1.
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
Cozying Up to Goliath: The Pros and
Cons of Taking on a Strategic Investor
By Dave Panos, CEO and Co-founder, Pluck Corporation
Most early-stage entrepreneurs who are
building successful companies will have the
opportunity to raise money from a corporate
partner that wants to invest for strategic
reasons. You also may find that existing
investors like the idea of filling out a round
with a partner that has deep pockets but
isn’t very sensitive to valuations. While the
prospect of cozying up to a strategic investor
initially sounds appealing, the implications
are significant and caution is advisable.
The Dance Begins
When in the throes of explicitly raising
money or developing a strategic partnership,
it is fairly easy to become seduced with the
idea of taking a strategic investment from a
Goliath partner. Among other things, it
rounds out the corporate résumé with a very
nice sound bite. You may rationalize that
there is some sort of transitive property that
magically will make your company more
valuable—if Goliath thinks it’s worth
investing in, then the category matters and
this start-up must really matter.
The corporate partner’s appetite for this type
of relationship varies wildly according to
market dynamics and the personalities
involved, but in positive economic
environments, it is fairly easy to rev up
Goliath’s engines. Some large companies
are very aggressive in their pursuit of
strategic tie-ups at the balance-sheet level.
In fact, it isn’t uncommon for them to
actually institutionalize the process to a
level where a formal and rigorous
conversation around investment must take
place before any strategic partnering deal is
consummated. However, note that many of
these companies aren’t investing solely to
realize a return on their capital, but rather
are looking to attach themselves to the
(Continued on page 8)
Feature Articles
Cozying Up to Goliath: The Pros and
Cons of Taking on a Strategic Investor
By Dave Panos, CEO and Co-founder,
Pluck Corporation ..................................Page 1
The Non-dilutive Cash Injection:
Selling Your Patents
By Kent Richardson and Erik Oliver,
ThinkFire Services..................................Page 1
From the WSGR Database:
Financing Trends ................................Page 2
Is the Government Your New
Lead Investor? .....................................Page 6
Mitigating Risks: Contracting
Considerations in a Down
Economy ............................................Page 10
The Fundraising Process: Best
Practices for Entrepreneurs and
Directors.............................................Page 12
In This Issue
(Continued on page 14)
The Non-dilutive Cash Injection: Selling Your Patents
By Kent Richardson and Erik Oliver, ThinkFire Services
Many companies in search of a cash infusion
are not aware that they might be sitting on an
asset that can be monetized to help meet their
liquidity needs. Whether you are an early- or
late-stage company in need of cash, if you
have a patent portfolio, you might consider
selling some of those patents, particularly
those that you do not need today. Indeed, the
cash generated from any such sale may
reduce the impact of, or eliminate the need
for, a dilutive down-round financing.
The Market for Patents
We estimate that approximately $1 billion a
year changes hands buying and selling bare
patents. These patent sales occur almost
exclusively in the information technology
sector, including such fields as wireless
communications, Web 2.0, SaaS, and LCD
TVs. Prices can range from a few thousand
dollars to more than $10 million per patent.
In the last decade, the growth of this market
has been remarkable. In 1998, only a few
large companies, such as Intel, Broadcom, and
IBM, were buying or selling patents. Today,
there is a robust market of buyers and sellers,
along with a developing community of patent
brokers and finders. With the growth of this
emerging market also come the challenges of
volatile pricing, deal transparency, lack of
standard terms and conditions, and lack of
standard processes.

2.
2
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
The first quarter of 2009 saw a very sharp
decline from previous quarters in both the
number of equity financings that were
completed as well as dollars invested. The
acceleration of the decline from the fourth
quarter of 2008 to the first quarter of 2009
was steep in comparison to the decline from
the third to fourth quarter of 2008. This
accelerated decline in the first-quarter private
equity financing market trails by roughly a
quarter the steep decline in the public equity
markets beginning in September 2008.
The backdrop for venture financing in the first
quarter continued to be challenging:
• The decline in venture capital
financings in the first quarter of 2009
that we saw in our database was
consistent with the declines reported
by VentureSource and MoneyTree.
These declines were experienced
across all sectors and across all stages
of venture capital rounds of financing.
• There were no venture-backed IPOs in
the first quarter of 2009, and only one
venture-backed IPO since the first
quarter of 2008. However, there were
two venture-backed IPOs that priced in
May 2009. While it is too early to tell
what this portends for future periods, it
is safe to assume that a high level of
venture-backed IPOs is not likely to
return immediately.
• According to VentureSource, the
number of exits in the first quarter of
2009 through merger and acquisition
transactions deceased in comparison to
the fourth quarter of 2008, continuing a
downward trend that began in the first
quarter of 2008. The average valuations
of merger and acquisition exits also
decreased significantly from prior
periods.
These and other factors have had a significant
negative impact on venture capital investing
in recent periods, which is borne out by the
data from the financing transactions captured
in our database. These trends continue to
impact the rate of return for the venture
capital asset class.
The number of financing transactions of all
types decreased from 151 transactions in the
fourth quarter of 2008 to 101 transactions in
the first quarter of 2009, a decline of
approximately 33%. This decline is even
steeper when compared to the financing
transaction activity in the third quarter of
2008, during which 183 transactions were
completed. The number of transactions
completed in the first quarter of 2009 was
significantly lower than the number of
transactions completed in any recent quarter.
There was also a steep decline in the
aggregate dollars invested in the first quarter
of 2009. The $606 million aggregate
investment amount was nearly 60% less than
the $1,485 million aggregate investment
amount in the fourth quarter of 2008. The first
quarter saw no megadeals, i.e., single
financing transactions involving an amount in
excess of $100 million. The absence of
megadeals in the first quarter of 2009 had
a significant impact on the aggregate
investment amount (three such megadeals
accounted for approximately $550 million in
investment amount in the fourth quarter of
2008). However, even after eliminating the
megadeals from the fourth quarter 2008 data,
the decline in investment dollars from
From the WSGR Database: Financing Trends
By Mark Baudler, Partner (Palo Alto Office)
1Q08 2Q08 3Q08 4Q08 1Q09
$1,478
$1,245
$1,616
$1,485
$606
$1,178
$1,245 $1,294
$920
$606
155
162
183
151
101
$0
$500
$1,000
$1,500
$2,000
$2,500
AmountInvested($M)
0
50
100
150
200
NumberofDeals
Total Amt. Invested Amt. Invested without Megadeals Total # of Deals
Q1 08 - Q1 09 Amount Raised - By Quarter
For purposes of the statistics and
charts in this report, our database
includes venture financing
transactions in which Wilson
Sonsini Goodrich & Rosati
represented either the company
or one or more of the investors
(although we do not include
venture debt or venture leasing
transactions, or financings
involving venture debt firms). This
data consists of more than 600
financings in each of 2005, 2006,
2007, and 2008, as well as more
than 100 transactions in Q1 2009.

