The Confusing World of Joint Ownership of Intellectual Property

A confusing topic for many emerging companies is joint ownership of intellectual property. Many of the implications of jointly owned intellectual property are counterintuitive. In this post, we breakdown the implications of joint ownership by the default rules in the United States for patents, copyright, trade secrets, and trademarks.

A confusing topic for many entrepreneurs is joint ownership of intellectual property. It often comes up in connection with joint development arrangements, subcontracting portions of work, joint ventures, and other collaborative projects involving intellectual property development, whether it be in connection with software, cleantech, medical device, drug development, or other technology-based initiatives. Continue reading →

Bridge Financing Documents

One of the sets of documents that we have automated at AlphaTech Counsel is the bridge financing documents for an emerging company. Attached is a sample of the documents.

One of the sets of documents that we automated at AlphaTech is the bridge financing documents for an emerging company. Attached is a sample of the documents: Convertible Note and Subscription Agreement

Instead of just using form documents as most law firms do, robust automation allows us to deliver common document sets for emerging companies in a more efficient manner. So what else does “robust automation” yield? It improves document accuracy, provides a valuable knowledgebase from which to draw, and enables us to deliver common document sets to our clients quickly. It also frees up time of our lawyers to enable them to spend less time on basic contract drafting and more time on activities that afford our clients higher value. Continue reading →

LLC Choice of Entity for Emerging Technology Companies

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program should be a real boon to many area companies. A surprise to many though when reading the fine print of the program is that limited liability companies that have a tax-exempt organization as an owner, as many university biotech spinoffs do, are not eligible for a grant under the program. While there is a cumbersome fix for this, the “LLC issue” for emerging companies extends well beyond this grant program, however.

The recent $1 Billion Qualifying Therapeutic Discovery Project Credit program will be a real benefit to many area small life science and medical device companies. A surprise to many though when reading the requirements of the program is that limited liability companies (LLCs) that have as an owner a tax-exempt organization are not eligible for a grant under the program. Having a tax-exempt organization as an owner is more common than one might think. Many university technology transfer offices, such as the Wisconsin Alumni Research Foundation (WARF), are tax-exempt organizations and frequently hold an equity interest in the startups to which they license patents. As a result, those LLC biotech licensees are not eligible for a grant under the program. As the CEO of an LLC with which I work (but did not set up) said earlier this week about being excluded from eligibility, “Ouch! That stings! Another painful learning experience.”

LLCs are Typically Not the Best Choice of Entity for Emerging Technology Companies

The “LLC issue” for emerging companies extends well beyond this grant issue for therapeutic companies. I say this even though many attorneys recommend LLCs for virtually all contexts. Sure, LLCs have their place. I frequently advocate using them as holding companies, investment vehicles, and joint venture entities. Among other situations, it also can be appropriate to use them when there is a limited, small group of owners actively participating in the business or when the owners want to have a certain allocation of profits and losses that cannot be accomplished when using an S or C corporation. But for many emerging companies that have or plan to have outside investors, the LLC is often not the best choice of entity. Continue reading →

Angel Financing Transaction Form Documents

As a follow up on the angel investor and venture capital term sheet post, I want to elaborate on some efforts to streamline angel investor transactions and reduce related transactional legal costs. In the last year or so, there has been considerable effort to create standardized open source angel financing documents. The first of these recent efforts was from Y Combinator. With the assistance of the law firm of Wilson Sonsini, Y Combinator published the Series AA Equity Financing Documents. Another organization focused on seed stage companies, TechStars, subsequently released its Model Seed Funding Documents, which were prepared by the Cooley Godward law firm. And, most recently, attorney Ted Wang from Fenwick & West led an effort to put together the Series Seed documents. There are others as well, especially form term sheets, such as this one from gust. In coming months, a Midwest group of attorneys and law firms plan to publish a set of documents that will add to the mix, with a Midwest flavor of default terms.

This post provides a brief summary of each publisher of the open source form documents as well as a brief overview of the standardized terms for each set.

