Managing Legal Challenges on a Startup Board

My partner Brad recently released his latest book, Startup Boards – Getting the Most out of your Board of Directors.  This is a great book for people looking for advice on how boards should operate in the very fluid world of startups.

One of the areas that Brad focuses on are some of the legal challenges that present themselves while serving on a board.  What might seem easy “hey, don’t I just do the right thing and all is well and good?” becomes a lot harder when different people are added to the mix.  For instance, did you know that under certain circumstance the board can be personally liable for actions of the company?  Do you know what types of lawsuits are most likely in a startup company?

This book tackles the most important legal challenges including things like VC self dealing, down rounds and founder departures.  While all of these situations are tough, they are even worse with an inexperienced board.

As the lawyer-boy at Foundry Group, I’m a big advocate of getting smart on these issues and this book is a great resource.

February 10th, 2014     Categories: Education, Venture Capital    

I’m Adopting A VC Code of Conduct

A few days ago, Gil Dibner posted what he called a VC code of conduct.  I read articles all the time where VC’s write about how venture capital “should work” and the vast majority of the time I either disagree or find them a waste of time.  I feel that most of these articles are just self promotion with no actual new intellectual capital being created.

But Gil’s article is fantastic.  It’s also depressing that he felt compelled to write it.  It is yet another indictment that many VCs behave poorly and have given our ecosystem a bad, but deserved, reputation.  When I read it I had three strong reactions: one, I have tried my best in my career to comply with these ideas (call me out if you feel otherwise!), two, I think others VCs would do well by adopting these proposals, and three I think my partners at Foundry Group score well on these metrics to date.

I’m going to summarize his idea of a VC code of conduct and add a few wrinkles of my own.  That being said, you should read his full article here.  I’m only going to detail where I have a particular spin.  I also think that Gil missed three themes that are important as well.

1. I will do no harm.  Should be “duh,” but being on boards for the last 15 years proves this isn’t as simple as it sounds.

2. I will respect your time. CEO / Entrepreneur time is simply more valuable than my time.  I don’t make the companies successful – y’all do.

3. I will not ask for material I don’t need.  And I wish Gil would have added “And I will read and be responsible for understanding all materials that you send me.”  I can’t stand board meetings where a CEO is having to go through the presentation for the benefit of lazy board members.

4. I will not string you along.  It always surprises me how many people thank me for a quick NO.  It’s the humane thing to do.

5. I will let you know about competitors in our portfolio.  Done.

6. I will be transparent about any conflicts of interest between and entrepreneur and myself.  I’d argue that this should be even broader.  Just be transparent in general!  An entrepreneur should never wonder what a VC is thinking.  Let’s just be open and keep filters to a minimum and clear honesty to a maximum.

7. I will not sign a NDA, but will act as if a reasonable one is in place.  Simple.  But also know that if you ask me for a NDA I’ll know you haven’t done much homework and you aren’t starting off on the right foot.

8. I will not share your slide deck unless you give me permission.  With my partners, yes.  With others, no.

9. I will not speak to your customers without permission.  This is horrible behavior in our industry that must stop.

10. I will educate before I negotiate.  I’ve always loved doing this and this is what led to Brad and I writing our book Venture Deals – Be Smarter Than Your Lawyer and Venture Capitalist.

11. I will be honest about what standard terms are.  I agree with the sentiment, but as a former lawyer, I hate the idea of negotiating over the term “standard.”  I’d prefer to just put our term sheet out on the web and give the same deal every time as we’ve done at Foundry Group.

12. I will not issue a term sheet unless my firm has made a firm decision to invest.  This is perhaps the worst behavior in our ecosystem today. I see it more often with late stage firms than early firms, but it is present at all stages.  Once a firm pulls this trick on a company I will never work with them again. Ever.

13. I will reflect the term sheet in the final legals.  A deal is a deal.  ’Nuff said.

14. I will not seek an unreasonable equity stake in your business.  I think this is an important one.  Everyone must feel like they have proper “skin in the game.”  This seems like a simple concept, but often you find people fighting over things that shouldn’t matter.  Assume the company will be a huge success and don’t over optimize around the edges.

15. I will avoid surprises.  I think that if VCs and entrepreneurs have transparent relations, as in 6 above, then this just follows.

16. I will act in the best interests of the company at all times.  It’s not only the law, but a good idea too.

17. I promise to try not to look at my phone in meetings.  This is a hard one, but an important one. I’m not perfect, but I’m trying.  Frankly, I find myself looking at my phone when the meeting gets bogged down, usually by a board member who didn’t come prepared.

