This week I'm attending the Internet Law Program cosponsored by Harvard Law School's Berkman Center for Internet & Society and Stanford Law School's Center for Internet and Society. The program is a sweeping review of the legal issues surrounding cyberspace -- some are clearly legal issues (e.g., can France claim jurisdiction over Yahoo! to stop them from selling nazi memorabilia on their auction site) and others are more philosophical in nature (e.g., what is ultimately more restrictive, government directly regulating internet pornography or porn sites regulating themselves?). The legal underpinnings are interesting but I'm not surprised to find that the conversation is much more animated when we are discussing the real world context of this stuff.
After writing about venture capital financing terms, I got a number of questions about what the terms mean. Thanks to Mike Patrick over at Fenwick & West, here's a glossary of the key financing terms.
Since the Internet bubble burst, venture terms have gotten increasingly tough. Some of it is understandable. Financing terms are market driven. They are intended to reflect the amount of risk a private investor is taking on. As the public markets have closed tight, follow on financings have grown scarce and corporations have clamped down on IT spending, it is no surprise that venture investors are demanding more protective terms.
In light of these changes in the market, the lawyers at Fenwick & West LLP have been tracking the financing terms of those private companies they represent in the San Francisco Bay Area. They send out quarterly reports on the terms their clients have experienced and track them against the financing terms of the quarters before. It is a good snapshot of what is happening in the Valley.
Here's what Bay Area companies saw in the first quarter of this year:
I had lunch last week with Brooke Coleman and and Katherine Blum, a couple of great attorneys from Gunderson Dettmer. We were talking a bit about the absurd pace at which legal transactions (financings, partnerships, mergers) took place in the late 1990's. If you wanted to make your clients really happy back then, all you had to do was get your work done quickly -- really quickly. These days speed rarely holds the same importance. I shared with Brooke and Katherine what I believe is the key to being a successful lawyer in the Valley -- "do good work." That's it. If you want to make people happy, do good work for them. Not surprisingly, Brooke and Katherine were underwhelmed by my shared wisdom. But I think it points to the reason we find it hard to invest in service businesses. Service business are ultimately only as good as the people who provide the service. And if I learned anything in the years that I recruited for law firms, it's that it is really hard to scale a business that is dependent upon identifying and attracting great people. Technology businesses are far more leveraged than service businesses. A relatively small number of software developers can build a product with huge reach. Whereas a relatively small number of service providers can service a relatively small number of organizations. Don't get me wrong, service businesses can be great money makers. But as a general matter they are lousy early stage venture investments.
I've been assisting my clients on their BOD searches
(especially CFO/Audit Committee/Sarbanes-Oxley types).
Examples of my current candidates interested in
Board opportunities:
-Former PeopleSoft CFO
-Former Intuit CFO
-Former Novell CFO
-Former LSI Logic CFO
-Former Redback Networks CFO
-Former NVIDIA CFO
-Former Sanmina CFO
-And I have other candidates similar to these, in most
industries (ie, Semiconductor, Software, Networking,
Biotech, etc)
Let me know if you have an interest in talking with
any of them in regards your current Board openings.
Ridiculous. I am deeply skeptical of the broad efficacy of Sarbanes-Oxley in combatting corporate corruption. Worse yet, look at what it has spawned. Never before have former CFOs been in such demand. That can't be a good sign.
A friend of mine, Mark Radcliffe from Gray Cary, sent me a PDF of the Hummer complaint last night (Capital Records et al. vs. Hummer Winblad Venture Partners et al.). It essentially alleges no more than 1) Napster contributorily infringed the Plaintiffs' copyrights; 2) Hummer Winblad invested $13 million in Napster at a time when it needed the money; 3) Hummer Winblad and its partners Hank Barry and John Hummer controlled Napster through their equity ownership in Napster and their participation as board members and CEO; therefore 4) Hummer Winblad, Hank Barry and John Hummer contributorily infringed the Plaintiffs' copyrights. I am told by folks closer to the copyright laws than I that there are in fact cases that have found officers and directors directly liable for the copyright infringement of their companies. If that is in fact the case, it's bad law and at odds with the very principles of corporate law.
Interestingly, Judge Patel threw out similar claims against individual defendants in the initial Napster litigation; however, she threw out the allegations for failure to properly state a claim, so she never actually got to the merits of the claims. Regardless, it is clear to me that this case is not about actually recovering damages for copyright infringement. This case is about intimidation and the complaint reads like it to me.
There were two huge stories in the Napster saga last week. One was Federal Judge Stephen Wilson's ruling in favor of Streamcast and Grokster -- the first big blow against the record labels. The other, in sharp contrast, was the newly filed lawsuit against Napster's main investors (Hummer Winblad and its partners Hank Barry and John Hummer). While the former is hugely important news in the evolution of digital content distribution, the later is of obvious interest to venture investors like me.
Gone are the days when the demand for good lawyers well outstripped the supply. Lawyers in the late '90s not only routinely turned away potential clients that they did not believe brought the requisite cachet, but often demanded large equity stakes (as well as high hourly rates) in connection with representation of those clients they did take on. Those days have passed. While the supply of lawyers has normalized to a certain degree (few law firms in the Bay Area escaped some form of downsizing), there remain a large number of qualified lawyers with free time on their hands. This is good news for startups on a number of accounts:
I just received a newsletter from Perkins Coie LLP. The topic of the newsletter was a recent Federal Appeals Court ruling concerning Non-Disclosure Agreements (NDAs). The gist of the case was that a company hired a consultant under a written NDA. According to the terms of the NDA drafted by the company, the confidentiality of the information exchanged during the consulting arrangement expired after 5 years. The 5 year period lapsed before the consultant utilized the information he had gained in the consulting engagement but the company sued him anyway. The Company argued that California law protected the confidentiality of the information forever and, therefore, the fact that the NDA had expired did not matter.
The Company LOST. The Federal Appeals Court ruled that because the Company had entered into an express contractual relationship, the terms of that contract overrode the general terms of California law when it came to proprietary information. Therefore, since the Company said the information was no longer confidential after 5 years, it didn't matter what a generic statute said about it. In this particular instances, the Company would have been better protected if it had never entered into an NDA with its consultant.
This isn't to say by any means that you shouldn't enter into NDAs when engaging in business (whether in California or elsewhere). It's just worth pointing out that in the law, things aren't always as they would appear.
