Archive for June, 2008

When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge

June 30th, 2008

HBS Working Knowledge newsletter has a Q&A with a Harvard professor who examined a specific kind of right of first refusal, where one party has the right to buy an asset at a fixed price, but can also swoop in if the asset is offered to a third party at a lower price.

The article explains that this works against the right holder, because it lets the seller tell the third party “buy at this (high) price or not at all.”

When Rights of First Refusal Are a Bad Deal — HBS Working Knowledge

The best part of the whole article is the answer to the question “why do people use these types of rights if they work out so badly for the right holder?”  The answer:

Contracts are big, complicated things with lots of clauses, some of which get exercised rarely if at all.

Words to live by for sure.

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Wasted Paper, Inefficiency and the Infamous “Secretary’s Certificate”

June 27th, 2008

I recently re-read attorney Ted Wang‘s great proposal to simplify Series A financing documents in venture capital investment transactions.  He is completely correct that there is a lot of inefficiency in the way those deals are structured.  A bit of housecleaning would streamline the process a bunch.

The counterargument is that as attorney I don’t want to spend a huge amount of time renegotiating the form of the documents.  Ted has a few suggestions that will take more effort to adopt widely, and others that are really no-brainers in almost every deal, venture financing or otherwise.

Number 1 for me on the no-brainer list is the Secretary’s certificate and incumbency certificates that go along with most transactions.  These say that the Board has approved the transaction and that the people who sign the documents actually hold the offices they say they do.

This is a pet peeve of mine because the company already represents and warrants in the agreement that Board has approved the deal.  Saying it again in a separate document serves no benefit.  As well, the people who sign the incumbency certificate are, at least in most smaller companies, the same as the ones who signed the agreement.  Getting them to verify their titles adds no material benefit.

There is an exception here- if the deal is signed on one day and closed on a different one, then I completely understand the value in “bringing down” all of the reps and warranties to the closing date and verifying that the information in the agreement remains up to date.

Where this leaves us: the Secretary’s certificate and incumbency certificate are unnecessary in 99% of deals and result in extra time spent drafting and wasted paper.  However, they are valuable once in a while and I don’t want to bill my clients for time spent fretting with opposing counsel about whether this might be one such case.

So here’s my suggestion: leave the language requiring those certificates in the document, but add a short line saying that the certificates must only be delivered if the closing occurs on a different day from signing of the documents.

It’s a simple suggestion- 10 minutes to discuss and drop a phrase into the relevant part of agreements that could cut out an hour or two of attorney drafting and review time.  We’ll see how it works in the real world.

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The Tumbling-Around Space in My Head

June 21st, 2008

Anyone who has talked to me for any length of time knows that I am nuts about bikes and cycling.  Getting out regularly is incredibly important for my mental as well as my physical health and well-being.

It helps in my work too.  I realized today that I have puzzled through a remarkable number of work problems out on my bike.  Being in the office involves so many distractions that it can be hard to find time to think straight through one topic for very long.  Once I get out on my bike I usually end up rolling around one idea for a while in my head, thinking it through from a lot of angles.

I’m not an especially fast thinker on the bike.  Traffic, stop lights and navigation all take pieces of my attention.  Somehow that helps too, perhaps because those distractions are transient compared to the demands of multiple long-attention-span projects I face while sitting at my desk.  I let an idea bounce around a bit, set it down to focus on getting over a certain hill, then pick it back up.

Sometimes I get lucky and it seems like the idea has kept tumbling on its own and some new angle appears that I hadn’t considered before.

I find this all fascinating.  Some problems can’t be muscled through.  They just need time and quiet space in my head, and then the path to a solution start to lay itself out.  Cycling is how I make that space.  It sure beats lying awake at night stressing out about them.

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Startup Business Strategy For The Simple-Minded

June 20th, 2008

Dharmesh Shah is an entrepreneur in Boston who writes a thoughtful blog on the challenges of launching a new business.  This post rings true with me.

