tag:blogger.com,1999:blog-345989182024-03-13T23:27:26.962-04:00Venture Law LinesStart-up and Tech Law Notes from a lawyer and former VCSuzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comBlogger325125tag:blogger.com,1999:blog-34598918.post-32161703766057728782010-11-17T07:13:00.003-05:002010-11-17T07:25:51.191-05:00When University Commercialization Offices Turn Troll<a href="http://www.bloomberg.com/news/2010-11-15/intel-sued-by-university-of-new-mexico-over-chip-patent.html">Bloomberg</a> reports that the patent licensing office at the University of New Mexico has launched a lawsuit against Intel alleging infringement of a UNM patent for a process of making circuit boards.<br /><br />The lawsuit comes on the heels of rumoured successful negotiations by UNM with Samsung and Taiwan Seminconductor in respect of the same patent.<br /><br />This seems to me to be an imminently sensible (and potentially far more profitable) route for university commercialization offices. Are there any hero patent lurking in the bowels of Canadian tech transfer offices?<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-85015122764134831792010-11-16T12:43:00.003-05:002010-11-16T13:22:47.727-05:00What to do When Blackberry KIKs You to the CurbThis morning the blogosphere was abuzz with news that Blackberry had removed <a href="http://www.kik.com">KIK </a>from the Blackberry APP World store, without apparently providing any reason for doing so. It's not clear whether this is actually the case, but let's assume for the moment that it is. Can distributors like RIM lock out app vendors with impunity?<br /><br />Anyone who has sold through AppWorld and read its vendor terms can tell you that (like most distribution channels) RIM has reserved for itself the right to remove products from its storefront when it sees fit. However, actually exercising that right and removing apps like KIK can raise anti-competitive issues. If I were KIK, I'd be asking my lawyers, does RIM's leveraging of its rights as a distributor to remove a possible competitive threat to Rim's own Blackberry messaging constitute an unfair trade practice?<br /><br />This kind of issue has already become the subject of a wave of litigation in the US -take a look, for example, at Skyhook Wireless' September lawsuit against Google (more later on this one). Stay tuned.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-83780097847043567802010-09-23T12:46:00.002-04:002010-09-23T14:07:23.826-04:00Founder CEOs and Severance Agreements: Drafting tips from Mark HurdThe value of a severance agreements for departing CEOs lies not only in how much they promise to pay, but in what protection it preserves. Mark Hurd's agreement with HP sets out some of the subtleties that you should ensure your own arrangement addresses:<br /><br />1. <strong>Continuation of Indemnity</strong>. Most severance agreements will stipulate that, once a has made a lump sum payment to the departing employee, the company's obligations to make any further payments cease. Make sure that any indemnity the Company provided youa s an officer/director survive your departure, so that you are adequately protected in any future litigation brought against you or the company.<br /><br />2. <strong>Non disparagement/cooperation</strong>: Companies often require that departing employees agree not to disparage the business in any manner after they leave. Of course, this becomes awkward if you are approached by future investors or, say, asked to speak to a Congressional hearing. It's important to specify whether cooperation with respect to due diligence or other matters is agreed to.<br /><br />You can view the full agreement at various sites on line.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-6768324893032052732010-09-22T09:26:00.005-04:002010-09-22T10:32:14.077-04:00Not Now. I'm Having a Bad Day.Look, I'll talk to all of you tomorrow. Right now, I'm going back to bed. It's barely morning and already there are all kinds of signs that the day is not going to go well.<br /><br />First, a blow to women executives everywhere. Hillary Clinton sends the message that, even if you break through the highest of glass ceilings and become Secretary of State, no one will help you with your hair:<br /><br /><a href="http://3.bp.blogspot.com/_7Lvb1IioF1M/TJoFSWUdcXI/AAAAAAAAAJw/O9zm2i8KgpQ/s1600/hillshairclip.jpg"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 362px;" src="http://3.bp.blogspot.com/_7Lvb1IioF1M/TJoFSWUdcXI/AAAAAAAAAJw/O9zm2i8KgpQ/s400/hillshairclip.jpg" border="0" alt=""id="BLOGGER_PHOTO_ID_5519730106083144050" /></a><br /><br />All across Canada, board search committees are looking at this photo and thinking, maybe we don't need to address gender diversity on our board of directors right now. <br /><br />Then, I read that some mandarin within the federal government has been picking on a veteran, causing me to wonder whether veterans are as poorly served by the legal profession as they seem to be. <br /><br />According to this morning's <a href="http://www.globeandmail.com">Globe & Mail</a>, some chuckleheads within Canada's Veteran Affairs ministry decided that it was perfectly fine to use personal medical information about veteran Sean Bruyea in a briefing to the Minister in charge. At the time (2005), Mr. Bruyea was a vocal critic of Ministry's draft Veterans Charter and presumably, ministry officials were looking for a way to silence him.<br /><br />To be clear, this is not a matter of a few overzealous bureaucrats digging for dirt. The Globe reports that 614 people in Veterans Affairs accessed personal data, which included Mr. Bruyea's psychiatrist's notes. 150 of them shared emails about his medical treatment and Veteran's pension, and a further 243 liberal and conservative party staffers appear to have received briefing notes containing the same materials. It's a systemic disregard for privacy rights.<br /><br />How is this possible? Somewhere, somehow, someone decided it was acceptable to have Veterans sign away broad rights to their data if they wished to get Veterans benefits. And somehow, we've led an entire ministry to think this is acceptable. Don't even get me started on how this kind of widespread abuse impacts Canada's reputation as a leader in other emerging areas such as telemedicine, where control of medical records and data is important. Thank you very much indeed, Veterans Affairs.<br /><br />As lawyers seek out new practice niches, may I suggest some of you take a look at how specializing in veterans matters? Yikes.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-25798786108215398042010-09-21T12:40:00.004-04:002010-09-21T13:25:22.170-04:00The BDC: A Board Level ViewThis morning <a href="http://www.wellingtonfund.com/blog">Mark McQueen </a>eloquently pointed out that, despite its expanded mandate to invest in entrepreneurs, the BDC has resolutely remained....a bank. Even though it was allocated nearly $500 million for venture capital investing, Mark reports, the BDC has deployed a mere $58 million and change in venture capital investments, at a time when the need for investors (and for VCs, investing partners) has never been greater.