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I GOT THE CALL while driving up the expressway after work one Friday. President Bill Clinton was visiting our city and I had a very excited client on the phone.
"Clint! You've got to look for me on the local news tonight! I should be on a story about President Clinton."
"What?" I replied. "You hate President Clinton."
"I know but you have to watch! My brother and I were wearing our chicken suits along the motorcade and something happened. We were interviewed by reporters."
This was when I learned that my valued client, paragon of the community, successful entrepreneur and businessman had a side to him I did not know.
It turns out he was politically active. No, he was politically passionate. How could I not know that?
And, he explained, he took great offense during Bill Clinton's campaign against George H. W. Bush in 1992 when Clinton operatives started showing up at Bush rallies in chicken suits carrying "Chicken George" signs. It made him so mad that he bought two chicken suits that he and his brother would wear at Clinton rallies and events carrying "Chicken George" signs. This had been going on for a long time. It was years since Bill Clinton had first been elected.
"I was along the motorcade route in my chicken suit with my sign having a great time talking with people. But the motorcade was delayed and then more delayed. And, then someone tapped me on my shoulder."
"When I turned around it was a tall guy in a black suit holding and Secret Service badge. He asked me if it was my box labeled Chicken Suit in the stairwell of a nearby office building."
"I knew this was no time to lie."
My client, we will call him George, explained he had carried his chicken suit in the box and changed in the stairwell. The Secret Service found the box and called the bomb squad. The President's motorcade was rerouted. The news crews caught the his meeting with the Secret Service but it did not make the nightly news to George's disappointment.
So, what's my point? George was a successful entrepreneur, whose success created hundreds of jobs. He created a great business from an idea, perseverance, and passion while he was still in college. He is someone to be admired. And, at least in this one respect, he was a bit eccentric.
People who take on the challenge of building and growing a great business are not milk toast. Many of them have quirks. Some (not George) are downright difficult to deal with. But most of them share one trait. They are passionate about what they do. And they act when they see something that needs to be fixed.
Like Chicken Willie.
FOR COMPANIES THAT NEED TO RAISE FUNDS, it can be tempting hire legal counsel based on the lawyer’s ability to make introductions to funding sources. Not many CEO have the time to stay connected to those sources and the connections of their legal counsel can be viewed as a plus.
That’s all fine as long as the lawyers skills as a lawyer are vetted and the counsel engaged is savvy and experienced in the matters they are likely to be needed for, including venture funding documentation. And, while it may not be easy to fully vet the qualities of savvy or good judgment, you can inquire about past experience and reputation.
Confident lawyers will be happy to share names of CEO’s and others they work with who can provide firsthand information about what it is like to work with them. It is not enough to rely on the general reputation of a law firm a prospective lawyer works with. The careful CEO or CFO will get granular when investigating a legal hire.
Here is why it matters. Good lawyers with the right experience can save you from future headaches while helping you complete transactions on favorable terms.
Consider the following example involving something as mundane and detailed as notifying shareholders about their first refusal rights while completing a Series B financing. In our example, the prior Series A financing granted rights of first refusal to investors that entitles them to purchase a pro rata share of the Series B offering.
On the verge of closing a large Series B financing, the company sent out notices to the Series A shareholders telling them about the pending fund raise and giving them a fixed period to exercise their rights using a form they provided. The notice requests the Series A shareholders to either waive the first refusal right or purchase a full pro rata share. It also requests they either waive or elect to participate in buying a maximum share of first refusal shares not purchased by other Series A holders.
Simple enough and, superficially at least, all appears in order. But there are details unattended to and risks being taken by the company in following an all or none approach. The risks stem from the agreements used in the Series A financing and from the fact that shares are being offered for sale.
The investor rights agreement from the Series A financing grants a right to buy a pro rata share without explicitly saying whether the holder has to purchase all of the shares available or has the right to buy fewer shares. The term sheet, which preceded the investor rights agreements, and was disclosed to investors is clear that an investor can buy part or all of a pro rata share. Also, by way of background, options like this are usually interpreted absent express language to the contrary - to entitle a holder to buy less than all of the shares subject to the option.
The company and its lawyer, however, have chosen to interpret the agreement to grant rights to purchase all bu not less than all of the first refusal shares. Their notice and exercise form are so constructed putting the effectiveness of the notice at risk.
In addition, the first refusal agreement is unequivocal that the notice about exercising rights to buy first refusal shares not acquired by others must come later, after the company can determine how many shares are available. Failing to meet this requirement also puts the effectiveness of the company’s notice at risk.
Lawyer gobbledygook, right? What possible difference could any of this make? Technical deficiencies in the notice cannot make that much difference, can they?
Yes, the can. The problem is that if the notice is ineffective it can have expensive ramifications down the line for the company and other shareholders.
For example, if the company goes public in the next few years, lawyers for the underwriter will diligence the Series A documents and the notice. And they will care about whether the notice was effective. If it was not valid, the first refusal rights may still be effective which means they will need to be cleaned up or disclosed as part of the offering. This can create an expensive and time consuming headache for the company just when it is eager to finance.
