Aubergines Summer 2013
HS&F’s NEW WEBSITE
“DISTURBINGLY NARCISSISTIC, YET BELOVEDLY BLISSFUL”
“FATUOUS BUT INFECTIOUS … FETCHINGLY SKETCHY”
SAY COUNTLESS CLIENTS, FAWNING KIN AND RANDOM TYPES
“We done outdone ourselves.” is how our esteemed founding partner Brian Heffernan summed it up, in his usual taciturn Central Valley cowboy-speak, when he first saw the full extent of the massive face-lift that had been administered to HS&F’s previously clunky, outdated and lifeless web presence.
We think you might like it, too. In addition to adding much bolder colors, richer text and dramatic black-and-white head shots of our highly photogenic partners, we’ve also eliminated those oh-so-yesterday gimmicky weight-loss crawlers, re-fi ad banners and e-Harmony pop-ups.
But perhaps the best part is that our new site has “…taken puffery, self-promotion and plagiarism to a whole new level…” as a letter from the California State Bar’s Disciplinary & Ethics Committee stated recently when it warned of our having possibly pushed the boundaries of something or other. We’re pretty sure the letter is a hoax, written by one of our many envious competitors.
Take a moment and judge for yourself: www.hsfllp.com
HS&F SMACKS DOWN OPPONENT’S SUBPOENA REQUEST
FIRST AMENDMENT RIGHTS CITED AND APPLIED
HAPPY CLIENT GIVES SNAPPY SHOUT-OUT
Our litigation partner Bill Frimel was mentioned by our client Glassdoor.com in a recent issue of The Daily Journal. Glassdoor is an online jobs and career site that allows current and former employees to anonymously post comments about their employers. One such employer brought suit for defamation against several anonymous posters who were previous employees. The employer sought a subpoena to obtain the identities of the employees from Glassdoor. Allyson Willoughby, General Counsel and Senior Vice President of Glassdoor, was interviewed in the Journal about the success of Glassdoor’s arguments in opposition to the subpoena, which urged that the First Amendment protects even the free speech of anonymous speakers.
Allyson also had some nice things to say in the article about Bill, HS&F and her preference for working with boutique law firms, which she finds collaborative and more cost effective. Click here to read the article
HOW DO FOUNDERS OF SUPER-SUCCESSFUL STARTUPS FARE?
ALWAYS WHOPPING WINNERS, OR SOMETIMES STIFFED?
One might think, with the abundance of Ferraris and Lamborghinis on the streets and freeways of Silicon Valley (not to mention private 747s and personal drones filling San Jose International Airport’s hangars and tarmacs) , and with Teslas now almost as common as nail salons and Priuses, that the many successful exits by tech startups would have created an enormous amount of wealth among tech startup founders. And indeed, this is the case.
But a recent article in the New York Times cited new studies by professors in both Harvard Law School and the Harvard Business School that conclude it’s not all that unusual for founders of successful startups to end up with chump change when a venture-backed company gets sold.
Here are some of their key findings, based on a review of venture-backed company acquisitions over recent years:
- In roughly half the cases, the common shareholders received nothing.
- In all but one instance, the majority of the sale proceeds went to vc’s and other holders of preferred shares.
- In 75% of the cases, the vc’s did not recover all of their investments (resulting in the founders and employees receiving nothing).
- Most CEO-founders of companies that take venture capital end up being replaced as CEO.
- Those founders who negotiated harder for rights to board seats and pay-out rights on liquidity events received, on average, $3.7Million more than those who did not.
There are several messages here, not the least of which is the high failure rate of startups, but that’s certainly not news to vc’s. They are commonly said to expect fully a third of their portfolio companies to fail, and to count on only ten percent of their companies to reap a high enough return to make up for the meager or zero returns from the rest.
But another message is that negotiating hard to retain control rights makes a difference. (And, we might add, that shopping deals with different funding sources can often strengthen the founders’ negotiating position.)
The Times article was prompted by a case filed in Delaware Chancery Court in late 2012, Casanaro, et al v. Bloodhound Technologies, et al. The case arose from an action brought by founders of a health care software company against its investors, after the company was sold for $82Million and the five founders received a paltry $36,000 in total, while the management team at the time of sale received a special $15Million cash bonus payout. The case is still pending, but the court’s opinion on a preliminary motion to dismiss contains a full discussion of the history of the company and its multiple rounds of financing, and is amply footnoted with references to the Harvard studies and more. Click here to review the opinion.
