Navigating Tranche-Based Funding in The MedTech Sector

We’re seeing more investors making tranche-based funding offers to companies, especially in the MedTech sector. This article covers the unique opportunities and challenges that come with this funding arrangement through the lens of MedTech companies. However, the information is relevant for any company considering a tranche-based offer from investors.

What Is Tranche-Based Funding?

Tranche-based funding involves the capital being delivered in stages (or ‘tranches’), as opposed to the entire investment being delivered upfront. Each tranche is typically delivered after the company developing the product meets a specific milestone. In the MedTech space, this might include trial results, specific regulatory approvals, or revenue targets.

Why Is Tranche-Based Funding Becoming More Common?

This funding approach appeals to investors because it helps structure the risk they take on. It also appeals to MedTech companies since funding can be structured to arrive at critical milestones.

Other benefits for investors include the fact that this structure incentivizes the startup to make progress in a timely manner. It also offers increased flexibility for investors, especially when it comes to terminating the deal if the startup does not meet important benchmarks.

Recognizing Unfair Terms in Tranche-Based Funding Agreements

While tranche-based funding offers advantages to MedTech startups, it also comes with challenges. It can result in resource constraints, as aggressive milestones often demand more capital and time.

Beyond the business challenges, tranche-based funding agreements can pose problems for startups, particularly when they include the following provisions:

• Impractical or unclear targets: Ambiguity in these terms can leave startups uncertain about their obligations and the resources required.
• Disproportionate control or oversight for investors: Such clauses can hamper strategic decision-making.
• Restrictive covenants: These can hinder a startup’s ability to seek alternative funding or make strategic operational pivots.
• Overly broad default triggers: These give investors excessive flexibility to halt funding.
• Unfavorable valuation adjustments: Such adjustments can dilute founder equity.
• Limited or no recourse for withheld funding: This can include unfavorable dispute resolution clauses.
• Excessive reporting obligations: These can divert resources that are already constrained.

How Legal Advice Can Protect Your Startup

Seeking experienced legal counsel early can help ensure tranche-based funding does not come at the expense of your company’s future. Here’s how legal counsel can assist:

• Evaluate terms and conditions: Identify unclear, vague, or unfair conditions and work to improve them.
• Draft effective contracts: Create agreements that serve as practical business documents, not just compliance checklists.
• Negotiate realistic milestones: Ensure milestones are measurable, mutually beneficial (where possible), and appropriately balance risk.
• Protect intellectual property (IP): Use NDAs or other legal mechanisms to safeguard your IP.
• Provide flexibility for exits and funding: Ensure the contract allows for strategic pivots, seeking additional funding, or adjusting the team without incurring significant penalties.

If your company is considering a tranche-based offer, reach out. Our experienced legal counsel can guide you through the process.

• Corporate Insights