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The Venture Alley

A blog about business and legal issues important to entrepreneurs, startups, venture capitalists and angel investors.

Take the Technology Leaders Forecast Survey

Posted in News and Recent Events

On October 7, DLA Piper will host the Technology Leaders Summit, where technology leaders, influential innovators and policymakers convene to discuss the future of innovation. At the Summit, DLA Piper will release the results of its fourth, semi-annual Technology Leaders Forecast Survey, which will gauge the perspectives of leading technology and venture capital executives regarding the business climate and operating environment for technology companies.

We invite you to participate in the survey (on or before September 22).  In appreciation, respondents will receive a copy of the final report and survey results.

What is Micro-Venture Capital?

Posted in For Entrepreneurs and Companies, Fundraising, Startups

pic-trent.jpgCONTRIBUTED BY
Trent Dykes

Over the past few years, a new funding source for seed stage startups has developed and quickly become an integral part of the startup ecosystem.  This newer brand of investor is typically labeled a seed venture or micro-venture capital fund (a Micro-VC).

Micro-VCs are smaller venture firms that primarily invest in seed stage emerging growth companies, often have a fund size of <$50M and typically invest between $25K to $500K in a given company.  While many Micro-VCs are managed by former venture capitalists, former entrepreneurs and/or super angels, many larger venture firms also have Micro-VC equivalent funds used (or have earmarked a small portion of their fund) to target the same seed stage startups and prospect later opportunities for their larger venture funds (or investments).

Samir Kaji, Managing Director at First Republic Bank, provides an excellent overview of the Micro-VC market and his observations and predictions regarding the prevalence of Micro-VCs going forward on the CB Insights blog (entitled Where is the Micro-VC Market Going?).

As Samir notes, the Micro-VC investor has developed to fill a necessary gap in startup funding, namely the window prior to a traditional venture capital round.  From my experience, Micro-VCs are much more tolerant to the risk of the unknown that all startups face as they develop new technology or attempt to enter or create a new market.  Given the ever decreasing cost of getting a startup off the ground (due to technology innovations and efficiencies such as cloud, SaaS, digital distribution channels, etc.), startups need less money to sanity check their business concepts – and Micro-VCs have provided much needed capital to the startup world (especially considering the reduction in the number of traditional venture capital funds over the past several years) and have reaped the rewards of getting in early on the next big ideas.

CB Insights estimates that there are 135 Micro-VC firms actively investing at this time.  Here is the list from CB Insights of the funds it identified, together with a list of the most active Micro-VC funds between Q1 2011 and Q1 2014.  However, the actual number is likely higher than 135 given that a few Seattle-based Micro-VCs (that are not listed) also come to mind.  The good news for entrepreneurs and startups is that Samir estimates there may be an additional 40 to 50 new funds entering the market.

Angel Investment Trends: Q1 2014 Halo Report

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fundraising, News and Recent Events, Startups

pic-trent.jpgCONTRIBUTED BY
Trent Dykes

The Q1 2014 Halo Report has been released by the Angel Resource Institute, Silicon Valley Bank and CB Insights. The Halo Report analyzes angel investment activity and trends in the United States. Here are a couple interesting Q1 2014 highlights:

  • The median angel round size jump to $980K (up from $750K in each of Q1 and Q4 2013);
  • The median round size was $1.65M when angel groups co-invest with other types of investors;
  • The median seed stage pre-money valuation increased slightly to $2.7M;
  • Angel groups continue to primarily invest within their home state, with 75% of angel group investments made intrastate;
  • California was the most active region for angel deals completed (at 17.7% of the total deals), however, the Great Lakes region accounted for the most total dollars invested (at 24.6% of total dollars invested); and
  • The top three industry sectors attracting angel investment were Internet, healthcare and mobile, both in number of deals and total dollars invested – with the Internet sector accounting for the most deals and total dollars by a significant margin.

