Bringing Investors to the Party

Have you ever heard the expression “all cash is green”?  This expression is apt when the cash is coming in a one shot deal with no continuing relationship.  Of course, that is not the case when a private company is seeking investment.  Often, companies will look at a proposed investment and be satisfied with the economic terms of the deal, only to realize after the fact that the investor’s vision for the company and the business does not align with that of management or the Company’s existing ownership.  Companies looking for investment should consider more than the pure economics of a proposed investment when selecting investors.  Choosing the right investors will pay significant dividends going forward as the company needs to manage its business as well as its investors. 

In seeking professional investors, a company needs to do some diligence on the investors to make sure that the investors’ interests align with those of the company.  A few things that companies should consider:

• Recognize different circumstances and different motivations.  For example, is the investor a super wealthy individual?  A private equity fund?  Is this a seasoned investor who understands the risk of investment in private companies? 
• If the investor is a private equity fund (regardless of how it characterizes itself, be it venture capital, growth capital, hedge fund, etc.), how long has the current fund been in operation and how long does the fund expect to wait for its return on investment? 
• If the investor is an angel investor, the same question should be asked about the investor’s expected time before he sees a return on investment.  With angel investors, the question of experience and sophistication is generally more pertinent than with private equity funds. 
• The company should understand the investment strategy of all of its investors.  Some investors are more fiscally conservative than others.  Using baseball terminology, do the investors hit for average or power?
• Does the investor have the ability to invest more and does the investor typically participate in subsequent rounds of financing with its other investments?
• Does the investor easily have the ability to absorb a complete loss of its investment?  Said in another way, would the investment account for an overly large percentage of the investor’s assets?
• What is the investor really intending to invest in?  Is it the company’s current product(s)/services?  Is it the company’s proprietary technology? Is it the company’s management team? Is it the company’s business plan?  Or is it something else?
• How well does the investor understand the company’s business and industry and how well connected is the investor in that industry?  Can the investor open doors for the company with those connections?

Doing due diligence on prospective investors is key to a company’s success.  However, that diligence is not done in a vacuum.  The company needs to be honest with itself about its business plan.  For example, if an investor typically seeks an exit from its investments in 2 years, but the company believes that it needs 5 years to be ready to exit, the company must stick to its beliefs and not set itself up for failure by unrealistically re-setting its goals.

If you wish to learn more about selecting investors for your company or about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com

Developing and Managing Distribution Networks

You’ve strategized and struggled.  You’ve created and developed.  You are ready to sell your new product.  Now what? 

Entrepreneurs have always struggled with this issue.  Your distribution strategy for a new product should not be off the shelf because distribution strategies are not one size fits all.  When deciding what distribution strategy you should use for your product, here are a few things to consider. 

One of the first questions that you should ask yourself is whether you want to grow your own distribution network or outsource some or all of your distribution to others.  There are many factors to consider in making this decision.

Case for developing your own distribution network:

In general, building and utilizing your own distribution network allows you to maintain a greater level of control of the operation and to keep a greater percentage of your revenues than if you were to utilize a third party.  You don’t need to worry about your third party distributor[1] ignoring your product or making illegal payments to a government official for which you may have liability under onerous anti-corruption/bribery laws such as the FCPA.  Moreover, you can retrench and refocus your distribution efforts with few limitations if you utilize your own distribution network, whereas your ability to modify or terminate your relationship with a third party distributor may be significantly limited by lengthy termination notice periods, termination or other payments.  The confidence and flexibility that controlling your distribution network, along with the long term potential economic reward for doing so, are strong reasons why so many large companies, particularly in heavily regulated industries such as life sciences, use their own distributions networks whenever possible. 

Case for utilizing third party distribution network:

Developing your own distribution network takes significant time and resources, generally much more so than utilizing an existing third party distribution network.  Good third party distribution networks can offer you almost immediate market penetration as you benefit from the distributor’s knowledge of the market.  Moreover, when doing business internationally, there may also be significant legal and customary barriers to entry that are difficult or practically impossible to overcome without utilizing local distributors.  Good local distributors overcome these barriers for you.

In the event that you choose to utilize third party distributors as part of your distribution strategy, here are a few things to keep in mind as you negotiate the terms of your agreement with the distributor.

