with experienced legal and regulatory advisors can make a big difference in navigating this process.
Bottom Line: Getting Incorporated Can Be a Fun Legal Experience
Incorporating a biotech startup is like trying to mix science with legal wizardry, all while juggling vials of cash and test tubes of IP. And remember, if you start feeling like a mad scientist, at least you’re in good company—just try not to let the paperwork get out of hand.
Just remember, you don’t need an expensive lab right off the bat (you can operate virtually), but you do need to avoid mad-scientist-level mistakes (like forgetting to incorporate as a C Corporation). And sure, the journey from lab bench to blockbuster drug might be long, but hey, at least you’re not dealing with zombies. Probably.
