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How to protect your business in the changing medtech landscape

Last week, I discussed the changing landscape of medtech innovation, and how shifting dynamics in […]

Last week, I discussed the changing landscape of medtech innovation, and how shifting dynamics in the capital raising process have led young businesses to be more vulnerable to unscrupulous partners and mal-intentioned competitors.

This week I will begin discussing how distressed venture funding and litigation finance can be used to help protect these innovating young businesses if they are ever faced with the proposition of potentially using the legal system to protect their assets.

While the adoption of commercial litigation finance (and to a lesser extent, distressed venture funding) are on the rise, the particulars of the practice are still not widely understood. How are these deals structured? How do lawyers and clients work with funders without jeopardizing the attorney-client relationship? How are litigation-related assets valued?

We at Lake Whillans will be addressing these and other questions; discuss topics of interest; and spark an informative dialogue. We will kick things off by shedding some light on a few frequently asked questions about the structure of litigation finance deals.

Q. Who are the parties to a transaction?

Generally, litigation finance companies transact directly with the business (referred to as the “claimholder” because it is the party who holds the legal claim). While the claimholder’s counsel is typically involved throughout the investment process—helping to answer due diligence questions and providing a case budget, for example—the investment contract is structured as a bilateral agreement directly with the claimholder. The attorney-client relationship remains exclusive to the claimholder and its attorney.

Q. Can litigation finance provide capital for activities other than litigation?

Yes, the capital invested can be used for almost anything. Most frequently, funds are used to pay for litigation fees and expenses, but it is also quite common for claimholders to take additional capital to use toward operating costs such as R&D, payroll, or manufacturing.

Q. If litigation finance can be used for operating activities, what differentiates it from other forms of financing?

One of the most significant features of litigation finance is that in most instances it involves non-recourse capital. That means the financier’s only recourse is to proceeds from the underlying litigation or arbitration, not to any of the claimholder’s other assets. In other words, if the underlying litigation or arbitration claim is not successful, the claimholder owes us nothing. Non-recourse capital not only minimizes or eliminates litigation risk; it also provides the company with a way to raise capital without diluting equity or creating burdensome debt.

Q. What does the economic arrangement look like?

Generalizing the investment structure of a litigation finance deal can be difficult since each transaction is specifically tailored to meet the individual needs of a claimholder. In a future post, we will address the ways in which a litigation financier values various litigation-related assets.

For now, let’s tackle one common structure:

  • If the arrangement includes covering operating expenses, the litigation financier (i) makes a non-recourse investment directly in the claimholder, and then (ii) establishes a capital facility to be drawn down to pay for fees and expenses related to a litigation or arbitration.
  • Any proceeds from the litigation are used to repay the litigation financier for whatever capital has been disbursed. The remaining proceeds are allocated between the claimholder and the litigation financier according to their predetermined economic arrangement.

This basic structure can come in many different iterations. Sometimes a lawyer chooses to carry a contingent interest in the litigation; sometimes a claimholder prefers to pay a fixed dollar return rather than a percentage of the case. All of these arrangements are commonplace. At Lake Whillans, we are amenable to entertain new and alternative structures in order to meet the needs of a given company.


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Lake Whillans

Lake Whillans is a distressed venture funding and litigation finance firm that helps companies facing litigation or arbitration. It’s writing an ongoing series to empower startups to better protect their businesses and increase their likelihood of success. Learn more about us at http://lakewhillans.com/.

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