Consider an R&D project to develop a new product. US$8m is required over three years to bring the product to market. It is a relatively high-risk project – with around a 60% chance of success. The company anticipates projected revenues of around US$100m if the R&D is successful but given the nature of the product, it will not be easy to predict for some time the outcome of the investment.
This scenario is not uncommon. Companies will usually consider financing options for this project rather than allocating US$8m from the balance sheet. There are investors and lenders with specialisms in financing R&D projects who can assess the risks and rewards.
Consider another scenario. A supplier has failed to honour a supply contract, which has impacted the ability of the company to service clients – two key clients have threatened to sue and take their business elsewhere. The GC wants to sue the supplier and has been advised that the claim could be worth up to US$100m, with 60% prospects of success. External counsel have also said – following a brief phone call – that their fees will be around US$8m to run the claim.
This conversation usually ends one of two ways:
Neither option is ideal.
The third option remains the least common but most advantageous. The company can apply for disputes funding for the costs of the claim allowing them to pursue the US$100m claim without using cash from the balance sheet. Disputes funding is non-recourse so is only repaid along with a success fee in the event the claim succeeds. If the claim loses, the company pays nothing. By this approach:
This option is becoming more popular but is not yet as mainstream as its rationale suggests it should be. The CFO will always look to finance options for a multi-million dollar project, why not a multi-million dollar dispute?