Partner at Foley & Lardner LLP
Helping businesses and ventures with compelling technologies reach their growth objectives with sound legal strategies and solutions.
Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital, M&A and Transactions Practices and the Technology, Health Care, and Energy Industry Teams. Louis Lehot focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and successfully obtain optimal liquidity events.
To assist his clients in realizing their objectives, Louis Lehot brings to bear a broad array of legal and business instruments, processes and strategies, from formation to liquidity. Prior to joining Foley, Louis was the founder of L2 Counsel, a Silicon Valley boutique law firm.
AWARDS & RECOGNITIONS
ARTICLES PUBLISHED BY LOUIS LEHOT
What would an economic downturn mean for technology M&A activity, and how should buyers and sellers get ready for the coming cycle?
Foley Represents NEA as Lead Investor in $12M Series A Round for College Social Media App Fizz
FREQUENTLY ASKED QUESTIONS
The pandemic made a very challenging year for many businesses. Most braced themselves for a profound economic impact as shutdowns began. By Q1 2021, however, investments surged to a new quarterly record, according to PWC and CB Insights’ MoneyTree Report.
During Q1 2021, VC-backed companies raised more than USD 62 billion, up 117% year-over-year (YoY) and up 62% over Q4 2020. Seed-stage round deal activity was down in Q1 2021 compared to Q4 2020, in contrast to Series A and later rounds. Seed deals dropped from 592 in Q1 2015 to 437 in Q1 2021. All other stages showed a modest uptick during the same period. Regardless, in total, Q1 funding amounted to nearly half of 2020’s annual funding.
Mega-round investment set a new quarterly record—184 mega-rounds took place in Q1 2021, and mega-round deal share accounted for 64% of total funding—a historical record.
The U.S. median deal size by round also points to mega-round prevalence.
- Series E median deal size—USD 100 million
- Series D median deal size—USD 75 million
- Series C median deal size—USD 50 million
- Series B median deal size—USD 24 million
- Series A median deal size—USD 11.5 million
- Overall median deal size—USD 10 million
- Seed stage median deal size—USD 2.6 million
Four deals in Q1 2021 were USD 1 billion+ rounds:
- Robinhood: USD 2.4 billion—Convertible Note
- goPuff: USD 1.2 billion—Series E+
- Databricks: USD 1.0 billion—Series E+
- Robinhood: USD 1.0 billion—Other
According to the Q1 2021 Benchmark Venture Capital Report from The Venture City, the first quarter saw a record 98 new unicorns compared to 64 in Q4 2020.
Unicorns may still be rare, but they are gaining on the horses.
There are four different stages where we see venture capital firms focusing, each with its own specific characteristics.
- Seed Stage
After you have raised money from friends, family and business angels, and you have developed a minimum viable product or “MVP,” and are at a point where you are able to demonstrate product-market fit and are probably collecting revenue, you can consider approaching seed-stage venture capital investors.
- Seed Stage
- Early Stage
Early stage funds now are focusing on “Series A” and “Series B” stage companies. While historically Series A was seed stage, it is now a “tweener,” having demonstrated product-market fit by trailblazing disruption to a category, and showing four quarters of double digit revenue growth. In today’s world, Series A and Series B funding rounds are scaling capital, with money being deployed to boost sales and marketing and further develop product.
- Early Stage
- Growth Stage
Series C, D, E and further rounds are what we call “growth stage.” While historically this capital was for scaling, it is now used for product development, M&A, going global and fueling hyper-growth. A startup that has made it to this stage is quite successful and looks for additional funds to help develop new products, expand to new markets or even acquire other companies in order to grow its own business.
- Growth Stage
- Pre-IPO Stage
By this time, a startup is looking for money for the sole purpose of going public.
- Pre-IPO Stage
With all the changes to earlier rounds of raising venture capital, companies are staying private much longer. The terms in these pre-IPO or later growth rounds that were before quite exotic are going to become intricate and interesting.
Mega-VC funds or public pools of capital dipping into the private markets have been the driver of this change. Their involvement changed the whole venture model, because they are investing large amounts of money at later stages. Previously, companies had to get access to public markets to raise that kind of capital. It changed the calculus and perspective on the market. As a result, by the time companies are going public, they are worth tens of billions of dollars. These valuations were unheard of before now.
- First make sure you have an experienced advisory team. This is significant because your advisory team will provide valuable input that will save your company time and money. One way to resource an advisory team is by asking your network for references.