<br /><br />Just between us girls, this is no great surprise. In 2009 the BDC was saddled with the gargantuan task in of overseeing and implementing credit stimulus programs to preserve cash flow for SMEs; it's fair to say their hands have been full. But BDC's sidelining of venture capital support is not simply an oversight. BDC's CEO has always made clear that he prefers to focus is on companies with strong balance sheets and assets. And when I look at the board of directors of BDC, I question not only whether this is likely to change, but whether there is even anyone likely to ask if it should.<br /><br />BDC's board is first-rate. As a group, they tick all the boxes any board recruitment committee would want, save one: there is no representation from the start-up or venture capital community. Entrepreneurs and VCs, who form the cornerstone of Canada's innovation agenda are for all intents and purposes locked out of the board room. <br /><br />Oversight of the BDC should be conducted by a group that includes those who can evaluate BDC's performance from the high risk capital side of the table. I'll nominate Mark on your behalf; he already has the shirts for it.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-49207058919816271492010-09-20T11:47:00.008-04:002010-09-20T15:19:16.269-04:00The Challenge of Adding a Corporate InvestorThe corporate VC is the unicorn of high risk investing: while many sing of them, few have ever really seen one up close. This is why I recommend to start-ups who find themselves dealing with corporate investor that they should assume they are engaged in a business development exercise and frame their disclosures and their deal terms accordingly. Here's why: <br /><br />With the exception of a notable few (<strong>Dell, AT&T</strong>), few corporations establish separate corporate venture funds. More often, companies establish venture "<em>programs</em>" for which specific funds are notionally budgeted, but not reserved. Investments are tightly linked to corporate strategy, and often made to test out new lines of business and/or as a first step in an acquisition. <br /><br />This loose structure makes most corporate venturing models inherently unpredictable. In some cases, taking investment from a large corporate investor can ultimately cost you market share. Just ask <a href="http://www.craigslist.org">Craiglist</a>, which has for the last few years been locked in a litigation battle with its shareholder, <a href="http://www.ebay.com">eBay</a>.<br /><br />On Sept. 9, the Delaware Chancery Court issued the latest ruling in the ongoing dispute between Craigslist, its founders, and eBay, which had invested $32 million in Craigslist in 2004 in exchange for a 28.4% stake in the business.<br /><br />eBay's investment had a typical structure: it received a board seat and special approval rights over certain corporate decisions. The stockholders agreement even provided that if eBay opened a business that competed with Craiglist, eBay would lose forfeit its approval rights, leaving the founders free to remove eBay's board seat and to run the business. <br /><br />The problem with these terms is that they did not incent the investor to grow Craigslist. There do not appear to be restrictions in the stockholders agreement on who eBay's could place on the Craigslist board, nor on who at eBay could access confidential information about Craigslist, its technology or its business model. The absence of any controls in some ways incented eBay to create its own alternative to Craigslist.<br /><br />When a corporation places one of its employees on an investee board, a clash of cultures often results. I've seen this happen time and again: nominees from mature companies often equate the looser startup atmosphere with incompetency. This often leads to the inevitable "we could do it better ourselves" way of thinking. The board books distributed to directors each month enable this further, by providing nominee directors with the kind of information that, coincidentally enough, is the same information an employee would want to collect in order to draft the business case for an internal new product proposal at his business.<br /><br />eBay's investment in Craigslist seems to have taken this course. According to Business Net, eBay even admited that it used the confidential information it obtained as a board member and investor about Craigslist to help <strong>Kijiiji</strong>, eBay's competitive classified service. The lawsuits continue.<br /><br />For me, Craigslist is a cautionary tale on the problems that come if you assume that a corporate investor should be treated in the same fashion as any other institutional investor. Corporate investor 101: <br /><br />1. Do your homework and understand what kind of investor you are dealing with. <br /><br />2. Unless you are dealing with the fabled unicorn, you need to assume that there is a risk your shareholder will become a competitor. <br /><br />3. Insist on a Chinese wall between those who are managing the investment in your business, and those in your investor's operations who might compete with that business. The two worlds should never co-mingle. <br /><br />4. Avoid corporate investors who could easily displace your company if their corporate strategy shifted. The bigger the partner, the bigger the risk to you if they set up their own competitive business. It may not be enough to reduce their shareholder role in the business if your investor has cannibalized your position in the marketplace.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-37644643506789586232010-09-14T09:32:00.005-04:002010-09-14T10:45:11.699-04:00Mobile and Med Tech Start-Ups: the Next Great Wave in Ontario?Last week Barry Gekiere, the tall drink of water who is the new chief of Ontario's Investment Accelerator Fund, <a href="http://www.marsdd.com">coyly announced </a>that he has a fresh $7 million available for life sciences and med tech startups. This leads me to ask application developers, what are you waiting for?<br /><br />Ontario has one of the largest telemedicine networks in the world. The province is poised to be one giant early adopter of enabling services and technologies that would leverage this network. We also have one of the most highly skilled populations of application developers, and a track record for building profitable services plays(if there's one thing Canada has always done well, it's build service providers - look at the sale this June of Stream the World to Triton Digital Media). <br /><br />Teledialysis, remote monitoring of medication regimes, wireless monitoring of cardiac performance - start-ups trying to deliver solutions that streamline healthcare services delivery have found ample venture (and strategic backing) south of the border. Ontario has significant drivers of growth in this space - stay tuned.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-52906468486580716002010-07-23T07:09:00.002-04:002010-07-23T07:21:49.746-04:00Mediazoic streams cashCongratulations to our client Greg Nisbet at <a href="http://www.mediazoic.com">Mediazoic</a>, who yesterday announced an investment from Slaight Communications Inc. in Mediazoic's personal broadcasting software business. <br /><br />I checked the calendar and it's been 8 years since I started representing start-ups in online music and entertainment, beginning with the launch of <a href="http://www.puretracks.com">Puretracks</a>, Canada's first music download store. It's practically a mature industry. You can read about Mediazoic, and Greg's unique take on the future of the music industry, at the company <a href="http://www.mediazoic.com">site</a>.