When Should a State Take Equity in Life Science Firms? Issue Debated in Massachusetts

As Massachusetts legislators are in the process of crafting a compromise bill for the statewide Life Sciences Initiative, one new issue to emerge would have the state taking an equity position in the life sciences companies in which the state provides financial support.

Insuring the state receives the economic development impacts promised by a company when the state provides financial support is not particularly new. Clawbacks for deals that leave state or fail to live up to employment promises are being demanded by states and communities with increasing frequency on conventional recruitment economic development projects.
 
The House version of the bill – H. 4554 – includes an “Equity investment” clause in which the state receives no less than 3 percent of the equity in a company that received state grants. The equity clause calls for a future quasi-public agency to become an equity partner in a biotech firm if state funds are used, and it only applies to firms that fail to secure venture or angel investor capital, according to a Boston Herald article. However, S. 2566, the Senate version of the bill that passed last month, does not include the clause.
 
Backers of the House version said in the Boston Herald article that it is not unusual for universities to negotiate similar deals with start-up companies that have potential for large returns within emerging fields. The article also notes that the Massachusetts Technology Development Corporation, a quasi-public agency, cuts similar equity deals. The approach is not uncommon for most public angel or venture capital-like programs, but the Massachusetts proposal for life science firms adds a caveat that effects only those deals unattractive to private equity sources.
 
For more information on the Life Sciences Initiative, including a comparative analysis of the House and Senate bill versions, please visit the Massachusetts Biotechnology Council at: http://www.massbio.org/