Financial Instruments in the Psychedelic Medicine Industry

As new investments pour into the emerging psychedelic medicine space, capital markets are already buzzing with excitement. Indeed, leading research institutions such as Johns Hopkins and the Imperial College London have produced groundbreaking results from their clinical research into these compounds. With headlines boasting the efficacy of drugs like psilocybin, the active ingredient in magic mushrooms, to be four times more effective than SSRI’s at treating depression, it’s hard not to take notice of this burgeoning space. While there is a justifiable reason for excitement, especially for investors, there are some crucial risks that are worth exploring as well the tools, also called “financial instruments”, that sophisticated investors are using today to manage risk and reward in their investments.

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Financial Instruments Psychedelics Industry

Pitfalls, Pressures & Pain Points to Psychedelic Progress Investors Should Be Wary Of

While promising clinical data and the overall revival of psychedelic science is certainly alluring to new investors, there are a few significant risks that psychedelic investors should be aware of. As with any new business venture, there is a chance of failure. In psychedelic medicine, this could mean a particular drug candidate a company has seriously invested in fails to make it through the arduous drug development pipeline–some 9 in 10 drugs do fail this rigorous journey in the end. Furthermore, psychedelic drugs are still by and large illegal across the globe. While attitudes are certainly changing, and policy is beginning to shift as well, investments in psychedelic opportunities are still highly speculative and a long-term play. In fact, the sophisticated investor will likely not be interested in purchasing common shares when wanting to invest in a psychedelic company. The risk is simply too high for many investors to engage in such an arrangement.

Financial Instruments Psychedelics Industry

What does the Sophisticated Investor Do to Maneuver This Emerging Space?

Because it is so speculative and high risk, most seasoned investors will not take common shares in an early-stage private psychedelic company. When revenue might be literally five years out and, for instance, the drugs being developed still have to make it through clinical trials, most early-stage investors simply don’t want to be in the highest risk/highest reward investment category. Rather than take common shares, experienced investors tend to opt for a more refined instrument for their investment. These instruments can allow them a balance of mitigating the inherent risk in the opportunity while still being able to capture massive gains should the company thrive. This piece will explore one example to help illustrate the complex landscape of financial instruments in psychedelic investing.

Financial Instruments Psychedelics Industry

Preferred Equity Over Common Equity & Anti-Dilution Protection

It’s very common for investors to take preferred equity instead of common equity in early-stage psychedelics ventures. This allows investors to participate in the rewards of being an equity holder but still have additional risk protection in case things don’t work out. For instance, one feature that could be included in a preferred equity term sheet would be anti-dilution protection. In a nutshell, if an investor buys shares in a company at a certain valuation and things don’t work out, forcing the company to raise more money at a lower valuation than the valuation the investor originally bought in at, the investor would be compensated with extra shares. Considering the fact that drug trials could go seriously awry, a highly probable outcome in the drug development and IP play, the sophisticated psychedelic investor can gain some protection through this anti-dilution feature. This is but one of the myriad financial instruments available to investors in the modern psychedelic medicine industry.

Financial Instruments Psychedelics Industry

Learn More About Financial Instruments in Psychedelics at Psychedelic Capital

The anti-dilution feature of a preferred equity instrument discussed in this blog is simply one feature within one type of financial instrument available to the knowledgeable psychedelic investor. To learn more about financial instruments in the psychedelic market, you can catch this panel on the subject at our last Psychedelic Capital event. To gain even deeper insights into the countless financial instruments that savvy psychedelic investors can take advantage of, be sure to attend our monthly Psychedelic Capital event, the gold standard in psychedelic due diligence today.

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Microdose Psychedelic Insights

Your Guide to the Business of Psychedelics. Our mission is to shift the world's perception of psychedelic medicine.