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-76831651505869710212010-07-20T07:56:00.002-04:002010-07-20T08:52:57.481-04:00Ontario's Investment Accelerator Fund: Phase 2 BeginsFor the last four years, Ontario's <a href="http://www.oce-ontario.org">Investment Accelerator Fund </a>has been a lifeline for many high- growth, early stage companies, providing convertible debenture financing of up to $500k per business. With the movement of the fund's management over to MARs, and the appointment of a new Managing Director (Barry Gekiere), it appears that the IAF may be laying the groundwork for an expanded mandate.<br /><br />The IAF was formed in 2006, when the Ontario Government annonunced a "Market Readiness Program" to provide early-stage tech companies with "financial support and management expertise". The premise was that this combination would allow promising companies to accelerate growth and attract investment from VCs.<br /><br />Despite receiving only $29 million to invest(a surprisingly large $17 million was allocated to a "Mentorship and Entrepreneurship Program"), the IAF produced. They get full credit in my books for adjusting to the market realities and assessing investments not only on the basis of whether the business would meet venture capital requirements for later investment. <br /><br />Now, however, the fund finds itself in a unique position. With sources of follow-on capital low, what approach should it take to its current investments? Should it risk destabilizing businesses by forcing repayment of debentures? Or should it convert its stake and become a shareholder, and (if so) what kind of role should it take as an investor? <br /><br />And what about future investments? Here, the IAF has always had a tricky path to walk. In an era where many companies build business plans on the assumption that there will be no venture capital, should the IAF assess investment-worthiness based on venture capital metrics, or should it focus more on the ability of a potential investee to create a sustainable, innovative business , i.e., one that may never be sold for millions of dollars and generate a capital gain? (A business that creates innovation economy jobs and is simply profitable is a policy maker's dream, but a VC's nightmare.) Does IAF's investment committee have the right blend of advisors to ensure that decisions reflect both equations, or is it too heavily populated with VCs?<br /><br /><br />Stay tuned.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-74069724562998995372010-07-19T11:48:00.004-04:002010-07-19T13:16:19.593-04:00Is Canada the Worst Consumer of its Own Innovation?According to <a href="http://www.techcrunch.com">Techcrunch</a>, a whopping $69 billion was spent on tech mergers and acquisitions in 2009. For me, the most interesting part of this data is the almost complete absence of Canadian acquirers. <br /><br />If there is one common element in recent press about successful start-up exits, it’s this: the acquirer's residence is almost always anywhere but Canada. Large Canadian companies don't share the same appetite for Canada's start-ups as their foreign counterparts. <a href="http://www.bumptop.com">Bumptop'</a>s patents? You can visit them at Google. <a href="http://www.6nsilicon.com">6N Silicon</a>'s silicon purification technology? Send your royalty payments to California. For all the tax dollars we allocate to fostering new discoveries and patents, it would seem that we rarely retain any ability to reap long-term rewards. This doesn’t make a lot of sense to me: when I pay for a facial, for example, I don’t expect to see the blackheads disappear from my neighbour’s face. Which leads me to ask, <em><strong>is Canada the worst consumer of its own innovation?</strong></em><br /><br />A long-standing complaint of many in the venture capital sector is that the corporate culture at Canada’s leading tech companies is too conservative to successfully implement a growth strategy based on M&A. Their engineering departments remain dominated by developers who swear by the “not invented here” school of thinking. The result? Often, it’s a deal focussed on acquiring patent rights, together with some transitional services from the inventors. Not surprisingly, this kind of deal: (a) is lower-priced, and (b) tends to drive deal flow away from the acquirer into the arms of a competitor with a more entrepreneurial corporate culture – usually, someone outside of Canada. <br /><br />This mindset is also often reflected in corporate structure: because some Canadian tech stars do not view M&A as a cornerstone of their growth strategy, they have no real infrastructure to get deals done, or to properly integrate acquired staff into their businesses. In an environment where Google, Cisco and other competitors have entire departments focussed on mergers and acquisitions, this kind of ad hoc approach is a competitive disadvantage. And it shows: a US VC (and client) recently told me that he strongly discourages any of his portfolio companies from speaking about acquisitions with one Canadian tech giant, because it is a well-known “price bottom-feeder” who cannot complete a deal. <br /><br />Conservatism is hardly a flaw, but is it an approach that Canada’s tech leaders can afford in the current climate, where tech M&A is at an all-time high? As any VC knows, future growth and profit is all about the quality of investment opportunities, or deal flow, that one can generate. I worry that poor access to great acquisition targets will be the long term price to be paid for the current approach to M&A that many Canadian tech companies take.<br /><br />Beyond that, I worry about the return on my investment as a taxpayer. When we sell a start-up that turns out to have the next billion dollar discovery to a US acquiror, we lose the tax we could have collected from that business. Tax that could have paid for funding for more discoveries. <br /><br />A common question in the world of Canadian innovation is: when? When will we see the next Nortel? With all the money being deployed (and tax credits awarded) for research and innovation over the last 12 years, why aren't there more emerging tech/biotech/clean tech giants? If we do not focus on improving the more mature parts of the value chain, then Canada’s innovation economy may well become an export industry. This would be wrong. Innovation is not like oil; there isn’t an infinite supply which can be extracted and shipped offshore for profit. How can we incent more Canadian acquisitions of Canadian tech? And beyond this, how do we create tech acquisition leaders?<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-27829891299835811522010-07-06T11:02:00.006-04:002010-07-06T11:51:31.644-04:00Facebook Law: Beyond PrivacyThere is a thin line between keeping a trade secret, well, secret and public disclosure, and that line is most narrowly drawn in the world of social networks. All of you who use your Facebook page and other networks as your own personal start-up sites, take heed:<br /><br />Can postings, messages and/or emails that you send through social networking sites be used against you in contractual disputes? According to last month's ruling by the US District Court (Central California), the answer is maybe, probably, yes - perhaps. Would the same conclusion be reached in Canada? That also isn't clear. <br /><br />Before the court was a request to subpoena all private messages, wall postings and comments posted by a litigant on his Facebook and MySpace pages. These items, it was argued, would support a defense in connection with a breach of contract/copyright infringement suit.