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  • Principally interested in who has work experience with technology companies.
  • Good idea to get a big three ringed binder and organize materials as they are distributed. Somebody needs to confirm that the supplemental books are accessible in the library
  • This will cover many statutory provisions of both the California and Delaware Corporations Codes; the California Corporate Securities Laws; the US Securities Act of 1933; the corporate governance requirements mandated of Nasdaq-listed public companies; and various principles in both tax and accounting. There are typically a lot of buzz words in this industry. It is important to stop me if I start rattling on about something that doesn’t make sense. I don’t think there is anything conceptually difficult to understand in understanding buzz words or anything else about the venture capital and emerging growth company environment. The important thing is to think about the relationships that the different concepts have with one another.
  • We will focus principally on California law, with occasional references to the Delaware General Corporations Code. Question: why is the Delaware General Corporations Law so important to corporate attorneys practicing in California?
  • Why is the 33 Act relevant? Why is the 34 Act relevant? Sarbanes Oxley: o promissory notes to officers o board/committee process and composition o internal and disclosure controls; Section 404, management certifications and auditor reports
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  • slides1.ppt

    1. 1. Venture Capital and the Emerging Technology Company Hastings College of the Law Mark Baudler Rob Kornegay Spring 2008
    2. 2. Week 1: Introduction and Overview <ul><li>Agency Theory to </li></ul><ul><li>Financial Contracting </li></ul>
    3. 3. Introduction and Housekeeping <ul><li>Our background </li></ul><ul><li>Your background </li></ul>
    4. 4. Introduction and Housekeeping <ul><li>Class roster </li></ul><ul><li>Class participation </li></ul>
    5. 5. Introduction and Housekeeping <ul><li>Course materials </li></ul><ul><ul><li>Course syllabus </li></ul></ul><ul><ul><li>Distributed readings and materials (required) </li></ul></ul><ul><ul><li>“ Caselettes” and problem sets (required) </li></ul></ul><ul><ul><li>Course statutes and regulations (required) </li></ul></ul><ul><ul><li>Posted powerpoint presentations (pdf format) </li></ul></ul><ul><li>Class preparation </li></ul>
    6. 6. Introduction and Housekeeping <ul><li>Meet Monday afternoons 4:30-6:30pm </li></ul><ul><ul><li>See semester class schedule </li></ul></ul><ul><ul><li>Evening routine (breaks, questions, etc.) </li></ul></ul><ul><li>Our accessibility: </li></ul><ul><ul><li>after each class, and at the office </li></ul></ul><ul><ul><li>650-320-4597 Mark </li></ul></ul><ul><ul><li>650-320-4533 Rob </li></ul></ul><ul><li>Email: </li></ul><ul><ul><li>[email_address] </li></ul></ul><ul><ul><li>[email_address] </li></ul></ul>
    7. 7. Introduction and Housekeeping <ul><li>Required course pre-requisite: </li></ul><ul><ul><li>Business Organizations </li></ul></ul><ul><li>Class communications: email </li></ul><ul><ul><li>Weekly postings and announcements </li></ul></ul><ul><ul><li>Powerpoints will be posted before or after each class </li></ul></ul>
    8. 8. Introduction and Housekeeping <ul><li>Grade components </li></ul><ul><ul><li>100% final exam </li></ul></ul><ul><ul><li>Discretion to recognize class participation </li></ul></ul><ul><li>Final exam </li></ul><ul><ul><li>Short answer/multiple choice </li></ul></ul><ul><ul><li>Hypothetical fact situations with essay questions </li></ul></ul><ul><ul><li>2 hours—open book (bring a calculator) </li></ul></ul>
    9. 9. Course Objectives <ul><li>A basic understanding of the legal and business issues that are involved in the growth cycle of the venture-backed technology company </li></ul><ul><li>A mainstream view from the perspective of Silicon Valley </li></ul><ul><li>The corporate lawyer as business counselor </li></ul>
    10. 10. Course Objectives <ul><li>Multi-disciplinary approach: </li></ul><ul><ul><li>Business judgment and evaluation </li></ul></ul><ul><ul><li>Accounting </li></ul></ul><ul><ul><li>Tax </li></ul></ul><ul><ul><li>Psychology </li></ul></ul><ul><ul><li>Process </li></ul></ul><ul><ul><li>Law </li></ul></ul>
    11. 11. Course Outline <ul><li>Theories of financial contracting </li></ul><ul><li>High level view of the venture capital industry </li></ul><ul><li>Venture capital: basic fund structure </li></ul><ul><li>Start-ups: basic organizational matters </li></ul><ul><li>Stock in the start-up environment </li></ul><ul><li>Valuation of start-ups </li></ul>
