Commercial law for entrepreneurs and established companies

Disgusting greed alert!!

2011-07-02T12:45:00.000-07:00

Periodically, a business headline will start me thinking. That happened last week, when we learned that several senior Skype executives were being fired before Microsoft acquired Skype from its current owners, an investor group led by Silver Lake Partners.

Okay, shit happens, and senior managers often bite the dust for legitimate business reasons when their company is acquired: perhaps their work duplicates what the acquirer already has people doing, that sort of thing. Business is aware of this risk, and has learned to make provision for it, so that senior managers don't look elsewhere or lose interest whenever a rumor surfaces that their company may be acquired.

This headline was noteworthy because of one key way that businesses typically keep their managers involved when their company is being acquired: acceleration of their options. Unfortunately, the headline is noteworthy for all the wrong reasons.

Companies keep their managers motivated when a company is acquired by:

(1) having the acquisition itself trigger accelerated vesting, meaning that all options can be exercised on the day of the acquisition, or

(2) having any termination of the manager after the acquisition trigger accelerated vesting, meaning that all options can be exercised and the resulting shares sold if the manager is fired in the year (normally) or two after the acquisition is consummated.

The common thread is acceleration of the options, which accelerates the employee's realizing any gain in them. Either the acquisition itself triggers the acceleration (single trigger), or the termination of an employee after the acquisition triggers the acceleration (double trigger).

It looks as if these Skype managers had a better deal than double trigger acceleration, if not as good as single trigger. According to Skype's now withdrawn S-1A (an SEC filing for its abandoned IPO), more "than two-thirds of (employees' unvested) shares (will) vest by the first anniversary of the change in control and all of the (employees' unvested) shares (will vest) by the second anniversary of the change in control."

In other words, the average Skype employee who is still employed when the acquisition occurs and stays will make good money out of the acceleration of his or her options.

Back to this week's headline. By firing several senior managers, Skype was depriving them of the benefits of any acceleration that the Skype option plan provides for them. Before accelerated vesting kicks in, an employee gets nothing out of an acquisition, and accelerated vesting only kicks in when the deal closes.

So someone in this scenario is depriving managers of a decent benefit that they had been led to expect they would receive in the event of an acquisition. Who, and why?

A quick reminder: the Silver Lake investment group picked up 70% of Skype from eBay (which retained the other 30%) in 2009 for about $1.9 billion. Microsoft is paying about $5.95 billion for that 70%. A pretty good profit in two years. (The other roughly $2.55 billion of Microsoft's $8.5 million purchase price goes to eBay.)

So why screw a few senior managers out of maybe a few million max? And who is doing the screwing? Isn't there enough to go around here?

It looks like Microsoft.

But I must say that without reviewing the various contracts (which are not publicly available) that is not a sure thing. Or maybe it is eBay and the Silver Lake investor group that might lose a few bucks if these senior managers were not fired. Unlikely. For one thing, Niklas Zennström and Janus Friis, the renegade founders of Skype, are still in the current ownership group. I can't believe that they would have let this happen to their own senior managers.

But on some level they did, because these firings happened on their watch. eBay and The Silver Lake investment group still owned and controlled Skype when these senior managers were let go.

The investors would likely claim that the firings were nothing to do with them, because Skype was already being run for Microsoft's benefit. But that reasoning doesn't work, at least not if this was a normal M&A deal in transition matters. In a normal deal, the sellers agree to run the company in the normal course, and not to do anything out of the ordinary, during the pre-closing period. Firing a bunch of senior executives is out of the ordinary.

If this is a normal deal, the Silver Lake investor group had no duty to allow these executives to be fired. My guess is that they allowed Microsoft to do so as an accommodation to the software giant, to stay in its good graces. In short, they likely shared responsibility here.

With Tony Bates, Skype's CEO, of course, the manager implementing other people's desires here with an impressive display of butt-kissing. If you work for Tony, watch out! This story suggests that his loyalty to his people is fickle, to say the least.

And guess what? According to Skype's now withdrawn S-1A, if Tony's "employment is terminated without 'cause' or if he resigns for 'good reason,' any . . . options that would have . . . . vested had he remained employed with us for the 12-month period following the date of termination will be vested as of the date of termination." Which means that Tony gets accelerated vesting of a chunk of his options if he is fired or quits because of bad treatment even if Skype is not acquired!

In any event, a few of the senior people whose efforts expanded Skype's subscriber base over the years and helped make the company's owners a fortune have now been screwed, just when it was looking as if their chips had come in.

Thanks to some unspecifiable combination of Microsoft, with its obscene quantity of balance sheet cash, Tony Bates, their own CEO, and the Silver Lake investor group, with their obscene profits out of the deal.

Shame on all of them!

Big SVLFs, another bad acronym

2010-11-14T21:31:00.000-08:00

An astonishing thing happened the other day over coffee with a potential client: he brought up this blog, and asked me questions about it.

Good grief! I didn’t think that anyone ever read this, which is one of the reasons that I’ve been writing so little. Now I’ve discovered that there actually is an audience, I’m going to try to post more regularly.

This particular potential client ended up going to a big Silicon Valley law firm (SVLF), which many do, in the same way as many people go to McDonalds and Pizza Hut and the like. What is familiar offers comfort.

Of course, there the analogy ends, because big SVLFs are not exactly the discount players in any market! But many people, like this engaging and erudite potential client, despite their obvious entrepreneurial skills, meaning their ability to take calculated risks, end up fueling the absurd profits of these big law firms.

Why would an entrepreneur go to a big Silicon Valley law firm?

In part, a big SVLF does give a client security, in the same way as wearing Brooks Brothers clothes or staying at a Hilton hotel or drinking coffee at Starbucks gives you security. Everybody does it, the market has validated it, the content is going to be pretty much what you expect and are accustomed to: we’re OK, they’re OK, we’re all people like us doing what we do.

But entrepreneurs by their nature don’t need much of that security. They live and work outside of the security given by the corporate world. They can handle the lack of a pre-existing employment framework to fit themselves into. That’s their job, creating their own worlds.

Founders of start-ups are not like the managers of publicly-traded corporations, who need to be able to justify their corporate actions and decisions in the face of plaintiffs’ lawyers and financial analysts and the other hawks circling their businesses. Then, a name-brand big SVLF can be as important to feelings of comfort as a name-brand accounting firm or investment bank. Start-ups don’t have these worries.

So why do entrepreneurs go to big SVLFs? Because they hope to locate VCs or other sources of finance through the law firm, that’s the basic reason.

There’s also a sense, fueled by what can only be described as brilliant marketing, that being taken on as a client by a big SVLF validates your entrepreneurial vision. So the willingness to pay triple what they are worth for a big SVLF’s legal services means that the SLVF is validating you as an entrepeneur? Right! Think about it: by signing on, you’re validating their ability to market themselves, not the reverse.

How big Silicon Valley law firms help entrepreneurs locate financing.

It’s a relationship thing. Some of the partners in SVLFs have an extensive network of relationships among VCs, and they do introduce new clients to the VCs. I saw it happen when I brought in an entrepreneurial client to a big SVLF where I was working. The VC even thanked the SVLF partner for the referral.

That was back in the glory days before the slump of 2001, when referrals were anybody’s and the VCs were throwing money at anybody who could articulate a web idea. Nowadays, there is much less early-stage VC money.

But it is true, I suspect, that a big SVLF can still help an entrepreneur locate VC financing.

But this help comes at a price. The SVLFs may “defer” (one of their favorite phrases) a portion of their excessive legal fees ($25K was a number I was hearing for a while there, which sounds like a lot). But they cost a fortune, and first-time founders typically don’t have the money. If $25K is deferred, you can bet the firm will be up to $75K in billings for the start-up in a few months.

The cost to Entrepreneurs of the Relationship between big Silicon Valley law firms and VCs.

The excessive legal fees charged by big SVLFs are far from the most significant price paid by entrepreneurs for the SVLFs connection with VC and other financing.

The real cost is in the deal terms for the financings.

A simple commercial insight will help you understand how the deal terms were arrived at. Your best customer, whoever you are, is a repeat customer. Founders and entrepreneurs don’t repeat very much as a big SLVF’s clients. Even the best and most unsuccessful only repeat once or twice. But VCs last for years, decades even, as repeat customers of big SVLFs.

The VCs bring clients to the big SLVFs - you know the spiel – “we’d like you to work with [insert big SVLF name] going forward. They may be expensive, but they know start-ups, and we’re sure you’ll be very happy with them.”

And of course you are, you feel special, one of the chosen ones. You secretly glow inside.

You are also the big SVLF’s client, and not the VC. You are entitled to expect that your very own big SVLF will represent your interests to the best of its considerable abilities. And it will, sort of.

But when it comes to VC financings, are the big SVLFs really going to bite the hand that feeds them? How hard are they going to work at reducing the VCs’ share of any pie relative to the entrepreneurs’ share? All you need to answer that question is a little common sense.

That’s an entrepreneur’s real cost.

And the solution is not . . .

. . . me. Surprisingly enough, the solution here is not to find a lawyer who is not a big Silicon Valley law firm partner, and yet is smarter than most of them, in short someone like me, although that would certainly solve many of your legal fee problems.

Finding a smart and truly independent lawyer, a risk taker like yourself, doesn’t work as a fix for the VC financing terms, or at least doesn’t accomplish enough with respect to ameliorating those terms, because of their history. VC financing terms have been around for a very long time in Silicon Valley’s timeline.

And guess who wrote the book on the terms of VC financings, literally, and wrote it years ago? Big SVLF lawyers, of course! Here it is, in its most recent incarnation. The terms do vary a little over time, as one or other quirk or style comes to the fore. But after thousands of deals structured by big SVLF lawyers who are cultivating VCs as serial clients, the basic deal does not favor founders. Not a lot else to say.

