Organizers at the athenahealth More Disruption Please accelerator say they are in the midst of updating its term sheet. This is a good thing, because not everyone’s a fan.
I’ve been fielding complaints since HIMSS last month that the athenahealth term sheet is too harsh. It’s not easy to compare. Other accelerators I spoke to who reviewed the terms were split on its merits.
Plus, athenahealth is relatively unique to most accelerators since it’s run directly by a healthcare technology company.
Behavioral Health, Interoperability and eConsent: Meeting the Demands of CMS Final Rule Compliance
In a webinar on April 16 at 1pm ET, Aneesh Chopra will moderate a discussion with executives from DocuSign, Velatura, and behavioral health providers on eConsent, health information exchange and compliance with the CMS Final Rule on interoperability.
This is an important discussion because there’s little open, substantive critique of strategic investors. Corporates and strategics are increasingly prominent in healthcare – often because they truly offer more than money. But so much is still unknown about their roles and their terms, and how to quantify the extra value strategics bring.
“Some of our terms are not market” compared to other investors, said athenahealth’s Mandira Singh, a senior business development manager for athenahealth. “But VC firms aren’t walking you into clients helping you get that traction.”
The More Disruption Please accelerator provides cash, mentorship and other standard benefits of an incubator. But companies can also beta test their products with athenahealth’s customer base.
Separately, accelerator companies can get into the athenahealth marketplace, the company’s “app store,” in exchange for a revenue share.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
athenahealth provided these boilerplate More Disruption Please accelerator terms:
- Varying check sizes and valuation caps – money can come as convertible debt or equity
- Optional conversion at qualified financing (proceeds that qualify vary)
- A provision that athenahealth cannot own more than 49 percent of the company
- Negative covenants on new debt (thresholds for qualification vary)
- “Basic information rights” for financial reporting purposes
- Board observer seat
- Pro rata rights on subsequent fundraising; super pro rata amounts vary
- Right of first notice of acquisition/liquidation – terms, time periods vary
Critics of the term sheet, who would only speak to me off the record, said athenahealth has asked for other requirements, too. They said in some cases it asked for right of first refusal on acquisition or liquidation, and will make requirements on access to a company’s data.
Athenahealth denied they have such requirements but also said terms can vary. Singh, an ex-Essex Woodlands analyst who built the More Disruption Please term sheet and is working on the new version, also stressed that there’s always back-and-forth negotiations with startups.
Looking solely at the basic provisions athenahealth supplied, the terms aren’t so bad. The most common criticism of those terms is around the first-notice language. These are useful for a financial investor, but couldn’t they be problematic for an industry participant, particularly if the company is interested in doing a strategic transaction with a competitor?
Also, in addition to the problems it raises from the standpoint of interfering with the company’s ability to make a deal, if the potential acquirer is a public company, complying with this provision could be providing material inside information that could result in tipper/tippee liability under the insider trading rules.
Isn’t that bad for everyone – unless, of course, the only acquirer is athenahealth?
That would make the terms worse because the early accelerator investment essentially, through the terms, locks athenahealth in as the only acquirer.
Singh said the term sheet is by no means exclusive. “Rather, we started the program to bring more collaboration and interoperability to the space, so we encourage our partners, and portfolio companies to develop onto other platforms,” she wrote in an e-mail.
She stated the right of first notice terms make sure portfolio companies don’t violate terms of an offer. “If confidentiality around the entity and terms are included in the offer they receive (which is quite standard), the company need only tell athena that they have received an offer, nothing more,” she wrote. “Athena then has a reasonable period to respond, either with an offer of our own or with a pass.
“We do know our terms are different than financial investors and we hope that companies that work with us see that the value we add is pretty differentiated as well,” Singh said. “We continue to gain feedback on these terms and adjust our agreements accordingly. No deal we have struck to date has been boilerplate, and we have been able to find common ground on legal terms with the many companies that have joined our accelerator.”
MedCity News has started to take a harder look at corporate and strategic investors in healthcare. I’d love to hear other term-sheet stories – at athenahealth and beyond – to see what’s what (so send them my way).
