20 posts categorized "April 2010"

That Elusive Founding Boilerplate

Since returning to private practice, almost four years ago now, my team and I have been trying to improve our efficiency each time we document the organization of a startup.

By and large, this means sticking to a standard set of forms that we improve in an iterative fashion.

I get closer to thinking we might promise and deliver a standard suite of founders documents for no charge, other than the valuable investment of time the founders make in us. Startups, at least in the IT and web space, will typically need early support in negotiating development agreements, licenses, even NDAs (which bigger companies sometimes populate with hidden trade secret licenses); if there is cash for legal, it makes more sense, to founders and lawyers alike, to spend it on productive commercial relationships rather than protective internal governance. 

Besides, the founding documents should not stray far from what investors and purchasers will expect to find when doing due diligence. So customizing industry-accepted boilerplate is not only costly, but fraught with hazard.

At the same time, it's rarely the case that founding documents won't require some original effort. 

I'm not talking about discussions to make sure founders are adequately informed and have a path to understanding what the company is asking them to sign. That's a single conversation, a series of meetings, or something in between, depending on the experience of the entrepreneurs. 

No, I'm talking about one-off circumstances that make almost every founding unique.

Take that agreement with a prior employer that purports to require the entrepreneur to give a right of first refusal to non-assignable IP. Enforceable? Not likely; but are there things we should be doing now to mitigate ambiguity later? Or take well-intended but premature actions of a founder that might make it tougher to have confidence that an 83(b) election will work. The list goes on, but I'm reluctant to bring up those that are top of mind at the moment.

It's never quite as simple as you think it should be, as you always hope (in spite of knowing better!) that it will be.

Social Networks and Public Utility

I wonder whether online social networks are being shortsighted in their rush to monetize. Are they giving in too quickly to proven but tired variations on advertising revenue and sponsorship models?

Telescope sign [Image courtesy of Atwater Village Newbie, used by permission.] 

Last Saturday, I went to the Griffith Observatory in Los Angeles. It's an amazing public space. Hundreds of families were there. One in particular stood out: a family of six I first observed in the delicatessen that was tucked under a corner of the building and was hard to find. Four kids, a mom and a dad. Oldest kid was a girl who seemed about five. Middle child, also a girl, was maybe four. Youngest were twins, boys, probably a year old. Each parent juggled a twin while also attending to the meals of the older girls. The twins took turn crying but the parents were calm and attentive to what the eldest child had to say about their visit so far.

I saw them again several hours later, one parent pushing a double stroller and the other holding the hands of the two girls as they moved through the magnificent interior of the Observatory. They were making a night of it.

The Observatory is run by the City of Los Angeles. I'm not sure I can think of another public space that is so well built and maintained with such care.

Admittance is free.

I'm sure power, politics and money are in the story of the making of this place. But if the programs at the Observatory are sponsored by anyone, I didn't see or hear it. I didn't see or hear an ad all evening.

Not even the coffee was sponsored.

Out on the lawn, a dozen or more amateur astronomers had set up telescopes of differing size and sophistication, and people were lining up to look at the Earth's moon, at Saturn's rings and moons, at other heavenly bodies. All of the astronomers were generous in answering questions (as were the City employees attending the exhibits and telescopes inside).

Twitter could be like that. Used to be like that? Was it that long ago that Twitter's founders were visiting heads of state and receiving appeals from the US government to not perform system maintenance during an international crisis?

I'm not bothered about Facebook. That's just the AOL or MySpace of the moment, destined to collapse under the coagulation of its own sleaziness. But I'll lament any early loss of Twitter for what might have been. I'll look for it again as a public utility, for it (or a utility very much like it) could be as important to the infrastructure of the world as railroads, as lending libraries, as civic spaces like the Griffith Observatory where astronomers come to share their passion, where parents bring children to model intellectual ways to reflect on the world.

Some Changes @ Wac6.com

Regular readers will notice new features on this blog, and may notice subtle design changes.

The new features include:

  • A list of related posts at the end of the body of each post
  • The ability to tweet each post, or post it to Facebook
  • A completely reconfigured and much more useful archive
  • A search bar
  • A sidebar list of popular posts, to supplement the category cloud and list of recent posts

6a01156e3d83cb970c01156fec56ca970b The work has been done by Adam Hindman, cracker jack designer for Jason Thane of my client, General UI.