3.
3
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
$920 million in the fourth quarter of 2008 to
$606 million in the first quarter of 2009
was significant, representing a decline of
approximately 34%. The decline in investment
dollars in the first quarter of 2009 is
significant in comparison not only to the
fourth quarter of 2008 but also to other
recent quarters.
The number of Series A financing rounds was
down significantly in the first quarter of 2009
when compared to not only the fourth quarter
of 2008, but also to each of the other three
quarters of 2008. Given the macroeconomic
climate, this is not surprising, but it does shed
light on just how difficult it has been recently
for new start-ups to attract venture financing.
Not shown in the tables is the significant
decrease of angel-led financing transactions.
Our database only recorded two such angel
financing transactions in the first quarter of
2009. There are likely a number of factors
contributing to the paucity of angel financing
rounds, including steep declines in many
angels’ personal net worth and increased
conservatism for new investments. As a
result, entrepreneurs are experiencing
significant difficulties in securing early-stage
financing for their companies in the current
environment.
Similarly, the number of Series B and the
number of Series C and later rounds of
financing have continued to decline from
prior periods. These decreases are likely
attributable to a number of factors, including
heightened conservatism, increased diligence
time prior to making investments, and
venture capital firms deploying a greater
amount of capital to their existing portfolio
companies (and often only to certain of these
portfolio companies).
The first quarter of 2009 also saw a marked
decrease in the number of bridge transactions.
Bridge transactions are often made for the
purpose of providing capital between
investment rounds or to provide capital to
enable a company to
complete an exit transaction
or a wind-down. Bridge
transactions also are used in
some cases as a means of
financing prior to a first
equity round of financing.
This type of seed-investment
bridge financing also declined
sharply in comparison to
prior periods.
Not surprisingly given the
economic climate, the percentage of down-
round financing transactions—transactions
where a company’s valuation declines from
the prior round of financing, resulting in a
price per share of the new security that is less
than the price of the security issued in the
previous round—has increased significantly.
In the first quarter of 2009, slightly over 50%
of all Series B and later financings were down
rounds, as compared to just over 25% in the
fourth quarter of 2008. The percentage of
down-round financings in the first quarter of
2009 is over twice as high as the percentage
of down-round financings in the years from
2005 through 2008.
Further on this point, in the first quarter of
2009, only 29% of Series B and later rounds of
financing were up rounds, as compared to
financings that were down rounds or where
the per share valuation was flat. In
comparison, at least 65% of such financings
were up rounds in the years from 2005
through 2008. This data reflects the
deterioration of the national and global
economies combined with the severely
challenged exit opportunities for venture-
backed companies.
The charts on the next page set forth the
median amounts raised and median pre-
money valuations broken down by series of
equity financing. The first quarter of 2009,
compared with the quarterly data from 2008,
reflects decreases in both median amounts
raised as well as median pre-money
valuations. The same holds true for Series B
financings (with the exception that median
amounts raised in the first quarter of 2009
increased slightly in comparison to the data
from the fourth quarter of 2008) and for Series
C and later financings. The steepest decline in
all of these charts is the median pre-money
valuation for Series C and later financings in
the first quarter of 2009 as compared to prior
periods. This ties to the down-round financing
data trends discussed above.
In sum, the data shows that the deterioration
in the investment climate that began in 2008
accelerated in the first quarter of 2009.
0
10
20
30
40
50
60
70
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09
#ofdeals
Series A Series B Series Cand Later Bridge
Number of Deals by Quarter
2005 2006 2007 2008 Q3 2008 Q4 2008 Q1 2009
Down 21% 21% 14% 19% 16% 26% 51%
Flat 14% 14% 13% 12% 11% 18% 20%
Up 65% 65% 73% 69% 73% 56% 29%
Up vs. Down Rounds*
*Series B and Later

4.
The table on the next page reflects
certain terms regularly used in venture
financing deals.*
Overall, the data does not show that deal
terms in the first quarter of 2009 (other than
valuations) changed dramatically as compared
to prior periods. Nonetheless, given how
difficult it is to raise venture money in the
current environment, it is not surprising to see
that the number of Series B or later financings
where there is a pay-to-play provision for such
round of financing increased. Pay-to-play
provisions are structured so that existing
investors have to participate in the next
financing or else lose some or all of the
benefits they currently hold as preferred
stockholders—these provisions are “sticks”
to encourage investment in new rounds of
financing.
*To see how the terms tracked in this chart might be used
in the context of a financing, you can construct a draft
term sheet using the automated term sheet generator
available on wsgr.com.
4
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
From the WSGR Database: Financing Trends (Continued from page 3)
$9.2
$12.1 $12.4
$6.1
$8.0
$20.0
$24.0 $25.0
$17.0
$15.3
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09
$M
Median Amount Raised Median Pre-money Valuation
Q1 08 - Q1 09 Series B
$12.0 $12.0 $10.8 $10.0 $9.0
$58.0
$61.0
$40.0
$50.9
$24.5
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09
$M
Median Amount Raised Median Pre-money Valuation
Q1 08 - Q1 09 Series C and Later
$3.1
$5.0
$2.7
$3.0
$2.6
$7.0
$7.6
$5.7 $6.0
$4.8
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
Q1 08 Q2 08 Q3 08 Q4 08 Q1 09
$M
Median Amount Raised Median Pre-money Valuation
Q1 08 - Q1 09 Series A (Excludes Angel)

5.
5
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
2007
All Rounds2
2008
All Rounds3
Q1 2009
All Rounds3
2008
Up Rounds4
Q1 2009
Up Rounds4
2008
Down Rounds4
Q1 2009
Down Rounds4
Liquidation Preferences - Series B and Later
Senior 50% 45% 45% 37% 29% 69% 60%
Pari Passu with Other Preferred 48% 53% 48% 61% 64% 21% 28%
Complex 0% 2% 5% 2% 0% 4% 8%
Not Applicable 2% 0% 2% 1% 7% 6% 4%
Participating vs. Non-participating
Participating - Cap 29% 28% 21% 31% 15% 26% 16%
Participating - No Cap 32% 30% 35% 25% 15% 38% 36%
Non-participating 40% 42% 44% 43% 69% 36% 48%
Anti-dilution Provisions
Weighted Average - Broad 88% 92% 91% 91% 100% 77% 80%
Weighted Average - Narrow 3% 2% 3% 3% 0% 4% 4%
Ratchet 4% 5% 4% 3% 0% 9% 8%
Other (Including Blend) 5% 1% 1% 3% 0% 10% 8%
"Pay to Play" - Series B and Later
Applicable to This Financing 7% 6% 11% 2% 7% 21% 20%
Applicable to Future Financings 8% 7% 5% 7% 0% 11% 8%
No 85% 86% 84% 92% 93% 68% 72%
Redemption
Investor Option 32% 31% 39% 32% 36% 32% 36%
Mandatory 3% 3% 3% 3% 7% 4% 0%
No 65% 66% 58% 65% 57% 64% 64%
Private Company Financing Trends1
(WSGR Deals)
1
Numbers do not always add up to 100% due to rounding
2
Includes Series A rounds unless otherwise indicated
3
Includes flat rounds and, unless otherwise indicated, Series A rounds
4
These columns include only Series B and later rounds. Note that because the numbers in the All Rounds columns include Series A and flat rounds, they are in some cases outside the ranges
bounded by the Up Rounds and Down Rounds columns.