- Clean up and prepare all your marketing and investment documents. The executive summary, the investor pitch deck slides, and your financial model are the main three documents necessary when approaching VCs.
- Create a targeted list of investors with preferences that you fit into, this includes things such as industry, size of investment, geography, among others.
- Before approaching more investors, update your pitch with the feedback you have received from previous interactions with investors that decided not to invest in your project.
- Continually practice and revise your pitch with your advisory team, to make it more refined.
- Review your legal documents with your attorney to make sure they are ready for the new investment.
- Make sure to be polite and in a good mood. Watch your online reputation. Be communicative and follow-up. Make sure to avoid any even small detail that could turn off the investor.
As you embark on your first fundraise or a full venture capital round, startup founders need to know who they are talking to when they go out to raise money. You don’t want to waste your time or be “out of school” approaching late stage funds when you are pre-revenue. With many funds focusing on a vertical strategy, founders must also pursue funds in their space.
- Convertible Note
A form of short-term debt that converts into equity, typically in conjunction with a future financing round.
- Convertible Note
The ubiquitous form of financing for pre-seed and seed stage companies, this refers to the “Simple Agreement for Future Equity” created by the Y Combinator accelerator to simplify the process of fundraising for companies and conserve resources
- Equity Round Term Sheets
NVCA has recently issued a suite of new model legal documents to be used in venture capital financings, including a new model venture capital term sheet, with explanatory footnotes and links to background material.
- Equity Round Term Sheets
A term whereby an investor’s prior investment is adjusted (usually upward) upon the occurrence of a specified event. A typical “ratchet” scenario occurs to enable an earlier investor to be issued additional shares upon a later investor purchasing shares at a lower price. A ratchet is often the mechanism used to ensure anti-dilution protection, but can also be used to adjust value for other events.
This refers to a plan that is exempt from the liquidation preferences specified for the preferred stock holders in the charter, and “carves-out” an amount of proceeds from a sale transaction, usually to the management team, because the common stock is under water, or capital will not flow down to the management team that holds common stock in the “waterfall” of proceeds upon a sale
Corporate filings are required upon incorporation of your company and following several key events that will occur through your company’s lifecycle.
When your startup is first formed, you must file a charter. Regardless of where the charter has been filed, it will set forth the classes of stock held by the corporation, the rights and privileges associated with those classes, and the corporation’s purpose and agent’s address. Additional corporate filings can include:
- Changes to corporation name, purpose, or other matters: An amendment to the charter must be filed if the corporate name is changed, the corporation’s purpose is revised, or if the registered agent is different.
- Tax statements and reports:The corporation must file an annual tax statement or report, this often needs to be filed before a corporation can pay its annual taxes.
- Operating in other states:If your corporation operates or does business in states aside from where it is incorporated, you must file to do business in each of the additional states.
- DBA filings:If your corporation operates or does business under a name that is different from the corporate name, you must file a “doing business as” filing with the relevant state(s).
Corporations are also required to make sure any securities they issue comply with the state and federal laws. This could be done through filling with the SEC or finding an exemption. State securities laws will be different for each jurisdiction, so it is best to have your legal team review what is required for your corporation.
In the early stages of a startup company, taking legal support is one of the most important steps. Before panicking and hiring someone out of nowhere ask yourself what kind of legal support do you need? This will help you determine what your company needs and make sure that it is secured. Rocket Lawyer and Legal Zoom provide inexpensive forms if you need help with initial paperwork.
Some companies will need more legal support than others. Legally starting a corporation is simple, however hiring a lawyer or seeking legal counsel is crucial to make sure you do not miss anything. Lawyers can also aid with major legal challenges such as regulations, industry concerns, leasing agreements and more. It is also important to make sure all the legal documents are in order when the time comes for a round of venture investment or an exit. From our experience, it is usually more costly to fix these problems if a startup does not engage a lawyer to get everything right from early in the game.
Choosing the right Lawyer is also important when starting a corporation. Make sure you choose someone with an honorable reputation. It is also beneficial when that Lawyer is connected to a firm. Most likely, lawyers connected to firms have more resources and could help you with social networking.
Lawsuits are an unfortunate reality of many businesses. Sometimes an insignificant customer pain point can escalate into a class-action lawsuit very quickly. There are some tips to remember when your business is threatened with a legal action.
