Venture Capital
Prof. Mira Ganor
Spring 2015
I. Introductory Stuff
A. Conflicts between investors & entrepreneurs include timing (ex. when to sell?)
B. Private Equity vs. VC
1. VC invests in emerging companies (tech and biotech start-ups), while PE invests in mature companies (not solely the tech industry).
2. VC firms will take a small stake in the company, and invest in many companies; PE invests large amounts of money in very few companies.
a) Risks must be different
3. VC invests cash. PE can invest cash and debt.
4. At the time VC firms are investing, they are already focused on the liquidity event (the exit), when they will get the money back from their investment (whether IPO or M&A).
C. Who is your client?
1. Law firms insist on representing the entity. Liabilities will run to the company, and they want to represent the company when the founders leave or, even if they don’t leave, at the exit—that’s where all the fun/money is.
2. Lawyers’ fees are usually deferred, and the lawyers take all the risk.
3. Many entrepreneurs hire lawyers to have them introduce them to VCs to help them find funding.
4. Engagement letter: Include what should happen if a founder leaves, how the company will be split, and who the client is.
5. Lead investor is always represented by counsel. Other investors in the syndication generally are not, and rely upon the lead investor and his counsel.
a) Syndication is good for: Diversification/spread of risk, cheaper (sharing the lead’s counsel).
D. California Labor Code § 2870
1. Employer cannot assign rights to IP created outside of work to his employer.
a) Other states: can assign, as long as it’s fair.
2. Protects an employee’s ability to innovate beyond by his employer’s purview.
a) Allows you to determine who the IP belongs to, and thus where the IP will go (will it remain with the employer or will it move with the employee).
E. HP Agreement § 3: Proprietary Developments
1. Exclusionary language is required by California Labor Code § 2872. Informs employees they have the right to retain the assignment/IP rights if it was in their free time and not using employer’s supplies or anything.
a) Employers would really rather not include this language (take the risk that the employee will not be aware of their rights and hence not ask for those rights/will not sue/etc.).
F. HP Agreement § 4: Respect for Rights of Former Employers
1. You don’t want to be sued by the former employers/don’t want unclean IP.
G. DDB Technologies v. MLB Advanced Media (federal appellate court)
1. Facts: MLBAM secured retroactive license from Schlumberger.
2. Question: Were the patents automatically assigned to Schlumberger?
3. Procedural Posture: District court said yes.
4. Appellate Court says: Since it’s a patent assignment issue, federal law applies.
a) Apply state law when talking about employment agreements, but for patent clauses within employment agreements apply federal law.
b) Whether an assignment of patent rights is automatic or merely a promise to assign depends on the contractual language.
c) Here, language of K agrees to and does grant and assign all rights in future inventions.
(1) So District Ct. correctly determined that if the patents were within the scope of the employment agreement, they would have been automatically assigned.
d) Were the patents within the scope of the agreement?
(1) Remands to District Ct. to allow DDB to conduct reasonable discovery to determine this.
H. Stanford researcher has K w/Stanford to promise to give them patent rights. He visits Roche, signs K allowing automatic assignment of rights. Roche gets the patent rights. Stanford can sue researcher for breach of K, but cannot get the patent rights.
I. Skype sale
1. Facts: Founders of Skype sue Ebay over who owns the core p2p tech. Founders did not assign the IP to Skype—simply licensed the IP to Skype when they formed Skype. Then sold Skype to Ebay. Then sued Ebay as owner of Skype for infringing their rights/not paying them enough.
2. Take-away: Clean title to IP is great, but ultimately it’s just a business risk.
a) Our job is to point out these risks; it is up to the client to decide whether or not to take them.
b) Even if founders insist on only a license, maybe you could amend the license agreement to make it a bit more favorable to your client.
J. Example: Consider standard clause: “I understand and agree that any invention I conceive, develop, or reduce to practice within the scope of my employment, or as a result of using any company info, facilities, or other resources, shall belong to the company. I agree that I shall execute anything necessary to document the assignment to my employer of all rights, title and interest in any inventions.” How would you change it?
1. Who is the client?: Say the company.
2. Changes:
a) Make assignment automatic (replace “shall” with “do hereby assign”).
b) Add explanation of what WILL remain fully to the employee.
c) Maybe add requirements of disclosure of any inventions made by employee (Cal. Labor Code § 2871), and assignment of any invention developed by employee all alone which relates to the business or actual or demonstrably anticipated R&D of the employer?
II. Trade Secrets and Covenants Not to Compete
A. Trade secrets: Appellate Courts in CA have allowed covenants restricting employee from using your trade secrets once they are terminated (but cannot tell them they cannot work for a competitor).
1. Still an open question how the CA SC will treat it.
B. Covenants not to Compete – California
1. Noncompete covenants are NOT enforceable, UNLESS you are selling the goodwill of the business, or most of the assets together with the goodwill (sometimes the latter can be proven by the price—higher if it includes the goodwill). [CA Business and Professions Code §§ 16600, 16601]
a) Even if you do fall under the exception, additional restrictions: must be in
ce Code § 15.51(c)
a) If the court must narrow the scope/reform the covenant, then court may not award the promisee damages for a breach of the covenant before its reformation and the relief granted to the promisee shall be limited to injunctive relief.
b) If the primary purpose of the agreement to which the covenant is ancillary is to obligate the promisor to render personal services, the promisor establishes that the promisee knew at the time of the execution of the agreement that the covenant did not contain limitations as to time, geographical area, and scope of activity to be restrained that were reasonable and the limitations imposed a greater restraint than necessary to protect the goodwill or other business interest of the promisee, and the promisee sought to enforce the covenant to a greater extent than was necessary to protect the goodwill or other business interest of the promisee, the court may award the promisor the costs, including reasonable attorney’s fees, actually and reasonably incurred by the promisor in defending the action to enforce the covenant.
(1) i.e. Generally covenant requires reasonable limitations on time, geographical area, and scope of the activity to be restrained.
(2) “Reasonable” depends on what you need. Ex. how integral the employee is.
4. Sheshunoff (ASM) (Tex. 2004)
a) Take-away: TX courts will enforce noncompete clauses even if it is for future consideration and in the context of at-will employment. So:
(1) Encourages employers to uphold their future consideration promises sooner rather than later in order to ensure the noncompete is enforceable
(2) Additionally, if you want to sue on a noncompete violation, as an employer, you want to make sure you’ve upheld all the promises.
b) Facts: ASM employee Johnson signed agreement containing covent not to compete for 1 year. Johnson leaves to work for a competitor. ASM sues alleging breach of covenant not to compete. Court of Appeals says it wasn’t a valid K because it was for future consideration and at-will employment terminable at any time by the employer.
c) TX SC: Reverses and says although at-will, the covenant not to compete can become enforceable at the time the consideration is received, as long as the overall K containing the covenant is enforceable at the time it is entered into.
d) This is a huge change! Texas court is trying to be more employer-friendly.
(1) So don’t push the “reasonableness” consideration…