6.
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
6
Last year’s financial market collapse has made
for tough times for technology companies that
traditionally have looked to venture capitalists,
venture lenders, or the public markets for
financing. Venture capital investment in the
first quarter of this year was down 47% in
terms of dollars and 37% in deals from the
fourth quarter of 2008.1
After a banner year,
capital investment in clean technology
companies was down 63% in dollars and
48% in deals compared with the same period
in 2008.2
With potential customers cutting
back on purchase commitments, companies
have struggled to find sources of funding, and
in many cases, to survive.
Government funding long has been available
to technology companies in the form of grants,
loans, loan guarantees, tax incentives, tax
credits, and cooperative research and
development arrangements that are cost-
shared with the government. With the new
Administration’s and Congress’s focus on
mainstreaming renewable energy, ensuring
energy security and energy independence for
the United States, creating American jobs, and
reducing greenhouse gas emissions, the
American Recovery and Reinvestment Act
(ARRA) and 2009 federal budget
appropriations process already have directed
tens of billions of dollars into programs
administered by federal, state, and local
agencies to provide an immediate and
substantial boost to the renewable energy
industry.
We expect this trend to continue in 2010 and
beyond. For example, the entire budget for the
Department of Energy’s (DOE’s) Office of
Energy Efficiency and Renewable Energy for
the 2008 fiscal year was $1.7 billion, but the
ARRA alone provided the same office with an
additional $16.8 billion to commit by
September 2010. Given the state of the
financial markets and the large amounts of
government funding now available, technology
companies, particularly those in the clean
technology and renewable energy industry,
should consider applying for some form of
government funding.
For venture-backed
companies, applying for
government funding may
be a foreign concept,
approached only with
great trepidation.
However, in our firm’s
experience with
emerging technology
companies and the
government, we have
found that the
government and venture
capitalists are not so
dissimilar.
How do I decide which government
funding opportunities to pursue?
In the same way that certain venture
capitalists are known for their focus on certain
industries or on companies at a particular
stage of development, each government
funding opportunity has a specific focus. For
example, the DOE’s Advanced Research
Projects Agency-Energy (ARPA-E) funding
opportunity is targeted toward R&D-stage
companies with “transformational”
technology, while the Advanced Battery
Manufacturing funding opportunity focuses on
shovel-ready projects for companies to create
a domestic battery manufacturing industry for
electric vehicles, and specifically excludes
R&D-stage companies.
Therefore, determining which solicitations
might be useful should start with an
assessment of your business and needs. Are
you an early-stage R&D company in need of
funds to get to proof-of-concept? A later-stage
company in need of funds to put up a
manufacturing or production plant? Isolate
what you want to
accomplish, the
anticipated timing of your
project, and your funding
needs, and then assess
which funding programs
best map to those of your
company’s business and
scale of financial need.
Federal agencies’
funding opportunity
announcements are listed
at www.fedconnect.org.
State and local funding
opportunities are more
difficult to track because
of the sheer number of opportunities available
and the fact that a number of programs are
starting up with federal funds allocated to
states for various projects. A database of
state renewable energy opportunities is
available at www.dsireusa.org.
Given the number of applicants for each
funding opportunity and the amount of
management time (and in some cases, non-
trivial sums of money) that can be expended
on a funding application, companies would be
well advised to make a very clear-eyed,
upfront assessment of which opportunities to
pursue.
Is the Government Your New Lead Investor?
A Technology Company’s Guide to Making the Most of Government Funding Opportunities
By Sandra Pak Knox, Special Counsel (Palo Alto Office)
1
MoneyTree Report by PriceWaterhouseCoopers with the National Venture Capital Association and Thomson Reuters.
2
Ernst &Young Cleantech Investment Group with Dow Jones VentureSource
With the government's
new focus, tens of
billions of dollars
already have been
directed into programs
administered by
federal, state, and
local agencies.

7.
7
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
How do government agencies decide
which companies to support?
Government agencies make decisions about
which companies to back in much the same
way that venture capitalists do. Just as
venture capitalists do not give handouts to
companies based on financial need, neither
does the government. Each agency will make
funding awards to companies that it believes
can best use its available funds (i.e., our tax
dollars) to advance the agency’s strategic
goals in particular target industries. Across
the board, we have found that government
agencies ask the same basic set of questions
of applicants:
Is your project
technically sound?
When funding
applications are reviewed,
the bulk of the applicant’s
“score” in most cases will
be based on the results of
the agency’s technical
review, which is to be
conducted by reviewers
schooled in the art of your
technology. Do you have good research
conducted by reputable scientists backing up
your claims? Do you have positive results from
small- or large-scale demonstrations of your
technology? Does your manufacturing process
work? Can you point to previous success in
this field to bolster your case? Applicants who
inspire the confidence of the government in
their companies’ technology are those most
likely to obtain funding.
Will funding your business help the
government achieve its policy objectives
and programmatic priorities?
The Obama Administration has high-level
policy objectives to mainstream renewable
energy technology, enhance energy security
and energy independence, reduce greenhouse
gas emissions, and create jobs; programs
within the federal agencies have more specific
objectives, such as developing the electric
vehicle industry or encouraging partnerships
between academia and industry to collaborate
on wind-energy technology research.
Companies that are able to make the case
that their project will help the applicable
agency achieve these goals quickly and with
greater success are more likely to receive a
government funding award.
Is your project plan financially feasible?
In most cases, a separate financial review
of your application will be conducted by
people who are
sophisticated in such
matters, including
major consulting firms
and accounting firms
who are retained to
assist the applicable
agency in application
review. Are your
spending plans and
revenue projections
realistic? Is the timing
you propose for the
commencement and completion of
your project supported by reasonable
assumptions? Overly optimistic projections are
likely to be viewed as just that, and may
detract from the credibility of an otherwise
strong application.
Do you have an experienced
management team that inspires
confidence that the project can be
completed as planned?
Just like venture capitalists, the government
wants to bet on horses that have won in the
past and are likely to win again. An
experienced management team with past
successes in a similar industry gives the
government confidence that it is backing a
company that will put taxpayers’ money to
good use. This is particularly important with
respect to funding obtained through ARRA
programs; the intense focus on weeding out
waste, fraud, or abuse of taxpayer funds
distributed through these programs puts
additional pressure on the government to pick
likely winners who will run their companies in
a trustworthy and ethical manner that will
achieve success.
Do you have good references?
When your funding application goes into the
hopper at a particular agency, it is likely to be
competing with many (possibly hundreds of)
other applicants for the attention of the
agency’s reviewers. How will you differentiate
yourself?
One way is to try to get to know key people
within the relevant departments or programs
and introduce your technology to those
individuals well before your application is
submitted. If you are able to meet with these
key individuals, you should treat that
opportunity as you would an opportunity to
present to a venture capitalist. Prepare well,
use your time wisely, and have a succinct,
high-impact presentation that will leave a
positive and lasting impression of you and
your company that will give you name
recognition when applications are reviewed.
In addition, try to make yourself known at
industry conferences and through positive
media coverage. The program managers and
application reviewers are going to the same
conferences and reading the same press
that you are; become a familiar face whose
presence in the application pool will be
expected and sought out by the granting
agency.
Do your traditional investors have skin in
the game?
Most funding opportunities have a cost-
sharing requirement (or equity investment
Just as venture
capitalists do not give
handouts to companies
based on financial
need, neither does the
government.

