Sunday, June 20, 2010

Ontario's Emerging Technologies Fund: Progress Report

With a mandate to spend $50 million a year, Ontario's Emerging Technologies Fund should be the busiest tech investor in the province right now. And after a slow start, it looks like things might be picking up.

On June 10 the OETF quietly announced two matching investments: first, in b5 Media, long-time portfolio company of Brightspark Capital and JA Albright Ventures, and a second investment in Energate, a clean-tech play backed by Montreal-based Cycle Capital Management. These matching investments brings to 6 the total number of announced deals by OETF since its inception in 2009. The Fund notes on its website that it has 9 conditionally committed co-investments deals that will result in $16.77 million being invested this year.

The list of qualified investors who wish to access matching money now stands at 13, with all but two of them local players. The public record suggests that OETF has not yet succeeded in attracting new foreign investors to Ontario. I don't think this is the case, but regardless, it needs to change, and soon. Roughly half of the qualified investors are at the end of their current funds. Given the current LP market, they are not likely to raise new funds anytime soon, which means that while their status with OETF is good news for existing VC portfolio companies, it does not do much for new start-ups.

Now, those of you who know me know that I am now a big fan of OETF, which has participated in matching investments for some of my clients. Right now, John Marshall is my personal Elvis. But I think we as a community need to consider how to lever OETF's spending success to date to aggressively seek additional qualified investors.

Tuesday, June 08, 2010

Selling the Start-Up: How Antitrust Laws Can Kill Even the Smallest Deal

There is a special art to startup M&A. Those of you chasing the early exit should be forewarned: if your legal and professional advisors treat the sale of your startup like a typical small business sale, your problems can multiply.

What should a founder who sells his cool new social media tools business for, say, $5 million worry about? For one thing, the intervention of antitrust authorities. Increasingly, authorities are examining (and in some cases, undoing) small private company deals that have anti-competitive effects.

Corporate lawyers who don't specialize in tech consolidations might look at a $5 million price tag and rule out any antitrust concern, on the basis that competition laws in most jurisdictions are focussed on much larger transactions than the typical early high tech company exit. But your advisors need to look beyond pre-merger notification threshholds.

A start-up that has developed truly innovative or disruptive technology can dominate a market niche, or create an entirely new market altogether. If another player in that niche makes an offer, the result could be domination of a potentially huge market.

Consider last fall's $5 million sale by Diebold, Inc. of its money-losing voting machine division to Nebraska's Election Systems & Software. Despite the small purchase price, the result was a merged firm that controlled 70% of the market for voting systems. Fielding complaints from other competitors, among others, the US Department of Justice and nine states filed civil complaints. In March 2010, a settlement was reached which required the acquirer to sell all of the assets it purchased to another competitor, and to waive any rights to the business' employees. On May 19, a sale of the divested business to Dominion Voting Systems was announced. No price was disclosed.

Acquirors and sellers need to draw from this example (one of the uglier ones of many) and make sure that their advisors have all the facts when evaluating the impact of even the smallest sale.

Thursday, June 03, 2010

Hiring and Firing: Avoiding the Grey Areas

As a firm that represents entrepreneurs, we get involved in a lot of hiring and firing. And when it comes to these HR matters, I often want to smack my clients upside their heads.

Firing (or being fired) leads to litigation most often because of lax hiring practices. Founders, investors, early hires - all of you tend to take an almost abstract approach to the agreements you sign. This needs to stop.

An employment agreement needs to function as a roadmap. If there are grey areas, someone will take a wrong turn and litigation will ensue.

How to avoid this? You should not make or accept any employment offer that does not contain terms that allow you to calculate precisely what an employee is to be paid when he or she leaves the business. This means, at a minimum, the offer needs to specify: (a) how vacation accrues (monthly or otherwise), (b) whether unused vacation carries over from year to year, (c) whether bonuses and other incentive-based compensation will be paid out on departure, and (d) what will happen to options or shares held by the employee after he/she leaves.

Without this kind of clarity (and even in spite of it), parties on both side of the table are incented to exploit the grey areas for their own benefit. This may be less of a risk in jurisdictions where employment-at-will is a concept, but here in Canada our laws are pro-employee, to the point where employees are always incented to ask for more unless an agreement comprehensively disposes of all matters.

On the other side of the table, investors and employers often will take a limited view of what their obligations are to a founder/employee who is leaving the business, especially when it comes to stock. Take our friends at RIM, for example.

In 2004, Bryan Taylor, a VP of Engineering at RIM, was terminated without cause a few months before some 40,000 stock options granted to him were scheduled to vest. The options, with a strike price set at 1999 levels, would have netted Taylor $4.4 million if exercised and sold right away. While RIM apparently agreed to pay Taylor several months of severance, it refused to allow him to exercise the options, which vested during the severance period. You can read more about the matter here.

Taylor sued and the matter made its way through the Ontario courts until it was finally dealt with in April 2010. By that time, RIM had conceded that, in fact, Taylor was entitled to the options, but disagreed as to how much cash they should have to compensate him. Taylor argued that he was now entitled to more than the $4.4 million in question, since he would have held onto the shares which would now be worth approximately $12 million. The Ontario Superior Court partly agreed, holding that Taylor likely would have held onto 75% of the options in question.

Next time you sign an employment agreement (as either employer or employee) ask yourself whether the agreement is clear, or whether it’s possible this kind of problem could arise. Then smack yourself on the head and revise.

Wednesday, June 02, 2010

Yaletown Re-sizes

A few weeks ago Techvibes noted that Yaletown Ventures partner Steve Hnatiuk had been photoshopped off of the Vancouver-based seed fund's website. Yaletown, which has been know to make seed investments in Ontario green tech companies (6N Silicon), is one of the few seed funds to raise money from LPs (including a recently announced $14 million commitment from Alberta's Enterprise Corporation). PE Hub now confirms that Steve has left to pursue other opportunities in the Canadian VC market, which will be announced in the fall.

Why do you care? If you are an entrepreneur, angel or advisor anywhere but Silicon Valley, it's important to know where the experienced investors are, if only to hide the single malt before they show up at a party. Funds generally follow experience. Stay tuned.

FileMobile Makes Video Social

It's a constant refrain here in Toronto, a social and digital media innovation centre: you haven't arrived until you've found meaningful technology partners for your business. We congratulate our client Filemobile, who has announced a technology partnership with giant Brightcove, which will see Filemobile's multimedia comments and ratings applications integrated with Brightcove's video players and platforms.