Both the Times article and the Bloodhound opinion underscore the point that vc’s typically hold preferred shares in startups, which have liquidation preferences that allow the vc’s to get their money out first – before the common shareholders receive anything – when a sale occurs. In some cases, the liquidation preferences of preferred holders can even exceed a 100% return of invested capital.
It’s also the case that when a startup doesn’t develop revenues or profits as quickly as originally projected, the business model is revised, the management is changed, and new capital is brought in. Sometimes, the cost of that new capital, which in many cases is provided by the existing vc’s, can come at a very high cost to the founders. This is due to the dilutive effect of what at times can be a drastic per-share price drop in a financing when compared to the company’s previous funding rounds. In some cases, the dilutive share price drop is so extreme that the founding investors’ holdings are referred to as “washed out”, meaning that while they still hold their original shares, they have become essentially valueless.
There is no reason for would-be founders to lose hope, however. Many founders continue to strike it rich in Silicon Valley. And the odds of doing so are considerably better than getting a child admitted to Stanford, winning the Lottery or scoring a table on short notice at Palo Alto’s toney Evvia Restaurant.
TRIPPY TREPIDATIONS OVER TRADEMARKS?
CRIPPLED BY CHRONIC COPYRIGHT KERFUFFLE?
READ THIS AND MAYBE YOU’LL CHILL A BIT
In today’s world of BFFs who LOL, it is arguable that intellectual property lawyers have long been on the cutting edge of making things more obtuse in the name of simplicity. Does ©, ℗ or ® sometimes leave you thinking ??? If you have ever been tempted to put one of those “thingamabobbers” on your website or brochure, but weren’t quite sure which “doohickey” was the right one or why, then here’s a cheat sheet you can keep on the DL.
© Hopefully this symbol is a gimme for most of you. It means that someone is claiming a copyright in a work. It is usually followed by the claimant’s name and the year of the work’s first publication. However, this symbol does not tell you whether or not the work has actually been registered for protection. Additionally, due to some changes in the law in 1989, claimants are no longer required to put this symbol on works over which they claim protection, although it is still the custom and also a very good idea to do so.
℗ If you think this means patent, you are in good company. You are wrong, but you are not alone. It is actually the copyright symbol used for sound recordings, or in archaic legalese a “phonorecord”. Patents are typically indicated by “U.S. Pat. No.” followed by one of more registration numbers. It is not uncommon to see a variety of patent notices, including the prevalent “Patent Pending”, which often simply means that a one-year mini-application has been filed as a placeholder and gives no legal insight as to whether a full application for registration will ever be filed, much less granted.
® Does an encircled “R” say trademark to you? It does now. It means that the owner has applied for and received registration of a name, logo, slogan or other indicia that tells consumers that the relevant product or service is being provided by that particular owner. Only marks that have received the official governmental registration blessing after an examination process may utilize the ®. Using this symbol without such registration can actually constitute fraud. Where does one file for such registration? The “PTO”, of course.
™ If “R” means Trademark, does “TM” mean Recyclable? No, because that just wouldn’t make any sense. ™ means trademark. It will typically be used when the owner has not yet applied for or received a registration for the mark, but still wants to put others on notice that the owner is claiming rights in its use of that mark. It has also been known to be used by owners who, against the advice of lawyers, don’t want to spend the time or money to update their labels after their marks have been registered or whose marketing departments can’t locate the ® symbol on their typesetting or just plain think the ™ looks “cooler”.
SM We are into the bonus round now. This symbol means service mark. It is used and misused similarly to ™. Whereas an owner places a trademark on the product or good it is selling, those who offer services as opposed to tangible goods should utilize a service mark. Despite the fact that trademark law divides the world of stuff for sale into 45 “international classes”, 11 of which are specifically reserved for different types of services, the little “SM” is mysteriously underrepresented in marketing material. A business development executive of one of our clients once offered this explanation, “We didn’t want our customers to think this meant S&M”.
We explained to the executive that she was probably being a bit too prissy, and that the legal benefits of including the SM symbol far outweighed a possible misunderstanding by what would probably be a very small minority of readers. She ultimately took our advice, and recently affirmed that she has never once regretted it. And so far as we know, no one has ever so much as snickered about a possible bondage connotation.