8.
8
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
requirement in the case of loans and loan
guarantees) typically mandating that 20 to
50% of the proposed project cost be borne by
the applicant company. One of the goals of the
ARRA is to bring skittish investors off the
sidelines, and requiring cost-sharing or an
equity investment alongside debt financing
provided or guaranteed by the government is
one way to accomplish that goal. The
government also has found that the higher the
proportion of project cost borne by the
applicant, the higher the likelihood of success
of the project, because the applicant is
literally more invested in the project. Note
that cost overruns will not be cost-shared by
the government, but borne by the applicant.
Yet more reason to make sure that your cost
projections are as realistic as they can be.
How is the government different from a
traditional venture capital investor?
There are a few key differences, including:
No equity investment. The government’s
investment is not an equity investment
(though there has been some discussion about
whether this should continue to be the case).
So long as government funding is in the form
of grants, loans, or loan guarantees, your
traditional equity investors will have far
greater control from a stock ownership
perspective relative to the percentage of
capital they have invested. Particularly if an
equity investment is contingent upon receipt
of a government funding award, you must
consider the effect of this dynamic on the
company’s valuation when negotiating
investment terms with those investors.
More process, a different kind of control.
The Energy Secretary is not going to come to
your board meetings if you receive funding from
the DOE. However, starting with the application
process itself, you will be subject to strict
procedural requirements, and if you receive an
award, you will be subject to government
contracting regulations that sometimes can be
quite onerous, especially compared to the
information rights that are granted to board
members and key investors in a venture-backed
company. Government funds come with
restrictions regarding the manner in which they
may be spent, and may require that an
awardee company institute new accounting
procedures to ensure that the necessary
tracking and reporting can be done accurately
and on a timely basis. If you are selected to
negotiate a funding award with a government
agency, please consult with experienced
government contracting accountants and
attorneys so that you understand and are
prepared to meet these requirements.
Intellectual property rights of the
government should be understood and
negotiated wherever possible. Each
funding program will have intellectual property
rights provisions in the relevant funding
opportunity announcement that should be
considered when formulating an application
and in negotiating a funding award. The
government may have certain rights in
technology created using a funding award
by statute, or there may be flexibility to
negotiate those terms. Questions for an
applicant company to ask include: Does the
Bayh-Dole Act apply to me? If so, what does
that mean? What position is the applicable
agency likely to take when they are
negotiating intellectual property rights under a
Technology Investment Agreement? Will I be
able to commercialize my technology as
planned, domestically and overseas, if I use
government funding? Companies should
consult with experienced government
contracting and intellectual property attorneys
to structure the award to preserve maximum
flexibility to commercialize technology
developed using government funding.
Is the Government Your New Lead Investor? (Continued from page 7)
Cozying Up to Goliath: The Pros and Cons . . . (Continued from page 1)
perceived value they believe will be created
by virtue of them doing business with you. If
this is the case, your partnering deal is likely
to include a purchase option for your company.
Common Ground
I now have the benefit of having raised money
or otherwise partnered with seven strategic
investors over the course of five start-ups during
the past two decades. With significant hindsight
as my guide, I now believe that there are
primarily two scenarios where it is beneficial
to take money from a corporate investor:
1. Access to new markets via partner
distribution. In this instance, the investor
agrees to distribute your product to
markets that they dominate; ideally, these
markets are both large and cleanly
separated from your existing distribution
channels. This kind of operating leverage
makes it worth taking on a corporate
investor along with the potential pitfalls
that accompany this type of relationship.
Early on in my career, my company sold
IBM 10% of its stock in return for IBM
distributing a version of our software to
their customers through their massive
sales force. They guaranteed a certain
level of revenue and the product was tied
to their operating system. It worked
incredibly well for both parties, and we
were able to go public largely on the back
of our mutual success. At a different
company, we took on a strategic
investment from Cisco in return for a large
internal software license plus a
distribution agreement that brought our
technology to their sizable customer base
in Japan. It allowed us to safely and

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quickly enter a new market and rack up
millions of dollars in revenue with little
operating risk.
2. Access to proprietary technology. In
this case, you take the investment
because it is coupled with a license to
critical (and potentially patented)
technology that you would otherwise find
challenging or impossible to develop on
your own. If the technology is clearly
game-changing and you can box out
potential competitors from also gaining
access to it, a strategic investment easily
can make sense. I had a positive
experience with Intel many years ago,
where they spent tens of millions of
dollars developing a technology but were
challenged with bringing it to market. My
company exclusively licensed the
technology from them, packaged it for
sale to our customers, and quickly built it
into a multimillion-dollar revenue stream.
They invested in our company and
ultimately profited from both the license
fees associated with the technology and
the sale of our company two years later.
Taking an investment from a corporate partner
simply because they are a very large customer
(or plan to be) is typically not a good reason to
do this kind of deal. You have all the potential
issues mentioned below, without adding any
significant leverage to your business.
Similarly, raising money from a strategic
partner as a means of “getting closer”—i.e.,
in hopes of some future operating agreement—
is generally not a sufficient rationale.
Common Pitfalls
The following are the more frequent common
pitfalls associated with raising money from
strategic partners:
Stamina. Corporate venture investors
generally have a reputation for being
interested in strategic investing when markets
are good. But when economic times are tough,
the corporate VC group is often among the
first casualties. It is fairly routine to see
corporate VC funds turned into caretakers,
sold off at a steep discount, or entirely
shuttered. Unfortunately, this usually occurs
exactly when the entrepreneur needs an
engaged and supportive investor team. If you
are hitting the road for a challenging follow-on
round, you can’t afford to also be scrambling
to explain and fill in a new hole in your
capitalization table.
Polarity. The presence of a well-known
strategic investor on your capitalization table
(and perhaps on your board) can present
problems later in life when you’re trying to
enter into a strategic relationship with one of
that investor’s major competitors.
Downstream deal-making can be very
challenging when the prospective partner is
concerned about information being shared
upstream, or when deal champions worry
about losing points internally for doing
anything that can be perceived by their peers
as aiding and abetting the balance sheet of
the enemy. Why should they help their
competitor when they can build a similar
relationship with your competitor?
Absenteeism. This pitfall falls into the
“frustrating but not fatal” category. Unlike
traditional venture capital and private equity
investors, the individuals behind a corporate
investment often have a different day job.
They are being paid to run their businesses,
not yours. Despite their best intentions, I found
that getting operating executives to burn road
time on your behalf is nearly impossible.
Entanglement. Finally, the more your
strategic partner puts into the operating
agreement portion of the deal, the greater the
chance that your investment will come with
significant strings attached. If the strategic
investor is helping to make you an important
player in your shared industry, they will want
to be sure your company isn’t easily snatched
up by somebody else. This concern typically
manifests itself in some form of Right of First
Refusal (RoFR) or Right of First Offer (RoFO) as
part of the investment agreement. Many early-
stage companies will want to avoid this deal
feature, but if you are pressed on the matter,
try to negotiate a time constraint so that
you’re freed up if they don’t move within the
first year of the arrangement. In the one case
where we were stuck with an unbounded
RoFR, it nearly derailed an acquisition. The
prospective acquirer refused to negotiate a
deal price unless the strategic investor agreed
to waive their RoFR. There was little incentive
for our investor to waive the right to acquire
us, but after numerous very intensive
discussions, we ultimately convinced them
that they should. Of course, this did little to
then help us maximize price—our suitor had
flushed our greatest leverage point completely
out of the picture.
Conclusion
Every deal is different, but the patterns and
pitfalls associated with strategic investors are
now well chronicled and understood. They
have repeated themselves through multiple
economic cycles and across virtually all
technology sectors. As a start-up company
executive, it’s your duty to distance yourself
from the emotional and qualitative arguments
associated with taking capital from a strategic
investor. Instead, you must relentlessly insist
that any investment be associated with real
operating leverage and without the
entanglements that can sub-optimize a
liquidation event. Follow these rules and you
can land a strategic investor deal that strongly
positions your company for growth, without
misdirecting your energy or sub-optimizing the
final outcome.
Dave Panos is the CEO and co-founder
of Pluck Corporation, a social media
software pioneer that successfully sold
to Demand Media in early 2008. An
executive in five early-stage software
companies, Dave also spent two years
as a venture partner with Austin
Ventures. Dave can be reached at
dave.panos@pluck.com.
Cozying Up to Goliath: The Pros and Cons . . . (Continued from page 8)

