Friday, April 25, 2008

Venture Round: VCs (and others) Win With Sirtris

Tired of Sirtris-GSK talk yet? Too bad. As we now bring you, the venture angle.

As you no doubt know by now, GlaxoSmithKline will pay $725 million for Sirtris Pharmaceuticals Inc., paying $22.50 per share, an 84% premium over Sirtris' closing price.

We've already gone over the particulars of the deal, including some of our concerns. But one irrefutable fact is Sirtris' venture investors made more than a few bucks.

As should be the case, the earlier investors did the best. Polaris Venture Partners, TVM Partners, Cardinal Partners, Skyline Ventures and a few of the company's co-founders will do very well. But by our measure even investors in the company's last private round early last year will see nearly their capital nearly triple, including the cigar-smoking guy directly above.

Now let's go over a round-by-round account:

* Back in the fall of 2004, Series A investors Polaris, TVM, Cardinal and Skyline as well as a few individual—co-founder Richard Aldrich, Paul Schimmel and David Sinclair—paid 50 cents a piece for 10 million shares of convertible preferred stock. At last year's IPO, those shares converted into 1.9 million shares of common stock, so by our measure those investors ultimately paid roughly $2.63 per common share.

* Later that year, Sirtris raised another $12.6 million by selling 21 million shares of Series A-1 convertible preferred stock for 60 cents a piece. The four venture investors bought in along with Wellcome Trust Limited. At the IPO, the shares converted into 4.1 million shares of common stock, meaning investors ultimately paid roughly $3.07 for each common.

* Series B investors, who came along in the spring of 2005, bought 33.7 million shares for $27 million, paying 80 cents per share. All the earlier VCs were joined by Three Arch Partners and Novartis BioVentures. Those 33.7 million shares converted into 6.4 million of common at the IPO, making the per common share price $4.20.

* Sirtris went to the well again in spring of 2006 raising $22.1 million in a sale of Series C stock, priced at $1.12 per redeemable share. Investors this time included all of the Series B investors as well as a trust managed by Schimmel, Paul Schimmel Prototype PSP. After the IPO, the 19.7 million preferred shares converted into 3.7 million common shares so these investors paid $5.88 per share.

* Finally, Sirtris capped off its private fund raising with a $35.9 million round at the start of 2007. Earlier investors TVM, Skyline, TVM, Three Arch as well as Sinclair were joined by CEO Christoph Westphal, co-founder Sinclair and Peter Elliott, senior vice president and head of development. Investors paid $1.68 each for 21.3 million shares of Series C-1 redeemable convertible preferred stock. At the IPO, those converted into 4.07 million shares of common. Per share price: $8.81.

Who were two other big winners? A trust managed by John Henry, the principal owner of the Boston Red Sox (pictured), was the single largest investor in Sitris' C-1 Round. Not sure how he came to be involved in Sirtris, perhaps he met up with fellow Brookline, Mass. resident Westphal at their neighborhood Dunkin’ Donuts. Meanwhile,Venture lender Hercules Technology Growth Capital will crow about its big returns in an upcoming conference call. (Tip of the cap to PE Week Wire for pointing this out.) Hercules provided Sirtris $15 million in venture debt in 2006.

Insider Sales

Sirtris wasn't public long enough to file a proxy. You can find out who owned what just after the IPO right here. But some investors and executives already unloaded some stock, so the final numbers will be different.

Early investor Polaris, for example, distributed close to one million shares to its limited partners on Nov. 30, just after the lock up expired. Shares closed at $16.09 on that day.

Co-founders Westphal and Sinclair, meanwhile, sold off 55,000 and 30,000 shares, respectively, over the past few months, with the shares selling anywhere between $11.23 and $14.95. The sales were part of a Rule 10b5-1 trading plan, a prearranged and gradual sell-off of shares by insiders. Separately, Schimmel also sold off just over 11,000 shares at $17 a piece.

Westphal's Future

In our earlier post, we wondered whether Westphal would remain with GSK to run the unit or return to his venture capital roots as he was a proficient company starter while at Polaris. Westphal has kept his fingers in the venture game serving as senior advisor to Flybridge Capital, formerly IDG Ventures.

No doubt, venture capital will continue to call to Westphal, but he will have strong incentive to stay at GSK. According to the 424B4 form filed after the IPO, the stock vesting scheduls for Westphal contain a "double trigger" requirement that "prevents an unintended windfall to management in the event of a friendly (non-hostile) change of control."

Under this structure, unvested equity awards under our 2004 Stock Plan would continue to incentivize our executives to remain with the company after a friendly change of control. If, by contrast, our 2004 Stock Plan had only a "single trigger," and if a friendly change of control occurred, management's equity awards would all vest immediately, creating a windfall and the new owner would then likely find it necessary to replace the compensation with new unvested equity awards in order to retain management. This rationale is why we believe a "double-trigger" equity vesting acceleration mechanism is more stockholder-friendly, and thus more appropriate for us, than a "single trigger" acceleration mechanism.

Westphal found Sirtris' story compelling enough to leave a general partner position at Polaris. That attraction--coupled with the "double trigger"--means he may stick around for a while.

As always, if you have any private suggestions, tips, and comments on my math email me here.

No comments: