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What the heck is "emerging growth"?

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Sinoper
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What the heck is "emerging growth"?

Post by Sinoper » Thu Nov 29, 2018 8:53 pm

I'm exploring my firms practice areas as I think about asking to split for the summer (we aren't asked about it until February, luckily), and I found a practice area called "emerging growth" but have no clue what it's about. It looks like it centers around Rule 701, which I've touched on a bit in my employee benefits/exec comp class. Could anyone give me a bit more info on what emerging growth groups look like?

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ymmv
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Re: What the heck is "emerging growth"?

Post by ymmv » Thu Nov 29, 2018 10:55 pm

From a quick google search it sounds like the hip new name for venture capital law? Probably refers more specifically to these new kinda of companies. Seems like something our corporate lawyers around here could speak to generically—formation, deals, mergers, financial/structural advice and all that jazz. I’m guessing from this that it’s a very broad practice area.

altoid
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Re: What the heck is "emerging growth"?

Post by altoid » Tue Dec 04, 2018 9:18 pm

Yep, it is helping new companies with various corporate law needs, stretching from venture capital law, partnerships, m&a and capital markets. At my firm, the meeting growth group seems to have corporate generalists and more of an industry focus (either Silicon Valley tech or pharma).

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JusticeHarlan
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Re: What the heck is "emerging growth"?

Post by JusticeHarlan » Wed Dec 05, 2018 4:57 pm

I wrote this (checks date) like four and a half years ago, so I’m sure if I took the time I could update it, but whatever:
Here's some thoughts for working as an emerging company/venture capital corproate lawyer at a firm. Generally, this practice area involves representing clients from very early stage companies as they grow and move towards exit (sale or going public), and sometimes representing venture capital investors who invest money in these growing companies.

Let's say you've got a new client. Could be a couple bros from MIT/CalTech who have a killer new technology they've developed and want to monetize, or it could be some serial entrepreneur who just sold his last company to Google and is bored of sitting on his yacht all day and wants a new gig. So sometimes they're very sophistracted and demanding, sometimes they don't know anything and you need to walk them through the steps, the documents ("bro, what's a ROFR?"), etc.

The first step is incorporation. As a junior, you'll be the one drafting the certificate of incorporation and getting it filed in Delaware. You'll probably be the incorporator: the founder of the company who appoints the initial board of directors, approves the bylaws, all that introductory stuff. You'll do that by written consent: you have a piece of paper setting out all those basic steps, and then at the end it has you resigning as incorporator. Once you sign the incorproator consent, the founders will be in charge. Sometimes you need to do something quirky, like the client has already incorporated an LLC in their home state instead of Delaware, so you'll do a conversion or merger to get them set up in the right structure. Certain companies might have more complex holding corp/LLC structures that are driven by arcane tax provisions and require incorporating a lot of random subsidiaries, but for the most part it's just a Delaware C-Corp.

You'll want to make sure that all these early steps are done correctly, because any mistakes will come up in diligence when someone wants to investor or buy the company. You want to make sure the founders are assigning their IP to the company, so you draft an agreement for that. You want to make sure they get stock in the company so you draft agreements for that. You'll give early, key hires restricted stock that vests either based on time or certain milestones, and make sure they file their 83(b) tax elections (seriously, not getting the 83(b) election is like a fireable offense for a junior, and you have 30 days to get it done). These are all done without anyone on the other side of the deal, so it's a lot of taking the same document you used for the last client, updating the names/dates/dollar amounts and getting them to sign.

The next major step is a venture financing round. Much like an M&A deal, there's a primary transaction document, the Stock Purchase Agreement, (SPA) by which the company is selling some percentage of itself to the investors for some cash. Like the merger agreement, there'll be a term sheet that the partner will work on negotiating. The lawyers representing the company will want to get the best valuation they can, and the lawyers representing the investors will want to have certain rights: we want X seats on the board, we want to be able to inspect the company's facilities, we want a veto on a sale of the company, etc. Sometimes its one investor but typically its a group of VCs, with the one providing the most money calling the shots for the group. Existing investors get the first crack at a new financing but sometimes new investors will be providing all the money for a given round.

Once all the terms are agreed to, the midlevel from one side, usually company side will take the first crack at writing the SPA to turn those business terms into a binding document. Like a merger agreement, there are also representations and warranties that assign risk between the parties, or making sure certain things are true (all the investors are sophisticated so you can utilize federal securities law exemptions, for example) and the juniors will be tasked with working with the company to fill out disclosure schedules, and on the investor side you'll be doing the diligence to figure out what the company's been up to and what's its liabilities are.

There are also a handful of other documents that will also contain those the provisions you agreed to in the letter of intent/term sheet. the Investor's Right Agreement (IRA), the Right of First Refusal and Co-Sale Agreement (ROFR) and the Voting Agreement (VA). You're also changing the capital structure of the company (creating a new class of stock, increasing the number of common stock, etc.) so you need to do an Amended and Restated Certificate of Incorporation (COI or Charter). The IRA gives certain rights to the preferred stock holders (investors get preferred stock, founders/employees get common stock), such as requiring that all employees that get hired sign IP Assignment provisions, or that existing investors get offered the chance to invest more in a subsequent financing before any new investors. The ROFR gives the preferred holders, then the company, the right to buy any stock that common holders are selling, or to sell their shares along at a pro-rata rate. The VA defines how people will vote on the election of directors, to ensure the VCs get the board seats they were promised, etc.

You can see the industry standard models for all of these docs on the National Venture Capital Association website. So, much of the drafting/negotiation will entail figuring out how to deviate from the standard docs, or if the company's done a VC round before, it's about how it will deviate from the prior round's docs. The mid-level will generally do that drafting, the junior will proof/review and run changes.

The junior on the company side is also going to take the lead in drafting the ancillaries: a board consent that authorizes amending the Charter and entering into the agreements and issuing the stock and all that. A shareholder consent that approves what that needs to approve. A certificate from the company's president and one from the secretary, saying certain things are true. A waiver from existing investors agreeing they were offered the chance ot invest in this round but turned it down. The junior on the investor side will be doing more diligence, and will draft of investor side ancillaries, such as a side letter/management rights letter (this has something to do with ERISA and so no corporate lawyer actually understands it) and the indemnification agreement between the company and the director who will be representing the investors. Both will be handling deal mechanics, like signature pages and heckling their client to sign the signature pages and asking the other side for the right signature block to put on the signature pages.You'll usually trade signature pages so company side can assembled the documents, with the signatures held "in escrow" until you release on closing.

Juniors on the company side might also get tasked to do a draft of the opinion (because no one really wants to be the person who drafted the option), which is the document by which the law firm, subject to enough caveats as to render the whole thing useless, is putting itself on the hook for certain, specific parts of the agreement, like that the deal documents are enforceable and the capitalization of the company is correct. This need to get approved by some super-senior partner not on the deal who is part of the opinions committee, who will just tell you get rid of any deviations from the form after you ask them for a week or two for any comments because we've got to get it approved by the other side before we close.

Once everything is agreed to and in final form, you "close": investors wire the money and receive shares. Juniors on the company side will handle a number of post-closing items, like getting stock certificates to the investors if they want them, a 228 notice to the shareholders of the company that didn't vote on the shareholder consent to tell them what the other shareholders voted for, maybe a Form D (notice that the company engaged in an unregistered sale of securities in reliance on certain federal exemptions to registration).

There can be any number of quirks, like some of the insiders want to sell their stock along with the financing (rare but you see it), or if they just want a quick infusion of money instead of a real round, you can do a venture debt deal: investor gives them the money now without figuring out how much stock that's worth, and it accumulates interest until the next financing round, when outstanding principle + interest get converted to equity at the same rate as the new money coming in. Sometimes you combine the ROFR and the VA into one agreement. Sometimes you have multiple closings, so the the investors poney up more money for more stock at a later date if the company gets enough subscribers or something. Fun stuff like that.

Between financing, company side emerging company work entails doing a bunch of different things for the companies that are too small to have their own inside departments. You'll draft the stock option plan and form stock option grants (running everything by the tax/employee benefits people), you'll do a board consent appoints Bob Smith the new VP of Operations, you'll read contracts they want your advice on, etc. A lot of this stuff is pretty mundane and gets pushed down to juniors. (I've got a stack of restricted stock grants I have to "draft" right now that I'm putting off by writing this, for example.) But you really get to know the company and how it works, so that when it (hopefully) comes time to go public or sell the company off, you can help them figure out what the important things are for the S--1 or merger agreement

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