General Solicitation One Week On

As readers of this and other startup-focused blogs will be aware, exactly one week ago today general solicitation of securities offerings to accredited investors became legal for the first time in 80 years. Prior to the 23rd of September, coverage of this upcoming shift was divided with some predicting major alterations to the landscape, others predicting hardly any change at all, and yet others delaying judgment, at least until some additional proposed rules are finalized. Reading the Tea Leaves What can we learn from the first week’s tea leaves regarding the initial reaction to general solicitation? Some notable actors were off to the races, with folks like AngelList and WeFunder immediately jumping in and offering solutions that take advantage of the broad exposure offered by general solicitation (while recognizing the need to still comply with accredited investor requirements). Leading the charge were Second Market and WeFunder. The latter has taken perhaps the most proactive stance on general solicitation, even offering to do some securities work on behalf of companies (using generic forms). These companies seem to be betting that the current window between the enactment of the rules adopted in July allowing for general solicitation and the pending adoption of any of the proposed rules will give them a significant head start on their competitors. They are also betting that any new rules won’t change things significantly (the best case for them), or at least won’t be applied retroactively. On the opposite end, FundersClub has taken a cautious “wait-and-see” approach. CEO Alex Mittal has made it clear that the VCs, angel investors, law firms and others that he has...

Elements of an NDA for Startups to Ponder

I participated in a session yesterday on IP protection for technology companies that presented a wealth of good advice on certain provisions of Nondisclosure Agreements (NDAs) to which founders and IP owners should pay close attention. These agreements are sometimes confusing to the uninitiated, and often drafted in a manner that heavily favors the side producing the document. Knowing what to look for when an NDA is pushed across the table (or the electrons arrive at your inbox) is of utmost importance when discussing technology with a potential partner. Of course, some partners (such as VCs) will generally refuse to enter into NDAs at all. Often times these people talk to so many companies about their ideas in the course of a business day that there is simply no practical way for them to avoid running afoul of the provisions of an NDA. At the opposite end of the spectrum are mutual NDAs, where the terms apply (generally equally) to both sides. Mutual NDAs are far less likely to contain one-sided provisions. A unilateral NDA, however, presents the opportunity for one side to fine tune the language to benefit themselves (as either the recipient or discloser of confidential information), and may contain some tricky clauses for which every startup founder should watch out. I outline a few of these in this post. Residual Information Clauses One clause to be keenly aware of is what is known as a “residuals” or “residual information” clause. These are often structured to permit the recipient to freely use any information that is retained in his or her unaided memory (i.e., anything that they...

General Solicitation Now Allowed. What’s Required?

As has been continuously reported in the media, and on fine law blogs, today marks the end of the 80 year ban on general solicitation (public advertisement) for securities sales. This means that for the first time since the Securities Act of 1933 was enacted, companies will be able to go out and solicit groups of accredited investors to invest in their startups, provided that they: Check a box on their form D indicating that they have generally solicited; Take additional steps to verify that their investors are in fact accredited (one page questionnaire no longer good enough); and Ensure that they do not accept any funds from non-accredited investors. #1 is self explanatory. #2 requires a bit of attention, because in the past is was sufficient to have an investor fill out a basic questionnaire verifying that they comply with the definition of “accredited”, as defined in Rule 501 of Regulation D. Now, however, those generally soliciting investments must take “reasonable steps” to ensure that the investors are indeed accredited, and must keep proof of having done so. This means that you will need to ask for personal financial documentation, such as copies of form W-2 or 1040, bank statements from past three months,  and brokerage statements from your potential seed or Angel investors. Many will scoff at this intrusive requirement. #3 is also important. While a “regular” Rule 506 offering still allows for up to 35 non-accredited investors, if you check the box indicating that you’ve generally solicited, you may not sell ANY shares to non-accredited investors. In addition, the SEC took the confusing step of issuing...

Building Your Moat: A Conversation with Greg Gottesman

This morning I attended an event hosted by Joe Wallin, attorney at Davis Wright Tremaine and founder of Startup Law Blog. Joe had Greg Gottesman, managing director of venture capital firm Madrona Venture Group, in the house for a Q&A session that began with some stories about Greg’s background and a successful business that he spawned out of a startup weekend. The session also touched on the importance of patents to early stage companies, what he considers to be differentiating factors of successful companies, and implications of the lifting of the ban on general solicitation (effective today) for companies hoping to rely on an exemption under Regulation D as they look to raise funding.  The hour-long discussion gave attendees the opportunity to present questions to one of the top venture capital funders in the Seattle area. Below are some highlights of the meeting based on my notes and recollection. Building Your Moat The session started with a question about businesses with “sharing economy” models, such as Rover.com, and whether Madrona had any others in its portfolio. Greg mentioned this as a growing area, and that he had thought of several other ideas, including connecting personal chefs with hungry households, and renting out extra storage space in people’s garages and homes. The problem was that every time he came up with an idea, it seemed as if someone had already started a corresponding business somewhere, and he then lost interest. One problem with this model, he said, was that it is very difficult to build this sort of company up from scratch and gain a critical mass of users in...

Washington Startup Incorporation

Introduction Delaware has long been considered the jurisdiction of choice for startups pondering incorporation. Reasons frequently given for this include a well developed body of corporate law and experienced court of chancery to hear business cases, efficient procedures for filing and reporting and, importantly, institutional investor familiarity with Delaware law. But should these factors necessarily preclude an early stage company from organizing as a corporation in their home state? In this post, I provide a basic outline of key distinctions between Delaware and Washington startup incorporation, allowing the reader to evaluate where they align and diverge and educate themselves as to which might provide the best fit for their new company. As always, it is advised that you consult with legal counsel when forming a company to provide advice relevant to your specific needs. DE Advantages WA Advantages DE Disadvantages WA Disdvantages Investors may demand it. Because most funders are simply more familiar with Delaware companies and the Delaware General Corporation Law (DGCL), they may insist that your company reincorporate before they consider an investment, though this may not be as common with Washington companies as it is with companies domiciled in states such as California. Developed and predictable case law. The Delaware Court of Chancery, a trial-level state court from which appeals are sent directly to the Delaware Supreme Court, has jurisdiction over corporate law matters concerning Delaware companies. Because of the high degree of specialization in this court, there is a much more developed body of case law for attorneys to consult for guidance in the event of a conflict. The Court of Chancery also makes a...

What is the value of a lawyer to a startup?

I get this question a lot. Most recently, a friend of mine was contemplating starting a company with a friend of his, and had several questions about entity formation, IP protection, when to file for patents, stock distribution, and “anything I left out that I need to be thinking about”. This particular friend had been through the process of building a company before, and based on his subsequent questions it was clear that he already had an answer to his first one: there are a lot of issues in starting a new venture that seem simple at first blush, but that can create thorny issues down the road if not contemplated and handled correctly during a company’s formation. Planning for these issues early on is part of the value of a lawyer to a startup company’s founders. Blueprints for Your Success there is real value in talking to an experienced attorney at the formation stage just to make sure that all documents are prepared and executed correctly. I encourage founders to look at their formation documents as their blueprints, and to not underestimate the importance of solid and professionally developed formation docs. You just can’t trust everything that you find online, and there is real value in talking to an experienced attorney at the formation stage just to make sure that all documents are prepared and executed correctly. Filing services are not qualified to give an entrepreneur the nuanced advice that they need in making decisions about how a company should be set up to best attract investors and, down the road, acquirors. If you use a document filing...