Announcing the New Emerging Enterprise Center Blog
Posted 11.18.2008
Foley Hoag is excited to launch the Emerging Enterprise Center Blog. Here we cover topics that arise from our practice representing technology companies of all stripes, including issues facing startups, financed companies, and the entrepreneurial ecosystem as a whole. The Emerging Enterprise Center at Foley Hoag LLP is specifically equipped to work with the entrepreneurial community in tackling legal questions and complex business issues that technology companies face. Our lawyers are here to work with you as you strengthen your business plans, seek out funding, grow your business and eventually go public or merge with other businesses. We want to be your go-to source for advice and partnership during the entire process and beyond.
We also want to be a source of market analysis and insight, especially during these tough economic times. An active discussion about these topics and issues is what we’re hoping to foster so please don’t hesitate to ask questions or post your thoughts. From now on please visit the new blog for all future entries.
We look forward to the conversation.
emergingenterprisecenterblog.com
Funding and Exits - Written by Dave Broadwin
Posted 11.14.2008
Anecdotal evidence indicates that in the current environment there are a lot of "extension" rounds or bridges from existing investors. The obvious reason for this situtuation is that it is hard to attract Series B and later round money in a climate where there is as much uncertainty as there is right now. By extension rounds, I mean selling additional shares of the previous round at the same valuation as the previous round to the same players. I suspect our research will show that Series B and later round activity in the second quarter was basically flat. We wont be able to get numbers for Q3 until near the end of November, but, anecdotal evidence indicates a decline in activity. Clearly a resolution of the current crisis in the financial markets can only help, but an improvement in the long term outlook for exits (both IPOs and M$A transactions) is what is needed to turn the investment tide.
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Further to Money on the Sidelines - Written by Dave Broadwin
Posted 11.10.2008
According to the NVCA approximately $36 billion has been raised by venture funds in 2007 (see my blog titled Money on the Sidelines). This is a really big number, and I am not sure what is included.
Research into DowJones VentureSource indicates that (according to their methodology) the following is the money raised by VC funds in the last ten years.
| |
Investors |
Funds |
Total Raised (MM) |
| 1998 |
175 |
194 |
$23,828.64 |
| 1999 |
290 |
334 |
$54,156.31 |
| 2000 |
404 |
437 |
$78,353.32 |
| 2001 |
230 |
247 |
$47,167.32 |
| 2002 |
107 |
111 |
$12,368.85 |
| 2003 |
63 |
65 |
$7,547.95 |
| 2004 |
96 |
104 |
$16,779.37 |
| 2005 |
107 |
112 |
$23,113.81 |
| 2006 |
85 |
86 |
$24,811.91 |
| 2007 |
35 |
35 |
$7,414.60 |
Any way you look at it a lot of money was raised in since 2003, and some of it is getting old. Without having an accurate fix on how much has been invested, it is impossible to know what is on the sidelines.
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CEO Breakfast with Don Bulens - Written by Dave Broadwin
Posted 11.06.2008
This morning I attended a “CEO Breakfast” with Don Bulens, former CEO of EqualLogic (here's a video interview of him from YouTube), sponsored by The Massachusetts Network Communications Council. He commented on a couple of things that are recurring themes in this blog.
Don made reference to slide 49 from the now famous (infamous?) Sequoia Capital’s 56 slide presentation of doom. This slide has a red line labeled “Death spiral” which shows a hypothetical company that does not trim its burn rate falling off a cliff to presumed extinction some time in ’09. It also has a green line that shows a hypothetical company that trims its expenses right away, then grows at a slow but steady rate and survives the downturn. Don’s point was that the same kind of thing happened at the end of the dotcom bubble. He notes that some companies did hunker down and survive. Constant Contact was an example that he pointed to. His general advice is don't fall into the trap of thinking you will be the one who captures the market by maintaining spend -- if you don't make it to the other side you will be the red line.
