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					SVEntrepreneurs: Financing and IP
Strategies 2012
Mark Radcliffe
DLA Piper USA LLP
Mark.radcliffe@dlapiper.com
www.lawandlifesiliconvalley.com/blog
Global Platform

                   Largest law firm in the world
                    with 4,200 lawyers in 30
                    countries and 76 offices
                    throughout Asia, Europe,
                    the Middle East and the US
                   1st in M&A deal volume
                    globally
                   Ranked #1 among the
                    world’s leading global law
                    firms
                   1st in Venture Capital and
                    Private Equity deal volume
                   Ranked in the top 5 for US
                    IPOs by US Issuer Adviser
                   More than 550 DLA Piper
                    lawyers ranked as leaders
                    in their fields
                                         2
IP and Technology Practice


 Dow Jones: No 1 in Private equity/venture capital in 2011
 2005-2010: No. 3/4 worldwide in venture capital deals (more than 490 in 2010; 2011
  rankings not yet announced)
 More than 150 IP and Technology lawyers in the US and more than 400 around the world
    70+ patent litigation
    30+ patent prosecution
    20+ trademark, copyright and media
    25+ technology and sourcing; licensing
 Leading Open Source Practice in the US
    Advised Sun on open sourcing Solaris
    Assisted on Novell patent sale
    Committee Chair for GPLv3 review
 Ranked in multiple US regions as a top-tier firm in the area of IP, Chambers USA:
  America’s Leading Lawyers for Business (2009)
 Recognized as one of the top law firms that “The 50 Most Innovative Companies in the
  World” rely on to protect their IP, IP Law and Business (2008)


                                                                                      3
Great Time to be an Entrepreneur:
Sense of Urgency

We too, are standing on a “burning platform,” and we must
 decide how we are going to change our behaviour.
             Nokia CEO Stephen Elop




                                                        4
Funding Sources


 Individual angels
 Angel groups
 Super angels
 Angel funds
 Traditional VCs
 Corporate VCs




                      5
New Company Realities


 New role for angels and corporations
 Longer time to exit
 Syndicates less predictable over life of investment
   Investors will not be able to raise new funds and drop out
   New investors who purchase their position due to secondary
    market
 Founders are selling shares prior to “company exits”
 IPO markets coming back but mergers still dominant –
  liquidation preferences are critical




                                                                 6
Bloomberg Series


Technology Start-Ups Legal Issues


www.youtube.com/user/bloomberglaw/videos?query=Tech++sta
 rt-ups


IP Issues: http://ow.ly/ajlMY (with me)




                                                      7
PWC/NVCA: Shaking the Money Tree:
VC Investments Q4 2011

               Amount   % of Total   Deals
Startup/Seed   $134M    2.04%        80
Early Stage    $2267M   34.53%       364
Expansion      $2364M   36.00%       222
Later Stage    $1801M   27.43%       178




                                             8
PWC/NVCA Software Investments (by
quarter)

 Quarter      Amount        Deals
 Q1 2010      $5.15B        797
  Q2 2010      $7.19B        1011
 Q3 2010      $5.4B         857
 Q4 2010      $5.52B        861
 Q1 2011      $6.61B        849
 Q2 2011      $7.96B        1027
 Q3 2011      $7.29B        953
 Q4 2011      $6.57B        844


                                     9
Key Issues for Companies

 Mature industry with “established” expectations
    DE or CA “C” corporation (not Nevada and not a LLC except for angel
     rounds)
    Founders: common stock
    Investors: preferred stock
    New possibility: LLC for angel backed companies (some VCs)
 Key terms
    Valuation
    Merger exit (role of “preferences”)
    Investor control (“protective provisions”)
  Strategy
    Role of IP




                                                                           10
Preferred Stock Terms




                        11
Key Deal Terms
Economics

 Valuation
   Pre-money versus post-money
   Wild card: size of option reserve
     Risk of setting per share price in absence of hard information re:
      capitalization
 Amount
   Milestone investing
   Dealing with multiple investors




                                                                     12
Key Deal Terms
Economics

                   Liquidation Preference
 Conventional Preferred Stock: Get your money back first and
  no more (or convert to Common Stock)
 Fully Participating Preferred Stock: Get your money back first
  and then participate on common equivalent basis
 Partially Participating Preferred Stock with a Cap: Get your
  money back first and then participate on common equivalent basis
  up to cap amount
 Participating Preferred Stock with a Common Preference: Get
  your money back first, then Common gets a fixed amount back
  and then Preferred participates on a common equivalent basis



                                                                 13
Key Deal Terms
Control

              Basic Protective Provisions –
    Actions That Require Special Consent of Preferred
 Authorize more of that series
 Authorize series with more senior rights
 Change rights of that series
 Merger/sale of assets
 Bankruptcy
 Limits on changes to number of members of Board of
  Directors
 Many other possible
     Limit on borrowing
     Limit on exclusive licenses
     Limit on dividends

                                                        14
Strategy: Role of IP

 IP Value Recognized
    Novell patents: $450M
    Nortel patents: $4.5B
    Friendster: $40M
    DOWD:
 What is the IP strategy of the company?
 What does the company own?
 What patents does it own
 What has it licensed
    Exclusivity
    Scope
    Term
    IP: Key To Value




                                            15
Rapid Growth in Patent Applications and
IP Lawsuits (Lazard)

                                 PATENT APPLICATIONS                                               PATENT LAWSUITS & INVESTIGATIONS

                    ANNUAL US PATENT APPLICATIONS AND PATENTS ISSUED                                US PATENT LAWSUITS FILED ANNUALLY

                      ~2.5x increase in U.S. patent                                                                                         18% increase in 2010
                      applications since 1996 at an
                      annual compounded growth rate
                      of 6.7%
                                                                                                                       Patent related lawsuits have
  U.S.




                                                                                                                       nearly doubled in the past 15
                                                                                                                       years, at an annual compounded
                                                                                                                       growth rate of 4.3%




                                                                                                        Source: U.S. Courts; Director’s Annual Reports.
                                  Source: U.S. Patent and Trademark Office.

                  ANNUAL GLOBAL PATENT APPLICATIONS AND PATENTS ISSUED                         ITC SECTION 337 INVESTIGATIONS FILED ANNUALLY

                       Patent applications have increased 3% annually since                                                                          81% increase in 2010
                       1996, led by the U.S., Japan and Germany
                                                                                              ITC investigations have increased
  INTERNATIONAL




                                                                                              11% annually since 1996, and 18%
                                                                                              since 2003


                                                                                       N.A.
                                                                                                                  Currently 62 ITC investigations pending



                                                                                                               Source: U.S. International Trade Commission.
                                   Source: World Intellectual Property Organization.
                                  Note: 2009 & 2010 patents issued not available.


                                                                                                                                                                    16
Common Entrepreneur Mistakes


 Patents: Failure to file early to protect rights
 Salary: deferring salary (once earned, very difficult to waive)
 Entity: need investor appropriate entity
 Stock issuances: compliance with state and federal security
  laws. For example, taking money from unqualified investors
 Protective provisions in the preferred stock which gives a veto to
  one investor




                                                                    17
Summary


Great time to be an entrepreneur
Very competitive, competition is now global
Many funding sources, but many issues are the same such IP
 ownership and cap table
Understand the ecosystem and ensure warm introduction
Plan for the future
 Multiple funding rounds
 Possible exits




                                                             18

				
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Description: This presentation describes how startups should seek funding and the funding environment in Silicon Valley in April 2012.