© Erica Roman 2013
AIRBNB AND “THE SHARED ECONOMY”
NIRVANA FOR BOTH PROPERTY OWNERS AND GUESTS?
OR WILL ENDLESS LEGAL COSTS RAIN ON THEIR PARADE?
The wildly successful web-based Airbnb, which makes it easy and inexpensive for consumers to rent a room in someone’s home online instead of using traditional lodging providers like hotels and motels, has capitalized on and propelled a growing social and commercial phenomenon sometimes called “collaborative consumption” or “the shared economy”.
Both those who use the service as guests, and those whose homes provide the lodging, appear to be highly enthusiastic about Airbnb. And they should be, one might say, because it pretty much looks like a win-win for everyone.
But not so fast, say critics, many of which are apartment building owners, neighbors and, increasingly, local governments. These critics are rising on a broad scale to urge that the activity be deemed prohibited by zoning laws or anti-sublet terms of lease agreements. They also contend that hotel taxes are being unfairly avoided by these newly-minted innkeepers, putting tax-paying lodging proprietors at a competitive disadvantage.
One thing is clear: Airbnb has become both a lightning rod for sticky legal issues and a gold mine for some lawyers. And since the legal issues can turn on the specific terms of an innkeeper’s own lease, no single case is likely to set a binding precedent. The same applies to hotel taxes: these are often adopted at the municipal level, and each city’s hotel tax is therefore different. Lawyers for Airbnb and its opponents are finding the onslaught of legal challenges being made throughout the US, and to an extent in other parts of the world, to be a rewarding and growing area of practice for them, but Airbnb is no doubt enjoying this far less.
Expanding this post-Millenial notion of sharing beyond the realm of real estate, one can already see similar areas of legal wrangling in the world of “collaborative consumption”, with ride-sharing and car-sharing services like Uber and Pink Mustache. These web-based services have been warmly embraced by consumers, and their fast growth and considerable imitation have been remarkable.
But again, many tough legal issues remain to be resolved. Some issues, such as insurance, are quite basic, and involve some deep-pocket interests who will fight hard to ensure that any risks they are required to insure involve a premium that has been tailored to the unique risks of “the shared economy”. And other private interests, such as taxi and limousine services, who pay hefty license fees and often wait a long time for their license medallions, are not at all pleased with these new consumer offerings. Local governments, too, want to regulate these new services from a safety standpoint, and they also want, perhaps even more, to collect license fees.
Where is all this headed? Darned if we know. But we predict that the growth of the shared economy won’t be limited to inn-keeping and public transportation for long. We’ve heard of a gaggle of web-based startups that are being formed – using crowd-sourced funding, of course (another good example of collaborative consumption) – to share storage lockers, cell phones and tablets, gardening and auto tools, motor scooters, bikes, gliders, parachutes and back-yard garden patches. And even sites to help one share their home kitchens, bathrooms, ATVs, portable air conditioners and home weight rooms, saunas and man-caves.
It might be said that the best of the Internet (or maybe the worst, depending on one’s perspective) is yet to come.
LAWYERS WITH ISSUES:
A LEGAL MALPRACTICE NIGHMARE CAN GET WORSE
WHEN THE MALPRACTICE LAWYER FLUBS UP, TOO
Talk about a bad lawyer joke. Pity, if you wish, the New Hampshire mortgage broker who hired a law firm to defend him in a lawsuit brought by a law firm seeking collection of its unpaid legal fees. The suing law firm, the broker alleged, did a pitiful job of representing him, charged him outrageous fees, and in the end got no concrete results.
So, to defend himself in the lawsuit, the broker sought out a new law firm that advertised itself as a legal malpractice specialist. But that firm, too, the broker has now alleged, charged a lot of fees, stalled in its filing of his malpractice counter-claim and, mon dieu, in the eleventh hour when the statute of limitations was running out, suddenly announced it was unwilling to file the complaint because, the beleaguered broker says, the firm was too cozy with the defendant’s insurance company.
Now what to do? The twice-lawyer-burned client took matters into his own hands, and filed a claim in pro se (on his own) against the entire lot of scoundrels, alleging conspiracy, consumer fraud, unfair dealing, violation of the implied covenant of good faith and fair dealing and, of course, legal malpractice.