Don also made reference to the difference between east coast and west coast VCs. As he put it (1) Silicon Valley “celebrates” risk taking in a way that is foreign to New England and (2) the significance of this difference of style between the two coasts is way overplayed.
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East Versus West - Written by Dave Broadwin
Posted 11.04.2008
I had lunch the other day with an entreprenuer/venture capitalist, Vinit Nijhawan. One of the things we discussed was the apparent difference in risk appetite between east coast based VCs and west coast based VCs. We both agreed that there is a popular perception in the Boston entreprenurial community that west coast VCs are more aggressive (in the sense of willing to take more risk on early stage companies) and more patient (in the sense of willing to build lasting companies rather than go for good, if early, exits). I noted in Vinit's blog that he wonders why more west coast VCs don't open offices in Boston. Good question, there seem to me to be many good investment opportunities that are not getting funded.
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Congratulations to Viridity Software - Written by Dave Broadwin
Posted 11.03.2008
Congratulations to our client Viridity Software, Inc. which recently close its Series A financing from Battery Ventures and Northbridge Venture Partners.
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Microsoft Joins the Cloud Computing Party - Written by Dave Broadwin
Posted 10.31.2008
Further on the subject of cloud computing and the next hot thing. Here is a link to another blog with an interest in this space that discusses Microsoft's entrance into the market.
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Liability of Officers and Directors - Written by Dave Broadwin
Posted 10.27.2008
I recently have had the misfortune of having to counsel a client on the general subject of closing down a business including the duties and liabilities of directors and officers who find their companies in this circumstance. Depressing as it sounds, I have the sense that there may be more of this in the near future. So, below is a punch list (not comprehensive or detailed) of some of the things you should be aware of, if you find yourself in this horrible situation.
Here are the disclaimers:
The content of this blog posting is in no way an adequate substitute for actual legal advice. The laws governing these topics are detailed and complex, and the brief descriptions below are not adequate synopses of these laws. The content of this blog posting is taken from memoranda prepared by our firm in connection with advice to clients operating under specific circumstances and may not be applicable to your particular circumstances. If you find yourself involved as an officer, director or otherwise with an insolvent company, consult an attorney knowledgeable in this discipline.
Credit for the research and writing of memoranda from which I have taken most of the below belongs other attorneys at Foley Hoag LLP, particularly Mark Clark whose carefully written, thoroughly researched, and detailed memorandum I have grossly butchered in an effort to provide readers of this blog post with the gist of the most important concerns applicable to officers and directors of insolvent companies. To the extent that errors and inaccuracies have crept into this information, they are, of course, my sole responsibility.
Duties to Creditors of the Company
When a company is insolvent under Delaware law, the officers and directors have a fiduciary duty to the company’s creditors. Insolvency usually means that a company is unable to pay its debts as they come due. As a practical matter, officers and directors of an insolvent company must put the interests of creditors ahead of the interests of equity holders. Failure to live up to this fiduciary duty could result in personal liability.
Until recently, the fiduciary duties of directors and officers also shifted to creditors when the company was close to insolvent, sometimes referred to as the “zone of insolvency,” Although the Delaware courts have said that this is no longer a viable cause of action, officers and directors who continue to authorize the accrual of debts at a time when the company’s ability to pay those debts is in doubt could still be exposed to personal liability under a variety of other legal theories.
Federal Payroll Taxes
For purposes of this discussion, federal payroll taxes include income tax and FICA (social security and medicare) withholding, but not FUTA (unemployment taxes) or the employer’s portion of FICA taxes. If federal payroll taxes are not paid in full and on time, the so-called “responsible persons” can be held personally liable for a penalty equal to the entire amount of the tax deposit that should have been made, plus interest from the date on which the penalty is assessed. Responsible persons may include, but are not limited to, the personnel directly in charge of paying the payroll, as well as supervisors up the chain to the chief financial officer and any other officer or manager with authority over financial affairs. In addition, directors may be liable if they interfere with, or diverts funds, that should have gone to pay the federal payroll taxes.