<br /><br />The court based its ruling on the antiquated <em>Stored Communications Act</em>, enacted by Congress in 1986 to protect emails and other private communications that individuals placed "in electronic storage" with "electronic communications service providers". The court went through a heavily-footnoted, elaborate analysis to conclude that yes indeed, direct messages sent via Facebook should be treated like emails sent via an ISP, and therefore protected from disclosure.<br /><br />The court's findings did not extend to wall postings or comments, although the court hinted strongly that it would, if the facts indicated that the user had set his privacy settings to limited disclosure only.<br /><br />Would the same reasoning apply here in Canada? It is difficult to see the line being so firmly drawn in many cases. Privacy settings allow for selective social networking, which is not the same thing as private, confidential or privileged communication. I can think of a number of situations where extending privacy to a user who has selected "friend only" access to his postings would be absurd.<br />What if the user granted all friend requests? What if the friends who could see the postings were, in fact, people with no relationship to the user? (One of my Facebook friends is, in fact, someone I've never met. He likes Farmville. A lot, according to my news feed.)<br /><br />Until Facebook comes out with some kind of focussed business networks offering that manages these issues, you need to proceed with caution. Not a day goes by without a lawyer somewhere thanking the billing gods for the delivery of Facebook. For lo, unto us lawyers has been born an entirely new niche of legal practice: social networking, or "Facebook" law. Now that the body of Facebook law is expanding to deal with trade secret and copyrght disputes, and other commercial matters, the fun begins.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-1846973568131262010-07-05T08:34:00.004-04:002010-07-05T12:36:37.780-04:00SRED Reform: Warning Signs AheadI've often worried that Canada does not have a organization that advocates exclusively for the start-up. After all, who has the time? Instead, we rely on organizations such as CATA and the CVCA to address issues on our behalf. <br /><br />For the most part, this makes sense. But what happens when the interests of the start-up community diverge from those of other members of these associations?<br /><br />SRED reform is one such area. The federal government currently is undertaking a review of the SRED program, and is soliciting active input from the private sector. CATA, ITAC and all these folk have opened their coffers and paid for handsome white papers, industry studies, advocacy programs and the like. But what they are advocating is not necessarily in the best interests of start-ups. <br /><br />The SRED program, albeit full of warts, has been a valuable source of additional cash to Canadian start-ups. Under SRED, the federal government will refund up to 35%of the first $2 million spent on research and development each year to Canadian controlled private companies(CCPCs). For companies which do not meet the CCPC criteria (foreign-owned subsidiaries, publicly traded companies, start-ups backed by foreign venture capital), the cash refund is not available; instead, tax credits are awarded. <br /><br />CATA and ITAC have quite rightly pointed out the many flaws inherent in the system. The process for claiming SRED refunds and credits is certainly no picnic, and has given birth to a lucrative cottage industry of specialists who will prepare the paperwork for you for the price of a small hybrid car. Audits of SRED claims are on the rise as well, making the time to refund, and the amount of any refund, uncertain in some instances.<br /><br />But for many lobbying groups, addressing these flaws has taken a back seat to a different priority: getting cash refunds into the hands of later stage companies. Public companies, foreign-owned subsidiaries, profitable private companies - all of these folks should also, lobbyists argue, be eligible for SRED cash back.<br /><br />Now, I know what you're thinking: if Canada provides direct cash government assistance to mature companies, will this turn SRED into an illegal trade subsidy that will cause all kinds of problems for Canadian companies in international trade? (Okay, I <em>know</em> you're not thinking that - it <em>is</em> Monday after the long weekend - but really, could someone explain to me how this would NOT cause problems? Has anyone been watching the increasing tech protectionist tendencies of Europe? Why not just paint a red target on the back of, say <a href="http://www.opentext.com">Opentext</a> or <a href="http://www.rim.com">RIM</a>, and turn them towards the EU?) <br /><br />What you are <strong>really </strong>thinking is, why do I care if there's more companies at the SRED refund party? The answer is simple: a tax base of 33 million people. The amount of federal money available is finite, which means that, should the federal government concede the point, the end result may well be less pie for everyone. <br /><br />Unless advocates can explain where the extra cash to fund an expanded refund program will come from, we need to proceed with caution. Back in high school, I once shared a summer job with <a href="http://www.tonyclement.ca">Tony Clement</a>. I followed him around the Old City Hall courts for two months, doing furniture inventory for the Ministry of the Attorney General. Let me tell you: even as a university student, that boy could count. I would not bank on him advocating an unfunded policy.<br /><br />There are valid reasons why CATA and others are advocating SRED cash for bigger industry players, but these needs should be balanced against those of the people currently benefiting from SRED. And you, entreprenuers, need to do the balancing. Agree that there should be cash made available to foreign-backed start-ups, as CATA recommends (although I will note that in my experience, while US VCs and angels have found SRED interesting, it hasn't been a key driver of investing in Canada. It's like leaving cookies out for Santa - sure, he might come, but I know that it's more likely I'll end up eating them)<br /><br /><br />SRED reform could enhance or further decimate the prospects of Canadian start-ups. Your participation is needed.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-74691185580835403142010-06-20T17:38:00.004-04:002010-06-21T12:12:01.208-04:00Ontario's Emerging Technologies Fund: Progress ReportWith 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.