Our goal has been to better enable the interested reader to find content behind the homepage.

But while we've worked to better expose the content this blog has to offer, we haven't wanted to change the essential simplicity and elegance of the original Nathan Bowers design. I think we've pulled it off.

A note on the branding: the original "Counselor@Law" phrase, now downplayed in the blog's banner art, is a reference to an awesome, idiosyncratic play from the 1930s about the trials and tribulations of a Manhattan lawyer. (The photo at the top of this post is of John Barrymore, who played the title role in the movie version.) I still like the title and am not abandoning the goodwill associated with it. At the same time, I find I more often refer to this blog by its url, Wac6.com. "Wac6" also reinforces my Cornell email address and twitter handle.

Another Take on Seed Financing: Right Side Capital Management

NWEN hosted a reception last Thursday in Seattle for Kevin Dick and David Lambert, two of the founders of Right Side Capital Management, a new San Francisco-based fund hoping to make 100-200 seed investments annually (the fund yet appears to be in the process of raising money).

I was over-committed that evening, but dropped in anyway and caught a half hour of the talk.

I'm glad I did, because the investment criteria they describe are entirely novel.

With the screening and evaluation methods they describe, an investor might almost gloss over the idea the given startup will pursue. Instead, the process Dick and Lambert espouse would look to measure what the startup founders have accomplished in the past, would tease out what in each founder's individual history would suggest that he or she can manage a project, a budget, a group of people.

Dick and Lambert take as axiomatic that you cannot know or predict what customers (be they businesses or consumers) will pay for in three years. So why try, particularly when you can more effectively screen for founding teams that are more likely to be successful.

Don't have co-founders? By their measures, that's a telling sign right there. What is it about you, that you can't attract partners to put sweat equity into the venture with you?

I found most telling a comment that one of them made about the business plan. If I heard them correctly, I think they said they will analyze it very carefully. But to ensure that it is well written!

NWEN Executive Director Rebecca Lovell says the fund will look to have a satellite or presence in Seattle as well. I'll keep my eye out for the entrepreneur applications and deal documents they are looking to standardize.

Amendments Afoot to Save Startup Seed Financing & Angel Investing

Amendments to Senator Dodd's financial regulatory reform bill are in the works to pull Reg D back from the brink of obliteration. The new approaches to Section 926 and Section 412 of the bill are elegant, would save the uniform set of rules for startup seed financing and angel investing, and would actually improve Rule 506.

Details are here on TechFlash in a post written this morning by Dan Rosen, Joe Wallin and me.

A summary of the new language is accessible through the Angel Capital Association site, here.

The outcome is yet uncertain. Too early to know if this new approach will take. But it could not be clearer that Sen. Dodd and other legislators are hearing from thousands of angel investors all over the country, and they are listening.

We'll do a debrief later on how this process, whatever the outcome, has changed the way Congress perceives startup land.

Picking a Law Firm: How Size Does and Doesn't Matter

I've recently discovered Matt Bartus's blog, been enjoying it, and have added it to my links list here on Wac6.com.

Matt delivers "inside baseball" advice that's nuanced, unique and non-snarky. I found his recent post on advisor option grants, in particular, to be chock full of good, practical stuff. (I sent it to one of my clients.)

All by way of saying I think you should read him.

And by prefacing how I disagree with 20% of his post yesterday on questions that a startup should ask in picking a law firm.

Read Matt's post for the other four, but his second of five points, that a startup should pick a "full service" (read, "large") firm, needs rebutting.

You can get good help at many large firms. Many include good lawyers. In fact, when I was in-house counsel at an emerging growth company, I hired outside counsel from large firms, including Matt's (its Seattle office), Wilson Sonsini, and others in the "full service" category. But I also hired lawyers from smaller firms, and lawyers who practice in boutiques. For me, the principal was always the same: hire the lawyer, not the firm.

The drawback to the full service firm is the full service overhead. In some circumstances, paying for that freight is justified. If you're hauling a ton of weight across the country, yep, take the Burlington & Northern and leave the Cessna with the gym bag parked on the runway.

Picking the lawyer over the firm is especially important when it comes to hiring a litigator. If you're a startup and you have a "bet the company" legal fight in front of you (e.g., an IP infringement issue, a nasty shareholder problem, a thieving former employee), the very, very last thing you want to do is be automatically "captured" by the litigation department of the firm of the corporate lawyer, even if you love and are loyal to him or her.