- First of all, don’t panic. Keep in mind that most threats don’t reach the stage of actual lawsuits because resolving a complaint via a court of law is a time consuming, high-effort and expensive process.
- Put yourself in the customer’s shoes to identify the best solution possible.
- Don’t take it personally.
- Pay attention to specific pain points in the customer’s story.When a customer gives you feedback, be sure to take lots of notes.
- Issue a sincere and authentic apology. The customer expects you to take responsibility when you make mistakes.
- Ask questions about their experience. By getting the customer to provide you with more information, you may uncover a workaround or solution that you didn’t see at first.
- Position yourself as a liaison between your company and the customer.
- Provide an effective solution. Just because the customer is threatening legal action doesn’t mean you can’t still meet their needs. In fact, providing an effective solution is probably the best way to de-escalate this type of issue.
- Seek Legal Advice from an Expert concurrently with taking the above actions.
As a company goes through an M&A transaction there are 8 key stages that typically occur:
- Preliminary informal conversation with potential buyers.
- Sign an NDA with potential buyers.
- Get a letter of intent (LOI) from potential buyers.
- Pre-signing period that includes negotiation of definitive terms, completion of due diligence and population of disclosure schedules.
- Signing of the terms.
- Pre-closing period to satisfy any additional pre-closing terms.
- Closing of the deal.
- Post-closing period during which the buyer takes care of full integration of your business.
Once the first round of VC financing is closed, your startup will have to have more formal meetings with the board of directors. These meetings can provide beneficial relationships between the investors and the experts. Some ideas on what to take into account when planning your next board meeting:
- Plan and calendar board meetings for the next 12 months. You don’t want them to be too long or too frequent. However, there’s no on size fits all solution and your board meetings should be planned based on your company’s needs.
- Prepare and send a written presentation to for the board members couple of days in advance the meeting. Make sure it covers the critical operating and financial metrics of the company’s trajectory in the prior period.
- Avoid surprises, especially if they are negative. If you have experienced unanticipated headwinds in the development of the business during the period, those updates should be communicated in real-time, by regular phone update calls.
- A board meeting is different from a meeting of your executive staff or your employees. The meeting should give a high-level overview without getting too deep into the weeds.
- Your management team should have some access to the board to be able to demonstrate the quality of the team you are building.
- Practice both working and closed sessions. This way you’ll be able to productively discuss important questions for company development and gather feedback on the management team.
- Make sure your counsel is present to take notes and answer legal questions.
Personally identifiable information (PII), which may also be called personal data or personal information, is a key concept when it comes to data privacy. PII refers to any information that can be used to identify a natural person or be reasonably associated with a natural person. This includes obvious identifiers such as names, emails, phone numbers, but can also include unique device identifiers, and information held in combination with other information where such combination can be used to identify a person. Most companies will encounter PII fairly early on, but the disclosures you will need to make will vary as your business grows.
Evaluating the various structuring alternatives before undertaking a formal sale process allows the seller to choose a preferred structure and set expectations with prospective buyers regarding deal structure at the outset.
- Merger is one way for you to sell or get out of your company. In a merger, two companies that are distinct legal entities are consolidated into a single legal entity that holds the original companies’ combined assets and liabilities.
- In SPAC transactions, operating companies obtain an exit in the public markets by merging with a special purpose acquisition corporation (SPAC).
- In an acquisition one company is a buyer, while the acquired company often loses its name and is absorbed into the buyer. The seller’s operations are typically fully integrated into buyer’s operations and in such cases, separate branding disappears.
- In a stock sale, the buyer purchases each share of your company’s outstanding stock directly from each stockholder, with options treatment to be negotiated but typically involves being cancelled, accelerated and cashed-out or assumed by the buyer. Your company’s legal status will remain the same, and your company name, contracts, operations, etc., stay in place unless otherwise agreed upon by the acquisition agreement until the buyer integrates the seller’s business into its platform, which it typically may do so at its discretion post-Closing.
- In an asset sale, the seller does not dispose of the legal entity. Still, a buyer can obtain some or possibly all the company’s assets, and seller may continue to exist and potentially operate following the closing of the asset sale. Buyers typically cherry-pick the liabilities and obligations of the seller to assume, while the rest will remain with the seller.
There are multiple ways to sell your business when you are ready however these are the most common. Regardless, it is wise to seek legal counsel for more advice and planning before you make your decision.
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