The Reasons for Using Standardized Forms in Angel Financings

As mentioned in an earlier post in connection with the National Venture Capital Association‘s (NVCA) efforts in adopting form venture capital investment documents, industry standardization would be helpful to achieve these and other goals:

Reduce transaction costs
Reduce time to closing
Reflect industry norms
Promote consistency among transactions
Establish certain industry standards
Provide basic explanations as to the reason for particular provisions or the context in which certain provisions should be included

While achieving these goals would be laudable, creating a standard set of angel financing documents that are used by various groups presents challenges. I will cover these issues in a later post. But first, here is a summary of the current open source documents:

Y Combinator Series AA Equity Financing Documents

Toward the end of 2008, Y Combinator was the first of the groups to release an open source set of angel financing documents. Y Combinator provides small investments (typically less than $20,000) to computer, Internet, and software startups. Along with the investment, they provide initial consulting and networking opportunities for startups, including a three-month training program in the San Francisco Bay Area. According to Y Combinator, they take a 2-10% equity stake in participating companies. To date, they have worked with over 140 companies.

The Y Combinator documents were originally created for Y Combinator’s portfolio companies to use for their angel financing rounds. Among other provisions, the documents contain a 1x nonparticipating liquidation preference, no springing future rights from subsequent issuances, participation rights, a basic set of representations and covenants from the issuer, and a board seat.

TechStars Model Seed Funding Documents

In early 2009, TechStars released its set of model seed funding documents. TechStars provides up to $18,000 in seed funding to emerging companies, primarily in Internet and software industries. In addition, they provide educational programs and mentoring for three months in Boston, Boulder, and Seattle, with the chance to pitch angel investors and venture capitalists at the end of the program. In exchange for the funding and services, TechStars takes a 6% stake in companies.

TechStars provides its model documents to founders and lead investors as a starting point in seed and angel financing rounds in the $250,000 to $2 million range. The TechStars documents contain, among other provisions, a 1x nonparticipating liquidation preference, broad-based weighted average anti-dilution protection, springing future rights from subsequent issuances, participation rights, a basic set of representations and covenants from the issuer, and a limited right to a board seat that remains in place until the holders drop below 5% ownership of the company on a fully diluted basis.

Ted Wang’s Series Seed Financing Documents

The Series Seed Financing Documents were released last month (March 2010). An important characteristic of these documents is that they are, for the most part, slimmed down versions of the NVCA forms. As a result, investors who use the NVCA documents will generally be familiar with the terms of these documents. According to Ted Wang, the documents are intended for typical angel financing rounds in the $500,000 to $1.5 million range.

Although the documents are intended to be neutral, they generally contain the most investor-friendly terms of the three sets. Among them are assignment of the company’s right of first refusal to investors, drag-along rights, reimbursement of investor legal fees (up to $10k), and protective provisions typical for a company-friendly venture capital financing. Still, some investors have commented that the terms in the Series Seed documents are not aggressive enough.

The Series Seed documents are also intended to be used “as-is” without further negotiation (just fill in the blanks). The philosophy behind this approach is that the value of standardization outweighs the costs of customization: a controversial concept for many companies and investors. Ted Wang has invited comments and is planning to publish a revised set of documents after one quarter, including regular updates thereafter.

Comparison of Angel Investment Form Documents

All three sets of model documents anticipate that the security issued is preferred stock. Generally speaking, the Y Combinator and TechStars documents are more company-friendly than the Series Seed documents, although the TechStars documents contain anti-dilution protection and the other two do not.

While it may sound like only a self-serving comment, the open source forms should not be a substitute for involving an attorney experienced in angel and venture capital financing transactions. Selecting and negotiating terms (and alternatives), addressing the inevitable deal-specific terms not encompassed within the forms, providing a check as to what current “market” is, and securities law compliance are some of the reasons to involve an experienced attorney in the process. That said, industry or at least regional adoption of a standard set of angel investment documents (with common variations) should significantly reduce transaction legal costs, especially if both sides are represented by experienced counsel familiar with the forms.

If and when the Midwest-based angel financing documents are published, I will provide another update.

