Japan-U.S. Entrepreneurial Forum
Economic Revitalization
Through Entrepreneurship
February 10 – 15, 2003
Panelist:
Tom Hicks
Wilmer, Cutler & Pickering
FORMATION OF VENTURE CAPITAL FUND
z Use
of Limited Liability Business Entities
z Management of the Venture Fund
z Private Offering to Qualified Investors
z Investment by Retirement Funds
z Respecting/Avoiding Regulatory Rules
PORTFOLIO COMPANY INVESTMENTS
z Technology
Company Investments
z Getting to the Term Sheet
z Due Diligence Investigations
z Series Preferred Stock Investments
z Convertible Subordinate Note Investments
z Warrants and Other Incentives
z Investors’ Rights and Protection
INTELLECTUAL PROPERTY CONCERNS
z Effect
of Domestic Patent/Trademark
Registrations
z Effect of Foreign IP Registrations
z Protecting Trade Secrets/Confidentiality
z Assignment of Developers’ Rights
z Derivatives, Upgrades and Modifications
z Effective Transfer of Rights
U.S. FEDERAL SECURITIES LAWS
z All
Investments Are Regulated Securities
z Exemptions From Securities Registration
z Regulation D
z Section 4(2)
z Rule 701
z States Also Regulate Securities
FIDUCIARY DUTIES OF INVESTORS
z Fund’s
Fiduciary Duties
z Directors’ Fiduciary Duties
z Avoiding Conflicts of Interest
z Business Judgment Rule
z Effect of Insolvency
z Merging Portfolio Companies
DILUTIVE FINANCINGS
z Bridge
Financing and Senior Debt
z Simple Down-Round Financings
z Reset Financings
z “Cram-Downs”, “Washouts”, “Pay-ToPlay”, and “Death Spiral”
z Investor/Director Conflicts of Interest
z Waivers and Consents From Existing
Investors
CHANGING TRENDS IN VENTURE CAPITAL
DEAL TERMS
z
z
z
z
z
z
z
z
z
Lower Valuations
Staggered Financings
Increased Liquidation Preferences
Participating Preferred Stock
Full Ratchet vs Weighted-Average Anti-Dilution
Redemption Rights
Dividends
Protective Provisions
Directors and Management
EXITING THE INVESTMENT
z Initial
Public Offering
z Sale of the Company for Stock or Cash
z Merger With Other Portfolio Company
z Redemption and Put Rights
z Liquidation of Company and Preferences
z Replacing Management
INTERNATIONAL INVESTMENTS
z Whether
to Invest in Foreign Company or
Local Affiliate
z Differences in Applicable
Law/Enforceability of Contract Provisions
z Differences in Business Culture
z Differences in Legal Language and Custom
z Currency Conversion Issues
z Limitations on Liquidity of Investment