best practices for corporate venture capital & strategic
TRANSCRIPT
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Best Practices for Corporate Venture Capital & Strategic Investment Programs
PRESENTED BYModerator: Thomas Knox, King & Spalding
Panelists:Joshua Hess, Capital OneDaniel Kahan, King & Spalding
Riana Studner, Lockheed Martin
October 28, 2021
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2
Speakers
Thomas KnoxPartnerKing & Spalding [email protected]+1 703 245 1010
Riana StudnerAssociate General Counsel, Director Lockheed Martin
Joshua HessAssistant General Counsel - Corporate and Strategic TransactionsCapital One
Dan KahanPartnerKing & Spalding [email protected]+1 202 626 9622
Moderator
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• Venture Capital and Corporate Venture Capital Overview• CVC Governance and Structure• Investment Terms• Risk Mitigation• Exit Planning
3
Agenda
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Venture Capital and Corporate Venture Capital
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What is Venture Capital (VC)?• Primary goal of financial VC investors is financial return• Typical structure:
– Preferred stock– Special stockholder rights
• Other structures:– Convertible debt– Other convertible securities (e.g., SAFEs, warrants)
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What is Corporate Venture Capital (CVC)?• Investment in startup companies by established companies• Investments focus on both strategic/commercial and financial
goals• CVC goals for making investments• Company goals for taking CVC
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Key Differences with Financial VC• Greater variety of positive outcomes • Lower level of control sought• Not subject to typical 10-year VC fund structure• Relatively limited financial exposure• Focus on side letter agreement • Commercial agreements
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CVC Trends: Investments
Source: CB Insights, The 2021 Mid-Year Global CVC Report, July 2021
CVC investment accounted for approximately 25% of all VC investment in the first half of 2021.
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CVC Trends: Exits
Source: CB Insights, The 2021 Mid-Year Global CVC Report, July 2021
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CVC Governance and Structure
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CVC Program Organization• CVC program structuring
– Legal structure– Placement within organization
• Key features of a CVC program– Decision-making process and authority– Capital allocation– Balancing financial vs. commercial goals– Compensation arrangements
• How structure impacts investment process/company relationships
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Investment Terms
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Typical VC Financing Terms• Economic
– Dividends– Liquidation preference– Antidilution protection– Pro rata rights– Registration rights– Rights of first refusal on secondary transfers
• Information– Reporting– Inspection
• Governance– Board– Voting
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Typical VC Financing Documents• Stock Purchase Agreement• Certificate of Incorporation• Investors’ Rights Agreement• Voting Agreement• Right of First Refusal and Co-Sale Agreement• Others:
– Letter agreement – Director indemnification agreement
• Similar structure for CVC investments, with focus on specific provisions and on side letter
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Key CVC Side Letter Terms• Basic information rights• “Major Investor” status• Public announcements• Not a “Competitor”• Right to conduct activities• Board observer• M&A rights• Rights with respect to
competitor financings• Rights with respect to
competitor commercial transactions
• RFP rights• Branding• MFNs• Compliance / regulatory
covenants• Put rights• Drag-along carve-outs
(preferably needs to go in Voting Agreement)
• Extended survival periods• Residuals clause
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IP Disclosure and Contamination• CVCs and companies must address issues regarding the
disclosure of technical IP and competitive and business information– Concern during due diligence and post-investment– CVCs need to preserve freedom – Companies need to protect confidential information/IP
• Key considerations:– “Competitors”– Clean teams– Redaction/withholding– Board observers vs. directors– Residuals clauses
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Exclusivity and Notice Rights• CVCs may want exclusivity or visibility with respect to strategic
transactions• Companies want to limit restrictive exclusivity, notice, and
negotiation rights• Key considerations:
– Scope of exclusivity and notice rights– Veto rights over exits– Negotiating with multiple CVCs who want equivalent rights
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Deal Timing• CVC investment thesis may be tied to commercial relationship, but
the timing of entering into commercial agreement may not align with the financial investment
• Timing considerations• Allocating risk of failure to reach agreement
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Risk Mitigation
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Risk Mitigation Concerns• Potential reputational damage to CVC investor• Key compliance risk areas include:
– Anti-bribery, anti-corruption and anti-money laundering– Data privacy and data security– Business dealings with sanctioned entities or countries– #metoo issues– Jurisdiction-specific issues (e.g., local workers’ rights laws)– Tech industry scrutiny– Thin line between founder puffery and fraud
• Highly regulated investors have additional concerns
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Risk Mitigation Techniques• Due diligence• Investment documents• Quick path to exit• Stay informed• D&O matters• Regulatory provisions
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Board Service• Director obligations
– Duty of loyalty– Duty of care
• Board observer– Contractual confidentiality obligations– De facto director doctrine
• Indemnification– Indemnification agreements – D&O coverage
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Exit Planning
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Thinking Ahead for Exit Transactions• Planning for positive scenarios• Planning for distressed scenarios• Disclosure considerations for public company CVCs• Special considerations for CVC directors
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kslaw.com© 2021 King & Spalding LLP
Questions?
Thomas KnoxPartnerKing & Spalding [email protected]+1 703 245 1010
Riana StudnerAssociate General Counsel, Director Lockheed Martin
Joshua HessAssistant General Counsel -Corporate and Strategic TransactionsCapital One
Dan KahanPartnerKing & Spalding [email protected]+1 202 626 9280