I also think that there should be three additions to the list.  I welcome your feedback.

18.  I will respond to you promptly, especially if we have an investment in your company.  This should be table stakes to a VC, but it isn’t.  There are always particular emergencies and situations which will make this difficult, but it is really important for an entrepreneur to know they always have someone to turn to.  After all, being CEO is a lonely job.

19. I will not collude with other VCs to harm your company.  I find it reprehensible when VCs collude to either drive down valuation / terms prior to a financing, or when the company is in dire straights collude to take over the company on the cheap.  There are plenty of other situations, too.   This one may have the greatest “subject to interpretation” issue to it, but I’ve seen this line crossed at times and it disgusts me.

20. I will answer all well-tailored emails.  If I am sent a well-crafted email, I will answer it.  I promise.  Whether or not I know you or not, you’ll get a response.  This doesn’t mean that I will answer spam, emails created from mail merges, emails with so many grammatical and spelling mistakes that I can’t read or emails that are clearly from someone who has done no research into what Foundry Group invests in.  But if you at least try, you’ll get a response from me.

That’s an even twenty and I’m sure we could add a few more, but this would be my Twenty Commandments of VC, or as Gil put it a VC Code of Conduct.  

I’m proud to say that Foundry Group signs up to this code of conduct as we feel this should be the minimum baseline for good VC / entrepreneur relations.

Have an opinion?  Feel free to leave  comment below or hit me up at @jasonmendelson on Twitter.  Well done Gil and thanks for getting an important conversation started.

 

 

 

 

 

January 22nd, 2014     Categories: Entrepreneurship, Foundry Group, Frustrations, Venture Capital    

It’s Time To Vote

I recently met Andrew Shoemaker who is running for City Council.  He impressed me in his understanding of the issues related to our startup community, but also his larger vision of the city.  While I don’t normally get involved in local politics, I decided I would vote for him.

Now, how about that Vote?

Oh yeah, it’s an off year election here in Boulder, Colorado and if history is our guide, surprisingly few of you are paying attention to the election and the candidates.

Be honest, how many of the City Council candidates can you name? How many of the ballot items? Have you decided who you support?

Ironically, your vote may be more impactful in off year City Council elections than in large presidential elections.

But life is good here in Boulder and we have busy lives, so why do we care?

We care because City Council influences our local lives outside of the office (like open space access) and makes decisions that impact businesses as well.  We are talking about support for new businesses and jobs, office space and open space, livability and housing – you name it.

Other cities are competing with us for the types of business cultivated here, the types of creative co-workers we want, and the brand that Boulder has built. Candidates like Andrew understand that Boulder should take measures to encourage innovation and entrepreneurial activity in Boulder, support Boulder’s brand and attract continued investment and creative workers to Boulder.  Andrew started his own law firm, leaving the larger firm life and knows what it takes to create jobs, as well.

In general, I feel that Boulder City Council is out of touch with what Boulder has become and Andrew is one of the few people that really understand this.

Now is a good time to recognize that in addition to being an important part of our community, we also have something important to say in support of Boulder’s future.

What should you do?

Look for your ballot in the mail (this is a mail-only ballot election). Educate yourself on the ballot issues and the candidates and vote by returning you mail ballot. These candidates influence Boulder’s future so you should influence which candidates win.

Please vote and consider supporting candidates — like Andrew Shoemaker — who understand our issues and support our innovation culture in Boulder.

This is worth taking time out of your day and making your voice heard.

October 20th, 2013     Categories: Entrepreneurship, General    

The Next Foundry Video

It’s so tantalizing close that I can barely stand it…

Imagine hairy legs with high heels, an epic fight at the grocery store parking lot and lots and lots of cheese dip.  And this is only the beginning.  See you in a couple of weeks.

September 27th, 2013     Categories: Just For Fun    

Drones, Drones and Drones

I’m really excited about our latest investment in 3DRobotics.  In short, they are developing the leading technology platform and community around Unmanned Aerial Vehicles (UAVs).  The official Foundry post is here.

I think that most people hear the word “drone” and picture war machines, Terminator movies, “Big Brother” surveillance and other uses that make many of our skins crawl.  That being said, I’m stoked that we are investing in technology that could be used for other uses.  Which ones am I most excited about?  In no particular order:

1. Agriculture monitoring:  Right now farmers either buy satellite photos, or pay humans to monitor crops.  What if drones could do this faster and cheaper and decrease our cost of food?