<br /><br />On June 10 the OETF quietly announced two matching investments: first, in <a href="http://www.b5media.com">b5 Media</a>, 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 $16.77 million being invested this year. <br /><br />The list of qualified investors who wish to access matching money now stands at 13, with all but two of them local players. The public record suggests that OETF has not yet succeeded in attracting new foreign investors to Ontario. I don't think this is the case, but regardless, it needs to change, and soon. Roughly half of the qualified investors are at the end of their current funds. Given the current LP market, they are not likely to raise new funds anytime soon, which means that while their status with OETF is good news for existing VC portfolio companies, it does not do much for new start-ups.<br /><br />Now, those of you who know me know that I am now a big fan of OETF, which has participated in matching investments for some of my clients. Right now, John Marshall is my personal Elvis. But I think we as a community need to consider how to lever OETF's spending success to date to aggressively seek additional qualified investors.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-12986393136621915192010-06-08T07:05:00.007-04:002010-06-08T12:36:05.667-04:00Selling the Start-Up: How Antitrust Laws Can Kill Even the Smallest DealThere 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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />Consider last fall's $5 million sale by Diebold, Inc. of its money-losing voting machine division to Nebraska's Election Systems & Software. Despite the small purchase price, the result was a merged firm that controlled 70% of the market for voting systems. Fielding complaints from other competitors, among others, the US Department of Justice and nine states filed civil complaints. In March 2010, a settlement was reached which required the acquirer to sell all of the assets it purchased to another competitor, and to waive any rights to the business' employees. On May 19, a sale of the divested business to Dominion Voting Systems was announced. No price was disclosed.<br /><br />Acquirors and sellers need to draw from this example (one of the uglier ones of many) and make sure that their advisors have all the facts when evaluating the impact of even the smallest sale.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-36140024515058125112010-06-03T11:54:00.003-04:002010-06-03T12:08:41.139-04:00Hiring and Firing: Avoiding the Grey AreasAs 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. <br /><br />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. <em>This needs to stop.<br /></em><br />An employment agreement needs to function as a roadmap. If there are grey areas, someone will take a wrong turn and litigation will ensue. <br /><br />How to avoid this? You should not <strong>make</strong> or <strong>accept</strong> 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.<br /><br />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.<br /><br />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.<br /><br />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 <a href="http://news.therecord.com/articles/697399">here</a>.<br /> <br /> 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 $12 million. The Ontario Superior Court partly agreed, holding that Taylor likely would have held onto 75% of the options in question. <br /><br />Next time you sign an employment agreement (as either employer or employee) ask yourself whether the agreement is clear, or whether it’s possible this kind of problem could arise. Then smack yourself on the head and revise.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-42778969780762897682010-06-02T13:26:00.003-04:002010-06-02T13:40:40.476-04:00Yaletown Re-sizesA few weeks ago <a href="http://www.techvibes.com">Techvibes</a> noted that <a href="http://www.yaletown.com">Yaletown Ventures </a>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 $14 million commitment from Alberta's Enterprise Corporation). <a href="http://www.pehub.com">PE Hub </a>now confirms that Steve has left to pursue other opportunities in the Canadian VC market, which will be announced in the fall. <br /><br />Why do you care? If you are an entrepreneur, angel or advisor anywhere but Silicon Valley, it's important to know where the experienced investors are, if only to hide the single malt before they show up at a party. Funds generally follow experience. Stay tuned.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-30447806883821745942010-06-02T12:30:00.002-04:002010-06-02T12:38:19.446-04:00FileMobile Makes Video SocialIt's a constant refrain here in Toronto, a social and digital media innovation centre: you haven't arrived until you've found meaningful technology partners for your business. We congratulate our client <a href="http://www.filemobile.com">Filemobile</a>, who has announced a technology partnership with giant Brightcove, which will see Filemobile's multimedia comments and ratings applications integrated with Brightcove's video players and platforms.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-44218988355544046632010-05-28T22:36:00.005-04:002010-06-01T07:29:33.814-04:00The Inevitable Return of Labour Sponsored FundsFor several months now there have been rumours that the Ontario government is preparing to reintroduce the kind of investment tax credits that formed the backbone of Labour Sponsored Funds (or "LSIFs"). Whether this is an active policy initiative or wishful thinking, it's an inevitability.<br /><br />What's driving this evolution? On the one hand, the retail sector is crying (and really, it's SO unattractive when they do this)for investment product to sell to their customers. Thanks to IAF Funding and the new OETF matching funding for start-ups, Ontario has amassed a solid portfolio of Series A ready companies with no real money available to fund them. And, of course, sitting to the east of us all is Quebec and its growing start-up community, taunting us with the sheer velocity of activity driven by similar incentives.<br /><br />To appeal to a retail community, new LSIFs will have to look meaningfully different than their forebears. Certainly, they likely would need to have much lower management fees, and investment rules that allowed managers to take a balanced risk to investment. (Under old rules, funds had to be deployed the year they were raised to meet tax creidt eligibility requirements. In an up market, there was nothing headier than being a lawyer for a high tech start-up in November, when LSIFs would seek out companies into which they could dump funds before the year closed out). And, of course, there needs to be greater accountability for funds to their retail investors. <br /><br /> There's an opportunity to create a new, evolved retail product that will plug the gaps in our current investment ecosystem - will it emerge?<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-63115592233930666772010-04-27T11:37:00.002-04:002010-04-27T11:40:45.883-04:00Accolades for Toronto NanoTech Start-Up ContinueCongratulations to our client <a href="http://www.vivenano.com">Vive Nano </a>for receiving Frost & Sullivan’s 2010 North American Technology Innovation of the Year Award for its encapsulation technology to synthesize nanoparticles. During a week of local venture capital contraction, it's nice to be reminded why there are compelling reasons to be optimistic about our future as an innovation centre.