Facebook S-1

A lengthy analyis of the Facebook registration statement (and what the SEC might be thinking) from colleague Andrew Ledbetter is available here.


Atlanta: Future Metropolis!

Atlanta has ranked extremely high (perhaps higher than expected) in Zipcar's future metropolis study, which "recognizes cities that demonstrate smart urban planning and policy making".  Like all indices, there is some bias here - the categories are those in alignment with Zipcar's mission. However, I think we can agree that innovation, sustainability, vibrancy/creativity, efficiency and livability/optimism are values to strive for in an urban metropolis.

Most noteably for this audience, Atlanta was #1 on innovation due to its high number of wireless hotspots and post-secondary education opportunities (and outweighing low grades on sustainability. measured by bike lanes/paths and hybrid cars, and livability, measured by crime and unemployment.  (I am a little skeptical of Atlanta's high efficiency rating, measured by use of public transportation).

Georgia State Senate Approves Alternative Investments

On February 23, the Georgia state Senate approved a bill authorizing state pension funds (other than the state's largest) to invest up to 5% in alternative investment classes.  Virtually every other state allows such investments.  The bill must still be approved by the Georgia House and signed by Governor Deal.

Theoretically, the bill would be a boon for Georgia's venture capital and private equity funds, and ultimately could result in more money flowing to Georgia entrepreneurs.  For Atlanta startups, that can only be a positive result.

Material Adverse Effect - Found!

M&A lawyers (including me) have spilled an enormous amount of ink regarding what constitutes a material adverse effect, or material adverse change (a "MAE" or "MAC") and various inclusions, exclusions, etc.  The existence of a MAC often allows the termination (or renegotiation to avoid termination) of a transaction.  However, in practice, courts are adverse to actually finding that a MAC has occurred.

In a recent blog post here, Steven Davidoff (a/k/a the Deal Professor) posits that the likely earnings restatement of Diamond Foods likely constitutes a MAC in its purchase of Pringles from Procter and Gamble.

The MAC in question arises in the context of a public-public deal; however, there are clearly ramifications for venture-backed companies. In negotiating the sale of a venture-backed company, lawyers (and principals) pay significant attention to deal certainty and avoiding termination risk. A startup cannot afford to announce a deal (even if privately to its employees and customers) and have it not close. And investors (who may already be counting their IRR) are typically unwilling to have the transaction renegotiated during the interregnum between signing and closing. So everyone pays particular attention to the MAC-out, and any data on what could cause it to be triggered will fuel future negotiations.


Costly Employment Law Mistakes Startups Should Avoid - Part II

Courtesy of our colleagues Merrili Escue and Nancy Kawano.  In part two of our post, we provide additional crucial tips on how to avoid costly mistakes through proper documentation and record keeping before, during and after the employment relationship that can prevent or lessen the potential for costly disputes. 


In particular, at the time of hire, you should provide and retain an offer letter, any background check authorization, a confidentiality and invention assignment agreement and, where applicable a non-solicitation and/or non-competition agreement.


During the course of employment, you may be required to prepare and retain wage statements, time sheets, bonus and/or commission plans. An employee handbook is highly recommended, and may be required under applicable state law.


At termination, documentation is particularly key to avoid future litigation: specifically, the reason for termination, the results of any exit interview, necessary change-in-status documents, return of property, reminders of obligations under current confidentiality, non-disclosure, invention assignment, non-solicitation and non-competition agreements, and any arrangements regarding severance and release.


More detail follows.


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Costly Employment Law Mistakes Startups Should Avoid - Part I

Startup enterprises often cut corners to reduce liabilities to employees.  Some corners should not be cut, however.  Courtesy of our colleagues Merrili Escue and Nancy Kawano, below is the first part of a two-part overview, discussing two key mistakes: deferring wages (or providing equity instead of wages) and failing to understand who qualifies as an employee vs. an independent contractor and who is entitled to receive overtime pay. 

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Startup Legislative Agenda 2012

On Tuesday (the first anniversary of Startup America), President Obama sent a legislative agenda to Congress (press release attached here).

The agenda contains four small business tax breaks:

  • The 0% capital gain rate on QSBS investments (described here) would be made permanent;
  • A new tax credit in 2012 would provide a 10% income tax credit on new payroll for small businesses;
  • Startup expense deductions would double from $5,000 to $10,000; and
  • The 100% depreciation provision (for qualified property) would be extended.

In addition, the agenda contains four provisions to "unlock capital access":

  • Increase the Regulation A offering limit from $5 million to $50 million;
  • Allow "crowdfunding";
  • Creating an "IPO on-ramp"; and
  • Expanding the SBIC program.

The proposal also includes immigration reform provisions and additional regional and industry commitments.

Default LLC Fiduciary Duties in Delaware

In an important opinion that will impact the drafting of Delaware LLC agreements, the Chancery Court held that an LLC manager owes default fiduciary duties of care and loyalty to minority members unless such duties are specifically modified or eliminated by agreement.  The decision -- Auriga Capital Corp. et al v. Gatz Properties, LLC et al, C.A. 4390-CS (Del. Ch. Jan. 27, 2012) -- was issued this past Friday.

The Court held that the Manager owed fiduciary duties of loyalty and care to Members because the operative LLC Agreement did not expressly eliminate those duties.  Because the Delaware LLC Act provides that “the rules of law and equity shall govern” in any matter not expressly provided for, and the 2004 Amendments to the Act allowed an LLC agreement to “eliminate” such duties, the Court confirmed that default duties of care and loyalty existed under Delaware law.    