Here is just one simple example, which is the root of many of the problems that founders have had over the years at the hands of their VCs. Why do the VCs and other investors typically obtain Board control? The normal rule of corporate practice is that majority shareholders control the Board. But VCs typically control it even when they only hold a minority of the shares. You need to be a Facebook to avoid losing control of your company to your VCs.

And once they control your Board, you just became second fiddle in your own start-up.

And the solution is . . .

This one, oddly enough, is easy.

Remember how businesses used to be started, with a kiss and a prayer?

Put it another way, remember when starting up was all about talking customers into buying whatever you had for sale?

That’s the answer for the future as well as the past. There’s got to be a way to build a customer base for your product or service without obtaining third party financing. Or there’s got to be a way to build a customer base with help from the SBA or from friends and family. Bootstrapping is beautiful.

You stay in control, and decide whether you expand the business or sell it, and when to sell it.

Problem solved!

How not to do business . . .

2009-10-01T11:06:00.000-07:00

Another blogging breakfast at NextSpace (www.nextspace.us)!

Today, it’s story time! As in “horror” story, sort of!

Tough negotiators, as in hard-nosed, ballsy and, oh yes, dumb!

Back when I was working for a major law firm, I was helping a start-up through its various pre-IPO funding rounds. It was that exciting period when neither profit nor revenue was needed to IPO a company if it was in the “right” field, and this company, let’s call it “Shrimp, Inc.” was smack bang in the middle of the hottest field of the moment.

The “A” round went well, smooth sailing, the angel investors were feeling smart and the company was feeling lucky. The “B” round went well, smooth sailing, some of the biggest marquee VCs came in, and everybody gushed their appreciation. The “C” round went well, and the “D” round went well, more of the same, money pouring in, product development advancing apace: the stars were beautifully aligned.

The bankers had told Shrimp that they could IPO Shrimp if it had not yet made a profit. They could even IPO Shrimp if it did not yet have too much revenue. But Shrimp needed a few customers in order to succeed in its IPO, and one of those customers needed to be a marquee customer. That was the important thing.

Obtaining that marquee customer became Shrimp’s number one priority, and not just for revenue generation purposes. That customer was the key to the IPO, and you must remember how much money was in IPOs in those days for all involved.

There were about five or six possible marquee customers in this field, and one of them stepped up. I was given the unenviable task of negotiating for Shrimp with this marquee customer, let’s call them “Megamax.” They were the 500 pound gorilla, and they knew it, and Shrimp’s senior management knew it.

Hard-nosed . . .

Megamax was completely overbearing and insisted upon hopelessly draconian terms, terms that no-one with half a brain could agree with. I would debate with them and push back, and then word would trickle down that Shrimp’s senior management were a little concerned that I wasn’t seeing the big picture . . . This was probably an accurate statement. The only big picture that I saw was Megamax telling Shrimp’s senior management to bend over, and Shrimp’s senior management asking “how far?” This was probably not the big picture that Shrimp’s senior management was hoping that I would see.

It was tough going, but we got the deal done. Megamax bought millions of dollars worth of Shrimp products and, yet again, everyone was happy and smiling. The marquee customer was hooked, and the future was assured.

Somebody told Megamax management, and the proverbial shit hit the fan.

Ballsy . . .

Megamax management decided that they too wanted to share in the windfall that the IPO was expected to bring all participants. After all, they were playing a major part in setting Shrimp up for its IPO, everyone could see that, and so they wanted to invest in Shrimp and share in the profit that the IPO was expected to bring all existing Shrimp shareholders.

They personally demanded the right to invest in Shrimp, and on very favorable terms. There was some resistance from Shrimp’s VCs, because Megamax management was insisting on better terms than the VCs themselves had obtained. As we all know, VCs are very understanding people, but not that understanding! Things paused while everyone reflected . . . .

Then came the voicemail: Megamax management were becoming frustrated. Forwarded on to their lawyers by Shrimp’ senior management, the voicemail said something like that there would never be another order from Megamax unless Megamax management was permitted to invest on favorable terms. So be it! The writing was on the wall!

That deal too got done. Megamax management invested, on favorable terms but no more favorable than the VCs’ terms. I protected Shrimp and its management from being implicated in Megamax management’s sleaze. The IPO happened, and the rest is history.

And dumb!

So why, you may ask, did I start this post by describing Megamax’s negotiating as being dumb?

Well, I’ve omitted parts of the story, so as not to breach any confidence. But it should be clear that Megamax and its shareholders had a legitimate claim to share in the profits of Shrimp’s IPO, because Megamax (and hence its shareholders) had spent good money on Shrimp products. Megamax management had not spent a penny of their money . . . .

This little anecdote ended for me the day, years later, when a Federal prosecutor (a US Attorney) called and asked me to act as a witness in a federal prosecution of, you guessed it, Megamax management!!

Of course, I agreed to do so - you don’t exactly say no to these people – but you must have some idea of how I felt! It doesn’t matter how much they tell you that you are not a subject of the investigation when the FBI agents who accompany them are visibly armed!

Accidental Breach of License

2009-09-10T10:19:00.000-07:00

Back at NextSpace (www.nextspace.us) for another blogging breakfast!

A few weeks ago, we looked at the problems that confront a licensor seeking to collect royalties from its licensee. Oddly enough, even payment by a licensee can become problematic over time.

Royalty Payment by the Licensee

Licensee payment sounds like a non-issue, right? You’re the licensee, you need to pay royalties, you have a member of the Finance team on the case, and you can sit back.

Tilt!

There are definite risks, even from a diligent licensee’s point of view.

Royalties are normally paid based on sales of products using the licensed technology or know-how. When the licensee starts out, the first such product is easy to identify. The license was likely entered into to enable this product, and the engineers, business people and finance are all on the same page. All were involved on some level in negotiating the license, and the initial period of its use builds on that joint effort.

Over time, that changes. The licensee is a normal company, after all. Different projects occupy the collective attention. Individuals follow the itinerary of their own particular groups, and attention is no longer paid to the license.

But engineers and marketing people love the licensed technology, and happily incorporate it into new and revised product offerings. They know that their company has obtained the needed license, and off they go.

Nobody tells the finance person tracking sales of licensed products. The royalties that s/he pays drop relative to sales of products including the licensed technology, and the licensee has fallen into an accidental breach of the license.

The remedy is establishing a process for ensuring that the engineers and marketing people introducing new or revised products for the licensee keep Finance in the loop. Enterprise software vendors sometimes have an appropriate functionality (e.g. SAP’s Rights and Royalty Management module), but the right people need to be trained to apply it.

I know, I know, this is dry, very dry, but hopefully also useful!!

Audits of royalties paid

2009-08-20T15:17:00.000-07:00

Here we are again: another blogging breakfast Thursday at NextSpace (www.nextspace.us)!

Royalty Collection for the Licensor

Bill Gates famously (maybe that means it never happened!) wrote an open letter to the software community early in Microsoft’s life imploring people to pay royalties on MS-DOS (and Windows?).

Microsoft has since solved that problem, at least in the US and EU, but the rest of us have an increasingly difficult time collecting royalties that are due. We’ll look into some of the reasons why next week, when we point out some of the pitfalls that a licensee can fall into that result in insufficient payments of royalties.

But for today, we’ll look at royalties from the point of view of the licensor, which depends on being paid all the royalties due. It’s no exaggeration to say that for the licensor, like Microsoft in its early days, receipt of royalties is a life or death matter. And licensee payments of royalties feel to me as if they are at an all-time low.

It’s not just the economy. It may not be the economy at all.

In many cases, it is cheating! As simple as that.

Several years ago, a client sued an Asian competitor for infringing on the client’s patents. The suit settled with my client becoming the licensor of its patents and the Asian competitor agreeing to pay past-due and continuing royalties. The amounts paid by the Asian licensee at the moment of settlement and during the license term were in the tens of millions of dollars.

As the agreed license term drew to a close, my client’s corporate controller scratched his head, weighed the odds, and decided to conduct an audit of the licensee’s sales and royalties. Nothing had alerted him, as licensor, that there may be a problem: royalties were being timely paid in amounts that appeared appropriate based on his business people’s estimates of the licensee’s sales.

But this is a guy with that great commercial asset, good instincts. He looked at the audit cost, in the tens of thousands if the licensee had paid everything, and decided that the cost was worth it.

One of the big five accounting firms duly took a look at the licensee’s books, and what do you know? The licensee was treating parts of its products as being excluded from the definition of “gross sales” under the license. This reduced the sale price of their products, and proportionately reduced the royalties being paid. But the excluded parts were sold as included in the products, and not even sold separately except as spares!

In short, there was no justification for unilaterally reducing the actual sales price to make the royalty calculation. None at all.

We know that there was none at all because the licensee paid all amounts that the accounting firm said were due without our even filing a lawsuit! The licensee paid several million dollars in underpaid royalties uncovered by the audit. They even paid the audit costs, because the License Agreement obliged them to if they had seriously underpaid royalties. The licensor’s corporate controller was the hero of the hour.

The moral to the story: if you’re a licensor, audit, audit and audit some more!

If you audited last year, audit this year as well. Even if the external signs suggest that your licensee is paying correct royalties, audit. It won’t cost you a lot, and it may give you a welcome boost to the bottom line.

2009-08-13T17:04:00.000-07:00

Blogging breakfast Thursdays!

LOIs and MOUs

I work in NextSpace (www.nextspace.us), which its CEO Jeremy Neuner calls the “awesome, mind-blowing, global“ co-working space here in Santa Cruz, California. NextSpace is the creation of and a catalyst for the “vibrant, sustainable, dynamic” Santa Cruz economy. Jeremy says that too. He’s a quotable kind of guy.

In less flowery terms, NextSpace is a great place to work, not the least because of the regular and creative activities that the “members” come up with. Today is the first day of the most recent creative idea, a blogging breakfast for all of those who have not blogged since “we only had white Presidents.” Thank you, Ellen DeGeneres!

