In Greater Philadelphia, from Princeton to Lancaster, there are literally hundreds of small start-ups founded by scientists who dream of making important contributions to the life sciences. Often academics or former employees of one of the area’s big pharmaceutical companies, these researchers see value in a drug, medical device or patent that may initially have been developed, but then was abandoned, by a university or company.
Setting out on their own, the researchers will raise a few hundred thousand dollars to pick up two or three of these orphan products, which they will then try to bring through two clinical trials. This is sufficient to establish proof of concept, and at that point, one of the major biotechnology, medical device or pharmaceutical firms may be willing to buy out the entrepreneurs for up to 100 times the product’s original purchase price.
Although any wealth advisor would be happy to manage the successful entrepreneur’s post-exit portfolio, financial planning should actually begin one or two years before the sale, when smart preparation can maximize what may be a once-in-a-lifetime event. This is when an advisor should use a full range of holistic strategies to prepare for the opportunities and risks that accompany a successful exit. Based on our own experience working with entrepreneurs in the life sciences, we have identified seven of these key strategies to consider well in advance of a start-up’s sale. These include:
1. Advance Income Tax Planning – If the entrepreneur knows that his or her company is going to go public with an IPO, an 83(b) election filed in advance with the IRS will start the clock ticking for long-term capital gains treatment. The owner will not need to have held the stock for a year from when the sale occurs but rather from when the 83(b) election was filed.
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