• If you grant any sort of exclusive distribution rights to a third party, make sure that the definition of those rights and the territory in which those rights exist is clear to all parties.  For example, if the distributor is the only party allowed to sell in the territory, you need to make sure whether that exclusion not only applies to other third party distributors, but to you as well.  Also, if you grant exclusive rights to sell, you need to me mindful of passive and cross territory sales. 
• You need to be careful not to inadvertently grant overlapping exclusive rights.  This risk is reduced by careful negotiation of the exclusivity and territory rights, but a matrix of rights granted in each territory should be developed and continuously maintained to preclude overlapping grants of exclusive rights. 
• You should negotiate for levels of performance from your distributors, both based on efforts and results (e.g., minimum sales levels, minimum number of sales calls per period, response time requirements for phone or other electronic contacts, average delivery time from order).  The failure to satisfy these requirements would be a breach of the agreement giving you the ability to terminate without penalty or modify the agreement to your economic benefit. 
• You need to negotiate carefully that ability to terminate the agreement.  Many distributors, especially those with an exclusive territory, want comfort that the effort that they expend in building a market for your product will not be for naught and seek to make termination of the agreement difficult, time consuming and expensive.

If you wish to learn more about developing and managing distribution networks, or about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com.

[1] The term distributor is used here generally, and may refer to a sales agent, franchisee or another contractual business relation that has the right to market, sell and/or distribute your product.

Attracting, Motivating and Retaining Employees

“How do we attract, retain and motivate employees?”  Anyone who has experience in human resources or practiced business law has heard some variation of this question.  The honest answer is that it depends on a number of factors, some in the control of the company, some outside of the company’s control.  Moreover, whatever strategies are employed by the company, the company has to recognize that employees and potential employees are individuals, each with his own set of motivators.

Generally, companies focus on different forms of compensation when discussing the attract, retain, and motivate question.  And so, this post also focuses on compensation.  Other components to answering the questions such as culture, personality fit and other social feelings are more subjective and to manage and change culture is a process that can not simply happen by management mandate. 

The three buckets of compensation that most companies look at to try to attract, retain and motivate employees are (1) base salary, (2) bonus and (3) equity (stock, options, RSUs or some other evidence of ownership or path to ownership in the business) or equity like rights (phantom stock or some other payment right based on the appreciation of the value of the business). 

Businesses at different stages of existence tend to allocate the focus of these compensation buckets differently. 

Looking at the typical early stage/emerging growth company, where revenues are highly volatile or non-existent, cash is king and should be preserved as much as possible.  These companies do not tend to pay big salaries or bonuses.  They need to do everything possible to slow the burn of cash to give the business more time to achieve its business objectives.  On the other hand, the potential significant growth of these businesses can be used to attract, retain and motivate employees.  These businesses tend to allocate a relatively larger part of their compensation packages toward granting equity and equity like rights.  Aside from preserving cash, granting equity and equity like rights is also believed to align the interests of the recipients of these grants with the interests of the stockholders of the business.          

Conversely, companies that are stable with a steady revenue stream, but that are not likely to materially appreciation in value typically will focus their compensation packages toward cash in the form of salary and/or cash bonus.  Although grants of equity or equity like rights are not uncommon in these companies, the perceived value of those grants is not nearly as meaningful as in the early stage/emerging growth company.

Employees have become increasingly sophisticated and, I would suggest, self-selecting over the past few decades.  Employees who are most likely to succeed working at an early stage or emerging growth business have come to understand and appreciate the risks and rewards of those businesses.  They are willing to make less in salary at these businesses because they are excited and enticed by the possibility of making more money in the long run through equity and equity like rights grants.  Conversely, those who are more interested in the perceived stability of a higher paying position tend to migrate to the larger, more stable companies. 

Companies and employees alike though need to recognize that a company’s circumstances are continually changing.  Emerging growth companies mature.  Stable businesses stumble.  As such, companies should regularly review their compensation plans to ensure that they are in the best position possible to achieve the company’s objectives at that point in time.

If you wish to learn more about attracting, retaining and motivating employees or about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com.

5 Benefits of Having In-House Counsel

As an in-house general counsel, I saw first-hand how having in-house general counsel aids a business.  Here are five important benefits that good in-house counsel brings to a company. 

