March 11, 2021

Venture Capital

Venture Capital

Tax Considerations–From the Company's Standpoint–in Structuring Venture Capital Investments
      Jill E. Darrow, 45(1): 233–60 (Nov. 1989)
This Article discusses income tax issues that are of concern to companies seeking to raise venture capital. The tax consequences of issuing common stock, preferred stock, debt instruments, debt plus warrants, and convertible securities are analyzed in detail, and issues of particular importance to start-up and developing companies are identified.

The Role of Counsel in Venture Capital Transactions if Disputes Arise
      Bruce Alan Mann and Marcus D. Wilkinson, 46(3): 759–76 (May 1991)
Lawyers involved in venture capital transactions frequently play multiple roles, representing the start-up company, entrepreneur, or investors in one transaction and dealing with those same parties on behalf of another client in the next transaction. If a dispute arises, failure to recognize and deal with the ethical conflict principles applicable to transactions between clients and former clients can subject the lawyer to disqualification, censure by the state bar, and liability to the client.

Understanding Price-Based Antidilution Protection: Five Principles to Apply When Negotiating a Down-Round Financing
      Robert P. Bartlett, III, 59(1): 23–42 (Nov. 2003)
This Article provides a practical guide for applying and understanding price-based antidilution protection-one of the principle financial terms negotiated by venture capitalists when making a portfolio company investment. The economic downturn of the past two years has forced venture capitalists and entrepreneurs to grapple with the often surprising and unintended consequences of standard antidilution formulas, particularly on a company's new investors. To this end, the Article provides five guiding principles for venture capitalists to apply when negotiating an investment in a company having antidilution protection.

How Many Masters Can a Director Serve? A Look at the Tensions Facing Constituency Directors
     E. Norman Veasey and Christine T. Di Guglielmo, 63(3): 761–776 (May 2008)
As business trends change and capital markets evolve, directors may face factual situations that raise new questions about the contours of directors' fiduciary duties. One increasingly common situation that presents tensions for a growing number of directors is the allegiances by individuals elected to the board by, and who may seemingly "represent," particular constituencies of the public corporation. Such "constituency directors" or "representative directors" may include, for example, directors designated by creditors, venture capitalists, labor unions, controlling or other substantial stockholders, or preferred stockholders; directors elected by a particular class of stockholders; or directors placed on the board by or at the behest of other constituencies.

We raise several questions. When a particular constituency causes one or more directors to be elected to the board, to whom or to what is that director loyal or beholden? The corporation? All the stockholders? If "yes" as to the corporation and all the stockholders, may the director give some "priority" to the views of the constituency that caused him or her to be placed on the board? Since the board must act collectively and the majority might not favor the outcome desired by the particular constituency, are these questions largely academic?

In this Article, we suggest that the existing standards of liability for breach of fiduciary duty should not change in order to account for changing circumstances. The existing standards of conduct and liability incorporate the necessary flexibility to balance the potentially competing duties of constituency directors with protection of the interests of various corporate constituencies. And if the fiduciary duty standards in corporation law are not sufficiently flexible to accommodate particular circumstances, constituents may wish to invest in an alternative entity (such as a limited liability company) governed by other law that will accommodate their needs. Or perhaps the investor may be able to effect a legally authorized change in the certificate of incorporation of the corporation to permit it to be governed more to the investor's liking.

Void or Voidable?—Curing Defects in Stock Issuances Under Delaware Law
     C. Stephen Bigler and Seth Barrett Tillman, 63(4): 1109-1152 (August 2008)
It is not unusual for a Delaware corporation's stock records to have omissions or procedural defects raising questions as to the valid authorization of some of the outstanding stock. Confronted with such irregularities, most corporate lawyers would likely attempt to cure the defect through board and, if necessary, stockholder ratification. However, in a number of leading cases, the Delaware Supreme Court has treated the statutory formalities for the issuance of stock as substantive prerequisites to the validity of the stock being issued, and the court has determined that failure to comply with such formalities renders the stock in question void, i.e., not curable by ratification. Unfortunately, the decisions issued by the Delaware courts have not afforded the necessary certainty to allow practitioners to decide whether a particular defect in stock issuance is a substantive defect that renders stock void or a mere technical defect that renders stock voidable. This Article analyzes the cases giving rise to this lack of clarity and proposes that the Delaware courts apply the policy underlying Article 8 of the Delaware Uniform Commercial Code to validate stock in the hands of innocent purchasers for value in determining whether stock is void or voidable.

Report on Selected Legal Opinion Issues in Venture Capital Financing Transactions
     Opinions committee, Business Law Section of the State Bar of California 65(1): 161–192 (November 2009)

The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions
      Corporation Law committee of the Association of the Bar of the City of New York, 65(4): 1153–1204 (August 2010)

Sample California Third-Party Legal Opinion for Venture Capital Financing Transactions
     Opinions committee, Business Law Section of the State Bar of California, 70(1): 177-216 (Winter 2014/2015)

Business Development Companies: Venture Capital for Retail Investors
     A. Joseph Warburton, 76(1): 59-108 (Winter 2020-2021)
Business development companies (“BDCs”) offer retail investors the allure of becoming venture capitalists, funding emerging enterprises with the help of professional asset managers. BDCs are investment companies that finance businesses traditionally locked out of conventional capital markets. Nearly forty years old, the BDC has remained virtually unexplored by academic researchers.