I’m honored to have recently been elected to the national Board of this terrific 30-year-old nonprofit organization, which is focused on fostering high school completion, college access and college completion for underprivileged children. The Foundation’s 30th Anniversary ‘Spirit of the Dream’ Gala is Tuesday evening, June 14, 2011. Click here for more information. This year’s Honorees include former NJ Governor Tom Kean, Shmuel Meitar (founder of Time To Know) and Stuart Udell (CEO of Catapult Learning and Chair of the National Dropout Prevention Center). We expect to have over 500 guests including leaders in the educational reform movement.
If you’ll be in or around the NYC area in mid-June, please consider attending the Gala. If you’d like to learn more about the Foundation in general, please feel free to contact me.
Jeff Fromm’s Panel Featured in April 8th News Segment about the US/Israel Venture Summit (The Jewish Channel)
I’m pleased to report that my panel was featured in a news segment about the The US/Israel Venture Summit, in an April 8th broadcast of The Jewish Channel. A link to the section of a YouTube video covering the panel is below. Fast forward to the 8:31 minute mark in the video.
I’m pleased to announce that Dorsey & Whitney is the Diamond Sponsor of the US/Israel Venture Summit, now in its 5th year, which is being held at Digital Sandbox in downtown NYC on Wednesday, March 30th. This conference will bring together over 50 venture capital firms and over 300 attendees including entrepreneurs, investment bankers and professional advisors, all interested in the activities of cutting-edge Israeli companies in the United States. This year’s conference will include companies from three major tracks that correspond nicely with Dorsey’s areas of expertise:
- Technology – see Dorsey’s Technology, Internet and e-Commerce Industry Group
- Life Sciences – see Dorsey’s Life Sciences Industry Group
- Cleantech – see Dorsey’s Cleantech Industry Group
I will be moderating the 9:00am panel, The Changing Venture World: How Does It Affect Israeli Startups?, which will feature VCs from Lux Capital, iNovia Capital, Canaan Partners, Norwest Venture Partners, Clarian Health Ventures, DFJ Gotham Ventures, and Robert Bosch Venture Capital.
Mike Moyer will moderate the 3:00pm panel, Solid Clean-Tech Deals Investors Will Fund, which will feature VCs from Sail Venture Partners, Greenhouse Capital Partners, Good Energies, WAVE Equity Partners, Signal Lake, and Kleiner Perkins Caufield Byers.
Steve Khadavi will moderate the 4:30pm panel, The Venture Roadmap: What Israeli Startups Need to Know To Attract US Capital, which will feature VCs from Mass Medical Angels, LaunchCapital, Rock Spring Ventures, Bridge Investment Fund, BD Technologies, Chart Venture Partners, and Highland Capital Partners.
Five members of Dorsey’s Israel Practice Group are planning to be at the US/Israel Venture Summit:
- Gary Abelev, Intellectual Property Group (Patent Strategy, Prosecution and Enforcement)
- Jeff Fromm, Corporate Group (Venture Capital, M&A and Emerging Companies – particularly technology companies)
- Mark Kaster, Regulatory Affairs Group (Risk Management, Health and Safety, Business Transactions)
- Steve Khadavi, Corporate Group (M&A, Capital Markets and Public Companies)
- Mike Moyer, Corporate Group (Venture Capital, M&A and Emerging Companies – particularly cleantech companies)
If you would like to discuss this conference or learn more about our capabilities with respect to cross-border business with Israeli companie and investors, please feel free to contact any of us.
Reprinted from Matt Bartus’s blog, A View From The Valley. Posted there on October 12, 2010.
Today the Palo Alto office of Dorsey & Whitney released the results of a survey we conducted of startup founders and CEOs about the criteria they use to select investors. The full survey can be downloaded here and a press release about the survey’s key findings was released today here.
Many people have asked us why we conducted the survey. First and foremost, we wanted to get a snapshot of the early stage financing market to determine if the trends we are seeing in our own practice of representing startup companies and investors matches up with broader trends in the market (and it did).
Second, a lot of the talk in blogs and popular press about the different types of investors and the purported competition of Angels vs. Super Angels vs. VCs has focused on how investors define themselves. We wanted to give entrepreneurs a voice to express what is important to them and how they view investors. We think the results speak loud and clear.