State Payroll Taxes
Most states, including Massachusetts, have statutes similar to the federal statutes that make “responsible persons” personally liable for the failure of a business to make the required payments of state payroll taxes.
State Sales Tax
The failure of a business to make the required payments of the sales tax imposed by many states, including Massachusetts, also may result in personal liability for such taxes on the part of “responsible persons”.
Compensation Payments Due under Oral or Written Agreements
In Massachusetts it is a crime (and at a minimum there is significant civil liability) to discharge an employee without paying that employee on the day of termination wages that have accrued to the moment of discharge. The applicable definition of wages includes not only regular salary, but also c the value of accrued but unused vacation days. Commission are also included in the definition, although payment may be made following the termination date if they have not yet been calculated in accordance with the regular schedule under the employer’s commission policy or practice. The persons who can be prosecuted under the statute include the president and treasurer and any officer or agent having responsibility for the management of a corporation. Under Massachusetts law, an employee who has not been paid in full must first give the Attorney General an opportunity to investigate and enforce the claim, but if the Attorney General does not do so within 90 days, or earlier grants permission, the employee may sue directly for unpaid wages and benefits. As of the summer of 2008, an employee who is successful in pursuing a civil claim for unpaid or late-paid wages is automatically entitled to treble damages and attorneys’ fees.
Priority for Federal Claims
Section 3713 of Title 31 of the United States Code states that a claim of the United States government shall be paid first when a person indebted to the government is insolvent. Among unsecured and undersecured creditors outside of a bankruptcy proceeding, however, this means that the unsecured claims of the United States must be paid before any unsecured claims of other parties are paid. Officers and directors who authorize — or who, knowing the circumstances, fail to exercise their authority to prevent — payments to other unsecured creditors before the United States has been paid in full may be held personally liable for the amounts they have “diverted” from the United States.
Misrepresentation
The fact that a person has committed a tort on behalf of, and in the course of performing his duty to, his corporate employer does not shield the individual from personal liability for that tort. Among the business torts that might be committed as a corporation slips into insolvency is misrepresentation of the corporation’s economic well-being.
Corporate Distributions and Stock Repurchases
If a corporation is insolvent at the time a dividend, distribution or stock repurchase is made, or would because of a dividend, distribution or stock repurchase become insolvent, creditors of the corporation may be able to recover from the recipient stockholders the amount of the dividend, distribution or stock repurchase. Under certain laws in some states, this liability may also extend to directors who authorize the distribution or stock repurchase. The laws from which these generalizations are drawn include state corporate law, state fraudulent conveyance law, federal bankruptcy law and state and federal tax law. Massachusetts has laws of this type. Application of those laws to particular facts may become quite complex.
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IPO and M&A Exits - Written by Dave Broadwin
Posted 10.24.2008
It will come as no surprise that the number of exits (IPO and M&A transactions) for venture financed companies is way off this year -- compared to last year. As I noted in a prior posting, Series A transactions are off year on year. Although some industries are faring well (greentech for one), on a macro level, Series A deals in New England are down approximately 30% in the first six months of 2008 compared to the first six months of 2007. You can get more detail on this in our EEC Perspectives October 2008 issue. In addition, however, the statistics for M&A and IPO transactions are worse according to the CNET NewsBlog which points out that as of July 1, 2008 there had been no IPOs for venture backed companies in the secnd quarter and that in the first half of 2008 there were 56 M&A transactions compared to 97 in the same period last year. We are still compiling the statistics for New England based Series B and later stage deals for the second quarter, but these numbers should be available shortly, and I expect they will be consistent with what we are seeing in Series A deals and exits. To some extent the problem begins with exits. If investors don't have good visibility on potential timing or valuation of exits, it becomes very hard to complete a later round deal. If investors are anticipating difficulty raising Series B and later rounds, they are reluctant to take the risk on the early round. The silver lining may be that there is a lot of money sitting on the sidelines, and when the market turns this money will be looking for deals.