And thank you Manesh Grossman and Margaret Rosas for coming up with the idea and supplying great muffins and bagels!

Manesh suggested that my post from this first blogging breakfast address one of those areas where clients most often do something wrong. That way, the post can offer helpful practical advice. Sounds good: here we go!

Clients often defer as long as possible engaging a lawyer for their commercial transactions. This is an understandable impulse. Why incur the expense before you’re more or less sure that the deal will be done?

But not bringing in your lawyer carries risks, especially if the other side has involved its lawyer, even in the background.

Take Letters of Intent (LOI), sometimes called Memoranda of Understanding (MOU). They are a preliminary step in the deal-making process. Clients rarely bring in their lawyers before signing them, because in their minds the LOI or MOU is not binding, and as such can be adjusted or fixed later.

Be careful!!

Something happens when people approach a writing. For example, a client may realize that it does not want the other party to the MOU or LOI to disclose the client’s confidential information. So an NDA will creep into the LOI or MOU. All well and good, except that the NDA includes obligations, or it would not bind the other party to secrecy. And so the MOU or LOI is turned at least in part into a binding contract. Whoops: that wasn’t the plan.

Try to keep obligations out of the LOI or MOU. Signing a separate NDA at the beginning of negotiations is always a smart move. If you catch yourself thinking that you need to be sure that the other side is committed in some other way, consider putting that commitment in a side letter. Keep it out of the non-binding MOU or LOI. Or you’ll change its nature, and become a party to a binding contract.

Here is the sort of language that you should include in every LOI and MOU:

• The principal terms of these understandings as set forth herein are not intended to and will not create a binding obligation on the parties.

• The parties intend to enter a separately executed, legally binding, definitive agreement in the future incorporating the general terms and conditions contained in this MOU (“Definitive Agreement”). Although the parties intend to negotiate and finalize a Definitive Agreement embodying the terms described in this MOU within a reasonable period of time, this MOU does not presuppose any such agreements, and if the parties fail to finalize a Definitive Agreement, no liability will be incurred by either party as a result of such failure.

• This document is a memorandum of understanding only, and is not intended to be, and will not constitute in any way, a binding or legal agreement.

• This LOI will not impose any legal obligation or duty on either party.

M&A due diligence

2008-11-25T20:01:00.000-08:00

My web designer has been telling me that an unused blog is worse than no blog at all.

And she should know: it's her business!

So after 21 months of inactivity, here is a Memorandum on that extraordinarily stimulating topic, due diligence for an M&A purchaser. Okay, so it may not be the most stimulating topic, but if you are in-house counsel asked to do it for your company, it's worth knowing something about.

What follows is a common sense summary of the due diligence of an M&A purchaser. It is set up as a list of FAQs. And yes, it does go on a bit, but we're catching up on 21 months here!

What is due diligence?

Put simply, due diligence is fact checking and elaboration.

Here we examine it in the context of a particular kind of transaction, M&A, where extensive due diligence is a baseline without which no purchaser should go forward.

But due diligence underlies every commercial transaction, even those such as product sales and purchases of supplies which in most companies attract significantly less attention from lawyers.

No lawyer should sign off on a contract without relating it to the underlying facts.
Due diligence is deal-specific and contract-specific, meaning that if you’re doing it right, you never do quite the same thing. Both the factual circumstances of the deal (e.g. the commercial domain or domains involved), and the legal structure and terms (e.g. asset or share purchase) need to be taken into account in pursuing your due diligence.

Although obviously related in its fact-checking role, the extensive due diligence that also goes into filings under the securities laws is beyond the scope of these FAQ.

What is the purpose of due diligence?

An M&A purchaser’s legal due diligence serves to clarify and elaborate on what is being purchased.

When a company is sold, its financial statements give the buyer a picture of what the company looks like from an accounting point of view. Legal due diligence should give the buyer a corresponding picture of what the company looks like from the point of view of “legal” assets and liabilities, many of which may not appear in the financial statements. Such legal assets may include, for example, trade secrets, and such legal liabilities may include, for example, guarantees.

In an asset sale, the same need applies for clarification and elaboration. It is common for asset sales to be described as including only specified liabilities, giving the impression that here the due diligence role of identifying legal liabilities is reduced. Not so. Due diligence here needs to focus on the liabilities linked to the purchased assets.

For example, the legal assets may include sales contracts which have great value for the buyer because of the customer relations that they bring over. But these same contracts may also bring over serious liabilities, such as a risk of cancellation upon assignment of the contract to the buyer or even built-in unsustainable pricing.

Another example involves employees in certain foreign countries where employees have extensive rights. A company I knew (not then a client, I hasten to add!) was delighted to purchase “for a song” manufacturing facilities in Europe, including all the needed up-to-date equipment and well-trained employees, with only a few specified liabilities. But unknown to that company, those same employees brought with them substantial liabilities whenever the inevitable rationalization or reorganization of the business occurred.

What is the utility (or otherwise) of a Due Diligence Checklist?

When you first bring your outside lawyers into a proposed M&A deal, they will likely send you a “Due Diligence Checklist” for you to send to the lawyers for the seller. Typically encyclopedic in content, such a checklist is a useful roadmap of potential issues as well as of the basic material to review.

It is important to remember that a Due Diligence Checklist, however well prepared (and they typically are very well prepared), is no more than a preliminary roadmap. Once the basic material underlying every deal has been covered (see below), the focus of your due diligence will as ever depend on the circumstances of the deal.

Portions of the Due Dilgence Checklist will likely turn out to be irrelevant or warranting very little of your time time, and other portions will turn out to need more detailed review than they suggest. This is not a failing of the Checklist: if due diligence was a mechanical and purely repetitive process, there would be no need for lawyers to perform it!

How do I initially orient a due diligence review?

By far the most important step is to obtain from your own clients their goals and expectations for the proposed deal. It is a step frequently neglected, and more often accorded too little time and energy on the lawyer’s part. This step is elaborated under the heading “What should I ask my client?”

If the target is a public corporation or a division of a public corporation, review its most recent securities filings on EDGAR (http://www.sec.gov/edgar/searchedgar/webusers.htm). Not only will these filings discuss in some depth the business or corporation that you are acquiring (in the “Management’s Discussion & Analysis” portion of the Form 10-K, for example), they will also highlight certain recent material events (in Forms 8-K) and commercial and financial risk factors (in the “Risk Factors” portion of the Form 10-K).

The most recent published financials are typically in a recent Form 8-K (including the Press Release of the most recent fiscal quarter’s results) or Form 10-Q (including complete quarterly financials).

Review the target’s website, in particular any press releases or other bulletins to be found there, and perform searches on the company and the names of the people and products identified on its web site. This may not be a very fruitful path, but is often a good orientation in the absence of securities laws filings.

Last but not least comes what is classically referred to as legal due diligence, reviewing from a legal perspective the various documents and contracts of the business to be acquired. The Due Diligence Checklist is the basis of this review, subject to the modifications learned as you move forward working with your clients and from the documentation.

What should I ask my client?

The great advantage of being an in-house lawyer is your ready access to the various individuals who comprise and lead your client. Not only are you seated right down the hall or in a neighboring cubicle, but also your colleagues in management know that your time any particular deal will not cost them anything additional. Make use of this access!

It is a good idea to meet with three or four different individuals or groups within a corporate buyer to get a feel for their respective issues in the deal BEFORE doing due diligence of the seller. If time constraints preclude such meetings before you are on a plane to visit the target, catch up with them as the deal progresses.

Meet with:

(1) the VP of business development (or CEO: whoever is driving the deal), in order to understand what is really going on here and what the corporation is really looking to buy. You may need to remind the Officer concerned of your duty of confidentiality, because there are at times more or less hidden goals underlying the deal which the Officer does not yet want to share widely, even within the corporation. Yet if the lawyer on the deal does not know these hidden goal, she cannot help assure that it is accomplished in the deal as consummated;

(2) the head of the product group, operating division or subsidiary which will digest or operate jointly with the target business, in order to understand how she sees the acquisition, and where she has concerns. Do the acquired product lines complement or overlap each other? What are her priorities within the various product lines, technologies and employees being acquired? Will integrating the acquired business’s IT systems pose problems? Will the product lines be integrated or run as a separate subsidiary? Are there technological aspects of the target that warrant special attention? How do the target’s customers complement each other? The list goes on.

(3) the Controller or Finance VP who will be handling the accounting due diligence, in order to get a feel for the potential hotspots in the target’s financial statements. As he goes through the financial statements line by line with his opposite numbers on the seller’s side, you will need to be parallel processing on the legal side. The target being (hopefully) in a business that both of you have some familiarity with will facilitate your joint effort to identify issues in advance; and

(4) depending on the nature of the target, the Officer responsible for a domain particularly impacted by the acquisition, so as to orient yourself in that domain. This is more difficult to identify in advance. If the acquisition involves patents, work with your client’s Officer responsible for IP. The HR Officer often fits under this heading, as does the GM of any local sales office or other facility in a location near a key location of the target.

As you discuss the deal with each of these individuals, issues will inevitably arise, and they need to shape the focus of your legal due diligence going forward.

What do the seller’s organizational documents tell me?

The starting point for a thorough legal due diligence review of the documents and contracts of a corporation or other going business is the various corporate records. Here is a sample section of a Due Diligence Checklist covering these documents. It is phrased as request of the target:

“1.1.1 Organizational Documents. Provide a copy of the following with respect to Company and each of its Subsidiaries:

1.1.1.1 certificate of incorporation and bylaws (or their equivalents, and other constitutional documents for non-corporate entities), and all amendments and restatements thereto.