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When entering into commercial contracts
during uncertain economic times, it is
important for a company to contemplate the
consequences of a counterparty becoming
insolvent or otherwise failing to perform.
While such considerations are prudent for all
companies, they can be particularly critical for
early-stage companies, which inherently tend
to have fewer contracts and less
diversification and, consequently, may be
disproportionately harmed by the failure of
one or more commercial relationships.
When a counterparty to a commercial contract
fails, there are a variety of potential
consequences for the other company. The
specific consequences depend on the nature
of the relationship, the type of failure, and
whether or not the failing party files for, or is
involuntarily forced into, bankruptcy
protection. In most cases, a party can mitigate
the risks of a worst-case outcome by
negotiating protective provisions at the outset
of the relationship, by paying attention to the
counterparty’s performance, and by taking
action before a bankruptcy petition is filed.
Bankruptcy Law
To understand the risks, one has to know
some basics about the overlay of bankruptcy
law. First, because bankruptcy law is a body of
federal law, it takes precedence over (or
preempts) commercial arrangements, which
are governed by state law. In other words, if
bankruptcy law requires one outcome and a
contract provides for a different outcome, the
outcome dictated by bankruptcy will prevail.
One of the more important provisions of
bankruptcy law (and an illustration of the
consequences of preemption) is the
imposition, effective immediately upon the
filing of a bankruptcy petition, of an automatic
stay, which is in essence a wall that divides
the failing party’s world into pre-bankruptcy
and post-bankruptcy periods (also called pre-
petition and post-petition periods). The
automatic stay severely limits the ability of
aggrieved counterparties to take any action
against the failing party without the approval
of the bankruptcy court, even if there is an
explicit contract provision to the contrary.
Payment Issues
A primary purpose of bankruptcy law is to
ensure that when debt claims are too much
for the failing party to handle, those claims
are processed in an
orderly manner. Thus,
claims for payment
on amounts that relate
to pre-petition
performance must be
brought before the
bankruptcy court. If the
claim is unsecured—
meaning there is not a
lien or other security
interest that serves as
collateral for the debt—
then the party owed
payment under that claim will stand at the
back of the line, behind aggrieved parties that
have secured collateral or that are otherwise
given priority status, and fight to collect
pennies on
the dollar.
A party can mitigate payment risk by getting
and perfecting a security interest in collateral,
or something that approximates this kind of
protection, e.g., a performance guaranty from
a credit-worthy third party, such as a parent
company, or a letter of credit from a bank that
can be drawn upon to make payment. Getting
these protections is easier said than done,
however, and in many cases these are not
practical options. But even where these
protections are not possible or practical, a
party can mitigate payment risk by requiring
pre-payment, or including a right in the
contract to suspend performance of services
or shipment of goods following nonpayment. If
a contract does not have these protections at
the outset, it might be possible, when a
counterparty begins to fall behind on its
payment obligations, to amend the contract to
put such protections in place or to otherwise
reduce the counterparty’s credit and payment
period. But due to the limitations imposed by
the automatic stay and other aspects of
bankruptcy law, timing is important and can
affect the validity of any
such amendment; thus, it
is important to closely
monitor payments.
Termination Rights
Many contracts contain
express rights to terminate
in the event the other
party is subject to a
bankruptcy filing. But
because of the automatic
stay, that right cannot be
exercised without the approval of the court,
which in the absence of extraordinary
circumstances, is unlikely to be granted. In
many cases, being held in a contractual
arrangement while the bankruptcy process
plays itself out may be perfectly acceptable,
but often this can leave parties in limbo while
waiting to find out whether the agreement
ultimately will survive.
If it is important to be able to exit a
relationship upon signs of instability, then the
termination rights need to be carefully
structured so that the right to terminate arises
prior to the actual filing for bankruptcy. This
means identifying events that are common
precursors to a bankruptcy filing (such as
making a public statement regarding financial
Mitigating Risks: Contracting Considerations in a
Down Economy
By Paul Huggins, Eric Natinsky, and Jay Reddien, Associates (Austin Office)
In most cases, a party
can mitigate the risks
of a worst-case
outcome by negotiating
protective provisions at
the outset of the
relationship.