2. Search and Rescue:  Currently, there are some drones that do this type of work, but we’ve just scratched the surface.  I guess this will put the St. Bernards with the liquor barrels out of business…

3. Hyper-local delivery:  Imagine ordering from a local store and having your prescription or other product delivered within an hour.  Is this technology what allows local stores to compete with the Internet?

4. Persistent cameras:  I’m really excited about persistent cameras for both movie making and sports.  Once these platforms become more advanced, we are going to see perspectives that we’ve never thought of before.

There is perhaps one more use case that I’m most excited about.  And this one is personal.  My dad and I have flown remote controlled model airplanes since I was a young kid.  It’s really the one activity that he and I bonded over.  While I do love flying, it pales in comparison to the memories I have of looking up to my dad and enjoying just being around him.  We still fly to this day and as our skills decline with age, it will be nice to have the ability to fly vehicles that refuse to crash.  :) While certainly not a big market and not a reason to invest, it’s a great side affect and I’m really excited to share with him.

Thank you to CEO Chris Anderson for giving us the opportunity to work with him and the company.

September 26th, 2013     Categories: Foundry Group Investments, Technology    

Wanted – Colorado-based Entrepreneur to Pitch My Me at Class

I co-teach a class at the University of Colorado Law School called “VC 360.”  We have MBA, Engineering and JD candidates and the course deals with all things in the entrepreneurial / venture ecosystem.

Each year, we have a pitch day where one entrepreneur comes in and pitches me.  The students get to watch.  The entrepreneur and I get an hour together and then the students get to ask questions for 20 minutes.

This is a real pitch.  It’s not any different than if someone comes to our offices, but there is a “studio audience.”

So if you are interested in pitching Foundry Group and want to do something great for the Boulder education community, let me know.  I can only take one.

The pitch date is 10/7 at 8am in Boulder.

September 11th, 2013     Categories: Education, Entrepreneurship, Financings, Venture Capital    

The “VC Bargain”

With the recently announced acquisition of our portfolio company MakerBot, the conversation invariably turns to “was this the best time for the company to sell?”

It’s a question that is asked every time a company sells and it usually creates a lot of noise by people whose opinions are usually misinformed and even more so, irrelevant.  The question is asked over and over and over again:  “When is the correct time for a startup to sell itself?”

The answer is simple:  “When the founders want to sell.”

Period.

Unfortunately, many investors do not feel this way.  Clearly, a VC can be very helpful in advising the founders about past experiences, the current state of the M&A market and their thoughts around valuations, but when the founders want to sell, it’s time to sell the company.  Who are we to tell the founders that they aren’t allowed to fulfill their dreams and create an event that will change their lives?

Brad and I have written a lot about venture term sheets.  (Plug:  buy our book!).  One thing we haven’t written about, however, is what we call “The VC Bargain.”

We believe this “bargain” is inherently created when VCs invest in a company.  And no, this isn’t in the legal documents, but should be part of a mutual understanding by both parties.  (Note, however, we’ve seen some VCs and many late stage funds actually try to draft into the documents at what valuations founders may sell at and we find this practice distasteful).

If a VC is playing for a longer / bigger outcome, then it is the responsibility of the investor to create some financial liquidity for the founders and employees that makes them feel secure.  The situation we hate is one where the founders and employees receive nothing except the message “no, you can’t sell, keep running the business.”

But this isn’t solely as one-way bargain.  If you take venture money, you have a duty as well.  You have a duty to actually work toward a liquidity event.

From time to time, we’ve encountered entrepreneurs who really aren’t interested in selling their company.  This has been expressed both explicitly “I have no intentions of ever selling my company” to more implicitly whereby an entrepreneur continually finds fault with potential buyers (“I hate their culture,” “I don’t like big companies,” etc.).

Few companies can expect to go public.  Therefore, the acquisition market is the only way for investors to create proceeds to return to their limited partners.  And everyone should know that our job is to take our investors money, invest it and return a lot more money to them.   Without acquisitions, we can not do this.

It amazes us, but we find that some entrepreneurs don’t actually realize (or respect) this when they take on investment.  Yeah, we know you don’t normally gravitate working for big companies (otherwise, why start your own?), but at some point, if things go well, BigCo may be correct path of the company.

Bottom line is that this VC Bargain is an important one in the startup ecosystem, but one that is not well understood by some.

June 25th, 2013     Categories: Entrepreneurship, Financings, Venture Capital    

We Signed an Important Amicus Brief in Oracle v. Google Case

At Foundry Group, we take a strong interest in the policy and legal ecosystem that affects the start up industry.  We’ve been among the first to support initiatives like Startup Visa and patent reform and have been active in city, state and national politics in the hopes of keeping the U.S. the center of the startup world.