Early Stage Input

For numerous financial and other practical reasons, outside attorneys are generally not involved in a company’s early stage business discussions.  The risk of wasting an outside attorney’s time and, therefore, the company’s money when a transaction is uncertain and undefined generally outweighs the benefit of having the attorney involved at such an early stage.  In-house counsel, on the other hand, can and should be utilized in early stage discussions to ensure that the ultimate objective is legally achievable. 

Shortly after forming ALR Law, I was approached to assist an emerging growth biotechnology company with documenting a joint venture with a Chinese company.  The client and its Chinese partner had already negotiated a term sheet that addressed the structure and key terms of the JV, which was to be governed by Chinese law.  However, neither party had in-house counsel or had engaged an outside attorney to review the term sheet until they were satisfied that it reflected the basic terms of the intended joint venture.  When a Chinese law firm was engaged to review the term sheet, it informed the parties that the intended structure was not compliant with Chinese law and that the structure would need to be significantly altered.  This advice has caused the deal to stall, perhaps permanently.  A great deal of time, energy and opportunity cost could have been saved if competent Chinese counsel was involved in these discussions from the outset.

Managing Outside Attorneys

Managing the relationship with outside attorneys is critical to small and middle market companies.  One important facet of this management is having enough knowledge to ensure that the company is receiving the best advice possible from outside counsel.  One can compare the situation to automotive maintenance and repair, about which many of us (including me) are ignorant.  To illustrate the point, when my mechanic tells me about issues with my car and how to address them, I can ask simple questions and try to understand the issue, but ultimately, I rely on the mechanic and hope for the best. Others who understand automobile maintenance and repair are able to challenge the mechanic and ask questions that sometimes lead to alternative or interim courses of action.  The same logic applies to legal services.  Competent in-house counsel can ask questions about the advice given by outside attorneys and ensure that the recommended course of action is the best for the company at that point in time.  Another important component of this management is making sure that outside attorney’s billing practices are reasonable and appropriate.  In-house counsel, particularly those that have come from private law firms, are generally better situated than their non-legal colleagues to gauge the complexity of legal tasks given and the appropriate fee for those tasks.  And if the in-house counsel used to be a billing attorney in a private law firm, he will have a better understanding how any billing disputes can be resolved.

Challenging Management

Successful business leaders are idea people.  They are always thinking how to sell more and how to produce better and less expensively.  As one of my former CEO’s said about me though, good attorneys think differently than most business leaders.  Attorneys think about legal and other hurdles and the “what ifs.”  Good, practical attorneys do not want to say, and recognize that their clients do want them to say, “No” unless absolutely necessary.  Rather good attorneys work with business leaders to develop sound strategies to realize the idea and to help the company achieve its objectives.  A trusted general counsel is ideally situated to have iterative discussions with the business leaders to create and shape ideas that have the best chance of success.  The general counsel asks many questions that poke and prod and challenge the business leaders’ ideas.  These sorts of discussions are often not had with outside counsel due to costs or, even if they are had, they are not as effective because the outside counsel does not have as thorough an understanding of the business as an in-house counsel has.

Interpreting Business to Legal for Outside Attorneys

Outside attorneys typically deal with many clients across a wide range of industries.  Even those attorneys that try to focus their practice on a particular industry segment, e.g., life sciences or technology, will not understand the full business of their clients – they are simply not exposed to the details of the business on a day to day basis.  However, often those details become important in the context of litigation or a deal or some other significant legal project.  Listening to a business person explain those details to an outside attorney can be like listening to two non-native English speakers trying to communicate in English.  They speak a common language, but are not comfortable in it and subtleties are often lost.  In-house counsel deal with these details on a daily basis and develop a fluency in the language and details of the business.  At the same time, in-house counsel speak the language of outside attorneys and interpret between the business and outside counsel, saving time, money and easing frustration.