A copy of the full report can be found here and the infographic can be found here.


Equity Compensation Alphabet Soup – ISO, NSO, RSA, RSU and more

Posted in For Entrepreneurs and Companies, Startups, Tax

Perkins, Rachel_Headshot.jpgCONTRIBUTED BY
Rachel M. Perkins

Startups and public companies alike often use equity to help attract, retain and incentivize talented employees and other service providers. The different forms of awards have proliferated in the past several years, though, leading to a confusing “alphabet soup” of jargon that often frustrates both the recipients of grants and the company itself. Many angel and venture capital investors continue to prefer seeing stock options and restricted stock awards in their portfolio private companies, as these are the most common and simplest to administer. Other forms of awards can also be challenging for startups because there is no public market to easily set a contemporaneous per share stock price or provide liquidity for the award recipients. However, while stock options—both nonstatutory (NSO) and incentive (ISO)—and restricted stock awards (RSAs) remain the most popular and most recommended form of equity compensation, other forms—such as restricted stock units (RSUs) and stock appreciation rights (SARs)—are gaining popularity in certain markets, and we are being asked more and more frequently about these alternatives.

Adding to our previous discussions of adopting your first equity incentive plan, NSOs vs. ISOs and options for issuing employee equity in LLCs, we have put together the below quick reference charts, which are intended as high-level summaries of the most common equity incentive awards as well as some of the other less common awards available.  The following charts highlight some of the key features and tax consequences of each type of award, as well as some of the potential drawbacks associated with each: Continue Reading

Seattle Office Real Estate Market Review for Q2 2014

Posted in For Entrepreneurs and Companies, News and Recent Events

Compliments of Jason Smith of Kidder Mathews, attached is a Seattle-area office real estate market review for Q2 2014. As the report notes, so far in 2014, the only major surprise in the office market was Boeing expanding into over 600,000 s.f. of space in Bothell and the I-90 Corridor, single-handedly dropping the vacancy rates in those submarkets by 300-400 basis points (bps) each. The rest of the market trends are holding steady; leasing activity is improving across the region and the lack of large contiguous spaces in the Seattle and Bellevue central business districts (CBDs) have emboldened developers. Rental rates for Class A space in the CBD hotspots have moved up significantly, and with the economy continuing to improve, the forecast is for rental rates to continue their upwards trend over the next year.

The second quarter saw positive absorption in all five markets (Seattle, East King County, South King County, Snohomish County and Pierce County) for the first time in over six years. As a result of this activity, the region’s vacancy rate dropped to 9.5%, a full 50 bps lower than the first quarter. The forecast is for the vacancy rate to continue to decrease, perhaps at an even quicker pace, as tenants see their options narrowing and rental rates still not fully back to pre-recession levels.

The full Q2 2014 market review can be found here.

Pacific Northwest Investment and Exit Report

Posted in For Entrepreneurs and Companies, For Investors and Fund Managers, Fundraising, News and Recent Events, Startups

pic-trent.jpgCONTRIBUTED BY
Trent Dykes

CB Insights recently released its Pacific Northwest Investment and Exit Report, which analyzed private company investment and exit activity over the past five years. The report collected data from all activity sources, including venture capital, private equity, strategic corporate investments, corporate venture investors, angels, incubators and accelerators. Here are a few highlights from the report:

  • Since 2009, the number of deals closed per year has increased 144% (195 deals in 2009 vs. 475 deals in 2013), with the total annual investment amount increasing 81% ($780 million dollars invested in 2009 vs. $1.41 billion dollars invested in 2013).
  • In 2013, Series A funding activity accounted for 29% of the total funding activity, a five-year high for the category.
  • In 2013, seed/angel funding activity accounted for 7% of total funding activity, up from only 1% in 2009.
  • By sector, 35% of all dollars invested went to Internet-related companies, a five-year high for the category.
  • CB Insights ranked Madrona Venture Group as the most active early-stage investor in the region since 2009, followed by Founders Co-op.
  • CB Insights also ranked Madrona Venture Group as the most active mid-stage investor (Series B and C rounds) in the region since 2009, followed by Ignition Partners.
  • CB Insights ranked Ignition Partners as the most active late-stage investor in the region since 2009, followed by Madrona Venture Group.
  • Over the last couple years, the number of exits per year has remained relatively constant (at 140 exits in 2013), with M&A accounting for 97% of the deals and IPOs accounting for 3%.
  • Google was the top acquirer in the Pac-NW, with seven acquisitions since 2009.

A copy of the full report can be found here.

You think your merger is too small for antitrust laws to apply…think again: Top 10 tips in non-reportable transactions

Posted in For Entrepreneurs and Companies, IPOs & M&A, News and Recent Events, Startups

Article prepared by and republished courtesy of our colleagues Steven Levitsky and Paolo Morante; originally published here: http://www.dlapiper.com/en/us/insights/publications/2014/05/merger-enforcement-actions-below-the-hsr-threshold/.

“Less is more” may be true in architecture, but in merger clearance law, “less” is still enough to trigger antitrust investigations and litigation and rescission of the whole transaction. By “less,” we mean less than the Hart-Scott-Rodino $75.9 million threshold.

The big case currently in the news underscoring this point is FTC v. St. Luke’s Health System. In January 2014, the Federal Trade Commission obtained a decision from the US District Court for Idaho ordering full divestiture of a non-reportable deal more than two years after the merger had been consummated.

But that result is actually old news. Contrary to popular opinion, the antitrust agencies have a long history of challenging deals well below the Hart-Scott-Rodino thresholds, even when the deals have already closed. And with the St. Luke’s case, they are warning again that no anti-competitive deal is immune from challenge, even if it is small.

What issues should you keep in mind to prevent a future disastrous challenge from the regulators? In this post, we briefly discuss the highlights of St. Luke’s and then close with 10 important points to keep in mind in upcoming M&A transactions. Continue Reading

Top 10 Pitfalls in Managing Employment Contracts as You Go Global

Posted in For Entrepreneurs and Companies, Startups

Megan Muir

From our colleague, Ute Krudewagen

The CEO of an emerging growth company called me a while ago, a bit shocked after having seen the employment contracts that had just been issued to a couple of new hires in Hong Kong.  “How could they be longer than mine!?  Are you sure that is the approach we should take as we expand our operations?”

This CEO, like many US executives, employment lawyers and HR representatives, is accustomed to one- or two-page US-style at-will offer letters. But in many jurisdictions around the world,. detailed employment agreements are not only customary and best practices, but are simply required.  In fact, as foreign companies expand into the US, we see the reverse phenomenon – foreign companies rolling out foreign-style employment agreements to US-based regular employees, thus losing the benefits of the unique concept of at-will employment in the US. 

Against this background, here are ten important pitfalls to be aware of as you develop your global employment documentation:

1.  You don’t use a contract.  Outside the United States, your employees will expect a contract – and might sue if they don’t get one! Written employment agreements are best practices and they can incorporate crucial terms such as probationary periods, termination grounds, or working time provisions.  In fact, many jurisdictions require written employment agreements.  In China, for instance, a company that fails to issue a written employment agreement within one month of the commencement date will be subject to double wage claims.  In the European Union, under Directive 91/533/EEC[1], an employer is required to inform its employees of all relevant terms of the employment relationship within two months of commencement of employment; commonly, this information is provided in the employment agreement.  Several EU member states have more stringent requirements.

