Newsletter of the Private Equity and Venture Capital Committee
  Preferred Returns
Join the Committee Online

Message from the Chair

Featured Articles
  Annual Survey of Judicial Developments Pertaining to Venture Capital
  Have IP Assets, Need Money! The Role of IP Valuation in Startup Investment

Heard on the Listserve
  Down Round Followed by Up Round - Anti-Dilution Formulas
(January 2013)

  Lawyers as Brokers?
(April 2013)

  NVCA Model Term Sheet
(January 2013)

(September 2013)

Articles and Authors for Preferred Returns

Committee Leadership

Editorial Board:

James D. Honaker
    Morris, Nichols, Arsht & Tunnell LLP

  Message from the Chair

Dear Committee Members and Friends:

It was great to see so many of you at the various activities and meetings of the Private Equity and Venture Capital Committee during the recent 2013 ABA Annual Meeting in San Francisco.

On behalf of the entire committee, and as I begin my tenure as chair of the PEVC committee, I want to offer a special thank -you to outgoing chair Mark Danzi. The past few years have been especially productive for our committee. Programming has been exceptional, and those who attended this past meeting in San Francisco can attest that the level of engagement of our members is very high. We owe this in large measure to Mark's steady hand and his thoughtful and engaging leadership style over the past four years. He leaves our committee in a very strong position to successfully pursue our agenda in 2013 and beyond. Thank you Mark! We wish you the very best as you find new ways to fill up the innumerable hours you poured into the PEVC committee.

Our Annual Meeting offered an outstanding series of meetings, programs and events. For those of you who were not able to attend, here is a quick recap of some of the highlights:

We had a full meeting of the PEVC committee where we discussed various cross-committee initiatives, including an SEC Comment Letter on certain proposed Amendments to Regulation D, Form D and Rule 156 under the Securities Act. We also discussed a number of recently released Delaware cases that are under consideration for our committee's 2013 annual venture capital survey.

Our group was involved in two CLE programs. Committee Vice-Chair Eric Klinger-Wilensky chaired an excellent program that brought together leading practitioners, and Chief Justice Steele of the Delaware Supreme Court, to explore a range of topics surrounding initial and down-round financings, and exit rights for preferred stock investors. Additionally, the committee co-sponsored a program to examine the pending Sample Third Party Legal Opinion for Venture Financing Transactions to be issued by the Business Law Section of the California State Bar. The program covered its genesis, approach, and relationship to other opinion reports and samples, including a comparison to the National Venture Capital Association form.

Our Angel Financing subcommittee met, and Joshua Geffon provided a very detailed summary of the recently passed and now-pending changes to Regulation D, Form D and Rule 156 under the Securities Act. In addition, our Venture Capital Transactional Documents and Issues Subcommittee met to discuss a range of issues that arise when there is a syndicate of venture capital investors, including blocking and other approval rights, waivers and related voting thresholds.

Last, but certainly not least, our committee joined the Middle Market & Small Business Committee dinner this year, and enjoyed a delightful evening of great company, food and locally bottled wine in our return to Omi's Farm in Napa Valley. Special thanks to Gerry Niesar for a memorable event!

We are also pleased to report the release of the most recent issue of Preferred Returns, the online publication of the PEVC committee. This issue includes our committee's first annual survey of venture capital cases for 2012, which we hope you will all find to be a useful summary of the most significant cases from last year.

The PEVC committee has a number of exciting initiatives underway, such as this annual survey, and we welcome input and participation from all of you as we tackle a number of projects. The more involvement and participation we have, the more useful and relevant our content and programming will be for all of our members. Feel free to contact me any time with your ideas and suggestions.

I am very much looking forward to working with you all in the coming year!

Jon Gworek
Chair, Private Equity and Venture Capital Committee

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  Featured Articles
Annual Survey of Judicial Developments Pertaining to Venture Capital

The primary purpose of the Annual Survey Working Group is to monitor and summarize judicial decisions related to venture capital that we believe are of the greatest interest to practitioners.


The following decisions are summarized in this year's Annual Survey:

  1. Andrew Shiftan et al. v. Morgan Joseph Holdings, Inc. -- Redemption Rights as a Factor in Appraisal Proceedings.
  2. Alta Berkeley v. Omneon -- Conversion Prior to Liquidation Event Eliminates Liquidation Preference Rights.
  3. Zimmerman v. Crothall -- Standard of Review and Rights Offerings in Context of Inside Down Round.
  4. Fletcher v. Ion -- Blocking Rights over Note Issuance and Definition of "Security".
  5. In Re: Appraisal of the Orchard Enterprises, Inc. -- Liquidation Preference Disregarded in Context of Appraisal Action.
  6. Greenmont Capital Partners I, LP v. Mary's Gone Crackers, Inc. -- Class Voting Rights and Conversion Provisions.