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-56647938379271221492010-04-12T10:50:00.003-04:002010-04-12T12:56:34.992-04:00The Immigrant Opportunities Fund...Okay, there isn't one. But there should be. Here's why:<br /><br />1. <em><strong> Regional venture capital has lost its appeal.</strong></em> If you ask any North American VC left standing(or bettter yet, their former limited partners), they will tell you that there is very little appetite for the classic venture capital model in any region outside Silicon Valley. <br /><br />2. <em><strong>As traditional lps lose interest in general venture capital, new players are embracing purpose-driven opportunities</strong></em>. Regional funds focusing on investments that make the world better (clean water, social philanthropy, micro-entrepreneurs) in have particular done better in attracting investors.<br /><br />3. <em> <strong>Helping immigrants who are innovators prosper is not only part of our business history, it's great business today</strong></em>. There are only 33 million of us in Canada, and while we are all thinking as hard as we can, we lack a critical mass that would allow us to play a meaningful role in innovation (and attract meaningful investment) unless we grow our entrepreneurial base through acquisition. It won't do to wait for our base to grow organically, either. The only person ever to profit from natural evolution was Darwin. <br /><br />4. <em><strong>Current global conditions seem to be creating a unique opportunity. </strong></em> Innovation clusters in places such as Israel and South Africa are finding themselves short of growth capital as US VCs close up shop and retreat. Our own tech entrepreneurs, many of whom have strong ties to both regions, may be able to leverage our proximity to the US with the US limit on work VISAs to attract and grow a larger pool of entrepreneurial talent.<br /><br />5. <em><strong> A fund focused on investing in (and attracting) immigrant innovation may better leverage government money: </strong></em> there is a growing realization at all levels of government that job creation comes from emerging business, not established ones. Last weekend, the New York Times' Thomas Friedman quoted Robert Litan of the Kauffman Foundation: " Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less....That means that <em><strong>established firms created </strong></em><em><strong>no net new jobs </strong></em>during that period." Government funding available for job creation in high growth industries makes Canada a compelling candidate for emerging immigrant businesses and is a compelling partner for any private fund investing in this sector.<br /><br />6. <em><strong>Canada has only a few years at best before we lose the ability to carve out a leadership role in this niche</strong></em>: The need to attract and retain foreign students and entrepreneurs has reached mainstream discourse in the U.S. Right now it seems as if the failure of Congress to figure out how to pass any legislation is all that stands between it and immigration reform. It would be nice to lead, not follow.<br /><br />Canada is replete with unspent fund of funds money, and business magnates with strong ties to their countries of origin - the ideal set of limited partners. Is there anyone who'll take on the task?<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-29339434876416342082010-04-07T05:31:00.006-04:002010-04-07T11:21:38.146-04:00So Far, April Really Is the Cruellest Month<strong>Toronto, 4:45 a.m</strong>: <br />I am accepting some kind of award from former secretary of state Madeline Albright when the chirping starts. Somewhere, a bird bar has closed for the night and all the birds who didn't find a mate have headed to the park across the street to troll for action. Looking for Mr. Goodbird is happening right outside my window.<br /><br /><strong>4:51 a.m: </strong> <br />I give up on sleep and go to my office to start today's blog post. My dog seems unusually excited about this week's entry. She starts roaming the house and I don't think anything of it until I hear her heading to the basement, which is her emergency rest stop when she is having intestinal distress.<br /><br /><strong>4:53 a.m:</strong> <br />I love the smell of Pinesol in the morning.<br /><br /><strong>5:11 a.m:</strong> <br />I let the dog in the backyard to complete any unfinished business. I can't see what she's doing. I hope she's not eating grass.<br /><br /><br /><strong>5:18 a.m:</strong><br /> Back at computer. A distant rumbling sounds from the main hall. She ate grass. I come downstair and step in dog vomit. Warm dog vomit.<br /><br /><strong>5:19 a.m:</strong><br /> Pinesol also comes in lavendar scent and is safe for wooden floors. Why is no one else waking up? I exhume my buried hostility over husband's seeming inability to hear crying babies at night, too. Inconsiderate bastard.<br /><br /><strong>5:38 a.m:</strong> <br />Starbucks instant coffee does NOT taste as good as a brewed pot. Tim Horton would never lie to me like this.<br /><br /><strong>5:44 a.m:</strong> <br />Birds are beginning to sound needy and desperate. SHUT UP SHUT UP SHUT UP. Haven't they heard of The Rules? Playing hard to get is more effective. <br /><br /><strong><br />5:59 a.m:</strong><br />I consider arming self with son's paintball gun and going hunting. Benefits outweighed by thought of <a href="http://www.idee.com">Leila Boujnane's </a>outrage. French people are awfully protective of birds when they are not stuffing them in cages and forcefeeding them so there will be foie gras for brunch.<br /><br /><br />Springtime is for insomniacs.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-56728086824830281242010-03-29T10:56:00.001-04:002010-03-29T10:58:58.720-04:00What Liabilities Do Board Observers Have?A few years ago, I was sitting in a board meeting for one of my fund’s portfolio companies, listening to an investor rant on about why the board should turn down an offer to purchase the business. Now, the offer terms were not great, but they meant that everyone would receive some gain on their shares. Given the state of this particular company, this was a gift from heaven and it was hard to see how the board could find that the offer was not in the best interests of all. And yet, here this person was, insisting on a different path. I happened to know that he was in the middle of raising his next fund, and suspected that his position was driven by his desire not to record a modest return on this investment until the fund closed.<br /><br />The board probably should not have allowed him to co-opt the meeting to pursue his own agenda. He was, after all, an observer with no right to vote on the matter. But this is not an unusual event in private companies – observers often feel emboldened to try and influence board decisions, relying on the belief that their status somehow insulates them from personal liability for their actions.<br /><br />They are wrong.<br /><br />The active participation of observers in board affairs can change their status and their liability to a corporation. In Canada, for example, the law imposes liability on those who function as directors, not just those who are elected by shareholders. In the US, there is a similar concept referred to as the "de facto" director. And while there have not yet been reported court decisions in Canada where an observer has been found liable for breach of fiduciary duties, there are to my knowledge claims that have been made (and settled) against investor/observers on this basis.