1.1.1.2 a list of jurisdictions in which Company and each of its Subsidiaries is qualified to do business or is otherwise doing business, certificates of good standing or qualifications to do business in each state or locality where such certification or equivalent qualification is required, and a list of all jurisdictions in which such certification or qualification is required but has not been obtained;

1.1.1.3 minutes of all meetings and materials presented (including financial projections) at such meetings (and all actions taken by written consent without a meeting) of the stockholders and the Board of Directors of the Company and its Subsidiaries;

1.1.1.4 all stock books, stock ledgers and forms of stock certificates of Company and each of its Subsidiaries.”

These documents are to be reviewed first for what is included in them. They comprise the broad lines of a corporate history of the target. The minute books (of Shareholders, Board and Committee meetings) can be long, and do not need to be read word for word, but if they have been prepared correctly they will give you a roadmap of the significant deals in the target’s life.

The most significant transactions involving any company will likely be authorized by Board action. The Board minutes should show you the most significant deals that you may need to review as part of your due diligence. Of course, if your client is buying a division, transactions involving other divisions in the corporation may not need to be reviewed. Prior acquisitions of the target are particularly significant.

Based on information that you have received from your own client, as well your review of available sources concerning the target (e.g. its filings under the securities laws or the results of your web searches), you may find significant matters not dealt with in the minute books. This could be a sign of incomplete minute books or even a (more unusual) red flag.

How should due diligence be organized?

Very carefully. However well you review what you find, its utility to your clients depends more on how well you organize it and present it to them.

As soon as materials that you review (not just the legal materials: see How do you orient your due diligence review?) give insight into what your client is buying, print and classify them. Initial organization should be centered around the Due Diligence Checklist. Most Checklists nowadays incorporate columns for noting the status of review of each line of the Checklist. Use them!

Your filing system for due diligence materials should initially track the Checklist, by headings or line depending on how much material you have accumulated. There will ultimately be lots of material, even in a smaller deal. Smaller rarely means less complicated.

As you delve deeper into the deal, you will find that certain areas of the Checklist demand greater attention than others because of the circumstances of the deal. Subclassify those sections as your review progresses, and develop a sub-filing system that tracks the Checklist.

What is a Virtual Data Room?

A virtual data room is a great improvement in the due diligence process, but a trap for the unwary. It brings the internet into service for the due diligence practitioner.

When the target begins to respond to your admittedly wide-ranging due diligence request (the Checklist), you begin to get into the meat of your due diligence. In the not-so-distant past, this meant trip after trip to the target’s offices or its lawyers’ or banker’s offices to review materials that had been pulled together in a “Data Room” in response to your due diligence request.

I remember days that accumulated into weeks shut in a windowless Data Room somewhere in Idaho with a group of lawyers painfully reading through file cabinets full of documents conscientiously provided by the seller.

The Virtual Data Room improves the Data Room process tremendously. The seller’s banker or its lawyers prepare the seller’s responses to your due diligence request and upload them online. You will be given a password, and can access the Virtual Data Room wherever you have internet access. Hopefully, the online documents will be organized congruently (or close to it) with your Due Diligence Checklist.

The principal downside is the absence of a human interlocutor. In an old-fashioned Data Room, the seller’s representatives were normally down the hall or even in the Data Room with you. As questions came up, they could be addressed in real time. You need to write down all questions arising out of a Virtual Data Room, and email them to the appropriate Seller’s representative, and follow up until you receive answers. That can be a time-consuming process.

In addition, Virtual Data Room contracts and documents are regularly incomplete in some manner. Exhibits and Schedules are omitted, or amendments missing. Again, follow up is the key. No review of a contract is complete until the complete contract has been reviewed.

The Virtual Data Room can trap the unwary by lulling you into a false sense of completion. When you have finished reviewing the broad selection of documents in the Virtual Data Room, you can be excused for feeling that you are done. Not so. There is almost always a lot more to do.

How do I communicate the results of my due diligence?

The classic answer to that question is the “Due Diligence Memorandum,” a detailed summary of the results of your review. Normally tracking the Due Diligence Checklist, this Memorandum can grow into a monster, especially if you are asked to include certain key information for each reviewed contract, like its assignability in an asset sale.

A thorough Due Diligence Memorandum is a requirement of complete reporting to the client, but its highlights should have been reported already.

Two other means of communication are to my mind of more value for your clients.

The first again reflects the advantages of your role as in-house counsel. As things progress and you identify issues that will be of interest to particular groups within the corporation, tell them promptly. These groups will principally be those whom you have already met to learn their itineraries in the deal (see What should I ask my client?), but should include whoever is responsible for key issues as they are uncovered.

The second complementary means of communication that I like to use is a shorter memo headlining major discoveries or summarizing a key domain of legal due diligence. A long or complicated deal can benefit from several such memos. Each can be addressed to the corporate officer responsible for the area covered, or to the client team if it covers a variety of issues.

“Headline” memos are of particular value to clients because they obviate for many individuals a review of all the detail of the complete Due Diligence Memorandum. Clients typically have a strong preference for headlines!

In my files is a sample “Headline” memorandum prepared after an initial visit to a target company earlier in 2008. It focuses on the areas of particular concern to the VP in charge of the deal. Feel free to ask if you'd like to review it, by emailing me at istock@entreprelaw.com.

How are the results of due diligence incorporated in the contracts for the deal?

The reps and warranties in the (Stock or Asset) Purchase Agreement are intimately linked with the Disclosure Schedule or Exhibits, which are based on the results of due diligence. This is the key interaction between the contracts and the results of due diligence, and others may exist in related or complementary agreements.

Reps and warranties are the portion of the Purchase Agreement which delineate and confirm what the seller is selling. Often long-winded, they are the meat of any M&A deal. Not as sexy as the earn-out, indemnification or break-up fees, for example, they remain fundamental.

There are essentially two types of Disclosure Schedule or Exhibits:

(1) detail of assets, for example lists of contracts or of patents and applications; and

(2) exceptions to the reps and warranties.

The first type of Schedule is a simple compilation. If the contract calls for an all-inclusive list of patents and applications worldwide, the target’s patent counsel will typically supply a print-out to be inserted. One issue here is whether to include the list as a part of the contract or refer to is as an outside document. The latter is useful for reducing the length of a contract. I have worked on a 2000+ page Stock Purchase Agreement, when for various reasons several lists of assets were required to be included.

The second type of Schedule interacts more sensitively with the Purchase Agreement. To illustrate, an Asset Purchase Agreement will usually rep. that all the contracts of the business to be acquired are assignable to the purchaser, except as set forth in the Disclosure Schedule. What is then disclosed in that portion of the Schedule is a not a list of all the contracts assigned to the purchaser, but only those whose assignability is in question. (All of certain types of contract will likely be listed pursuant to other reps.) Identifying which contracts fit that description is a part of your due diligence.

What should the final results of legal due diligence look like?

Ultimately, you will share responsibility for being the guardian of this acquisition for your client. It is a responsibility that you will share with finance and probably HR, IP and other functional departments, as well as the operating division or product group that made the acquisition.

You may not be given the resources needed to enable to adequately fulfill this guardianship role: the modern corporation tends to rush through its acquisitions with an emphasis on the speed of income accretion.

But this haste is one of the principal reasons that so many acquisitions do not fulfill the hopes of their proponents within your client. There is nothing like insufficient attention to detail and to cultural blending to ruin the logic of an acquisition. Synergies need more than a good idea: they need careful execution.

Your client will be best served by thorough and complete documentation organized around the Due Diligence Checklist or your Due Diligence Memoranda. The organization needs to be transparent to others in your corporation, both those there now and those who will come later.

One low-tech device which I miss and was very useful with this organization was the deal binder. Remember those leather-bound volumes that the law firms produced after M&A deals? They produce them less frequently now, especially in smaller deals, but their guiding principles are as useful as ever:

all documents, including indices and memoranda, need to be numbered;

the numbering system should bear some relation with the organization that has been applied; and

complete copies of all documents should be carefully collated and included.

What I've been doing recently . . .

2007-02-26T11:55:00.000-08:00

A potential client asked the other day for a list of recent representative commercial transactions that I have handled. As the title of a particular contract is often not a very useful means of understanding what it encompasses, I prepared the following capsule summaries. They cover only commercial transactions, and are a bit dry I’m afraid. But for some reason lawyers rarely explain enough to their clients or to the world at large. The EntrepreLaw website offers additional explanations: www.entreprelaw.com/services/index.html.

1. Contract Manufacturing Agreements between US clients and their Asian contract manufacturers. These agreements transfer labor to where it costs less but can still do the work. For the companies involved, they are a win-win situation, if approached reasonably. The US customer reduces its labor costs by a considerable amount, and the Asian manufacturer typically has a decent margin on top of its costs built into the contract.

Not that there is nothing to negotiate. Allocations of risk still need to be agreed on, for example after termination of the arrangement and with respect to bulk-ordered parts. Ordering in bulk normally reduces the per part cost, but who bears the risk when bulk-ordered parts are not needed because a new version of the product does not use them? Or because the deal is terminated before the end of the agreed term? The party to whom the early termination is attributable also effects this allocation of risk.

2. Website terms and conditions and privacy policies. The web’s ease of use and relative cheapness as an advertising medium encourage its use as a sales channel early in the life of many companies. In addition, as “software as a service” (SaaS) develops, more and more license Ts & Cs will need to be on the web site where the SaaS is provided to customers for download. Then there are the concerns of the Web 2.0 players, who do not want to assume responsibility for content that their users post or exchange.

Privacy policies address the central concern of protecting personal information, and what uses of it are allowed if you enter it into a website. Many web surfers want the sites that they surf to promise to never disclose personal information to a third party. There are factors which limit such promises, however much the web site owner may agree with the principle. The web site owner may subcontract treatment of personal information, or desire to use such information to refine and improve its offering. What happens if the web site is sold to another site owner with a different privacy policy?

3. Software License Agreements. No longer the exclusive domain of software producers, these licenses become more important in every tech. transaction. From web site Ts & Cs through sales of semiconductors, they need to be included more and more frequently. For example, a US chip manufacturer client licensed its customers software it developed to enable the customers to develop themselves applications using the programmable chips sold by the chip company.

