X-Message-Number: 6509
Date: Fri, 12 Jul 1996 11:33:23 -0400 (EDT)
From:  (Greg Stock)
Subject: Additional share purchases.

>>In Cryonet #6492 Greg Stock wrote:

>>One additional point: A few days ago Paul Wafker wrote something to the
>>effect that pledgors would be allowed to increase their pledges in the
>>future, and thus purchase more shares AT THE ORIGINAL SHARE
>>PRICE. This would be a good idea if the only intent were to raise more
>>research money for the project, but unfortunately (unless it is strictly
>>limited by some mechanism such as issuing a specific number of warrants 
>>or some other such device) would undermine the investment.
>>The better the project performed, the more original
>>investors would be diluted by additional share purchases from various
>>parties; the stock price would essentially end up pegged at its original
>>price by new sales.


Paul replied:

>Yes, I was aware of the possibility of some such phenomenon. But there are
>other conditions which I may not have stated before and which you do not
>mention.

>1) This privilege would only obtain until the end of the project. So the
>share price would only be pegged until then by this process.

True, but if any breakthroughs had been made there would still be serious
dilution -- much to the detriment of early pledgors who could not afford to
make subsequent additional investments.

>2) Again I wanted to give original pledgers as much incentive as possible.
>Surely having a share price pegged for the length of the project is better
>than having no project at all!

True again, but I suspect that setting this up in a way that protects early
investors from the possibility of dilution by late investments would be an
overall detriment rather than a plus for getting the project going.

>3) The way I see things happening right now, the company would not distribute
>any profits and would not go public until the end of the project. As I
>understand it until a company goes public all share sales are, in effect, by
>the company, in the sense that a sale of stock between two parties external
>to the company must be registered with the company and the shares reissued in
>the name of the new owner. Furthermore, by clauses in the Share Purchase
>Agreement, such external sales could actually be legally forbidden until
>the company went public.
>     The reason the I consider such things here which one would certainly
>*not* want for a normal biotech venture is that *our* main purpose is not
>monetary. If for example some very lucrative discovery were made at the
>beginning of the project, we have no other choice but to trust the original
>pledger/share purchasers to still continue with the project goal even if it
>meant not making so much immediate money from that discovery (although this
>may not be any practical restriction since the development and marketing of
>that discovery could always be spun off to some other company with large
>royalties to be returned to us). In any case, what I am trying to guard
>against is a bunch of investors who are only out for *monetary* profit
>gaining control of the company and abandoning the Prometheus Project.

Very valid concerns. The easiest way to guard against such a loss of control
is to set up the company in the first place so that it cannot happen.  For
example with a Limited Liability Corp (LLC), one can restrict transfers of
shares without the consent of a majority of shareholders (or of the
management even). Also, decisions about whether to allow additional
contributions are better off made by a majority vote of shareholders at the
time when such contributions are needed.  That way any progress -- or lack
of progress -- can be appropriately factored into that decision.

To continue this thread at this early stage in your fund raising is probably
a little silly. I only mentioned the issue because I wanted to help you with
the question you threw out about tax deductions for investors, and I'd
previously noted the dilution problem you were creating for yourself. 

If you can secure the necessary commitments for Promethius, rest assured
that setting up the entity in a way that will make it do what you have
suggested you want will not be a big obstacle -- either for maintaining
control and focus, or for getting some level of tax write-off for investors.
The hard part here is getting the commitments ... and then translating them
into actual funds.  

Best, Greg


            Gregory Stock
, 


Rate This Message: http://www.cryonet.org/cgi-bin/rate.cgi?msg=6509