    12. 12. Course Outline <ul><li>Primer on federal and state securities laws </li></ul><ul><li>Equity incentive plans and arrangements </li></ul><ul><li>Venture financing: term sheets and related issues </li></ul>
    13. 13. Guest Speakers <ul><li>Venture Capitalist </li></ul><ul><ul><li>To be determined </li></ul></ul><ul><li>Entrepreneur/CEO </li></ul><ul><ul><li>Jason Knight and Mark Hedlund of Wesabe, Inc. </li></ul></ul>
    14. 14. Principal Legal Resources <ul><li>California Corporations Code </li></ul><ul><ul><li>California General Corporation Law </li></ul></ul><ul><ul><li>Delaware General Corporations Law </li></ul></ul><ul><ul><li>California Corporate Securities Law </li></ul></ul><ul><ul><ul><li>California Department of Corporations </li></ul></ul></ul>
    15. 15. Legal Resources <ul><li>Federal Securities Law </li></ul><ul><ul><li>Securities Act of 1933 </li></ul></ul><ul><ul><li>Securities Exchange Act of 1934 </li></ul></ul><ul><li>Other Legal Resources (but we won’t cover) </li></ul><ul><ul><li>Nasdaq Corporate Governance Rules </li></ul></ul><ul><ul><li>Sarbanes-Oxley Act of 2002 </li></ul></ul><ul><ul><li>SEC rules and releases </li></ul></ul>
    16. 16. The Players in the Technology Community <ul><li>The Public Equity Markets </li></ul>Venture Capitalists Angel Investors Accountants Lawyers Investment Bankers The Universities Silicon Valley Infrastructure Technology, Inc
    17. 17. Some Names of the Supporting Cast <ul><li>Venture Capital </li></ul><ul><li>Mayfield </li></ul><ul><li>Sequoia Capital </li></ul><ul><li>Kleiner Perkins </li></ul><ul><li>Accel Partners </li></ul><ul><li>New Enterprise Associates </li></ul><ul><li>US Venture Partners </li></ul><ul><li>Lightspeed Ventures </li></ul><ul><li>Panorama Capital </li></ul><ul><li>Bessemer Ventures </li></ul><ul><li>Hummer Winblad </li></ul><ul><li>Opus Capital </li></ul><ul><li>Sutter Hill Ventures </li></ul><ul><li>Battery Ventures </li></ul><ul><li>Draper Fisher Jurvetson </li></ul>Accounting Firms Pricewaterhouse Coopers Deloitte & Touche Ernst &Young KPMG ______________ Grant Thornton BDO Siedman Frank Rimerman + Co Investment Banks Credit Suisse First Boston Goldman Sachs Morgan Stanley UBS Investment Bank Deutsche Bank Securities Thomas Weisel Partners Bank America Securities Lehman Brothers Law Firms Cooley Godward DLA Piper Rudnick Fenwick & West Latham & Watkins Gibson Dunn & Crutcher Morrison & Foerrster Orrick Pillsbury & Winthrop Shearman & Sterling Wilson Sonsini Goodrich & Rosati
    18. 18. Agency Theory & Financial Contracts <ul><li>The corporation as a nexus of contracts </li></ul><ul><li>Agency theory focuses on the relationship between the shareholder (principal) and the manager (agent). </li></ul>Legal Entity Suppliers Management Shareholders Customers Creditors/ Lenders Employees
    19. 19. Agency Theory & Financial Contracts <ul><li>“ The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot be well expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” </li></ul><ul><li>Adam Smith </li></ul><ul><li>The Wealth of Nations (1776) </li></ul>
    20. 20. Agency Theory & Financial Contracts <ul><li>Agency relationship exists where a principal delegates decision-making authority to an agent . </li></ul><ul><li>Shareholder/Manager is example of principal agent relationship </li></ul><ul><li>Challenge is to create financial contract structures that align interests of shareholders/managers in order to minimize agency costs . </li></ul><ul><li>Agency costs refer to the lost benefit to the principal because the interests of the agent may diverge from those of the principal. </li></ul><ul><li>“ Shirking” – actions by managers that diverge from the interests of shareholders. </li></ul>
    21. 21. Agency Theory & Financial Contracts <ul><li>Corporation’s capital composed of generally alienable, divisible claims on the assets and cash flows of the corporation </li></ul><ul><ul><li>Equity Claims of Stockholders </li></ul></ul><ul><ul><li>Debt Claims of Creditors </li></ul></ul>
    22. 22. Agency Theory & Financial Contracts <ul><li>Problem of Information Asymmetries </li></ul><ul><ul><li>Economic impact on markets where one party has more or superior information </li></ul></ul><ul><li>Used Car Market As Classic Example </li></ul><ul><ul><li>George A. Akerlof, “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics (August 1970) </li></ul></ul><ul><li>Impact on Market Pricing -> Bad Drives Out the Good </li></ul>
    23. 23. Agency Theory & Financial Contracts <ul><li>Adverse Selection / “Rational Paranoia” </li></ul><ul><ul><li>Common knowledge that someone (the informed party), knows more than someone else (the uninformed party), and the uninformed party will draw inferences from the actions taken and decisions made by the informed party </li></ul></ul><ul><ul><li>“’ Rational paranoia” because when there is a conflict of interest, it often involves drawing the conclusion that the informed party might be taking an action that is not helpful to the uninformed party </li></ul></ul><ul><li>AKA – the Groucho Marx theorem </li></ul><ul><li>Examples: Insurance </li></ul>