2. You fail to protect your company by including probationary periods and proper termination provisions.  Given the lack of at-will employment, probationary periods are crucial outside the United States.  Each country has different rules on the maximum duration of a probationary period, whether renewals are permissible, etc. (e.g., Germany permits a six-month probationary period, China six months for open-term contracts, but only one month for fixed-term contracts of less than one year, and two months for contracts longer than one year).  If you include a probationary period, make sure to make any termination decisions before expiration of the probationary period.  In various jurisdictions, termination provisions are crucial as well.  While they may not always give a company full protection (since ultimately, it is statutory restrictions that determine in which instances terminations are permissible), they often give a company at least a good starting point to enforce a termination (e.g., in case of violation of company policies such as a code of conduct).

3. You don’t think strategically when it comes to employment contracts.  One size does not fit all. Before you embark on drafting employment agreements for your international operations, think through the strategy you want to use.  The most common approach is to prepare a local-law-compliant employment agreement in line with best practices and the standard approach of the specific jurisdiction where you hire.  Some companies feel strongly about global consistency, though, and would rather create a “global” template that would only be localized as necessary under local laws.  One hybrid approach is to agree on company-specific clauses (such as references to specific global policies and commission plan or bonus language – keeping in mind that internationally, once granted, variable compensation is hard to take away or amend) to include in any agreement globally, while otherwise working off local templates. 

Also consider the interrelationship between your contract and policies.  In some jurisdictions, it is advisable to incorporate relevant handbook policies in the contract (e.g., in the UK you need to mention disciplinary and grievance procedures). Having policies incorporated (e.g., data protection) can also often protect the company if claims are brought to show the employee was aware of procedures.  Finally, do not forget data privacy considerations.  Consider, for instance, whether you need consent to the transfer of personal data in the employment agreement, or a standalone data privacy notice.

4.  You don’t properly address assignment of intellectual property.[2]  Keeping your intellectual property safe starts from day one. Have you considered how to address IP assignment?  If there is a standard proprietary information and inventions assignment agreement (PIIA) you want to use, this must be localized under local laws.  Sometimes, specific policies and procedures are required.  In China, for instance, absent company rules on payments made for employee-created patents, a company will end up paying an amount determined under statutory rules.  In Russia, trade secrets must be specifically outlined in a company trade secrets regime or those trade secrets will not enjoy protection.

5. You use the wrong employing entity.  Make sure your employees (and the government and courts) know who’s the boss. A common mistake is to print the employment agreement on the parent company’s letterhead, or to include the parent company as employer of record in the contract.  This is only accurate where that company in fact acts as the employing entity (which is not feasible in some jurisdictions, like Brazil, Mexico or Russia).  Where you have set up an international structure of local subsidiaries, these should be expressly indicated to be the employing entity, or you risk joint employer liability and permanent establishment exposure of the employing entity, thus obliterating all the tax planning the company has done.  One exception to this rule: if stock option grants are made in a parent company, that company should be issuing the stock award documentation.

6.  You use the wrong template.  Which template to use is not determined by the employing entity, but by the jurisdiction in which the employee performs his or her services.  While most jurisdiction recognize the principle of choice of applicable law, this is usually overridden by considerations of public policy, and employees are almost always deemed protected (for example, see Article 8 of the Rome Convention[3]).  Accordingly, an employee in France should receive a French law-governed employment agreement, even if the employee works for a UK employing entity.  Otherwise, the employee could enjoy the best of both worlds (in this example, UK contractual rules, plus French statutory rules).

Also, templates for specific individuals or situations should be used where appropriate, such as fixed-term employment agreements (where permissible), managing director or entrustment agreements (e.g., in Germany or Japan for certain individuals in corporate roles), or agreements with specific working time provisions depending upon level of the employee.[4]

7.  You fail to translate your contract.  No surprise, but employees should be able to understand their agreement or it will not be enforced against them.  It is always fascinating when employees who used to be fluent in English during their entire employment relationship seem to have lost their ability to communicate in that language when it comes to bringing a termination lawsuit.  Indeed, many jurisdictions (such as Belgium, France or Poland) require employment agreements to be in the local language, even for an employee fluent in a foreign language.  Absent that, the agreement will not be enforceable (at least not against the employee).

