Seed Funding Your IVF Startup

From the Basic Science of Finance series

David Sable
4 min readSep 25, 2023

The challenge:

how to fund the foundational part of a long development program — like taking an AI system for embryology through the pre-proof of concept (POC) stage — by selling a piece of the company (because there is no way to finance the company by borrowing the money without collateral to guarantee the loan) without having any idea how much it may be worth?

None of us has a crystal ball and no one wants to look back and think that we paid way too much or that we sold way too cheaply.

So our goal is to fund the next stages of development and let events dictate how much of the company gets allocated to the founder and how much to the funder.

If the proof of concept stages go well, the company will be worth a lot more, enough to attract professional venture capitalists, or a large business development partner, or even an acquirer.

When that happens, the seed stage investor profits from the value created, and gets paid for the extra risk that was assumed by funding the startup before tangible proof of concept was demonstrated, rather than investing into the de-risked project later.

The funder and founder allocate this extra risk by using a debt/equity hybrid called convertible debt. It works like this:

I want to invest a million dollars into your company. I ask for ten percent of the company, valuing the whole company at ten million dollars pre-money or eleven million post.

You counteroffer with five percent of the company for a million dollars. Obviously, we are far apart.

Instead of a “hard” valuation, we agree that the one million dollars will be considered a loan, but not a loan that either of us hope gets paid back. Instead, the loan will convert into a piece of the company at a predefined point in the future.

When? Usually when the startup raises money again, or possibly at a predefined date in the calendar.

For how much? That will depend on the value of the company at the next financing.

Why the next financing? Two reasons:

1) We will know the outcome of the work that we funded in the first place.

If we have a working prototype of a machine, or we have a real-world dataset demonstrating better cycle outcomes or more efficient cycle production, making the value of the company more clear, then we have proof, or at least suggestion, of concept.

If we don’t, then we may or may not convert to equity. If I choose to convert, my million dollars will buy a larger percentage of the company. If not, and the investment is still considered a loan, I will retain preferential rights to the liquidation assets, if any.

2) The risk is shared by the two parties, and neither had to convince the other on valuation in a way that one of the parties will have, in retrospect, received all of the benefits or shouldered all of the risks of something that neither could predict.

For later rounds of financing, the two parties’ interests are aligned, both benefitting from negotiating the highest value possible for the company as a whole.

So what does the piece of paper that you both sign look like?

In the simplest form, you define the amount of money being exchanged and the terms of the conversion. I loan/invest a million dollars in the company. At the time of the next financing, under predefined conditions (usually on the condition of raising a minimal-sized round) my money converts into stock in the company at a discount to the valuation negotiated by the future investors.

Remember that I thought the value of the pre-POC company was ten million dollars (one million dollars for ten percent); you wanted twenty million (my million bought five percent). Instead of arguing, we agreed to wait to see how the project develops.

If things go as planned, you then do a series A round with venture firm(s), and you agree on a value of, say, twenty-five million. My million converts at a discount to that, maybe 20%. So I ended up with 5% of a twenty-five million dollar company. Neither of us is dissatisfied with the outcome of our seed stage term sheet.

There are other aspects of the deal; I may be able to define a maximal valuation into which I convert as well as a % discount (then I get to choose whichever is most advantageous.)

The goal is to pay me back for the extra risk that I assumed by investing at the earlier, pre-results stage of the company.



David Sable

bio fund manager, Columbia prof, ex-reproductive endocrinologist, roadie for @PriyaMayadas. I post first drafts.