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Congratulations to Advanced Electron Beams - Written by Dave Broadwin
Posted 10.24.2008
Congratulations to our client Advanced Electron Beams, Inc. which recently completed a financing led by GE Energy Financial Services, a unit of GE (NYSE: GE).
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More on the Next Hot Thing - Written by Dave Broadwin
Posted 10.23.2008
Further to cloud computing as one of the next hot things, take a look at this article on Rackspace in TechDirt and this article from Always On.
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Due Diligence from the VC Side - Written by Dave Broadwin
Posted 10.23.2008
One of my themes has been how to deal with VCs. In particular, I have focused on making pitches, but, obviously, the process of getting funded involves a lot more than that, and the beginning of the process is the due diligence that a VC undertakes when making an investment decision. Here is a really good blog entry from Jeff Bussgang posted on Always On's blog. It is definitely worth a read.
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New Report on 2008 Second Quarter Series A Transactions in New England - Written by Dave Broadwin
Posted 10.22.2008
The EEC's analysis of Series A transactions in New England for Q2 just came out. It shows what is shows -- that there has been a decline in Series A deals compared to the same period in 2007. As I look at our publication (which covers data through June -- three months ago), I have to note that so much changed so dramatically in Q3 that Q2 seems like it was thirty months ago. We are in the process of finalizing our data for Q2 Series B and later stage financings and expect it to come out in the next couple or three weeks. I have a sinking feeling that it also will feel like history rather than current events. We have begun to gather the Q3 data but wont really know the numbers until well into November. Stay tuned. My sense is that (1) the number of Series A deals will continue to fall and (2) that we may start to see terms becoming more investor friendly, but don't hold me to it.
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More on Pitches - Written by Dave Broadwin
Posted 10.21.2008
Sometimes you can't be all things to all people. I often hear entrepreneurs say that they intend to alter very basic aspects of their business plans to appeal to what they imagine to be the appetite of a particular VC. One example of this thinking is the often heard "I only need $2 million, but I am going to put together a plan that shows a need for $10 million because that is the only way to interest a VC."
While it is undoubtedly true that there are many VCs who wont invest at "smaller" amounts, it probably means the entrepreneur should be approaching angels or so-called capital gap investors. It is very hard to imagine that an investor will not notice that you are asking for more than you need.
Aside from the awkwardness of asking for much more than is needed, this kind of request could suggest that the entrepreneur does not have a clear vision of what the business opportunity is. I believe that investors want to know whether you are planning to build a cottage or a cathedral and that you have a vision of what the business will be. This kind of request, targeted to the VC's interest rather than the needs of the company, assuming it is detected by the VC, might also suggest that the entrepreneur is more interested in acquiring an investor than in pursuing a particular plan. It could also suggest that the entrepreneur may not deal forthrightly with his or her investors. That is, they will take $10 million to execute on a plan that they really think only needs $2 million.
It is more important to have a plan you are enthousiastic about and then go find the right investor than it is to have the right investor then go build a plan around the investor.
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The Next Hot Thing - Written by Dave Broadwin
Posted 10.18.2008
Everyone on is always wondering what will be the next hot thing in the high tech world. We all know about energy and green and clean. Here are two more candidates for what may be hot in the next couple of years. (1) Mobile -- take a look at this article by Mark Horan of MassNetComms. (2) Cloud computing. MassNetComms strikes again -- they hosted a panel discussion on this topic. the panel included C level people from three very hot private companies Bill Blake from Interactive Supercomputing, Foster Hinshaw from Dataupia, and Bob Zurek from EnterpriseDB. It also included David Skok from Matrix. It is clear that there are a lot of entrepreneural opportunities in this space.
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