How to protect the owners from the inherent vulnerability of software has remained a consistent preoccupation since Bill Gates pleaded with the community to pay for the MS-DOS that it was using. The licensor wants to keep the source code confidential, so that its assets cannot be pirated, but the customer legitimately seeks access to the source code if the licensor goes broke or terminates without cause. The source code escrow arose to address these conflicting concerns by providing for a deposit of the source code with a third party with carefully defined instructions on when to release it to the customer.

4. Sales Ts & Cs; Distribution Agreements. Ts & Cs tend to appear on the back of PO acceptances, invoices, even packing lists, and purport to cover all sales of products (or licenses of software). Distribution Agreements are negotiated between a manufacturer or producer and a major sales channel. All address risk allocation, who covers warranty repair and IP infringement, etc., and cost allocation, who pays for delivery, etc.

A troubling recent trend is the larger, more powerful companies jamming overly onerous terms on their suppliers. To give an example, buyers and sellers normally agree to limit their respective liability, say to the price paid for the goods in question. Major players have begun refusing such limits, and at the same time demanding that their suppliers cover all costs of problems linked to the products at issue. For chip companies, this can include the cost of repairing and replacing chips once installed in the consumer products that they were built into, if they fail in situ. Add up the potential costs there! A chip company that accepts such terms is basically betting the company, as well as giving its customer enormous leverage in any settlement negotiations.

5. Contractor Agreements. As companies seek to avoid the costs and heartache of mass lay-offs, and individuals seek to diversify their “employers” to avoid periods of unemployment, individuals and groups are hired more and more often as contractors. These contracts also cover retaining service companies outside the US to perform, say, installation or warranty repair, when the manufacturer itself has reduced its employee presence in the country concerned.

The contracts accomplishing these arrangements seek to assure, among other things, that the service company does not use its customer’s IP in any other context, and warranties its work, and that the individual contractor cannot claim any benefits of employment. In some EU countries, if the local government can claim that the arrangement looks enough like an employment agreement to be construed as one, the financial risk for the company is high.

6. Development and License Agreement. This one was a seriously complicated deal. A US supplier of equipment for chip manufacturing wanted to license a competitor to manufacture a particular tool. The licensee was already selling the tool pursuant to an earlier license, and the US company wanted to enable its competitor to manufacture.

Licenses are always more sensitive when the licensee is a potential competitor of the licensor. This deal involved precise and detailed limits on the scope of the license grant, including on the field of use, so that the licensed technology and know-how could not enable the licensee to compete with the licensor in related fields.

Limits on the license grant were not enough to protect the licensor here. Some of the proprietary source code that was required in order to enable the licensee to manufacture the tool constituted the licensor’s “family jewels” in this particular domain. The licensor could not license this portion of the source code. No contractual protection can assure absolute protection of source code once delivered to a licensee.

A major part of licensor’s development in the deal was then bifurcating its source code so as to protect the part of it which was its key trade secret. This software development was undertaken by the licensor for additional consideration. It involved compiling the secret part of the source code to generate object code which was built into an appliance. The appliance was then sold to the licensee to be included with each tool that it manufactured and sold under the license.

I do enjoy the complicated deals!

Being Larry Sonsini

2007-01-18T16:03:00.000-08:00

I used to work for his firm, and in two and a half years there only met him about three or four times. But his influence, his approach, even his myths were all over the firm. As a business lawyer, I really do appreciate what Larry and his mentor, John Wilson, have done for my profession.

Here's a great article from Roger Parloff, one of the true individuals in my law school class.

Scandals rock Silicon Valley's top legal ace
From Apple to Netscape to HP to YouTube, Larry Sonsini has been the most important lawyer in the most important industry for 30 years.

But is he too close to the companies he represents?

Fortune's Roger Parloff reports.
By Roger Parloff, Fortune senior editor
November 17 2006: 7:12 AM EST

(Fortune Magazine) -- "I first remember hearing Larry Sonsini's name probably in 1986 or 1987," says Dave Roux, who co-founded Silver Lake Partners, a private-equity firm in Menlo Park Calif., focusing on technology investments.

Back then, when Roux lived on the East Coast, he was at a meeting of the board of Lotus Development in Boston, when someone suggested they find the "East Coast Larry Sonsini" to act as their lawyer.

Larry Who? Roux asked. "They explained to me that he was the Larry Bird of Silicon Valley," he says. "The go-to guy when you need the thing to work. The ice-in-his-veins, blue-collar, scramble-for-the-ball, great-teammate, no-ego, championship-caliber guy."

Twenty years later everybody in the tech business knows Sonsini. He is the most influential and well-connected lawyer in the industry. But he's more.

Portraits of power: 30 business titans

Sonsini, 65, is an integral part of Silicon Valley's history and culture. He's the unflappable, low-key business advisor everyone trusts, which is saying a lot in a community of super-smart, hyperaggressive egomaniacs. He's the behind-the-scenes player to whom the executives at the most innovative companies of the Digital Age take all their toughest business problems.

This year, though, Sonsini's 40th with the Palo Alto firm of Wilson Sonsini Goodrich & Rosati, he's found himself shoved uncomfortably into the spotlight. Some newspaper readers first learned his name in July, when it appeared in articles about the options-backdating scandal. Many of the implicated companies were tech firms, and a high percentage of them were his clients.

In September his name came up again when he was called before a subcommittee of the U.S. House Energy and Commerce Committee to answer questions about Hewlett-Packard's now infamous board leak investigation.

Rival lawyers and corporate-governance watchdogs then piled on, raising questions about whether Sonsini wore too many hats in the Valley, by investing in clients and serving on their boards. Maybe he represented so many clients, they argued, that he was risking conflicts of interest.

There's no disputing that Sonsini's client roster is long. It could serve as an outline for a history of the digital revolution. He started out working for semiconductor companies like LSI Logic, Cypress Semiconductor and National Semiconductor, then moved on to hardware companies like Silicon Graphics, Apple Computer, Sun Microsystems and Seagate Technologies, then represented software firms like Novell, WordPerfect and Sybase, and finally added Internet pioneers like Netscape, Google and YouTube.

This month Sonsini will complete another defining deal, the $17.6 billion acquisition of client Freescale Semiconductor (Charts) by private-equity investors - the largest tech buyout ever.

This is the story of how a modest securities lawyer became the most powerful man in the most crucial sector of the American economy. And what it means when a player noted for his probity and unfailingly good judgment suddenly finds his name being linked to some pretty sleazy behavior.

Driven

At an interview in Sonsini's Palo Alto office in October, his discipline and organization are immediately apparent. Papers are arranged in neat, evenly spaced stacks across his desk. The desk is modest in size, with clean, modern lines - no frippery.

He is dressed elegantly in a dark suit and tie, which stand out in Silicon Valley, where business casual was born and still flourishes. At five foot ten and 165 pounds, Sonsini is fit from morning workouts in his home gym. He weighs slightly less than he did in college.

Sonsini speaks calmly in a confident, voice-of-God baritone that a network news anchor would covet. There is no irony, sarcasm or cynicism evident in him, and he seems guileless in comparison to many East Coast lawyers. His sentences end promptly as soon as he has answered a question, another uncommon trait in his bill-by-the-hour profession. He is more Gary Cooper than Cary Grant.

What's concealed is what his partner Bob Latta refers to as the "nuclear reactor in his stomach," his drive to excel at anything he does. In 1984, when Latta was still a young associate, Sonsini invited him and another lawyer to fill out a foursome at the nearby Sharon Heights golf course.

At the time, says Latta, Sonsini preferred tennis and wasn't much of a golfer. When Latta arrived, Sonsini and client Ken Oshman - the "O" in telecom-equipment maker ROLM Computer - were already banging balls on the driving range with strange intensity. Latta then discovered that Sonsini and Oshman had already played an 18-hole round that morning; he would be joining them for their second round of 18. Then Latta found out what was going on.

"Oshman's company was being acquired by IBM," he explains, "and the IBM guys are serious golfers. So Oshman and Larry are going to get good at golf. Larry's not going to do something that he isn't going to be good at. They must have been out there for nine hours."

Sonsini was born in Rome, N.Y. When he was 8, his father, a quality-control inspector at Revere Brass & Wire, packed up his family and moved. "Rome wasn't growing," says Sonsini, "and he had an itch." In Los Angeles, Sonsini' s father found work with Hughes Tool Co. and, though he had no college education, climbed through the ranks to the No. 2 position.

"He instilled in me a very strong work ethic," says Sonsini. "It wasn't important what you did, but it was important that you do something and do it well."

Despite his slight build, Sonsini became a quarterback in high school and then, as just a freshman at the University of California at Berkeley, a first-string varsity rugby player on a team in contention for the national title. Yet Sonsini gave up college athletics in his second year to focus on his studies. "I wanted to be a professional," he says, "and I wasn't going to be a professional athlete."

Upon graduating in 1963, Sonsini entered Berkeley's Boalt Hall School of Law. During the spring of his first year, in 1964, tear gas periodically wafted over the campus from Sproul Hall, for this was the year of the Free Speech Movement - the opening bell of the 60s.

But Sonsini was "a pure observer of it all," he says. "I was so consumed in law school." (Though several of his partners today are major political fundraisers - John Roos for Democrats and Boris Feldman for Republicans - Sonsini's own politics are largely unknown, even to his partners.)

Finding a niche in Palo Alto

Already determined to become a business lawyer, Sonsini signed on as a research assistant to professor Richard Jennings, a frosty don who had co-authored the first casebook on securities regulation.

Though most Boalt graduates joined big commercial firms in New York, Los Angeles or San Francisco, Jennings suggested to Sonsini that he look at a tiny outfit in Palo Alto. "Dick said to me, "There's something going on down in the Valley. There are a lot of young businesses starting, and they're companies that are going to have to go public."