Startup Business Strategy For The Simple-Minded

The not-AP-approved short version is this:

Decide what to build, launch an imperfect version, sell unsuspecting customers, keep improving, sell more unsuspecting customers.  Lather, rinse, repeat.  SUCCESS!

I have had many clients over the years who spent a huge amount of energy working *around* the core aspects of the business rather than on them.  The ones that managed to keep everything to a minimum other than the core goals of the company have been the most successful, without exception.

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Lawyers Catching Up with the Real World: You Mean People Really Use Email?

June 19th, 2008

File this under pet peeves:  I work through a lot of agreements of all different kinds.  Every single one has a “Notices” provision.  The purpose of this language is to avoid arguments about whether notice was properly given of certain events.  It only becomes an issue when the relationship has broken down, and basically serves only to avoid arguments about the terms of the argument.

That said, 95% of the agreements I get say that notice may be delivered (i) in person, (ii) by Fedex or registered mail, or (iii) by fax with a confirmation copy by mail.

How often do you communicate by fax with people compared to email?

It’s not a huge point, but one of the items on my transaction-document checklist is to make sure that the communication methods reflect the way we actually communicate.  I have a standard paragraph I drop in to agreements that says people can provide legal notices by email (with a confirmation copy).  It takes about 30 seconds of extra time on my part and has saved a bunch of running around on the few occasions I have had to actually follow the notice procedures.

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The Selfish Side of 1% for the Planet

June 16th, 2008

My last post was a wonky one on changes in California law that affect company management’s ability to consider social good as well as shareholder value.  Here is a complementary piece to that, courtesy of Harvard Business School’s Working Knowledge newsletter.

Spending on Happiness — HBS Working Knowledge

The jist of the piece is that we spend our lives trying to accumulate money, but succeeding at that doesn’t make us any happier.  Instead, the researchers found that spending money on other people does increase happiness.

The article talks specifically about personal spending, but I am willing to bet that it holds true for companies as well.  Knowing that your company gives away money to help outside causes increases loyalty toward the business.

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Directors’ Duties to Shareholders and Society at Large

June 12th, 2008

There is a long-standing debate about the obligations of a company’s management to consider the needs of society at large. Economist Milton Friedman is famous for opining (to paraphrase) that the only duty of a company’s Board of Directors is to make money for the company’s shareholders.

In my view, this opinion completely sidesteps the issue of what time scale to consider, but it is entirely possible that a company could make tremendous short-term profit at the expense of segments of society at large, the environment, etc.

The California State Legislature has an opinion on this issue, too. There is a bill pending there (A.B. 2944 for the research-inclined) that would change the statutory duties of a director to include not only the company’s welfare, but society as well. The current duties of a director are to deliberate:

in good faith, in a manner that such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a likeposition would use under similar circumstances.

As amended, a director would be permitted, but not required, to consider:

(i) The long-term and short-term interests of the corporation and its shareholders;

(ii) The effects that the corporation’s actions may have in the short term or long term upon any of the following:

(A) prospects for potential growth, development, productivity, and profitability of the corporation;

(B) The economy of the state and the nation;

(C) The corporation’s employees, suppliers, customers, and creditors;

(D) Community and societal considerations; and

(E) The environment.

Pros/Cons Analysis:

From the social welfare side, this bill would say clearly that directors need not hew to the Friedman viewpoint and may take a broad view of corporate duties. On the other hand, the list of factors a director may consider is long and not well-defined. Merely deciding on the company/shareholders’ best interests is difficult enough and it is not clear to me that this language adds anything that is not implicit in Board deliberations anyway. Would this language be useful in preventing a company from, say, strip-mining with knowledge that heavy metals will leach into groundwater?

The answer is “no, not by itself”.  However, this language does open the door for the B Corporation I have written about previously. B Corporations say loudly and clearly that their duties are to consider shareholder value alongside social benefits.  As noted at the top of this post, that is not a universally-held viewpoint.  Shareholders, directors, executives and the courts that eventually ajudicate questions of shareholder duty need some encouragement- not to mention law- to let them know that there can be more than one bottom line.