8.  You insert unenforceable non-compete provisions.  You may think US state-to-state rules are confusing, but it gets much more interesting abroad. Rules on post-termination restrictive covenants vary significantly from jurisdiction to jurisdiction, with many following a general reasonableness approach (as in Australia, the United Arab Emirates or the UK), others prohibiting them outright (e.g., India, Mexico and Russia) and yet another set of jurisdictions requiring specific payouts for post-termination non-competes (e.g., China, France and Germany).  If you include such provisions in your employment agreement or PIIA, ensure that you understand the legal requirements.  For instance, in Germany, once included, a post-termination non-compete can only be terminated with a one-year advance waiver, or the company will end up paying the mandatory 50 percent post-termination non-compete compensation even if it has no desire in enforcing the provision.

9.  You don’t issue your contract on time.  Often, some delay is not a big deal, but there are jurisdictions (most often in the common law context) in which a valid contract is predicated not only on offer and acceptance, but also payment of a consideration, and these actions must happen within the proper timeframe. For example, if an employee in Canada receives his or her employment agreement after having commenced employment, then that employee will not be technically bound by the agreement, since no additional consideration was provided for the contractual restrictions set out in the contract.  Ongoing employment is not sufficient.

10.  You let your contracts become stale.  Last but not least, keep in mind that laws change, as do your company’s practices.  Implement a process to regularly review your template agreements and make sure they still provide you the best protection possible.

[1] See it here.

[2] See this post on the blog International Employment Lawyer.

[4] See this post on International Employment Lawyer.

FINRA Simplifies Corporate Financing and Conflict of Interest Rules

Posted in For Entrepreneurs and Companies, IPOs & M&A

FINRA, the securities self-regulatory organization whose members are broker-dealers, recently simplified two rules that are critical in the public offering process.

FINRA’s Corporate Financing Rule generally regulates underwriting compensation and prohibits unfair arrangements in connection with the public offering of securities.  Among other provisions, the rule requires members to file information with FINRA about the securities offerings in which they “participate” and to disclose affiliations and other relationships that may indicate the existence of conflicts of interest.  The rule also imposes lock-up restrictions on certain securities acquired from the issuer by a member and restricts the receipt of certain items of value, such as termination or “tail” fees and rights of first refusal as to future transactions (ROFRs).  In addition, FINRA’s Conflict of Interest Rule prohibits FINRA members that have a “conflict of interest” from participating in a public offering of securities unless certain conditions are met.

These two FINRA rules have been revised to simplify member participation in offerings and associated reporting, while enabling members to negotiate more broadly for tail fees and ROFRs, as follows: Continue Reading

Reducing startup brain damage: Delaware moves to further streamline corporate processes for emerging companies

Posted in For Entrepreneurs and Companies, News and Recent Events, Startups

Batts, Ed_Headshot.jpgCONTRIBUTED BY
Ed Batts

Proposed amendments to the Delaware General Corporations Law (DGCL) for 2014 aim to significantly streamline routine questions that often prove vexing for emerging growth companies and newly formed subsidiaries of larger companies.

It is a fact of life that people leave jobs.  They move to other cities, whether for family or lifestyle.  They quit for perceived greener pastures.  They retire.  Or they are hit by the proverbial bus.  Forming a company under Delaware law historically has had a pitfall:  a “sole incorporator” (often a paralegal) forms the initial company, one assumes promptly appoints one or more directors and then, one further assumes, immediately resigns.

But sometimes that paperwork is lost, overlooked (particularly if creating a new subsidiary for a larger company) or forgotten in the midst of workloads, or a company founder without the benefit of legal counsel did the incorporation and neglected to resign.  An existential crisis involving numerous lawyers scratching their heads can ensue if the resignation paperwork does not exist and the original sole incorporator cannot be located or refuses to cooperate. Continue Reading