A different, but equally annoying, set of problems can arise if the company wants to accept an offer of purchase later on. The buyer’s lawyer will do the same diligence and surface the same problem. In this context, the problem calls into question how many shares and rights to buy shares exist in the company being bought. The company will say the first refusal rights have expired. One or more Series A holders may say they still exist because the notice was defective, especially if the new share valuation is attractive. There are ways to resolve the issue but they can be expensive and time consuming to execute.
So, what would you want your lawyer to do under the circumstances? Issue the notice in the form it was or fix the timing issue and describe the purchase rights consistent with the clearer language in the term sheet to avoid creating issues in the future?
Most deal lawyers would not find this a difficult question to answer. But at the same time, most CEOs would not even be aware there is an issue without guidance from their lawyer on what probably feels like a minor detail.
Hence the admonition about hiring attorneys. The lawyer in this instance was hired in part because he had investor connections and he comes from a big firm. He may even be good at a lot of things but the this detail of a large funding is a mess, potentially a very expensive self inflicted mess.
Remember when hiring counsel: A good lawyer's primary value is in representing his or her client well with attention to details and a sensitivity to issues small and large that can impact the client. Connections can be a plus but they are dangerously not enough.
Look for more on lawyers in a later posts and check out our March 14 posting about the conflicts connected lawyers sometimes bring to their entrepreneurial clients. For more about fundraising and deal terms check out Richardson’s Growth Company Guide 5.0 – Investors, Deal Structures, Legal Strategies.
I DO NOT RECOMMEND IT and did not intend it but somehow I managed to crash the funeral of a dear business colleague. I confirmed this with the son of the deceased shortly after the funeral when I offered my apologies.
I became suspicious of my behavior when I realized I was among just a handful of non-family members at the event and later searched unsuccessfully for an announcement of the funeral in the local media.
How this occurred was innocent enough. I was copied on an email from the wife of the former CEO of the company where the deceased had worked. The email was directed to board members of the company. In it, she announced their plan to attend the funeral and asked for recognition of the contribution made by the deceased to the company. Her email included the time and date of the visitation and funeral services.
Unwittingly, I took this as an invitation to attend the funeral, made arrangements for flowers to be sent and showed up for the visitation. One of my law partners joined me to pay his respects as well.
The wife and the former CEO arrived after we did to a more expected welcome by family members. In retrospect, that was my first clue to my mistake.
Their physical appearance and demeanor was another clue. In the years since the CEO resigned and left town to retire, both he and his wife had changed. He stopped communicating with others who had been involved with the company so, even though they had both been good friends, I had been unable to speak with them for some time. A cold handshake was all I could muster from him as a greeting.
My reaction to her email was based on who I remembered her to be, not to the woman who had been cut off from her company friends by her husband's decision. The email plea with its detailed information about the funeral was something other than an invitation. I did not understand that because I no longer knew her.
My takeaway from all of this is that it is important to remember that the people who manage companies change over time. The ones you know and depend on, like all of us, react and adapt to changes they encounter and sometimes those changes are limiting or negative. In the context of running a company, especially one with outside stakeholders , it is important to be alert to this basic truth and diligent about evaluating the continued competence of your management.
This was not the first time I had seen changes in a CEO. The pressures of the job are immense. And, sometimes, the drive to survive in the position can lead to behavior that disguises or obscures reality from the company’s board of directors.
This was, certainly, an unusual example of how time and circumstances can change someone you know into someone you thought you knew. Things are not always what they seem.
Image is from Buccioni’s The City Rises (1910).
IT’S A SIMPLE QUESTION with a complex answer. Will your rocket ship of a business startup be better off joining a local business accelerator or not?
If you have a ground breaking, earth shattering, market dominator in waiting in your business plan you might find yourself considering a local startup incubator or accelerator as a way to find your footing as you launch your new business.
People use incubators for a variety of purposes with varying degrees of success. Some are pleased with the services. Others think the distractions outweigh the advantages. And no two incubators are the same. And no two startup teams are alike.
Services these organizations provide can include inexpensive rent, access to shared conference rooms and shared services, short term rent agreements, free or reduced-cost consulting services from accountants, lawyers, or business consultants, assistance in seeking government grants and identifying sources of capital, assistance in marketing and public relations. Some facilities have specialized equipment that would be otherwise prohibitively expenses to purchase. Others have entrepreneur-in-residence programs that attract successful entrepreneurs to mentor startup teams.
Educational programs are also common as are efforts to help new teams network with professionals and investors in their communities. Less common but not rare are incubators that provide small amounts of capital in exchange for ownership interests in their client companies. As you might imagine, the quality of the services and the professionals providing those services vary from incubator to incubator.
So, what should you do? First, ask yourself why you are considering an incubator. What do you hope to accomplish by participating? And then evaluate the available options as you would any other business proposition. Diligence the programs you are considering. Network with participating teams and graduates of the program to evaluate its merit for your business proposition. Meet with the professionals and read the fine print about the terms and conditions of participating.
Once you have completed your diligence make a decision and move on. You have plenty to do ahead of you.
Next week - What crashing a funeral can tell you about your management team.
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