Have IP Assets, Need Money! The Role of IP Valuation in Startup Investment
Bruce W. Burton

You've probably heard the stories-your neighbor or a friend of a friend believes they have the next great idea, perhaps the next Facebook. Ideas can come from anywhere: a part-time hobby in someone's garage, heated planning sessions over the kitchen table, or at the local university's funded incubator. However, ask any venture capitalist and he or she will tell you: Ideas and people willing to work hard are easy to come by. However, the process of maturing an idea, no matter how brilliant, into a successful business is exceedingly complex, challenging, fraught with risk, and expensive.

A study by Harvard researcher Shikar Ghosh suggests that 75% of startups fail.5 This statistic raises the question of what attributes separate the 25% of successful startups from their less successful counterparts? Very often, the difference between expansion and extinction for a startup is its ability to raise additional capital. It is not uncommon for technology startups to have little or no revenue, large research and development expenses, and few tangible assets. For high-tech companies especially, the companies' primary and most valuable assets are their ideas and the IP that protects their ideas-patents, trade secrets, trademarks, or copyrights.

The big question for many IP-centric startups is, "How does a new business venture attract money to meaningfully commercialize or monetize its ideas?"


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  Heard on the Listserve
Down Round Followed by Up Round - Anti-Dilution Formulas (January 2013)

Dear Colleagues,

I don't know why I have never thought of this before ‐ perhaps its one of those "hide in plain sight" issues.

With a standard weighted average anti‐dilution formula, upon a "down round" the Investor's conversion price adjusts so that he or she gets a higher percentage of the company on conversion and the economic value of his or her investment remains the same.

But, what happens if the next round is an Up Round, and far enough Up so that the Company's value has actually appreciated over the value at the time of the Investor's initial investment?

In this case, shouldn't the conversion price adjustment that occurred as a result of the down round be eliminated (with the investors conversion price reverting to the 1 : 1 conversion that prevailed immediately after his or her investment)?

The NVCA Model Documents do not explicitly prevent a readjustment upwards (the deal I am looking at now does), but the NVCA docs do clearly imply that no upward adjustment will be made.

Why not?



Lawyers as Brokers? (April 2013)

Dear All,

I am seeking kind advice and enlightenment on the following: Could a retainer providing for a success fee/percentage‐ofthe‐ deal as a part of the attorney's fee structure in a financing/VC deal be construed as being in violation of the broker/dealer registration requirement? The attorney, yes, would help to locate investors and introduce the deal. According to a recent but brief ABA Journal article and to a less recent Harvard Law Review piece, this is common practice for some Silicon Valley big law firms...however I am not convinced...
I really appreciate your precious insight Marco


Marco R Provvidera, Esq.


NVCA Model Term Sheet (January 2013)

Dear Colleagues,

I always thought that the fact that (a) the clause "(including an employee stock option pool representing ___% of the fully diluted post-money valuation)" under the heading "Pre-Money Valuation" in the NVCA Model Term Sheet appears in parentheses and (b) the second clause under the heading "Employee Stock Options" in such Term Sheet appears in brackets, reflects the proposition that whether the preferred investor is protected from the dilution potentially to be caused by common stock issued as a result of grants from the pool is subject to negotiation in each case rather than a standard, recommended provision.

My counterpart in a pending deal strongly believes that these clauses suggest that the preferred investor should be protected from such dilution as a matter of course, i.e. that the shares subject to the pool should be considered in the pre-money fully diluted capitalization, and that the parentheses and brackets do not reflect a "to be negotiated" posture.

Any light shed on the "weight of authority" on this issue would be highly appreciated.



Crowdfunding (September 2013)

Has anyone had any thoughts on crowdfunding? At first glance, it does not appear that it would be an appropriate platform for private offerings by tech firms.


Gary L. Hoffman, Esq.


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  Articles and Authors for Preferred Returns
The Editorial Board is collecting articles for future newsletters which are circulated to our members worldwide. Please send your submissions to Jim Honaker at

Articles should be 1500 words or less, and on any topic of interest to practitioners in the private equity and venture capital sectors. From short scholarly articles, to practice tips, reviews/summaries of a Section program, life in the trenches, interesting pro bono projects, humorous looks at life and the law, or even how you balance work and personal life. We appreciate your help in making this newsletter a success.

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