First, some information about the survey:
- The survey was conducted online over a 4-week period. We had 363 respondents that completed the survey. Participants were automatically registered to win an iPad, which went to Hiten Shah of KISSmetrics (congratulations Hiten!).
- 42% of survey respondents were based in the San Francisco Bay Area/Silicon Valley region, with 20% international and the rest distributed throughout the U.S. All respondents had either raised funds over the past 12 months and/or were planning to raise funds within the next 12 months.
- Respondents represented a range of sectors, spanning IT infrastructure, software, gaming, life sciences/biotech, and green tech/energy. However the majority of startups participating in the survey were in the consumer Internet, cloud computing/SaaS or mobile sectors, 34%, 17% and 13%, respectively.
While CEOs still find traditional deal terms like valuation, dilution, liquidation preferences and board control as very important elements in completing a deal, the survey illustrated the importance of other criteria. Following are some of the findings:
- 91% ranked the speed at which the deal can get done as “somewhat important” to “very important.” >tweet this stat<
- 92% ranked whether the investor understands the startup’s funding requirements and encourages them to not take more or less than what the business requires as “somewhat important” to “very important.” >tweet this stat<
- While valuation rated important, a full 32% of CEOs said that this factor was only “somewhat important” to “not important.” >tweet this stat<
- 64% of the respondents are seeking $1 million or less in funding, underscoring the new funding requirements of today’s tech startups. >tweet this stat<
- 48% of respondents ranked prior relationships with an investor as “not important.” >tweet this stat<
- The perception of the investor’s brand does not appear to carry the same prestige and value with today’s entrepreneurs. Approximately 75% thought that a tier-one “brand name” VC was only “somewhat important” to “not important.” >tweet this stat<
* * *
We hope that people find the survey results informative. It’s an interesting time to be working with early-stage startups and the technology industry in general. We think the survey provided a helpful overview of what early-stage startups founders and CEOs are looking for from investors and where those needs are being met.
We welcome any feedback or input people have so please drop us a line or note.
– Matt Bartus & Ted Hollifield
I wanted to memorialize the passing of Gail Koff, a long-time client and friend, on August 31st. Gail quietly fought a type of Leukemia for more than 10 years, yet due to her strength and love of life the people around her never thought her final day could be so soon.
Gail was one of the founding partners of Jacoby & Meyers, which started more than 35 years ago as a law firm for the average citizen. Gail had many ups and downs at her firm during that period, but never dropped her focus on trying to improve the world through her legal services. She also spent a great deal of time and energy on the boards of non-profit organizations and educational institutions such as Bank Street College and The Calhoun School.
The New York Times wrote an obituary here. The Wall Street Journal wrote a remembrance piece about Gail here. The Wall Street Journal Law Blog covered her passing here. Death notices in the New York Times are here.
On a personal note, this is the first time I had a client who became a friend pass away and I find myself very saddened by it. Gail was truly an inspiration with her strength, vision, perseverance, commitment to social causes, and love of family, friends and life. I consider myself very fortunate to have known her and will truly miss her.
Rest in peace, Gail.
On August 17th, I had a real treat of joining my non-profit, pro bono client, University of the People, for the closing bell ceremony at NASDAQ. UoPeople, the first tuition-free online university, was founded by Israeli education technology entrepreneur, Shai Reshef. You can learn more about this terrific organization that is trying to democratize higher education globally at www.UoPeople.org. You can view the video of the closing ceremony here.
Mike Droke, the head of our Seattle office and the Co-Chair of Dorsey’s Labor & Employment practice, recently spoke on Fox Business News about some of the pitfalls of misclassifying people as independent contractors. Federal tax authorities are increasingly targeting companies that treat people as contractors when they really should be treated as employees. Mike’s interview, linked below, provides a good overview of the topic.
TV interview: Hidden Dangers of Independent Contractors
This post is being filed in my new “Strange (or Interesting) Corporate Laws” category. This one came up in a recent Delaware Supreme Court case entitled Whittington v. Dragon Group, L.L.C.
The general statute of limitations for contract disputes in Delaware is 3 years. However, if the contract in question is “sealed”, then the statute of limitations is 20 years. Not much has to happen for a contract to be “sealed” – for an individual, the court ruled, all it takes is for the word “seal” to appear next to the signature. Those four letters, usually glanced over quickly (if at all) in the signing process, extended the statute of limitations by 17 years.