Private equity fund investors typically form LLCs to hold the investment.  The operating agreements for such LLCs should contain language clearly waiving/modifying the default fiduciary duties.  For example:

Notwithstanding anything to the contrary in this Agreement or at law or in equity including but not limited to the Act, each Member agrees that any fiduciary duty imposed under Delaware law (including the duty of loyalty and the duty of care) on the Investor Members or any individual designated by such Investor Member as a Board Member shall be defined, limited and eliminated as provided in this Section [__].

Read more courtesy of DLA Piper's John L. Reed, Jennifer A. Lloyd and Courtney Stewart:

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The Exit Market in 2011 - Dow Jones VentureSource Results

Happy New Year!  One of my resolutions is to increase the number of posts-- stay tuned in 2012 for posts every Monday (this week Tuesday because of the holiday) and Thursday. 

As we begin 2012, we can look back on 2011 as a mixed bag for exits.  Per today's Dow Jones VentureSource release (available here):

  • 522 deals reflected a 14% drop year-over-year, but
  • $53.2B reflected a 26% increase in capital, driven by some big IPOs (Groupon and Zynga)
  • Median prices paid in exits increased 77%, and median amounts raised decreased by 12%

Although the fourth quarter typically shows a surge in M&A activity, that was absent in 2012, perhaps reflecting growing global uncretainty (esp. re: Europe).

What will 2012 bring for the exit market?  Stay tuned.


DLA Piper Blog Award

Congratulations to our Seattle colleagues at The Venture Alley for winning LexisNexis best business law blog in 2011.

NASVF Conference (Part II)

I spent Monday and Tuesday attending the National Association of Seed and Venture Funds (NASVF) Conference in Arlington, Texas.  NASVF is an umbrella organization which provides education to seed and venture investors -- the primary members and attendees were (1) angel groups in so-called "flyover" areas (Michigan, Minnesota, Kansas, Missouri, Utah, etc.) and (2) commercialization professionals at research universities (including a number of folks from Georgia Tech).

I learned that there is a lot going on in angel communities across the country... angel groups are working together to commercialize technology, fund it across the valley of death, and ultimately sell it, in places like Lenexa, Kansas and Champaign, Illinois.  I also learned that we should be thankful for the scope of our technology and startup infrastructure here in Atlanta.  As Stephen Fleming pointed out in accepting his conference award, Georgia Tech -- and by extension the Atlanta startup community -- has its fingers in many pots.

National Association of Seed and Venture Funds

I'm headed to the NASVF conference today and tomorrow in Arlington, TX.  NASVF is an organization that advocates for the growth of seed and early-stage innovation capital and connects VCs and angels with regional economic developers and tech transfer professionals. Much of NASVF's work focuses on so-called "underserved" regions, outside Silicon Valley, Boston, New York, Seattle and other venture hotspots.

I'm on the Board as outside general counsel, but this is my first conference. More later.



Web 2.0 Cash Crunch

Today's WSJ has an article about nascent web companies facing a cash crunch -- specifically that they are having increasing difficulties obtaining financing.  Because the article is primarily about the financing market in the Valley, the challenges faced would come as a pleasant surprise to most Atlanta startups: valuations falling from $6-8 million to $3-5 million for angel backed companies (where Atlanta startups are lucky to see $1-2 million valuations at the angel financing stage); entrepreneurs reliant on bridge financing (where Atlanta companies may just be forced to go out of business) and a push to quick M&A rather than a big hit (where Atlanta companies typically see M&A as the only option). 

That being said, there are some lessons to be learned for companies in the Southeast.  First, the rush to finance consumer-focused web business is slowing after being undoubtedly frothy through the first half of 2011. Startups might be better served by focusing on other markets, including business applications-- always the heart of the technology market in Atlanta. Second, angel financiers are pulling back, perhaps having been overextended. Traditional financing sources -- friends and family and credit cards at the earliest stages, and venture at the later stages, will need to fill the gap. Third, and perhaps most troubling for the next 24 month cycle, venture fundraising in Q3 fell to its lowest level in 8 years (more on this in my next post).

In short, there are some suggestions that our current financing window may be closing, and entrepreneurs are going to have to batten down the hatches through some tougher times.  We will see.

Good News: Tech M & A to Stay Strong

The prognosticators have spoken (at least this week's) and the market turmoil shouldn't dramatically impact technology M & A.  The leader of PWC's technology group points to, among other things, (1) continuing convergence of computing, communications and entertainment on devices, (2) further consolidation of hardware and software providers and everyone's favorite, (3) the cloud.  The level of cash available to major acquiring technology companies (Google, Microsoft, Cisco, Oracle, etc.) undoubtedly also plays a huge role.

In a tumultous market, this is good news for founders, entrepreneurs and VCs here in Atlanta and elsehwere. A path to liquidity is a key component of the VC infrastructure.


Should Startups Move?

TechCrunch has an interview posted today focusing on whether startups should move locations (presumably to the Bay Area, but perhaps Boston or New York) to be closer to venture capital investors. The answer (in the interview at least) is no.

I often get this question from founders and entrepreneurs in the Atlanta area and my answer is generally no, as well. Although there is a well documented capital shortage here in Atlanta, that is mitigated by (1) the region's surplus of skilled technologists (esp. Georgia Tech grads), (2) the limited number of competitors for such capital and (3) the easy access through Hartsfield-Jackson to venture capital centers nationwide. It is just a day flight, even from San Francisco.

Admittedly, some entrepreneurs have chosen the path of relocation for various reasons. But many more have built strong businesses here in the Southeast.