“Start with the end in mind” – a lesson learned
I asked Chris Stepanian, Co-Founder and CEO at Windgap Medical, what was one lesson he has learned while developing Windgap’s Epinephrine Autoinjector. Without hesitation, Chris answered:
“Being an entrepreneur is exciting and takes passion, but the risks are real and need to be appreciated.”
Chris points out that many individuals are swept-up in the notion of being an entrepreneur. Perhaps it is the notion of being your own boss, working your own schedule, and developing new products to revolutionize the world.
All of which are admirable, but they come with a variety of risks and stresses, including loss of personal wealth, squandered earnings potential, unappreciated late nights, and challenges balancing team dynamics.
To justify these risks and stresses, there needs to be sufficient financial return for the entrepreneur, but how does one begin to assess if the venture will be worth the risks?
To help potential entrepreneurs better understand, Chris advises: “start with the end in mind.” Find an analogous entrepreneurial idea, which has been brought to market and use it as a baseline to assess the idea’s potential.
For Chris, he considered another medical device product which was brought to market over 10 years and the company eventually sold for $100-million. For most people and especially a scrappy entrepreneur, $100-million is a very respectable number. However, the $100-million market valuation is a best-case scenario.
The payout for the entrepreneur is likely to be less than the $100-million. In the baseline scenario, there were four rounds of financing and each round diluted the equity by 35%. See tables below. It is not uncommon for a round of equity financing to dilute the entrepreneurs equity by 50% or more.
If the entrepreneur’s stock was all converted to common stock, the entrepreneur’s equity share would be 17.9% or $17.9-million, a very respectable return. However for the baseline scenario, the investor required additional terms, including liquidation preferences and participating preferred stock, which decreased the entrepreneur’s final payout to $3.2-million.
This payout was for 10 years of work, so on an annual basis it equates to $320,000/yr. If there are multiple founders or employees with stock options, the value is distributed among them, diluting the value further.
Although this is much less than initial $100-million sell price, 3.2-million is still a very respectable payment and it is possible the actual payout could be much higher, especially if the entrepreneur plans ahead to minimize the dilution and positions the company so they can command a lack of liquidation preferences and participation (hummm… a good idea for a future blog).
For Chris, what was important was that he had a realistic value to assess if the epinephrine autoinjector venture was going to worth the risks and stresses.
Chris is passionate about the epinephrine autoinjector and because he started with the end in mind, he is confident there is a good chance for a high financial return for himself, his team, and his investors.
|% of Company Retained by Founders||% of Founder’s Equity Sold|
|No Equity Investment||100.0%||0%|
|1st round of investment||65.0%||35%|
|2nd round of investment||42.3%||35%|
|3rd round of investment||27.5%||35%|
|4th round of investment||17.9%||35%|
|Millions||% of Founder’s Equity|
|Valuation at Exit||$ 100.0|
|Valuation to Founders after Four Rounds of Equity Investing Assuming all Stock Converts to Common||$ 17.9||17.9%|
|Valuation to Founders after Four Rounds of Equity Investing Assuming Participating Preferred but No Liquidation Preference||$ 3.2||17.9%|
|Annual Value for Founders, assuming 10 years of work||$ 0.3||17.9%|
© 2016 Soul of Design
Chris Stepanian and Windgap Medical
Chris Stepanian is a co-Founder and CEO of Windgap Medical, a start-up company commercializing a patented wet/dry epinephrine autoinjector for individuals who suffer from life-threatening anaphylaxis allergic reactions. Windgap’s epinephrine autoinjector will compete in the billion-dollar market consisting of such tradenames as Epipen®, Auvi-Q®, and Adrenaclick®. Assuming development proceeds on schedule and the FDA approves the autoinjector; Chris expects to begin marketing the autoinjector in late 2018/early 2019.
Chris helped Windgap raise $11.5-million in equity and debt funding from angel, venture, and strategic sources. He has more than 25 years of experience in operations, finance, strategy, and technology with experience in aerospace, automotive, contract-research, industrial materials, and healthcare industries. Previously, he was a founding team member of Aspen Aerogels ( NYSE: ASPN ). He has engineering degrees from Rensselaer and Texas A&M along with an MBA from MIT’s Sloan Fellows program.
For information about Windgap, contact them at firstname.lastname@example.org