At that time Santa Clara Valley was already home to a handful of mature tech companies, including Hewlett-Packard (Charts) and Fairchild Semiconductor. Hewlett-Packard - launched from a garage and dedicated to innovation - was serving as an inspiration and paradigm for many young entrepreneurs. Early venture capitalists were providing seed capital. Thanks to liberal intellectual-property policies, Stanford and Berkeley were letting their engineering graduates try to commercialize inventions they'd come up with while still in school. "It was still early," Sonsini says, "but you could see it. Something unique was happening."

Though the starting pay was well below San Francisco rates - and notwithstanding that Sonsini had no savings and that his wife was pregnant with their first child - he rolled the dice with the firm then called McCloskey Wilson & Mosher, where he became the first associate. His new mentor was John Wilson, then 50, who after a distinguished legal career in the East had moved to the Valley in 1956. (Wilson died in 1999.)

"So we started to develop the recipe for how to build companies," Sonsini recalls. The recipe required entrepreneurialism, capital and infrastructure, and Wilson's law firm was part of the infrastructure. "I was becoming a piece of the recipe," Sonsini says.

"What I was learning very early on," he continues, "was that I could build an enterprise too. In fact, I had to." Wilson and Sonsini both wanted to continue to represent their clients as they grew, rather than handing them off to larger firms when they went public.

To do that, they'd need additional expertise, and Sonsini was put in charge of figuring out which new specialists the firm needed, and then recruiting them. "So I guess I was thrown early on into a leadership role," he says. In 1973 his name went on the door, and in 1978 the firm, still with fewer than 15 lawyers, adopted its current name: Wilson Sonsini Goodrich & Rosati.

Though the firm represented venture capitalists and investment bankers from time to time, its preference was to represent the startups themselves - a strategy not always understood by its younger lawyers.

Latta remembers when he was an associate in the 1980s being in Sonsini's office one day when Sonsini took a call on the speakerphone from Bill Hambrecht and George Quist. Their firm was then the dominant high-technology underwriter in San Francisco, and they had called to inquire if Wilson Sonsini would agree to become their regular outside counsel.

"I think I literally got out of the chair and started jumping up and down," Latta recalls. He was gleeful, he explains, because he thought that now he'd have a shot at making as much money as his classmates who'd gone to San Francisco firms.

"But Larry doesn't hesitate for a second," Latta continues. "Immediately he takes this apologetic tone and starts talking about why that's not a good idea for them. That there are several law firms up in San Francisco that can do just a fine job of representing them, whereas there's really only one firm down in Palo Alto that can do a good job of representing the companies they want to back. 'Isn't my highest and best use for you to continue to do what I'm doing? And if, by the way, that means you introduce these companies to me if you get to them before I do, that would be appreciated.' It was just brilliant."

Sonsini explains: "My view was that representing companies enables you to get involved at all stages of their growth. You develop a breadth and depth that makes you a better advisor and a better lawyer. It was also a fundamental part of the business plan. Many law firms at that point were focusing more on the capital markets side, representing investment banks, and to me that left a great opportunity to really develop the other side of the business."

Investing creates conflict

There was also one fringe benefit to representing the companies. Senior corporate lawyers at Valley firms sometimes got opportunities to invest in clients at the venture capital stage. Most startups would fail, but those that went public could pay off handsomely.

Taking stakes in clients, however, created a potential for conflicts of interest. If a lawyer holds stock in a client company, for instance, and then has to decide whether the client needs to disclose information that will cause its stock price to plummet, the lawyer's judgment might be clouded. Such investing might also trigger internal rifts at a law firm, since only the corporate lawyers were likely to get the opportunities, leaving their partners in other specialties out of a lucrative loop.

So in 1978 Wilson Sonsini set up WS Investments, a fund designed to manage both problems. Each partner's pay would automatically be docked to create the fund - the deductions were mandatory - and each would, in turn, have a stake in the proceeds.

Small investments in private companies could then be made when opportunities arose - typically $25,000 to $50,000, according to Sonsini. (Still, the payouts could be big. The fund's investment in Google (Charts), for instance, was worth close to $20 million after the company's IPO in 2004.) This way, each partner's stake in the fate of any one client would be diluted and all partners got a piece of the action.

"It's an opportunity for a return," Sonsini says of the fund. "And many times it's how we get paid. [Startups] don't have any money. So if I invest $25,000, you know what he does? Over a period of 12 months he pays us $25,000 back in the way of legal fees."

In later years, investing in startup clients became a nearly universal practice among Silicon Valley law firms. Nevertheless, many East Coast lawyers and other critics condemn it because of the lingering potential for conflicts.

"I don't buy the argument that the incentive with regard to any particular company is diluted, because so many issues - like backdating, expensing options, etc. - apply across the entire sector," says corporate-governance watchdog Nell Minow, co-founder of the Corporate Library research firm.

Should Sonsini have flatly banned such investing? "During the days of building the Valley," he says, "when we were all working together as entrepreneurs and trying to build industries, I don't know if that would have been a good thing or not."

The tech market explodes

The event that marked Wilson Sonsini's arrival on the national business stage was its representation of Apple Computer (Charts) in its initial public offering in 1980. It was the largest IPO since Ford Motor Co.'s in 1956, and the notion that a local Palo Alto firm would handle it was a seismic event in the deal community.

There was also a mini-bull market at the time, enabling the firm to rattle off a series of tech IPOs, and the momentum began to feed on itself. By 1988, Wilson Sonsini's average profits per partner reached $430,000, blowing past all the San Francisco firms and outpacing the nearest competitor by $100,000, according to The Recorder, a San Francisco legal newspaper.

But it wasn't just reputation that was selling Sonsini. When you meet a few of his entrepreneur clients - intimidatingly smart, headstrong, combative, abrasive - it becomes apparent that these are not the easiest people to advise. Yet they all seemed willing to listen to Sonsini.

"I don't take orders well," says T.J. Rodgers, the founder, chairman and CEO of Cypress Semiconductor. "But taking advice from Larry Sonsini is easy. He's professorial. He's nonjudgmental. 'You can choose to do this, you can choose to do that, and these will be the consequences.' So you realize you're not being forced or pushed into anything. He explains to us why the sometimes frustrating, arcane and inefficient system we have makes sense, or at least made sense at one time, and therefore should be followed."

These entrepreneurs were so eager to use him that they did not seem to mind that he often also represented their competitors. For a period in the 1980s, Sonsini was representing Seagate Technologies, Conner Peripherals and Quantum, which were then the country's three largest disk-drive companies - and bitter enemies.

"It's a tradeoff," says Steve Luczo, Seagate's chairman and former CEO. "Because he's counsel to the three biggest, he's also most aware of the issues that face the industry. That's what you want." In addition, Luczo says, he trusted Sonsini to keep his confidences. "We're not idiots," he says. "Would you do that all the time? No. With Larry? Yeah."

That reasoning may make more sense in Palo Alto than in New York City, since the Valley lawyering style is less adversarial.

"Most East Coast lawyers are in the business of protecting wealth," explains Latta. "You're talking about a pie that's not changing size much. You've got to take share away from someone else, and one way you compete is with your lawyer. Lawyers are combatants. Out here it's always been different. Larry's always been in the business of creating wealth. We don't want to spend weeks arguing, with lots of theatrics."

A lot of wealth was definitely being created. Netscape's 1995 IPO ushered in a new phase in the Valley's history by demonstrating that even a company with no earnings history could go public and make its investors fabulously wealthy.

The bubble happened fast, and Sonsini hadn't seen it coming. "Things started to align, and it just exploded," he says. "We handled 2,000 private companies, and now this great window opened up for them, and you can imagine what it was like."

Wilson Sonsini did 118 initial public offerings in 1999 (representing both companies and underwriters) - the most of any law firm in the nation. The firm bulked up to handle the workload, peaking in size at close to 800 lawyers in 2000.

Other firms were belatedly arriving on the scene too, of course. While Wilson Sonsini had competed mainly with two other Valley firms in the 1970s, by "tulip time" more than 40 major national law firms had opened outposts there.

"That was a period of raw greed," says Boris Feldman, the head of Wilson Sonsini's litigation department. "Greed was always an important component in the Valley, but it was sort of restrained greed: the sense that if you build a good company, you'll be rewarded for it. But during that time framework, what people forgot was the element of building value. It was much more like a gold rush. The values in the Valley were, if not corrupted, then certainly strained."

In 1999 and 2000, Sonsini says, it became "somewhat of a practice" in the Valley for lawyers to insist on being given investment opportunities in their startup clients as a condition of representing them. He admits that some Wilson Sonsini lawyers did this, and that they shouldn't have.

It was widely reported that many Silicon Valley lawyers were making more off their investments in clients than from their legal work. According to The American Lawyer magazine, WS Investments distributed $175 million to the firm's members in 2000. The figure plummeted to $8 million a year later.

A Wilson Sonsini spokesperson says she doesn't know where the $175 million figure came from, that it sounds wrong, and that it would be hard to compute a meaningful substitute.

Sonsini maintains that only very junior partners at Wilson Sonsini - those with salaries then in the $400,000 range - would have ever made more from WS Investments than from their partnership draws. (Wilson Sonsini's average profits per partner from legal work in 2000 were $835,000, according to The American Lawyer.)

After the crash, Wilson Sonsini's lawyer ranks dropped to fewer than 600 before they began growing again.

Excess baggage

In 2001, Sonsini achieved another landmark validation of business stature, not unlike the Apple IPO in its symbolism. This one, however, brought some baggage with it.

"Dick Grasso, then chairman of the New York Stock Exchange, came to me and said, 'We don't have anybody from the West Coast, and we don't have anybody from the technology industry, and I would like to propose you to become a board member of the New York Stock Exchange,' " Sonsini recalls.