<br /><br />Angel and private equity investors need to particularly careful about their interactions with investees. Even as observers, investors will often manage the business of a corporation, even leading negotiations for additional financing or sales. It’s not unusual for them also to take an active role in board meetings, or to participate in what are otherwise purely directorial decisions. When things go wrong, it is inevitable that they may well be named in any lawsuit.<br /><br />It has been the usual practice for sophisticated investors to require a company to sign an indemnity agreement for observers, so that they are protected. I do not necessarily agree that this is appropriate, unless the agreement also contains provisions that bind observers to certain standards of conduct. What are those? Post coming up.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-56115326729579425512010-03-24T15:53:00.001-04:002010-03-24T15:54:39.402-04:00After Bootstrapping: Preparing for the Mid HaulTen years ago, most bootstrapped start-ups were built for the short haul, on an 18-month plan: spend your friends' money, build a prototype and either attract investors or close doors.<br /><br />Fast forward to today, and it's a different world. There are more bootstrapped, high growth innovative businesses than ever and - more importantly - most of them are surviving well past the 18-month mark.<br /><br />If you are one of the many who has moved from the short haul to the next stage of growth, consider this your wake up call. It may be time to do some spring cleaning.<br /><br />A start-up that reaches the mid-haul has meaningful assets: it has built goodwill in the business, acquired customers and built a core team. The manner in which you protected these assets in the early phases of business need to be appropriately upgraded.<br /><br />Here are the areas where I often find there is a critical mismatch between the advancing stage of the company and its operating structures: <br /><br /><strong>Employee Compensation </strong>: Companies heading into the mid haul have a fairly good sense of their growth path for the next 3-5 years. Now may be the time to consider whether options are the appropriate way to incent employee performance, or whether profit sharing plans would better match the company path for the mid haul.<br /><br /><strong>Protecting the Company Brand</strong>: Your business now has an identifiable brand and goodwill to protect. Establishing usage rules so that your trademarks are not diluted is important. I will defer you to <a href="http://www.jessicastonelevy.com">Jessica the trademark goddess </a>for further advice on this matter, but the important note is this: you must establish corporate standards for how your brand is used in collateral, etc., so that you do not dilute any claim you have to that brand.<br /><br />Equally important is controlling the way in which your company is discussed in the broader public sphere. Consider establishing company guidelines for employee use of social media, so that expectations are clear. Laso make sure that your alpha and beta testers (if appropriate) have agreed not to disparage any produucts or the company.<br /><br /><strong>Intellectual Property </strong>: So many of you have gone all Frodo-in-the-shire and allowed your employees to moonlight that this bears discussion. It is one thing to permit key employees to supplement income in the early years of the business through outside jobs. It is quite another when you permit employees to start their own business on the side. For example, what happens when they start taking customer support questions during your office hours? <br /><br />Business issues aside, you have no way of knowing what contracts your employees have signed with outside engagements, and these can potentially impact your own intellectual property. The mid-haul is the time to re-think your moonlighting policy,as well as the invention assignment terms your early employees agreed to.<br /><br /><strong>Customers:</strong> The mid-haul phase is when your business moves beyond missionary, early-adopter customers who sucked the life blood from you to follow-on customers who may be agreeable to more balanced contract terms. Now is the time to adjust contract terms and to make sure that your contracts follow your current revenue model.<br /><br />Companies who have adopted a SAAS model for some of their solutions tend to need to pay particular attention to their agreements, in my experience. Most SAAS-based contracts should have provisions that allocate risk between the customer and the business for: export controls, data security, disaster recovery, redundancy backup, sales tax treatment, among other matters. If you've cobbled together your SAAS terms from a business that does not use the same model, chances are you've missed important elements.<br /><br />I'll blog about each of these items in detail in the next few weeks. Other issues for the mid haul? Let me know.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-60545823387111567042010-03-21T22:22:00.006-04:002010-03-22T07:32:29.883-04:00What Legal Duties Do Angels Owe Each Other?Just about four years have passed since the current angel investing surge began, and we now have in our midst perhaps the largest group of active angel investors ever. <br /><br />With increased investment comes a proportionate increase in disputes, and opportunities for courts to consider the nature of the angel investing relationship. <br /><br />Earlier this year, the Ontario courts provided guidance on what obligations co-investing angels owe each other. Angel investing has always been done on largely a club basis, with loosely affiliated investors sharing information. How much angels shared with each other has been an unregulated matter.<br /><br />Now, the Ontario courts have laid out some basic rules in a recent ruling involving angel investor Paul Alofs and his fellow angel investors in Kremeko Inc., the Canadian franchisee for Krispy Kreme donuts. Last June, the Ontario Superior Court ordered Mr. Alofs to reimburse his co-investors a total of <strong>$655,000 </strong>for failing to tell them that Mr. Alof was exiting his investment in Kremeko. The full judgment was finally published just a few weeks ago and is an important cautionary tale.<br /><br />You may recognize Mr. Alofs' name, who returned to Ontario in 1999 after a much lauded California success with MP3.com. He was an early investor in Kremeko which raised money for angels and other investors in three tranches over 2001-2003 in order to fund the establishment of Krispy Kreme in Canada.<br /><br />It was Mr.Alofs who contacted certain other angels about the opportunity. According to the court’s decision, the group agreed to work collaboratively, conducting some due diligence individually and exchange their own views about the opportunity. After the investment, two of the angels continued to collaborate directly – Mr. Alofs would share information packages he received for board meetings with the another angel. Some of them reviewed and discussed other investments with Mr. Alofs as well. <br /><br />And when the company raised the second tranche of $14.5 million, one of the other angels asked Mr. Alofs for his views, and if there were “any red flags” that they should be aware of. Mr. Alofs reported that he would be doubling up his position (which, unknown to the other angels, he did not do). The angel repeated Mr. Alofs' comments to other angels, and they all participated in the round.