I am philosophically (and practically) opposed to situations where small, unintended differences result in large, unintended consequences. Four letters, 17 years, is such a situation. Similar differences apply in many other states as well.
- Every word in a contract matters. Therefore, nitpicking sometimes matters.
- The governing law in a contract matters.
- Contractual obligations may be explicit (written expressly in the contract) or implicit (applied by statute or case law, where not covered expressly).
- Careful legal negotiation takes into account all of the above.
In a recent post, I recommended that the typical startup should start as an LLC (limited liability company) and remain an LLC as long as possible. One ever-present challenge with LLCs is that most entrepreneurs (present company included) like to try to force-fit corporate concepts and structures into an LLC format. This is not always easy or even possible — pass-through (partnership-style) taxation means that LLC membership interests are very different than corporate stock. These differences have a big impact on equity incentive compensation for employees.
In the corporate context, options are far and away the most common form of equity incentive compensation. In the LLC context, options are rarely used because they have uncertain, and largely unwelcome, tax consequences. So, how do an LLC’s employees get to share in the growth of an LLC’s value?
Capital Interest and Profits Interests
An LLC membership interest can either be a capital interest or a profits interest. A basic capital interest is similar to common stock — it has the right to a proportionate share of the capital, profits and residual value of the LLC. A basic profits interest is just like a capital interest, except that it gets a zero dollar interest in the value of the company on the date of grant. Like capital interests, profits interests share in the profits and residual value of the LLC (other than the initial value on the date of grant). In other words, the profits interest starts out with a zero dollar value and grows in value as the LLC grows in value. In this way, it is most similar to SARs (stock appreciation rights) in the corporate context.
One of the things that routinely causes confusion is that the term “profits interest” is a partial misnomer. The word “profits” in this term includes both actual profits and “value accretion”. Of course, true profits are allocated to members as they are earned. In addition, when an LLC grows in value and an allocation event occurs, the LLC allocates the value accretion as if it were profits. (Note that allocations of value, unlike actual profits, do not automatically result in taxable income for the recipient of the allocation.)
Profits interests are, in fact, a great way to provide equity compensation to LLC employees. Assuming certain tax rules are met, the profits interest is not taxable on the date of grant but still participates in the upside growth of the business. The problem is that an employee who owns a profits interest is a member (owner) of the LLC and, therefore, cannot be treated as an employee for tax purposes (they may still be considered an employee for federal and state employment law purposes). Instead of receiving income reported on the standard W-2 tax form, they receive their income reported on a K-1. This simple difference has several corollaries: (1) the employee has to file quarterly estimated tax payments instead of having taxes withheld from every paycheck; (2) the company does not match FICA payments but instead the employee has to pay ‘both sides’ of the tax; and (3) certain benefits to the employee, such as medical insurance, may be taxable. Generally speaking, an employee who receives a profits interest needs to receive higher compensation in order to have the same after-tax money as an employee who does not hold a profits interest.
Unit Appreciation Rights
An alternative to profits interests for an employee that does not want to have the tax attributes of a member is the issuance of UARs (unit appreciation rights). UARs have similar (not identical, but similar) economic consequences to profits interests, but still allow the employee to be treated as an employee for tax purposes. It should be noted that profits interests give rise to income that is taxed at either ordinary income rates or capital gains rates depending on the source of the underlying company income (typically the sale of the business will create mostly capital gain), while UARs will always give rise to income taxed at ordinary income rates.
A more comprehensive review of the vagaries of profits interests and UARs is beyond the scope of this post, but the key message is that there are effective ways to incentivize employees of an LLC and that care must be taken to determine the optimal way for particular companies and individual employees.
AEP Legal Corner – Independent Contractor or Employer: Getting It Right Is More Important Now Than Ever Before
by Gary M. Gansle, partner in Dorsey & Whitney’s Labor and Employment practice
For far too long, employers have taken a laissez-faire approach to classifying workers as independent contractors in order to help control costs, streamline their organizations, and honor the stated preferences of their workers. However, the cost associated with being undisciplined and incorrect about these classification decisions can be quite expensive, and is likely to get more expensive in the near future given the Department of Labor’s “Misclassification Initiative,” which is designed to identify and reduce employee misclassification.
Go to The Association of Educational Publishers’ Dorsey & Whitney Legal Corner.