I am told that although 31 US states have similar laws on the books, this bill has been opposed from several sides.  Having passed the Assembly it is in the State Senate currently, but its odds of making it out and across the Governor’s desk are uncertain.  These things can take time, I suppose.  If it doesn’t happen this year, let’s hope for next.

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Sustainability as a Standard Business Term

June 10th, 2008

My clients are doing more and more transactions with European customers these days. A few years ago I worked on a lot of agreements to have products developed for my clients in China and elsewhere. I still do those, but now European companies are finding great deals in the U.S. so I’ve been working through a lot of those as well. It’s fascinating to see the economic pendulum swing across the globe like that.

In any case, one European customer sent over a form document containing a set of standard purchase terms. I’m not fully up on the details, but it looks as though they are required to file these with an EU government office.

I find it extremely heartening to see that the standard terms include this language on sustainable practices.

This makes me wonder about two things:

1) If this is merely required language and is just window-dressing or if the company actually stands behind it; and

2) What it would take to get companies in the U.S. to think about and add terms like this to their contracts.

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Twitter is My FriendFeed

June 6th, 2008

I don’t totally get the point of FriendFeed- or maybe I just don’t like it. I consider it a meta-social network because it doesn’t do a lot that is totally new. It aggregates my contributions across the web (and those of people I follow), but there isn’t very much to actually do on the service.

At the same time, I would love a social web “home base”- a place I where I could both aggregate and contribute. I use Twitter and Brightkite a lot, but one friend might post often to Flickr and another to Yelp. Home Base would be a single place from which I could both keep track of my friends’ activity, and also interact with their photos, tweets and reviews.

Friendfeed lets me post to Twitter, but still isn’t as dynamic as that platform and it ends up being just another place for me to check, but not to post from.

In the end, it comes down to where most of my friends are. I have the most contacts on Facebook currently, but interact with people less there than any other other social network I’m on. That’s just me, I know. Plenty of people have entirely fulfilling internet social lives on Facebook.

I’ve realized that the place I interact with friends the most is Twitter. In addition, many other services feed into Twitter easily, so I can add a new service and not have to rebuild my social graph there before it becomes useful.

I’m close to the point of putting my Twitter ID on my email signature because it’s such a good way to get in touch with me, but at the same time I’m afraid of getting any more attached to Twitter because of its reliability problems. It’s really a shame. The service is so easy and so valuable. I sure hope they can overcome their “we built the wrong platform at the outset” issues and become the powerhouse they deserve to be.

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Website Terms of Use – You Mean People Actually Read Them?

June 3rd, 2008

Twitter and Adobe both got dinged this year for making statements in their Terms of Use that neither company exactly meant.  Twitter’s said that it reserved the right to “to warn and/or ban people who use their service to “abuse, harass, threaten, impersonate or intimidate other Twitter users”.  Adobe’s gave Adobe a license to use any photos anyone edited with Photoshop Express online service- for any purpose.

When faced with a request to warn and/or ban an alleged Twitter stalker, Twitter realized it didn’t want to take such an aggressive editorial stance at all and would rather let users be responsible for their own content.  Adobe corrected itself to say it didn’t plan to use anyone’s photos for just anything, so both statements were really mistakes.

As others have pointed out, terms of use are not complicated.  They do need to be correct for the situation, though.  Twitter and Adobe probably just grabbed someone else’s terms without a lot of thought and got nailed on it.  AOL got nailed much worse by the Ninth Circuit for changing terms mid-stream without properly notifying users of its newly-acquired Talk America service.

The mild irony is that any good lawyer would also grab other sites’ terms of use, but instead of finding one set, s/he would take a look at a few sites, pick and choose the best/most applicable provisions and create something tailored to the site’s actual business.

All of which goes to prove the old saw- haste makes waste.  It frequently doubles the legal fees too.

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