Sonsini joined in February 2001. Minow's Corporate Library now labels Sonsini a "problem director" because he sat on that board during part of the time when Grasso was amassing his now infamous $189 million deferred-compensation package.

The NYSE board, though, had 27 members at the time, Sonsini was not on the compensation committee, and former U.S. Attorney Dan Webb's official postmortem of the debacle concluded that the directors who weren't on that committee were misled. (Sonsini declines to discuss the issue, citing pending litigation.)

Sonsini's winning Hewlett-Packard as a client was another landmark, and another mixed blessing. As a young lawyer in the 1970s Sonsini's ambition had always been to one day represent Hewlett-Packard, the template for all the Valley startups that followed. In the late-1990s Sonsini got his wish, eventually handling Hewlett-Packard's $2.2 billion spinoff of Agilent Technologies in 2000 and its $19 billion merger with Compaq Computer in 2001.

Sleazy CEOs have even more options tricks

Then came "pretexting." From early 2005 to March 2006, Hewlett-Packard's nonexecutive chairwoman, Patricia Dunn, led two internal probes to find out which board member was leaking information to the press. The company's investigators deceived phone companies into providing them with private phone records of directors and journalists - an activity that ultimately led to felony charges against Dunn, then senior HP lawyer Kevin Hunsaker and three investigators.

Sonsini has faced a wave of criticism arising from the affair, culminating with his being summoned, along with Dunn and HP CEO Mark Hurd, before a House subcommittee in late September. It turned out, however, that the most serious criticisms against him were based on false assumptions.

As the story of the ham-fisted operation became public in September, internal HP documents leaked out that indicated that an outside law firm had approved the pretexting operation in advance. One had, but it wasn't Wilson Sonsini, as many initially assumed. It was, rather, a tiny firm in Massachusetts that did work for - and shared space with - one of the now criminally charged investigators.

The voluminous documents made public by the House subcommittee establish that Wilson Sonsini was never consulted about either probe until April 2006, after the snooping had been completed. At that point Dunn asked not for a legal opinion about the methods used - which HP described to Sonsini in a memo only as "lawful methodology" used by "licensed security firms" - but for advice about what to do about the leaker.

Still, it looked bad when a Sonsini e-mail surfaced that concluded: "It appears, therefore, that the process was well done and within legal limits." The e-mail was part of an exchange in June with venture capitalist and former HP director Tom Perkins, a co-founder of Kleiner Perkins Caufield & Byers.

By that time Perkins had found out that his private phone records had been obtained. Perkins also then believed, incorrectly as it turned out, that there might have been wiretapping too. Yet the context of the e-mail was not appreciated.

Sonsini had still not been asked or authorized by HP to conduct any additional investigation. He was told simply to relate to Perkins what had been done and the opinion of the HP in-house lawyers about its legality. In his e-mail to Perkins he did so, explaining in the first paragraph that his information came from Hunsaker and Baskins.

Only later, in August, did HP finally retain Wilson Sonsini to look into what the investigators had done and independently assess its legality. After doing so, the firm concluded that while "pretexting at the time... was not generally unlawful," it became unlawful when conducted in certain ways and that, accordingly, the firm "could not confirm that the techniques & complied in all respects with applicable law." The recommendation was that "HP immediately cease pretexting."

Tom Perkins won't comment on the HP matter, but he says this about Sonsini: "He's very ethical, brilliant, successful. People are taking shots at him. In my book, he's still No. 1. Expect him to continue to work with all of [Kleiner Perkins's] companies."

Questions of independence

Then there's the options-backdating scandal. That kicked off in March 2006, when a Wall Street Journal article showed that many stock option grants during the late 1990s and early 2000s had been exquisitely well timed, suggesting that their grant dates must have actually been chosen retrospectively - i.e., backdated. As a result, the Securities and Exchange Commission launched an inquiry.

Options were a particularly important form of compensation for startup technology companies and a central pillar of Valley culture. They were routinely given not just to directors and top officers, but also to members of the rank and file. Of the 120 companies now being scrutinized for backdating, either by government officials or internal auditors, 42 are Silicon Valley companies (35 percent), and of that subset, at least 40 percent were Wilson Sonsini clients during the relevant period.

These numbers look ominous, but for two reasons may not be. First, Wilson Sonsini's clients are no more heavily represented among the companies under scrutiny than those of any other law firm, once you take into account the firms' relevant market shares and niches.

The premier East Coast technology firm, Boston's Hale & Dorr - now WilmerHale - represented five of the 13 Massachusetts-based companies on the list of accused backdaters, or 37 percent. Similarly, six of Wilson Sonsini's leading Bay Area competitors represented multiple Silicon Valley clients on the list, seemingly in rough proportion to their shares of Valley business.

The second reason, according to nine Silicon Valley public company board members, CEOs or outside lawyers, is this: While outside law firms may be involved in drawing up a stock options plan for a public company, they very rarely administer it.

And that's where all the problems have been showing up so far: missing documentation, misdated or forged records, faulty accounting. "I've never seen it done by outside counsel," says tech investor Roux, of Silver Lake Partners, who has served on many boards and compensation committees.

"How to give options is well known," says Rodgers, the Cypress CEO. "You hire outside counsel, they have their word processor kick up a bunch of documents, and they charge you 50,000 bucks. Then you and your HR person give out options according to the plan. You administer it; they're not involved. You don't want them involved, because you don't want to be sent a bill for $2,000 every time you give out stock options."

Sonsini's more direct link to the backdating scandal is through his board ties: He was a director at two companies that have encountered options problems. One was Brocade Communications (Charts), whose former CEO Greg Reyes and former human resources chief have both been charged with criminal backdating violations by federal prosecutors in San Francisco. Though the prosecutors theorize that Reyes defrauded the company's board of directors, Sonsini has been tainted by the association.

Because Sonsini was on Brocade's audit committee one year, he has also been named as a defendant in private class-action suits. Sonsini was on the board of Novell (Charts) too, which has initiated a voluntary audit of its options practices. Like all Novell directors, Sonsini received options himself. He never exercised his, according to a firm spokesperson, and they expired three months after he left the board in 2002. Sonsini declines to discuss either Novell or Brocade.

What has been offered as the smoking gun implicating Sonsini in the scandal is that he allegedly recommended that Brocade's board make Reyes a "committee of one," with power to grant options without the full board's approval. That's what Reyes himself told Business Week in February.

In an interview with Fortune, Reyes' s criminal defense lawyer, Richard Marmaro, seems to implicate Sonsini via gushing praise: "Sonsini at all times acted totally above board and with the highest ethics of the profession, and my client relied on his sage advice."

A Wilson Sonsini spokeswoman says that Brocade's committee of one was actually set up by a different law firm, which she declines to name.

In any event, committee-of-one arrangements are neither as rare nor as intrinsically reckless as they may appear. The "committee" at Brocade could award options only to rank-and-file employees, not to officers and directors, so there was no opportunity for self-dealing.

In that context, the practice was - and remains - pervasive, since it's not practical to have full boards constantly approving options grants to scores of employees.

"If you're moving quickly in a hot job market," says former SEC commissioner Joseph Grundfest, who co-heads Stanford's Rock Center for Corporate Governance, "and there's an employee you want, boards would delegate to CEOs the authority to make offers for grants up to a certain size or for a certain total number of shares. That would not be rare in the least. And creating a committee of one never gave anyone the right to backdate. That said, in hindsight it clearly would be better practice to have crisper controls on that process, particularly to make sure that grant dates are appropriately and timely documented."

The remaining thing Sonsini might be faulted for is sitting on the boards of his clients. That's another practice that's more common on the West Coast than in the East, and one that some corporate-governance watchdogs denounce.

"The duties of a lawyer and a board member are fundamentally different," says Minow, of the Corporate Library. "You can't be the third base coach, the umpire and the batter at the same time."

Here the watchdogs appear to have won their argument. Though Sonsini sat on nine public boards in February 2002, today he's down to just one, and he says he expects to phase out that one soon too. He's come around to the view that "the presumption" should be against sitting on public boards. "It' s a question of the evolution of independence and objectivity in corporate governance," he says.

Last year Sonsini considered retiring from law practice to become chairman of the private-equity firm Silver Lake Partners. But having turned down the offer, he says he plans to continue practicing for the foreseeable future. (His father, a vigorous 90, participated in the firm's celebration of Sonsini's 40th year of practice at a retreat in Pebble Beach this year.)

"I have so many friends who say, 'Look, why aren't you stopping? We can all go take golf trips,' " he says. "That's the last thing I'm made of. I'm just beginning to be the best lawyer I can be, and why would I get off the train now? If you're going to be a top business lawyer in this country, you've got to take a lot of years. You don't develop the judgment except over a long period of time."

Evidently you develop some thick skin too.

VCs changing sides??!!

2006-12-28T12:05:00.000-08:00

Posted on Tue, Dec. 12, 2006 on www.mercurynews.com

SOME VENTURE CAPITALISTS ARE ESCAPING POWER STRUGGLES, OTHERS FLEEING FIRMS ON THE ROPES, BUT MANY ARE BECOMING ENTREPRENEURS
By Constance Loizos
Mercury News

VCs turned entrepreneurs
In the pecking order of Silicon Valley, you can't do much better than the clubby world of venture capital. High pay, intellectual stimulation, prestige and even, for some, fame. What's not to like?

Yet VCs do leave the industry, sometimes over personality conflicts or power struggles or unraveling firms. In a newer twist, they are also leaving to become entrepreneurs themselves, lured by ever-cheaper start-up costs and investors' continued fascination with Web properties.

``Some people who came into the venture business between 1999 and today have observed that no one has made any money, unless you happen to have invested in Google and YouTube,'' said Jon Holman, a venture capital recruiter in San Francisco who works closely with more than 50 firms, including Mayfield Fund and Accel Partners. ``Those same people are now saying, `Maybe this will get better, but it may be time to try something else instead.' ''

Vikram Kashyap was a junior venture capitalist at Battery Ventures on Sand Hill Road from 1998 until 2001, but because he was hired out of Harvard, Kashyap had little operating experience. ``I thought, to really be world class in this industry, it's not going to work for me to build my way up from the bottom.''