<br /><br />Following the second tranche, Mr. Alofs sold his shares to the some of the other investors and resigned his seat on the board of directors. Before that closing, the court found that Mr. Alofs failed to disclose his sale of shares when asked by the other angels, and did not provide the real detaile for his resignation from the board. When the company went under several months later,the angels sued for deceit and negligent misrepresentation. Had they known that Mr. Alofs was no longer participating, the angels claimed, they would not have further invested.<br /><br />The court agreed. Given the relationship that one angel had not only with respect to Kremeko but also their ongoing discussions about various other investments” the court reasoned, Mr. Alofs should have known that his statements would be relied upon by other angels in determining whether to invest in the third tranche. The skill and knowledge of the angel did not in the court’s eyes reduce Mr. Alof’s liability: “Because someone is a sophisticated investor does not mean that such person would not listen to others and take their views into account.”<br /><br /><br />As a lawyer, this ruling has made me re-think the kinds of terms I like to see go into investmet involving groups of angels. It could also be the beginning of increased rules around angel club investing. Stay tuned.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.comtag:blogger.com,1999:blog-34598918.post-19761384717220154692010-03-08T06:43:00.007-05:002010-03-09T10:24:42.641-05:00Advisory Board Agreement BasicsRequests for advisory board agreements seem to be on the rise. Five years ago, I would have dissuaded clients from bothering with an advisory board, largely because advisors dilute founders' equity stakes and typically ended up as short term additions, often squeezed out when venture capital comes in.<br /><br />But that was then. In the last two years, the number of VC-free start-ups has skyrocketed, and many will likely never add venture capital investors to grow their businesses. In the new start-up reality, the right technical and business advisors can fill gaps in product and business strategy, and even open doors.<br /><br />What kind of agreement should there be between companies and their advisors? Obviously, I'd prefer it if you bought me a donut, or even sent me flowers and candy before I answer. A gal likes to be wooed before she provides favours. Let's start with a checklist of provisions I recommend advisory agreements contain:<br /><br />1. <strong>Description of the Relationship</strong>: <br /><br /> You need to think of this agreement in a similar way to any consulting agreement, and set expectations as to deliverables. After all, your advisors likely are receiving an equity stake in your business; it should be clear how they are to earn those shares. At a minimum, there should be a generic statment that the advisor will agree to meet with the company on an intermittent basis and provide general advice and guidance/ or work on the Company's behalf in the advisor's areas of expertise. The amount of time involved should be specified, e.g. "up to X days per month." Some advisors provide specific deliverables as part of their role and you should be specific as to what these are. <br /><br />2. <strong>Disclaimer of Employment</strong>:<br /><br />The agreement should state that the advisor has no right to employment or continued engagement. <br /><br />3. <strong>Payment for Services</strong>:<br /><br />State clearly what the advisor is receiving (shares or options),their vesting schedule and strike price. In addition, specify whether any out-of-pocket expenses of the advisor will be reimbursed. <br /><br />The vesting of options need not follow the traditional 3-4 year schedule of most option plans. Many early stage companies allow the options to vest upfront and while I understand the need to attract the right advisors from the get-go, it needs to be tempered with a need to ensure the advisors actually contribute to the business in the way you intend. My own view is that everyone performs better with a carrot dangling in front of them,and any vesting schedule - per meeting attended, over just one year - is better than none.<br /><br />Do not forget to state that the options are non transferable and that the advisor will be expected to agree that a voting trustee will vote those shares, not the advisor. An advisor is receiving a stake in the value he has created in the business, but he is not receiving a say in how that business is run.<br /><br />4. <strong>Confidentiality:</strong><br /><br />The law will not necessarily agree that advisors owe you or your company a duty of confidentiality. It is therefore critical that you have nondisclosure terms in place with your advisors.<br /><br /><br />5. <strong> Competitors:</strong><br /><br />Because advisors have other jobs and investments, it is difficult to get them to agree not to compete with yours or not to solicit your customers. A reasonable middle ground is to ask advisors to notify you if their other work might compromise your business, so that you may terminate the relationship (or at least, limit your disclosure to them while they are so engaged).<br /><br /><br />6. <strong>Ability to Perform Services:</strong><br /><br /> This provision is a statement made by your advisor that the advisor is free to undertake the services required by the advisory agreement, and that there is no agreement that would prevent the advisor from giving the benefit of his/her services. You have no way of knowing whether the advisor is under an exclusive services agreement elsewhere, or whether he/she has a non compete or other covenant in place that would be breached by taking on this role with you. You want to protect your business from any claim that an employer or other party might make that you have interfered with their agreement or induced your advisor to breach his contract with that party.<br /><br /><br />6. <strong>Ownership of Work Product:</strong><br /><br />As would be the case with any consultant, you need to ensure that you own any written work, suggested product improvements or other contributions your advisor makes to the business. <br /><br />7. <strong>Termination:</strong><br /><br />Do not be afraid to reserve a right to terminate the advisory arrangement at any time. 50% of marriages end in divorce, and business relationships are no different. Simply state that either party may terminate this arrangement at any time without further payment or penalty, and state what you intend will happen with the shares or options that have been granted (vesting typically ceases).<br /><br />If you are already using an agreement, please take a look at the terms and consider whether you need to add any of the above rpovisions. If you have other suggestions for must have terms for an agreement, send a comment.<div class="blogger-post-footer"><p id="blogfeeds"><$BlogFeedsVertical$></p></div>Suzanne Dingwall Williamshttp://www.blogger.com/profile/04259034870397202270noreply@blogger.com