I’ve recently left the NVCA board after my four-year term was up.  During that time I took a particular interest in SOPA/PIPA (glad that blew up, but keep your eyes open, there are still folks out there trying) and I’m proud to say that the association has a permanent IT policy group that did not exist before I joined.  High on the list of issues going forward certainly will be around Cybersecurity and more patent reform.

Recently, our company signed onto an amicus brief that might be the most important issue that we’ve faced.  In short, Oracle is threatening to chill innovation in the software industry by arguing that APIs are copyrightable.  Google is the defendant and should Oracle win this case, the implications are disastrous for our startup ecosystem and our economy.

Thankfully the folks at the University of California, Berkeley, spearheaded by Jennifer Urban see this as a major threat as well and wrote a cogent and powerful amicus brief to the court.  The list of signatories to the brief are here and represent a wide constituency of the industry.

Thank you Jennifer and team for your tireless efforts.  Startup land:  please support and help recognize these important efforts.

 

May 31st, 2013     Categories: Entrepreneurship, Law, Venture Capital    

Calling All Angels – Fort Collins Version

Three keys to a building a strong ecosystem for startups are: (1) entrepreneurs; (2) technology; and (3) investors.   For a long time, newer entrepreneurial communities have relied on the first two segments to attract the third.  We are now realizing that to sustain and grow a vibrant entrepreneurial community, we need to support all three.

Angel investors are typically very bright, successful entrepreneurs who want to give back after they cash out in one or two of their own ventures.  Although they understand how to build products and companies, they may not have a lot of experience in taxes, financing, and investment.  One of the big areas that can come back to bite them later is taxes.

My friend, Roger Glovsky, along with EKS&H, the Rocky Mountain Innosphere, and Impact Angel Group are trying to shine a light on tax issues that may be critical for angel investors to understand, such as 83(b) elections, tax qualified stock options, and trading equity for services.  In addition, they will talk about tax loopholes for investors, the Colorado enterprise tax zone credit, and tax deductible philanthropic funds to support Colorado startups.

If you are in the Fort Collins area next week, be sure to sign up for this special event (free!) on May 31 at the Rocky Mountain Innosphere.

May 22nd, 2013     Categories: Financings, Law, Venture Capital    

CU Boulder’s New Venture Challenge. Come Join Me

I’ve seen the “Transactional IQ” – i.e., the level of understanding around startup deal making – rise at CU over the past five years.  This fall I finished teaching a Venture Capital course at CU for the fifth time.  And in recent years I’ve helped coach CU’s Venture Capital Investment Competition team.  It is fun to see what involvement with students over a five year trajectory can accomplish.

I’ll be involved in another five year milestone on Wednesday.  CU-Boulder’s New Venture Challenge Fifth Annual Championships are Wednesday 5:00 – 7:30 p.m. in the Wittemyer Courtroom at Colorado Law.  I am a judge.  Free registration available at http://cunvc.org/

It is fun see the NVC go from “let’s make up a competition” to, five years later, something that feels like an annual CU-Boulder institution with over 60 teams involved.

In 2008, several groups across CU-Boulder banded together to launch a cross-campus entrepreneurship championship, which they coined the New Venture Challenge.  In year one, the CU NVC set out to answer the question, “I’m interested in entrepreneurship.  But where do I start?”  Buoyed by a grassroots group of student volunteers, the NVC aimed to inspire students and “collapse the campus” (i.e., encourage people to build startups in interdisciplinary teams).   It helped that, from the start, the NVC involved all parts of campus, with the Silicon Flatirons Center, Deming Center, ATLAS, BDW, eShip, and the Entrepreneurship Center for Music involved.  About 75 or so people trudged through a foot of snow to see the inaugural NVC Finals, which my partner Ryan McIntyre helped judge, in 2008.

Five years later, the snow is back, but the CU NVC otherwise appears to be scaling well.  A robust mentorship program now connects CU NVC teams with Front Range entrepreneurs.  The NVC increasingly emphasizes action over endless business planning.   Several experiential classes have popped up across CU-Boulder that build companies that participate in the CU NVC.  Audience interest is up, too.  The NVC Finals are now held in the 250 seat Wittemyer Courtroom at Colorado Law School.

Check out the NVC on Wed night.  I’m looking forward to it.

April 16th, 2013     Categories: Education, Entrepreneurship