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difficulty or amending a credit facility) or
providing a more general right to terminate
upon a material change in financial condition.
Additionally, a company procuring goods or
services can mitigate risk due to the failure of
a vendor by insisting upon termination rights
in the event of an uncured material breach or
a number of immaterial breaches, because
such breaches may indicate that the
counterparty does not have the resources
needed to support its business. Further,
deeming the non-payment of any amount to be
a material breach and providing for a shorter
cure period for non-payment than for other
material breaches can further mitigate
exposure. But these rights only help if used
before the bankruptcy filing, and so it is
important to promptly send notices of default,
and to be diligent and precise in complying
with notice provisions, in order to start the
cure-period clock running and reduce or
preclude arguments that rights of termination
have not arisen.
Conversely, as part of the bankruptcy process,
the bankrupt party can reject, and thereby
terminate, certain types of contracts—
generally, any contract that has unperformed
material obligations of both parties. This right
is provided by federal bankruptcy law and,
thus, is available to the failing party even if
the contract does not expressly provide such a
right. If the failing party exercises its right to
reject a contract, the other party will be left
with an unsecured claim for damages.
Integrity of Inbound Licenses to
Intellectual Property
As an exception to the bankrupt party’s
general right to elect to terminate a contract,
parties holding a license to the bankrupt
party’s intellectual property, including patents,
copyrights, mask works, and trade secrets (but
not trademarks), are afforded special
protections under Section 365(n) of the U.S.
Bankruptcy Code. In short, a license within the
meaning of Section 365(n) will be preserved
irrespective of whether the contract granting
that license is rejected by the bankrupt party.
In other words, the right to use intellectual
property within the scope of the license
granted by a licensor that subsequently fails
will be unaffected by a bankruptcy filing. That
is good news for the licensee and underscores
the importance of being explicit that a license
is intended to fall under Section 365(n).
The bad news is that, while the license is
preserved, the license agreement itself can be
rejected. Accordingly, if a failed licensor has
ongoing performance obligations (e.g.,
development work, maintenance, and support
obligations), it can get out of those obligations
by rejecting the license agreement. If the
contract is rejected and the license grant is
not broad enough to enable the aggrieved
licensee to support the intellectual property,
the licensee may not have very useful rights.
And even with broad use rights, if the licensee
does not have access to the source materials
(e.g., source code, blueprints, and technical
instructions) or personnel with know-how, the
use rights may be significantly handicapped.
Consequently, if an inbound license to
intellectual property is of vital importance and
mere use rights are not in and of themselves
sufficiently protective, it can be critically
important to require that relevant supporting
materials be placed into a third-party escrow
account, to carefully define the release triggers
(e.g., material breaches of performance
obligations, insolvency, and termination of the
contract by licensee for cause) and, if
applicable, provide for expanded use rights
upon release, so that the licensee can access
the materials and use them to support its
license. Here again, monitoring performance
can help to mitigate risk. If a licensee who
negotiated for source materials to be placed in
an escrow account never bothered to verify
delivery or periodic updates, it may be left
without access to those source materials post-
petition and left at the back of a line with an
unsecured breach-of-contract claim.
Tools
WSGR TERM SHEET GENERATOR
Always looking for ways to better serve the entrepreneurial community, Wilson Sonsini Goodrich & Rosati is pleased to offer the WSGR
Term Sheet Generator, an online tool that allows entrepreneurs and investors to generate an initial draft of a term sheet for a preferred
stock financing. The tool is publicly available on our website at www.wsgr.com. By answering a series of questions, users are guided
through the principal variables contained in a venture financing term sheet. Brief explanations of the questions and typical deal terms are
included. After answering as many questions as desired, users can generate, print, and save a Word version of the term sheet, which is
intended to be useful in deal discussions between entrepreneurs and investors and in crafting a final, customized term sheet with the
help of attorneys. Please go to http://Display.aspx?SectionName=practice/termsheet.htm to learn more.

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Summer 2009
Fundraising in today’s tight capital markets
may present entrepreneurs and board
members with unique challenges.
Entrepreneurs may find that it is difficult to
identify new, outside investors that are willing
to participate in a round at a valuation that
reflects the company’s progress as viewed by
management and insider stockholders.
Companies may find themselves with fewer
financing opportunities and may have an
immediate need for cash to fund operations,
begin critical projects, or make payroll. In
situations where companies have limited
alternatives or have to rely on inside investors,
it is particularly critical that they implement a
process whereby they can balance the need to
bring in that vital cash infusion with the
requirement that the board and management
maintain an appropriate level of oversight to
satisfy their fiduciary duties and lessen the
risk of stockholder litigation.
Good Process Leads to Good Substance
Corporate law generally holds directors to a
standard of conduct that ensures that they
address the various interests involved,
carefully weigh important decisions, consult
with appropriate advisors, and disclose
conflicts of interest. In theory, implementing
procedures early in a transaction to ensure
compliance with such fiduciary duties will
lead to an optimal—or at least a more fair—
result when looking at the transaction through
the eyes of the stockholders as a group.
In recognition of these principles, courts have
provided certain protections for the benefit of
directors and the decisions they make where
minimum standards of board conduct are met.
For example, the business-judgment rule
generally provides that if directors comply
with their fiduciary duties of due care, loyalty,
and good faith (further discussed below), most
state courts will not second-guess the
business judgment of the board. Further, even
in many cases where a director has a financial
or other interest in a transaction (such that it
might be considered an “interested-director
transaction”), the transaction may be
protected from invalidation on that basis alone
if the directors’ interests are fully disclosed
and it is otherwise approved by a majority of
the disinterested directors or the stockholders,
or if it is ultimately determined to be fair to
the stockholders as a group. Whether or not a
transaction is fair to the stockholders will be
determined by reviewing the transaction under
the “entire-fairness” standard. The entire-
fairness standard encompasses two major
concepts: fair price and fair process (i.e.,
timing of the transaction; how it was initiated,
structured, negotiated, and disclosed to
stockholders; and how the approvals of the
directors and stockholders were obtained).
The rationale underlying the business-
judgment rule and upholding certain
interested-director transactions is that risky
business decisions are better left to those
immersed in the operations of the business
and the surrounding circumstances rather than
judges and legislators. Directors should not be
viewed as guarantors of success or guardians
against mistakes. Directors do not have to be
right in every decision so long as they satisfy
their fiduciary duties in good faith.
Understanding the Fiduciary Duties
Directors are subject to the duty of care, the
duty of loyalty, and the duty of good faith, as
described below:
Duty of Care. Directors must inform themselves
of all material information reasonably available
(which includes seeking input from relevant
members of management); engage in a
deliberate decision-making process; seek
advice from lawyers, accountants, and
bankers when appropriate; consider the short-
and long-term effects of a decision; and weigh
the risks associated with making a decision,
including a decision not to act.
Duty of Loyalty. Directors must not take
advantage of corporate opportunities at the
expense of the company and shall refrain from
self-dealing.
Duty of Good Faith. This is generally
considered a director’s duty to act with an
honest purpose and without a disingenuous
mindset.
It is important that a board implement
procedures to ensure that it discharges its
fiduciary duties, especially with respect to
transactions that involve interested directors.
Therefore, companies should implement
procedures engineered to maximize
compliance with fiduciary duties and
minimize, or at least fully disclose, conflicts
with respect to a given transaction and
appropriately evidence such actions.
Accordingly, and in light of some of the
protections for directors and their decisions
described above, this article focuses on the
decision-making process rather than the
substance of the decisions themselves.
So What Do You Do?
Certain steps can be taken to minimize a
board’s exposure to liability from stockholder
claims in connection with the fundraising
process, particularly where one or more
directors or funds affiliated with them are
participating as investors in the financing. A
number of these are practical and easy to
implement, and often make good business
The Fundraising Process: Best Practices for Entrepreneurs
and Directors
By Robert Housley and Evan Kastner, Associates (Austin Office)