“SLEEPY” MENLO PARK CONTINUES TO BURNISH ITS RACY REP
VANITY FAIR ARTICLE CACKLES AT ROSEWOOD COUGAR NIGHTS
“STILETTO HEELS, LOVE CONCIERGES AND MATING ALGORITHMS”
Our recent accounts of Menlo Park’s infamous Naked Cop and the bloody lovers’ brawl in the venerable Su Hong Chinese Restaurant in Menlo Park brought us more than the usual amount of reader responses. All of them, surprisingly, were supportive, and praiseworthy of the key role Aubergines plays in providing this critically important hyper-local coverage. So, since we seem to be on a roll, we’ve decided to make this a more or less permanent section of Aubergines.
This issue’s local story takes us to Menlo Park’s elegant and pricey Rosewood Sand Hill Hotel, where salacious accounts of high-priced prostitutes and their techie and vc Johns were widely reported last year in social media and the intrepid Daily Post. Vanity Fair Magazine sent a team of reporters out last month to write an investigative article on “Cougar Nights”, where “women of a certain age …come shod in sky-high stilettos… wrapped in dresses tight as a sausage… …to drink, play and meet a filthy rich entrepreneur or venture capitalist” as they engage in their “…mating algorithms…”
This time the theme is not the world’s oldest profession, but rather a profession that used to call its practitioners yentas. But the Rosewood version of the yenta prefers to call themselves “Love Concierges”. VF reports that these consultants, who work for both male and female clients, can charge up to $30,000 – and even more – to get as few as 11 dates set up for a client over a 24 month period.
LETTERS TO THE EDITOR:
I am a highly experienced lawyer with a high profile international, reputation. I am also very experienced in public speaking, public service and fund-raising. I am looking for a challenging partner role with Heffernan Seubert & French LLP.
Assuming that a ridiculous, and politically-motivated pending federal investigation of my campaign finances can be resolved quickly and does not result in my imprisonment, I am available to start work immediately.
After weeks of soul-searching, scriptural reading and consultation with my countless spiritual advisors, I determined that the place where my broad and deep skill set can best be utilized is Silicone Valley. You people out there think constantly about the future. So do I. I’m terrified of it. Although many think of me as a visionary and a thought leader, I’m facing unemployment for the first time in my life. It’s a bummer.
I would welcome an opportunity to interview with you. I am seeking a name partner position (preferably my name would be listed first) with a global firm that cares deeply about where our country is headed and wants a role in making sure that it gets there. Also, I will need a large corner office, a private bathroom, and plenty of storage space for my make-up, hair product, perfumes and expansive, multi-seasonal designer wardrobe.
My entrepreneurial spirit and experience are certain to be a huge draw. My husband and I have owned and operated a therapy clinic for years which has successfully applied the power of prayer to cure a broad array of social disorders and disgusting behaviors.
Although my law school, Oral Roberts University School of Law, was closed several years ago when its enrollment, despite free tuition, dropped below fifteen students and its Dean was convicted of murdering all of the faculty members in a Satanic rite that involved a drug-crazed pitchfork attack, I remain quite proud of the sound education and strong values that I received there.
If you are able to fly to Minneapolis to conduct our interview there, it will be much appreciated, as I have an ankle bracelet at present which does not allow for travel outside a five mile radius of my home.
Sincerely and with deepest affection,
Aubergines is a quarterly review of borderline-authentic news which publishes about twice per year. Nothing contained in Aubergines may be construed as legal advice or a legal opinion. Don’t even think about suing us. What few assets we have are securely lodged in offshore jurisdictions which do not recognize the United States or any of its laws. If you are fond of reading materials where annoying words like milieu, ennui or meme are in frequent use, you won’t be happy here. While there are widely reported accounts that regularly reading Aubergines will result in lower blood pressure, arrested male pattern baldness, reversals in gluten and lactose intolerance, an eradication of toenail fungus, relief from menstrual cramps, cessation of stammering, an end to incontinence or impotence and recovery from post-traumatic stress disorder, no such guarantee or warranty of any kind is applicable. All rights are waived in perpetuity and thereafter. No representations or warranties, express, implied or inferred shall apply whatsoever. This disclaimer is fully valid and enforceable even in jurisdictions where they are invalid, including outer space and beyond.