Financing a Life Sciences Startup

Raising money for a life sciences startup is a complicated endeavor: the science is expensive, the timelines are long, and investors often need to have a strong stomach for uncertainty. Unlike many tech startups, however, life sciences companies have access to an entire universe of non-dilutive funding like federal grants and collaboratons, sponsored research opportunities, charitable foundations, and collaborations with academic and industry partners. These alternatives can dramatically lessen early dilution, but they also require a clear understanding of eligibility, strategy, and timing.

The Two Types of Money: Dilutive and Non-Dilutive

Every founder must understand the difference between dilutive and non-dilutive funding. Dilutive funding involves selling a piece of the company, while non-dilutive funding does not affect ownership percentages. Life sciences founders must learn to strategically combine both types over the life of the company.

Dilutive funding includes common stock, preferred stock, SAFEs, and convertible notes. As Jay Reilly of Foley Hoag LLP points out, when a founder issues any of these instruments, the ownership table changes as they’re actually selling a percentage of the company. Many early founders underestimate how quickly dilution compounds, especially after multiple rounds of preferred equity.

Non-dilutive funding comes from grants, government lab collaboration programs, sponsored research, and sometimes philanthropic institutions. Non-dilutive funding options can be critical for capital-intensive startups, as they can extend ‘runway’ while preserving equity for later rounds. For life sciences founders, non-dilutive funds are often essential to completing early research, validating scientific hypotheses, and preparing for venture funding.

Early-Stage Financing: SAFEs and Convertible Notes

Life sciences companies often need significant funding before they have any prototypes or animal data, making early-stage investment uniquely challenging. While some founders obtain early support from friends and family, many also turn to angel investors.

SAFEs (Simple Agreements for Future Equity) delay valuation discussions until a later priced round, when professional investors can better assess the science. Unlike priced rounds, SAFEs typically do not come with board seats, control rights, or complex negotiations. Instead, they include simple economic terms such as discounts and valuation caps. A discount gives early investors the right to buy shares at a lower price than later investors. A valuation cap protects them if the company succeeds quickly. Both terms reward early risk-taking.

According to Zack Mueller of Foley Hoag LLP, SAFEs are appealing because, at the end of the day, they leave a lot of flexibility for the company.

Convertible notes share some characteristics with SAFEs, but operate as debt until conversion. They often include interest rates and maturity dates, which can add pressure if a priced round does not materialize quickly. Some investors prefer convertible notes because they provide downside protection, while others view them as overly burdensome for early life sciences companies.

Equity Rounds: Preferred Stock and Control Rights

Once a startup has early preclinical data or promising feasibility results, venture capital firms become interested. At this stage, founders typically raise money through priced rounds involving preferred stock.

Preferred stock includes financial and governance protections for investors. It comes with features such as liquidation preferences, anti-dilution protection, dividends, and veto rights over major corporate actions.

Preferred investors commonly negotiate veto rights related to:

• Selling the company
• Raising additional capital
• Changing board size
• Hiring or firing a CEO
• Undertaking large expenditures

These provisions are critical to investors as they often expect authority over significant corporate actions. Founders, especially scientific founders, can be surprised by these terms. Understanding how they work and how to negotiate them can make the difference between a collaborative partnership and a strained relationship.

Vesting and Founder Incentives

Investors want assurance that founders are committed. The standard tool for this is ‘vesting.’ The standard vesting structure is 4 years vesting with a ‘1-year cliff.’ Under this structure, a founder who leaves before the first year receives no shares. Vesting protects both investors and co-founders by preventing early departures from destabilizing the company. It also signals professionalism and alignment of interests, which is something venture investors care deeply about.

The Non-Dilutive Engine: SBIR/STTR Grants & CDMRP

For life sciences startups, SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) grants are among the most reliable sources of early funding.

“I consider this federal grant program to be the largest public venture capital initiative,” notes Elizabeth Smith of Fzata.

These grants allow companies to conduct feasibility studies, generate proof-of-concept data, and pursue early-stage R&D without giving up equity. Agencies such as DOD, HHS, DOE, NASA and NSF, collectively award billions of dollars annually to the SBIR and STTR programs with DOD accounting for about 50% of the total dollars obligated and NIH about 30%. Grants range in size from $50,000-multi-$ million.

Another significant resource is the Congressional Directed Medical Research Program (CDMRP). Funding is appropriated annually by Congress and the program is managed through the DOD. The program focuses on targeted therapeutic areas of military interest and supports collaborations between startups, academic institutions, and research hospitals.

CDMRP awards can be as large as multimillions of dollars for clinical stage studies. They often encourage interdisciplinary approaches and frequently fund research into diseases affecting enlisted, veterans and civilians alike.

A Note About Collaborations

Collaborations with pharmaceutical companies, academic research centers, or federal labs can accelerate development and provide non-dilutive support as well as strong validation. However, these relationships can also introduce risks related to new IP ownership, data rights, and control over eventual commercialization. Founders must balance the benefits, funding, research support, and infrastructure against the contractual complexity that often accompanies these collaborations and make sure that they have sufficient time and resources to complete their portion of the joint project.

A Practical Roadmap for Life Sciences Founders

Investors in life sciences companies assess not only the science but also the team’s ability to execute. As Deborah Hemingway of Ecphora Capital points out, ultimately, they’re not only investing in the company, but the people. Teams with strong scientific credentials, commercialization experience, and an ability to communicate complex ideas effectively are better positioned to secure both grants and equity financing.

Founders who understand the available tools and have the right team behind them can navigate the funding process more strategically. By combining grants, early-stage SAFEs, strong IP, non-dilutive federal lab collaborations and disciplined equity rounds, companies can preserve founder ownership while still advancing groundbreaking therapies and technologies.

Life sciences founders can benefit from following a predictable funding sequence that aligns scientific milestones with capital needs:

1. Secure IP early (file provisional patents, assess FTO).
2. Pursue SBIR/STTR and other non-dilutive grants.
3. Use SAFEs or convertible notes for early angel funding.
4. Build a vested founding team.
5. Engage academic, federal or industry collaboration partners when strategically beneficial.
6. Raise priced preferred equity rounds once you have compelling data.
7. Maintain cap table discipline.
8. Seek advisors familiar with life sciences financing.

To learn more about this topic, view Funding a Life Sciences Company. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested in reading other articles about start-ups & entrepreneurship.

This article was originally published on November 20, 2025.

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.