Two years ago, Kashyap founded San Francisco-based Canopy Financial, which aims to move the payment process between consumers and their health care providers online and is backed by $2 million from wealthy individuals.

Kashyap says that while he would ``never say never'' to another VC job, he has found greater satisfaction in heading a company.

Others admit that they would happily return to their old line of work for the right opportunity.

``I could definitely see myself becoming a VC again,'' said Touraj Parang, a venture capitalist-turned-founder of year-old Jaxtr in downtown Palo Alto, whose service combines a social-networking application with an easier way to call friends over cell phones.

Still, becoming an entrepreneur is harder than many expected, despite their experience with young companies. ``I had no idea of the number of details that I'd have to deal with every day,'' said Doug Valenti, a former venture capitalist with Rosewood Capital in San Francisco who founded seven-year-old QuinStreet, an online marketing company. ``From what kinds of chairs do you order to how do you get the rooms wired to how do you ensure your compensation plan is comparable to other companies, it's an endless list.''

Some VCs-turned-entrepreneurs also face lower pay, longer hours, and frankly, mundanity. ``Founding a company can be less stimulating than venture capital in that you're exposed to less new ideas and instead thinking much more about a particular market and a particular set of products,'' said Kashyap, who said he took a ``big salary cut'' but that his company has had some profitable quarters and is closing another round of financing.

Personal impact

Then there are the surprisingly personal ways in which leaving venture capital impacts some individuals. Tony Conrad, who founded the blog-search technology company Sphere in San Francisco half a year before his former venture firm, VSP Capital, imploded, said that ``for months after starting Sphere, I'd still tell people that I was a VC. I think I was in denial,'' he added, laughing.

Even loved ones can become attached to the role. ``Striking out on my own actually ended a relationship with someone,'' said another VC-turned entrepreneur, who earlier this year launched an online advertising network and asked not to be named. ``You'd have thought I was opening a lemonade stand.''

That's saying nothing of the considerably greater risk involved in founding a company. VCs have the luxury of piecing together diverse portfolios with the money of institutional investors. Entrepreneurs, even well-funded ones, are betting on one horse.

Still, VCs also enjoy many benefits as entrepreneurs, having sat on the opposite side of the table.

Two meaningful advantages are their networks and know-how. For example, said Valenti, ``there are many ways to screw up fundraising.'' He claims he avoided them all by knowing which investors to call and which to avoid.

More, QuinStreet -- which Valenti said is profitable after raising nearly $60 million in venture capital in its first four years -- sewed up its financing on ``terms that some entrepreneurs wouldn't see as important at the time but that I knew would be.''

Lessons learned

However, the biggest plus, say these Web entrepreneurs -- each of whom hopes as much as the next company founder to strike it rich -- is knowing what they'll do differently if they return to venture capital. ``I used to sit and nod and think I could fake my way through another meeting with someone,'' said the founder of the online advertising start-up. ``As an entrepreneur, I now see you can instantly recognize who doesn't get it, or care.''

Conrad, who has raised $4 million for Sphere and whose investors include Kevin Compton and Doug MacKenzie of Kleiner Perkins, said he'll be more sensitive.

``I think there will be a place and time when I'll be a VC again, and I'll remember the clueless things I did before,'' including asking a struggling entrepreneur to meet him at his expensive hotel during a cross-country trip, rather than drive to the start-up.

``You don't have to be in the trenches with them, but a lot of entrepreneurs resent VCs because they think they're disconnected from reality. Now, I see why.''

--------------------------------------------------------------------------------
Contact Constance Loizos at cloizos@mercurynews.com or (408) 920-5920.

Go4Ventures helpful summary of EU VC activity

2006-11-28T12:25:00.000-08:00

Every month or two, Go4Ventures in London sand out an informative summary of VC activity in the EU. Here is the most recent:

Dear industry colleague,

Attached is the October edition of our Monthly European Technology VC Bulletin. Again the month of October showed healthy gains, with nine Top Headline Transactions (more than €7.5 million). Overall the market is 23% ahead compared to the same period last year.

As our readers will know, as well as chronicling the return to health of the European VC market, we also aim at showing how the market and our industry are changing. In that respect, there were a number of interesting developments or debates during the course of October. A key debate was started by Steve Dow, a GP at Sevin Rosen who argued in an interview that the traditional venture capital model is broken. Many blogs picked up on the debate (for a good entry, see the article from Fred Wilson at Union Square Ventures here). We'll let you read the details, but a number of points are worth making:

VC is a game for either young people or old timers. Younger players underestimate how difficult it is and how much dedication is required to be successful. Old timers have seen it all, and are prepared to face up the vagaries of what is essentially a cyclical market at the mercy of long and unpredictable technology trends. So if you're young and impatient or have already made your money, forget it - the quick money schemes of the late 1990s were probably a once in a lifetime opportunity!
VC is becoming more international, with substantial opportunities outside the US (one of the premises behind the work we do at Go4Venture incidentally). For a view point which carries weight, let us quote Steve Jurvetson from DFJ (Draper Fisher Jurvetson): "Does the model need to change? The answer is yes but in a completely different area - expanding internationally (..) the lion's share of gains have come from China. Next would be Europe". Yes, Europe!
VCs will need to start chasing new areas (clean technology, environmental, or media - as Roger McNamee is doing at Elevation Partners) as well as mining the opportunities from the "you've seen nothing yet" broadband and mobile internet access space. Pushing the frontiers may not be a European VC speciality. However, it should become easier to operate successfully in Europe as we benefit from a larger pool of repeat entrepreneurs (a sure way to reduce VCs' anxieties or raise their level of confidence - depending on the way you want to look at it), more experienced VCs and a stronger network of better advisers. After all, part of the recipe is to follow the lead of US VCs already operating in Europe!
VCs operating in more traditional IT areas will have to figure out a way to make great returns on smaller exits (€100-250 million). This should not be an excuse for lacking ambition or starving European companies for capital. But in an odd way, making more with less cash should play to the strengths of the more traditional European VC operators.
For an illustration of how tall an order it is to be a successful VC, just take a look at a couple of recent announcements:

One deal which didn't quite make it as a Top Headline Transaction is Dailymotion (€7.0 million). The company started in February 2005, the same month as YouTube. It is rather ironic to note that the European startup is getting its first funding about the same time as its US counterpart gets sold to Google for $1.65 billion.
Another interesting snippet was the news of Good Technology selling out to Motorola after having raised $250 million from a range of prestigious Silicon Valley investors. This shows the depth of the US VC market, and their ability to sustain companies in the face of rather difficult market conditions (namely the entry of Microsoft in the push-email market with a new, free product). This shows (again) the difference between financial vs. strategic value, something which European VCs (under the pressure of their own LPs) don't always have the nerve to hold onto. For more on the circumstances of the Good Technology/Motorola deal, refer to the excellent blog entry from Bill Burnham of Inductive Capital here.
If access to deeper pools of capital is a key success factor (as we firmly believe it is), good news for funds' fund-raising is becoming more common in the European VC market:

SEP announced the closing of its new fund, its third, which closed over-subscribed and above target at a healthy €235 million.
A couple of early-stage funds got off to a good start, with German Creathor Venture Fund II closing at €50 million and Swedish InnovationsKapital closing its fourth fund at just above €100 million.
Newer markets are getting more attention with GIMV launching its Eagle Russia Fund with a target of €50 million to €80 million, and EIF announcing the final closing of its Spanish technology fund of funds Neotec with close to €200 million committed.
And Access Capital Partners held the second closing of its third European technology fund of funds, with €75 million already collected.
As usual, if you do not wish to receive further communications, just send a blank email to unsubscribe@go4venture.com.

The Team at Go4Venture.

__________________________

Go4Venture
1 Hay Hill
Berkeley Square
London W1J 6DH

United Kingdom

www.go4venture.com
Tel: +44 (0)20 7958 1672
Fax: +44 (0)20 7149 9811

__________________________

French exporters coming to Silicon Valley

2006-11-22T22:14:00.000-08:00

Chantal Buard is working on redesigning the firm website, www.entreprelaw.com, and tells me that not posting to a blog is worse than not having one at all. And that is bad enough!

So here is a video (http://www.dailymotion.com/video/xlhx9_fbia) produced by the French Business and Innovation Accelerator (http://www.frenchbusinessaccelerator.com/default.htm), which is accompanying established and emerging French companies who are coming to Silicon Valley. FBIA is helping the companies adapt their technology and their marketing to the US market, which is itself harder than it sounds. They are putting in place consultants who all specialize in some aspect of international business migration and who offer a range of appropriate expertise. The video explains it all, in English and French.

I am excited to be working with FBIA as they advance this project, and of course to be on the video. Does my accent in French really sound like that? Some things are better not known!!

Astecs of Silicon Valley

2005-05-06T17:14:00.000-07:00

Astecs is at www.astecs.org. It is an association of technology entrepreneurs based in Santa Clara, California.

It has a gift for attracting VCs, who are always on the look for a good investment. You somethimes get the feeling at the meetings that there are as many VCs as entrepreneurs!

I'm on a panel there tomorrow, May 7th, on what entrepreneurs need to know about M&A. It'll be fun. It'll also be really interesting to see what is currently preoccupying entrepreneurs in this space.

5/5/5

2005-05-05T20:52:00.000-07:00

Nothing profound today . . . but what a great date!

In the US: 5/5/5

In England: 5/5/5

The same date wherever you are in the West! The same numbers for the day, month and year!

Won’t happen again until June 6 2006. And once November 11 2011 is over, it won’t happen again for a very long time. I love numbers!