Sure, it's good for the corporate lawyer for you to go with one of his or her partners. That attorney is your guy or gal, and why shouldn't you make a choice that advances his or her career, or makes his or her numbers in the firm look better?

I don't mean that sarcastically. A good number of lawyers, at firms big and small, are passionate about working with startups, and not because working with startups is especially remunerative. We do it for quality of practice reasons, because we need to be engaged, make a social difference. Where a startup lawyer can make his or her billing numbers look better, that's good for the whole ecosystem: he or she will have that much more sway within the firm and be in an even better position to let up on the pedal for the client when cash is tight (and cash is always tight, or should be, at startups).

But helping your lawyer's career and your lawyer's general flexibility is a collateral benefit when the right answer for the given startup happens to work out that way. The right answer, of course, is to find the very best litigator, based on temperament, experience, jurisdiction and availability.

And here's another factor, if not exactly kosher to mention in polite company: the best litigators practice at boutique firms.  

It's a cliché, but well understood within the profession: large firm litigators pursue motion practice and avoid juries and verdicts. Startups don't need risk adverse representation, they need the opposite. If the other side knows you'll go to trial, and in fact that your lawyers will relish the prospect, you're more likely to settle quickly and on better terms.

I'm not touching at all here on the efficiencies to be had from patent lawyers and licensing attorneys who work for themselves, and are thus in a position to deliver better service at lower cost than they did at bigger "platforms." I'll ping some lawyers I know and ask them to consider supplementing this post with thoughts in the comments.

State Securities Regulators Say They Don't Like Sen. Dodd's Reg D Reforms, Either

The North American Securities Administrators Association (NASAA) issued a statement today from its President, Denise Voigt Crawford, stating that NASAA doesn't like the changes to Reg D proposed in Senator Dodd's financial regulatory reform bill, any more than startups and small businesses do.

Here's a pertinent excerpt from the Pres. Crawford's statement:

"The bill's current language offers an unworkable regulatory review process, which, contrary to those who have mischaracterized our position on Reg D Rule 5O6 offerings, has not been called for by NASAA. Such a process would impede capital formation in the United States, especially in the small business community and would add little to protect investors."

Not sure there is anyone, then, actually advocating for the 120 day SEC review period contemplated at the current Section 926 of Sen. Dodd's bill.

What NASAA wants is the ability to review Reg D filings for "bad actors." Again, from today's statement:

"NASAA strongly supports the adoption of a disqualification provision to prevent recidivists from conducting private securities offerings under Regulation D. This would provide much needed investor protection and would not be detrimental to legitimate issuers, including small business issuers, who are using Rule 506 almost exclusively for Regulation D offerings to raise capital."

But here's the difference, the fine but critical point where state regulators, on the one hand, and startup entrepreneurs and angel investors, on the other hand, disagree: Pres. Crawford says that Sen. Dodd's reform should "reinstitute the authority of states to use their so-called ‘bad boy’ provisions." That's not the right way to do it. Doing it that way means effectively gutting federal preemption, which means that startup companies would not have the benefit of a uniform, national rule to follow, but would instead have to comply with potentially differing requirements for all states in which they might have an investor. For startup seed financings, in particular, such costs far outweigh any benefit.

There are better ways to address the abuses of Reg D, which abuses, by the way, come almost exclusively outside the startup and angel investing community. I won't even think of saying I can pretend to speak for state securities regulators, but I believe the abuses they are concerned about would be best addressed by the comprehensive, alternative reform of Reg D announced earlier this month on Dan Rosen's blog. That reform would exclude from Reg D's federal preemption any offerings that involve broker dealers, or non-accredited investors.

The next best "fix" to the travesty currently in Sen. Dodd's bill - supported apparently by no one! - is to amend Rule 506 under Reg D to include the federal "bad actor" provisions already in Rule 505, and to change the Form D that gets filed with the SEC and copied to the relevant states. States could review those notice filings and, if they determine that a disqualified person is listed on the Form D, use their enforcement authority as they see best.

Both those alternative approaches are already drafted: respectively, on Dan Rosen's blog here, and on this blog here.

There's no need to add a layer of additional state regulation, in my opinion, to accomplish what Pres. Crawford says NASAA wants.

Related Posts with Thumbnails