Nanogene Technologies

Case: NanoGene Technologies

The NanoGene Technologies co-founders find themselves facing a common dilemma regarding the company's capital structure. As Noam Wasswerman describes in his article "The Founder's Dilemma", the founders must decide whether they want the power to run the company their way, or to get simply get rich. Capital structure is how firm finances its operations. It can consist of long-term debt, short-term debt, common equity, and preferred equity. The mix of these instruments that the founders choose to make up NanoGene's capital structure can determine whether or not a company succeeds. The case study demonstrates how particular capital structures can have both positive and negative consequences for the company depending on its business life cycle stage.

Strengths and Weaknesses of Capital Structure

Wasserman states in his article that founders must decide whether or not they want to get rich or run the company. NanoGene is unique life science company because it began with five original co-founders, which is more than there typically are in the nanotechnology industry. During the founding of the company, the co-founders decided to split the number of shares evenly at 20.00% each (about 333,000 of 1,665,000 shares per person). At this early stage this can be a positive thing. With the shares and salaries evenly distributed, it creates a sense of commonality and can help avoid strife. Throughout the case, one of the co-founders, Will Tompkins, frequently stresses the importance of teamwork and equality. He states, "First, I didn't really view myself as more important than the rest of these guys - we all started this together and success would depend upon all of us [...] There was no argument among us with the notion of equality". If Tompkins and his colleagues can maintain this positive attitude then this capital structure may benefit the company. However, because there are so many co-founders evenly splitting the shares, this capital structure may turn negative once they require further financial resources.

After each founder contributed $1,000 to incorporate the company, NanoGene later sought around $600,000 from an angel investor. After closing the deal, the founders decided they would make their own stock vest according to an agreed upon schedule. Josh Lerner describes vesting in "A Note on Private Equity Securities" as holding "that an entrepreneur's stock does not become his or her own until he or she has been with the company for a period of time, or some value accretion event occurs". Vesting their stock is both a positive and a negative for the founders. A positive because it can provide incentive for the owners to stay with company and help it succeed. It's an obvious negative too because now the founders potentially have to wait a few until 100% of their shares become vested. It is also in this stage of the Nanogene's business life cycle that Wasserman's dilemma becomes amplified. In exchange for the $600,000, the angel investor receives 600,000 shares of equity (26.94%) and each founder's share percentage is diluted to 14.70%. While it is a good thing that they received the financing NanoGene required, the angel investor now owns a larger percentage than each founder. This won't matter much if the founders all agree on an issue,