Differentiating Introductions

Whether looking for an investor, a joint venture or joint development partner, or your next CEO, a warm introduction is almost always better than a cold one. But the quality and effectiveness of warm introductions vary considerably. Setting up the right type of introduction from the right type of person can be a test of your entrepreneurial skills.

Whether looking for an investor, a joint venture or joint development partner, or your next CEO, a warm introduction is almost always better than a cold one. But the quality and effectiveness of warm introductions vary considerably. In fact, setting up the right type of introduction from the right type of person can be a test of your entrepreneurial skills.

Elements of a Good Introduction

In essence, there are at least two elements to a good introduction: (1) the introducer is someone who the prospective investor, joint venture or joint development partner, or CEO listens to; and (2) the introducer has something persuasively positive to say about you or your company.

Types of Introducers

Using an unscientific approach, here are my tiered groupings of people from whom to make your warm introductions:

Top Tier Introducers

The introducer successfully concluded a recent close business relationship in which the prospective investor, joint venture or joint development partner, CEO, etc., did very well.
The introducer has an on-going regular business relationship with the prospective investor, joint venture or joint development partner, CEO, etc., that is going well.
The introducer is someone well known to the prospective investor, joint venture or joint development partner, CEO, etc., and he, she or it wants to do business with the introducer.
The introducer and the prospective investor, joint venture or joint development partner top execs, CEO, etc., are close socially (e.g., families going on vacations together)

Middle Tier Introducers

The introducer currently works with or has worked with the prospective investor, joint venture or joint development partner, CEO, etc., but not closely.
The introducer has a good close working relationship with an affiliate or existing partner of the prospective investor, joint venture or joint development partner, CEO, etc.
The introducer is an acknowledged scientific expert or significant player in the industry and is known to the prospective investor, joint venture or joint development partner, CEO, etc., by reputation

Bottom Tier Introducers

The introducer and the prospective investor, joint venture or joint development partner, CEO, etc., has an on-going regular or previous business relationship that is not going well (or did not go well) through no fault of the introducer.
The introducer knows the prospective investor, joint venture or joint development partner top execs, CEO, etc., only through casual social situations (e.g., reception, conference, party, mutual friends)

Of course, there are situations where a “warm” introduction from a hostile source can lead to a problem, one in which a cold call may yield a better result. But in most cases, even a positive introduction from a “bottom tier” introducer is better than no third party introduction. For example, I’ve heard a number of venture capitalists say that they have never (ever) invested in a company that sent directly its summary or powerpoint over the transom.

Ensuring a Positive Message in the Introduction

Just because you have someone lined up who is a top tier or middle tier introducer, does not mean you are set. As an illustration, I have a client who was looking for an introduction to a particular potential joint development partner. The client discovered that an MD working at one of the company’s clinical trial sites had previously done a lot of work with the targeted joint development partner. Upon discovering this, the CEO quickly moved to ask the MD for the introduction, which the MD agreed to do. As it turns out, the MD by his nature was very measured in his words when making introductions. In making this introduction, the CEO later found out that the MD spent as much time disclaiming knowledge about the company and its prospects as he did explaining in a measured way the positive results of the recent trials. While the CEO did get the meeting, he spent considerable time explaining why the MD was not more enthusiastic about the CEO’s company.

So, how do you ensure a positive message in the introduction? Ask the introducer what he or she is going to say. Provide the introducer with an elevator pitch length email about your company. Provide him or her an executive summary or the bullet points to touch on during the introduction. You should do as much work as possible for the introducer to make sure that his or her job is easy and that he or she gets the facts right. That said, the introducer should know the basics about your company as the prospective investor, joint venture or joint development partner, CEO, etc., will likely have at least one question for the introducer. If the introducer does not know rough headcount or revenue numbers, or whether the company has filed an IND, for example, not only can that be embarrassing to the introducer but it will also degrade the effectiveness of an otherwise good introduction.

While serendipitous introductions or connections do happen, many times a good introduction is the product of deliberate, diligent entrepreneurial efforts of finding the right person with the right connection to deliver the right message.