    24. 24. Agency Theory & Financial Contracts <ul><li>Moral Hazard </li></ul><ul><ul><li>The risk that one party to a contract may change their behavior to the detriment of the other party once the contract has been concluded </li></ul></ul><ul><li>Examples: Automobile Insurance </li></ul>
    26. 26. Review – Agency Theory and Financial Contracting <ul><li>Agency Cost – diminution in value of enterprise relative to the value realized if agent acted solely in the interest of the principal </li></ul><ul><li>Impact of Information Asymmetries </li></ul><ul><li>Moral Hazard </li></ul>
    27. 27. Venture Capital Industry Overview Powered By:
    28. 28. U.S. Fundraising
    29. 32. U.S. Investment: Overall
    30. 42. U.S. Investment: Regions
    31. 45. U.S. Investment: Valuations
    32. 49. U.S. Liquidity
    33. 59. European Investment: Overview
    34. 60. Perspective on European Market Equity Investment in Venture-Backed Companies, US vs. Europe ( $ ) Overall Investment European Equity Investment U.S. Equity Investment Amount Invested ($B) Source: Dow Jones VentureOne/Ernst &Young
    35. 61. Industry Trends <ul><li>The good news... </li></ul><ul><ul><li>There clearly has been a recovery in activity and investment levels in the US venture capital industry from the first half of the decade </li></ul></ul><ul><ul><ul><li>Dollars and # of deals have modestly but steadily increased since 2002; activity levels map back to 1995-1996 timeframe </li></ul></ul></ul><ul><ul><ul><li>Importantly, the number of seed/first round deals has increased: innovation rates are returning, as VCs are able to focus less energy on triaging existing companies </li></ul></ul></ul><ul><ul><ul><li>Top tier venture funds are willing to invest modest amounts (i.e., <$1 million) to get in early on “good deals“ </li></ul></ul></ul><ul><ul><ul><li>Term sheets are back to historical conventions, i.e., fair and even handed (relatively speaking) </li></ul></ul></ul>
    36. 62. Industry Trends <ul><li>The good news... </li></ul><ul><ul><li>2006 was the fourth largest year ever in VC investments in the U.S.: $27 billion </li></ul></ul><ul><ul><li>2007 is on track </li></ul></ul><ul><ul><ul><li>Somewhat higher from pre-bubble years </li></ul></ul></ul>
    37. 63. Industry Trends <ul><li>The good news... </li></ul><ul><ul><li>VC money for investment is abundant </li></ul></ul><ul><ul><ul><li>Silicon Valley has “market share” over #2 region, New England by a ratio of 3-to-1 </li></ul></ul></ul><ul><ul><ul><li>California (Silicon Valley + Southern California) has over 40% of all VC investments in the U.S. </li></ul></ul></ul>
    38. 64. Industry Trends <ul><li>The bad news... </li></ul><ul><ul><li>Spending by the Fortune 500 on IT requirements is flat, with bias against purchases from startups </li></ul></ul><ul><ul><li>Startup valuations are climbing </li></ul></ul><ul><ul><ul><li>Basic supply and demand: more money chasing fewer deals </li></ul></ul></ul>
    39. 65. Industry Trends <ul><li>The bad news... </li></ul><ul><ul><li>Liquidity event is taking longer from the date of first funding </li></ul></ul><ul><ul><ul><li>2.8 years (1999) vs. 6.6 years (2007) for an IPO </li></ul></ul></ul><ul><ul><ul><li>2.0 years (2001) vs. 6.6 years (2007) for M&A </li></ul></ul></ul><ul><ul><ul><li>Result: more capital is required to carry the company to an exit event (e.g., $17 million in 1997 to $68 million in 2007) </li></ul></ul></ul>
    40. 66. Industry Trends <ul><li>The bad news... </li></ul><ul><ul><li>U.S. IPO market in general not a viable exit to most VC-backed companies </li></ul></ul><ul><ul><ul><li>Ratio of M&A:IPO exits in 2007 is approximately 10:1. In 2001-2005, it was as high as 20:1. In 1999-2000, it was almost 1:1. </li></ul></ul></ul>
    41. 67. Industry Trends <ul><li>The bad news... </li></ul><ul><ul><ul><li>IPO market open only to companies with substantial and predictable revenues and economic fundamentals </li></ul></ul></ul><ul><ul><ul><ul><li>General wisdom: minimum annual revenues of $100 million to absorb compliance costs ($2-3 million/year) under Sarbanes Oxley </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sarbanes Oxley not likely to be modified by Congress anytime soon </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Scarcity of directors willing to sit on boards in the wake of Enron, Worldcom, et al. </li></ul></ul></ul></ul>
    42. 68. Week 2: The Venture Capital Industry and Related Topic <ul><li>Anatomy of a Venture Fund </li></ul>