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sense from the standpoint of maximizing
stockholder value. Others are more formalistic
process protections that have proven to be
beneficial under scrutiny by trial courts.
It is important to be mindful of best practices
from the very onset of the fundraising process.
While there usually will be a sense of urgency
to close a venture financing once a term sheet
is signed, often six months or more will have
passed from when a company identifies the
need to raise money to when it finally signs a
term sheet and advances to a closing.
Therefore, it is critical to contemporaneously
consider these best practices throughout
this entire process to create a clear record
evidencing the company’s deliberations
and discussions.
Cast a Wide Net
Make your company’s fundraising pitch to as
many potential investors as possible. Reach
out to the investors who are known to make
investments in your company’s space; take a
fresh look at whether it makes sense to bring
in strategic investors (see “Cozying Up to
Goliath” on page 1); even consider making
overtures to investors who have previously
passed on making investments in your
company. If a board is required to demonstrate
the fairness of a financing transaction in the
face of a stockholder challenge, showing that
the company canvassed the community of
potential investors can be strong evidence
that the company tried to obtain the best
terms for its stockholders that it could—
particularly in the case of an inside-led round,
where it may be helpful to show a lack of
interest from outside investors on more
favorable terms.
Compliance with a board’s fiduciary duties
does not require it to turn down a term sheet
just because the terms are tough. However, a
board should be prepared to show that it
made an informed decision in approving a
financing. Having as many data points as
possible demonstrates that the board was
adequately informed.
Keep Detailed Records
When your company does receive a financing
term sheet, whether from an outsider or for an
inside-led round, the company is likely to
have pressing short-term cash needs and
may want to close quickly. A displeased
stockholder may seize on this as evidence
that the board did not carefully consider the
terms, did not actively weigh the financing
alternatives, or that the transaction was not
fair to the stockholders. In order to dispel any
such perception, the officers and directors
principally involved in the fundraising
process should carefully document each step
of the process.
Make sure board discussions of fundraising
alternatives and status are recorded in
meeting minutes during the months leading up
to the financing. Save copies of meeting
requests, presentation materials, and other
communications with potential investors
(including “no, thank you” correspondence).
Make it a habit to jot down notes after each
investor meeting or telephone conference with
a brief explanation of the results. Follow up on
potential leads and inform the board of the
current status of all discussions. Then, even if
your company is required to move quickly to
close a fundraising, the board still can
demonstrate that the company engaged in a
methodical, well-informed negotiation and
approval process.
Inform Stockholders
Throughout the course of fundraising, consider
keeping stockholders who may not otherwise
have day-to-day visibility into the process
involved and apprised. If the board is called
upon to defend the fairness of an interested-
director financing transaction in the face of a
stockholder challenge, it may be helpful to
demonstrate consideration of minority
stockholder interests and solicitation of
their feedback during the transaction
negotiation process.
From a practical perspective, stockholders who
are kept informed or consulted during the
fundraising process may be less likely to
instigate a stockholder lawsuit; they also may
be more cooperative during the closing process
(e.g., submitting signatures required of them
on a timely basis). For example, if initial
investor feedback indicates that the company
is likely to receive a low valuation or that a
recapitalization may be necessary as a
condition to their investment, you may not
want to surprise your stockholder base with
this information late in the fundraising process.
Maximize Stockholder Approval
Your company’s charter documents or
applicable corporate law typically will
necessitate obtaining approval from your
stockholders as a whole before you can close
a financing transaction. There also may be
separate approval requirements associated
with specific series or classes of your
company’s stock. However, you also should
consider whether seeking separate approval
from other groups of your stockholders would
be beneficial, even where such approvals are
not legally mandated.
For example, if as part of a financing
transaction current holders of preferred stock
are treated more favorably than holders of
common stock, you should consider obtaining
separate approval from the holders of a
majority of the outstanding shares of common

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stock. You also might consider obtaining
approval from the holders of a majority of the
shares held by stockholders who are not
participating as investors in the financing.
Obtaining these separate approvals may
provide your board with an advantage in its
defense of an interested-director financing
transaction. Additionally, actively seeking
these approvals may help you identify in
advance of closing a financing which
stockholders are likely to object to its terms.
Conduct a Rights Offering
Consider conducting a rights offering in
connection with your financing. This involves
setting aside a meaningful portion of the
shares or debt being sold in the financing and
making them available for purchase by
existing stockholders. Generally, a substantial
majority of the securities being offered in a
financing are sold to one or a few lead
investors who negotiate the terms of the
financing with the company. However, we
recommend that you offer your other
stockholders (at least those who are
accredited for the purposes of applicable
securities laws) the opportunity to maintain at
least their pro rata ownership in the company
by investing alongside the lead investors on
the same terms.
This can be strong evidence of the fairness of
the financing in the face of a stockholder
challenge. This also may foster goodwill with
stockholders who may otherwise feel that
they are being excluded from the process or
disadvantaged by the terms of the financing.
Special Committee; Fairness Opinion
If your financing could be considered an
interested-director transaction, your board
should consider whether it would be
beneficial to empower a special committee of
independent directors to negotiate on behalf
of the company and approve the terms of the
financing. While the use of a special
committee does not in itself insulate a board
from liability for breach of fiduciary duty in
connection with a financing, in some cases
the use of a truly independent special
committee can shift the burden of
demonstrating that the transaction was not
fair to the party challenging an interested-
director transaction (as opposed to the board
bearing the burden of demonstrating the
fairness of the transaction).
While it is not cost effective, a board also may
consider engaging an outside financial advisor
to render an opinion to the board or special
committee that the transaction is fair to the
stockholders (generally referred to as a
fairness opinion). This assists the board in
carrying out its fiduciary duty of care, and
helps it defend the fairness of an interested-
director financing transaction.
Conclusion
Interested-director and fiduciary-duty issues
can be complex and fact-specific and may vary
by jurisdiction, but with the assistance of legal
counsel, there are steps that companies may
take to maintain a high level of oversight and
transparency in a challenging financing
market. Entrepreneurs can help focus the
board on potential issues early and implement
procedures that should lead to good decision-
making, disclosure, and, ultimately, a better
result for all stockholders as a group.
The Fundraising Process . . . (Continued from page 13)
The Non-dilutive Cash Injection: Selling Your Patents (Continued from page 1)
Who is buying? Specialized private equity
funds, specialized start-ups, large and medium
corporations, licensing organizations, and
defensive patent pools. Depending upon the
patents in a transaction, there may be more
than 50 buyers to contact. The mix of
buyers—and their interests—changes often,
but it has been, and continues to be, an ever-
growing pool.
Who is selling? The sellers’ pool is similarly
large and growing—from Fortune 500
corporations to individuals and small
corporations, and from bankrupt companies to
universities. Investors, in particular, are finding
that patents are one of the few underexploited
distressed assets that are also uncorrelated
with the broader markets.
The patent-transaction market today breaks
down into two broad categories: (1) high-
quality patents with high market impact and
(2) everything else. Even during this recession,
the first category has seen prices increase.
The second category, however, has witnessed
a steep decline.
How Do We Participate?
For context, here is an example of the kinds of
transactions we have done at ThinkFire: A
venture-backed company is running out of
cash. An infusion of a few million dollars
could bridge them to a crucial partnership or
financing deal. The company has a few
patents issued and a few more pending. By
selling some of their patents, the company
raises cash without impacting their product
offering or operations, and without diluting
their shareholders.