Freeing Up Management to Manage Business

People do not go into business for the pleasure of dealing with attorneys and legal matters.  They are energized by creating, developing, helping, serving, selling and other activities that help their business succeed.  While good attorneys cultivate positive relationships with their clients, clients regularly tell their attorneys that time spent on legal matters rather than running the business is a source of frustration.  Good in-house counsel greatly reduce this frustration by freeing management to manage the business.  The in-house counsel participates in the same meetings where the ideas are discussed, thus obviating the need for a separate legal meeting on the subject.  And if there is a legal meeting with outside counsel, in-house counsel can generally handle it.  Good in-house counsel operate seamlessly within the organization to address issues that should not require senior management’s attention, making senior management’s job more enjoyable.  And doesn’t everyone want to enjoy their job more?          

If you wish to learn more about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com.

Introduction to ALR Law

Hello and welcome to the first installment of Andy Romberger’s ALR Law blog.  This blog is for ALR Law, but its scope is not limited to specifically legal matters.  This blog is for me to write about matters that interest me and I believe will interest readers as well.  Too many legal blogs that I see are dry and purely focus on the legal business.  These blogs reflect a concern that I have about many lawyers and law firms in general – that they are afraid to let others see them as real people.  As I will write in this blog, I have many interests outside of the law.  These interests help to give me a well-rounded, and practical view of legal issues and provide my clients with means to connect with me on a deeper level. 

One of the reasons why ALR Law focuses on being a part time general counsel and project general counsel is because I believe that there is great value in free flowing communication between clients and their attorneys.  The more complete and timely information that a good attorney can obtain regarding a matter, the greater value he can provide to his client.  The typical law firm/client business relationship presents two interrelated impediments to free flowing communication between clients and their attorneys: one is the billable hour; the other is the challenge of the attorney fully gaining the client’s trust that the attorney’s sole focus is on the client.

With skilled business attorneys billing their clients at hundreds of dollars an hour, and some even more than a thousand dollars an hour, it is only natural for clients to be selective about when to speak with outside attorneys and to focus the scope of that conversation as narrowly as possible.  A small to middle market company, where cash is king, generally can not afford to have its outside attorneys spend time, and hence the company’s money, on non-critical matters.  On the other hand, the standard billing model in reputable business law firms remains the billable hour and attorneys in these law firms are expected to bill a lot of hours.  Law firms succeed financially by grinding out as many billable hours as they can.  With the billable hour model, there is an inherent conflict in the law firm and client relationship. 

Law firms spend a great deal of resources to woo clients.  Among the more common attorney marketing strategies are attorneys joining clients for lunch, golf, or other social activities.  Ultimately, the objective is for the attorney to solidify a personal relationship with the client.  Some attorneys are very successful at this and genuinely enjoy building relationships with people, some of whom just happen to be clients.  However, many attorneys are interested in these social meetings for the obvious reason of obtaining more business.  Regardless of whether the attorney is genuinely interested in building the relationship or is more focused on building his book of business, the client nonetheless is always mindful of the billable hour conflict and therefore has difficulty achieving a full level of trust that the attorney’s sole focus is on the client.  The fact that so many law firms now openly acknowledge that they are willing to consider alternative fee and billing structures confirms the inherent issues with the billable hour business model. 

On the other hand, in-house counsel generally are employees who have an agreed upon salary.  There is no reason not to utilize an in-house counsel to the fullest extent of his capabilities and to get him involved in all facets of a matter from the outset.  In-house counsel’s interests are aligned with those of the business.  When I was in-house general counsel at Nuron Biotech after having been a corporate attorney at several prestigious law firms, I saw the information floodgates opened from the business people to me as the general counsel compared to the information that was shared with me as an outside attorney.  The floodgates opened immediately as a matter of the job, but then, as trust grew over time, my colleagues would bring me in on matters, not specifically because I was the general counsel, but rather because they trusted that I was someone off of whom they could bounce ideas.  Because my colleagues would bring me in at that early a stage to brainstorm ideas, I was able to provide better guidance and counsel to the client. 

The goal of ALR Law is to create relationships with companies where ALR Law is viewed as the in-house counsel, but on a part time or temporary basis.  ALR Law achieves this goal by utilizing a different business model than other law firms and by utilizing the expertise garnered by my experience both in the private law firm world and as a former general counsel of an international biopharmaceutical company to build a better, more productive attorney/client relationship.

If you wish to learn more about ALR Law and what it can do for your company, please contact me at Andy@ALRLawLLC.com.