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Whether you use a broker or not in this
process, the first step is developing the sales
package, which typically includes:
• Patents—overview and specific patent
numbers
• Third-party data on the impacted market
• Important patent claims
• Seller background
• Estimated price range
The sales package is then distributed to likely
buyers. Over a period normally ranging from
45 to 90 days, buyers review the materials
and ask questions about the market data, the
patents, and the bidding process. Bids are
then accepted and sales are typically closed in
the following 45 days.
Many sellers use brokers and some buyers
prefer to buy from qualified brokers, who
usually provide the following services:
• Creating the sales package, including
identifying the important claims
• Contacting the buyers
• Answering buyer questions
• Running the bidding process
• Helping to set price expectations
• Providing sellers with the current state
of the patent market
• Acting as a sounding board for deal
terms
• Helping to close the sale
Often, brokers do this work on a contingency-
fee basis, so there is no cost to the seller if
the deal does not close. Depending on the
complexity and expected price, the range of
fees is typically 15 to 30% of the sales price.
Finding the Right Price
Pricing the patents may be the most difficult
part of the sales process. Valuations can
range from zero to millions of dollars for the
same patents. One might assume that the
price range varies due to the different
information possessed by each of the
potential buyers. For example, finding an as
yet undiscovered problem with the patents
can lead to a zero valuation. Similarly, a
prospective purchaser may have better
comparables data. Since there is no multiple
listing service (MLS) for patent transactions,
only a few large buyers and brokers have
information on enough transactions to really
help here. But even when all the parties have
the same market, patent, and pricing data, the
valuations can vary considerably.
The primary reason for this variation is that
patent value is context specific, with the
context of the owner dictating the value. For
example, a patent held by a licensing company
can generate multiple royalty streams, while
that same patent held by a start-up is unlikely
to generate any. That makes the net present
value for each potential owner significantly
different. Thinking about who the potential
buyers are and how they would use the
patents is a critical element in pricing and,
ultimately, obtaining a higher valuation.
Importantly, keep in mind that, in any context,
the sales price is also significantly lower than
the cumulative future royalty stream. Where a
business case exists for $100 million in future
royalties, when risk adjusted, the same
patents likely will sell for $1-10 million. A
surprisingly large discount, but the patent
licensing risks are numerous and large, and
the investment is likely to be slow to yield any
financial returns.
What Happens After You Sell?
After the sale has closed, you now can use
the proceeds to move forward. Imagine a few
years into the future—your company has
annual revenues greater than $50 million, for
instance, and big competitors have begun to
enter the same market. These competitors
might have patents that are a concern.
But you are prepared to meet these challenges
because you planned ahead. Your company
kept a license back in the patent sale, so you
know that your former patents will not be
used against you. Also, you never stopped
innovating and you continued your patent
program. You've also bought a few companies,
along with their patent portfolios. Now,
because of your increased revenue, you can
participate in the patent market as a buyer to
purchase patents to address the specific
threat posed by your competitors. In other
words, by selling your patents early, you gave
yourself the cash to move the business
forward, and the time and resources to rebuild
your patent portfolio.
Other Structures for Monetizing Patents
There are other structures that you can use to
make money from your patents. Licensing,
hybrid licensing-brokering, or patent pools
(depending on your specific market) all can
yield attractive returns. Licensing your patents
can involve planning and execution
requirements as complex as product
development and launch. As such, it is often
too much of a distraction for the patent
owners to pursue as a strategy. However, you
can spinout the patents to a limited liability
corporation (LLC) responsible for licensing and
participate as a limited partner. As a limited
partner in the LLC, you can receive revenue
from the licensing activities without control of,
or direct responsibility for managing, the
licensing process. This structure allows
tremendous flexibility. For example, once set
up, the LLC can pursue hybrid models of
licensing some companies and then selling the
patents to another company or group.
Transferring the patents or patent rights to a
third party in exchange for a portion of future
licensing fees is a relatively common
The Non-dilutive Cash Injection: Selling Your Patents (Continued from page 14)

16.
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Summer 2009
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© 2009 Wilson Sonsini Goodrich & Rosati, Professional Corporation. All rights reserved.
Editorial Staff: Derek Willis, editor-in-chief (Austin); Mark Baudler (Palo Alto); Doug Collom (Palo Alto); Herb Fockler (Palo Alto); Craig Sherman (Seattle);
Yokum Taku (Palo Alto)
Knowledge Management Staff: Eric Little, Heather Crowell
practice (for example, MPEG LA acts as a
clearinghouse for MPEG patents). All of these
options can result in significant revenues;
however, the time to money can be too long for a
cash-squeezed start-up.
Kent Richardson is the general manager of
the Silicon Valley office of ThinkFire
Services, a leading patent brokerage,
licensing, and strategy consulting firm that
includes leadership from several of the
world's most-renowned IP organizations,
such as Lucent/Bell, IBM, Cisco, and
Rambus. Kent advises clients on patent
strategy, management, and licensing.
He has licensing and marketing patent
portfolio experiences resulting in more
than $600 million of patent license
bookings. Kent can be reached at
krichardson@thinkfire.com.
Erik Oliver is the managing director of the
Silicon Valley office of ThinkFire Services.
With licensing experience involving
several hundred million dollars of patent
and technology licenses, Erik advises
clients on patent strategy, management,
and licensing. He can be reached at
eoliver@thinkfire.com.
ENTREPRENEURS COLLEGE
In 2006, Wilson Sonsini Goodrich & Rosati launched its Entrepreneurs College seminar series. Presented by our firm’s attorneys, the seminars in each
session address a wide range of topics designed to help entrepreneurs focus their ideas and business strategies, build relationships, and access capital.
In response to attendee demand, there also are occasional additional sections that address issues of concern to particular industries. Currently offered
every spring, the sessions are held at our Palo Alto campus and are webcast live to our national offices. These events are available to entrepreneurs and
start-up company executives in the Wilson Sonsini Goodrich & Rosati network, which includes leaders in entrepreneurship, venture capital, angel
organizations, and other finance and advisory firms. For more information, please contact Norilyn Ingram (ningram@wsgr.com).
REMAINING SPRING 2009 SESSIONS
Events
Clean Tech Session, July 1
An in-depth look at the important issues that entrepreneurs need to
master in order to grow their clean tech ventures. Whether you have a
developed technology or are merely interested in getting involved in the
clean tech industry, this session will guide you through the stages in the
life cycle of financing your venture and bringing your ideas to the
marketplace.
Exits & Liquidity, July 15
An exploration of recent developments in exit events, including the IPO
process and M&A trends. Provides an understanding of the expectations
of investors and the public capital markets and covers the recent
corporate governance and regulatory issues involved in liquidity events.
Board Relations & Corporate Governance, July 18
A discussion of key issues in dealing with your board of directors,
including the composition of the board, how to run board meetings, and
dealing with conflicts of interest. Explores the important details of good
corporate governance for private companies and how to prepare your
company for future growth.
Biotech Session, July 29
An examination of the issues that biotech entrepreneurs should
consider when starting their ventures. Explores the process for acquiring
a core technology, from both universities and big biotech and
pharmaceutical companies. Discusses how these agreements will affect
your ongoing business operations, partnering activities, and exit and
acquisition opportunities.