May 2015

SAFE and KISSEarly stage and startup companies often face difficulty in obtaining initial financing.  These companies normally do not have access to traditional venture capital, angel, or bank financing.  Even when a startup finds an investor, the company may not have the time or the funds to pursue the long and complicated negotiation and documentation process required for a convertible debt or preferred stock investment.

Y Combinator (a Silicon Valley technology accelerator) developed a possible solution for this situation:  the SAFE (Simple Agreement for Future Equity). This is a short document that contains the basic terms of an investment in an early stage company. Y Combinator’s goal was to create a standard set of terms and conditions that the investor and the startup can agree upon without protracted negotiations so that the startup can obtain its initial funding relatively quickly and cheaply. Y Combinator offers both a summary of SAFE concepts and sample SAFE documents on its site.  Y Combinator first proposed this instrument in December 2013, but it is just now beginning to be used outside of Silicon Valley.

While the SAFE has appeared in a number of forms, the basic concept is that the investor provides funding to the company in exchange for the right to receive equity upon some future event.  The standard SAFE contains no term or repayment date, and no interest accrues.  The investor gets the right to receive the company’s equity when a future event occurs (normally a future equity financing). There is no need to spend time or money negotiating the company’s valuation, the terms of the conversion to equity or any similar items (which can often be tough and protracted negotiation items) – all of those decisions can be deferred into the future. The investor will receive shares in the subsequent offering, often at a discount to the price that other investors pay in that offering. The parties can also negotiate a cap on the valuation used in connection with the SAFE, and this may provide additional protection to the investor.

The beauty of the SAFE concept (from the company’s standpoint) is that it Continue Reading SAFEs and KISSes – Alternative investment vehicles can help early stage companies get financed

As we approach the end of the 2015 peak proxy season, the annual parade of articles and studies of executive compensation has begun. To no one’s surprise (at least not mine), the numbers keep going up, and some investors and media types are looking for someone to blame.   Companies and their boards or compensation committees are obvious targets (in some cases, quite justifiably), and some have criticized investors themselves, who continue to overwhelmingly support say-on-pay proposals whether or not their support seems warranted.

If you accept that one symptom of insanity is to repeat the same behaviors over and over again while expecting different results, then it appears we’re in the midst of an epidemic of compensation craziness. Why did anyone seriously think that say-on-pay votes would cause executive compensation to decrease? (Parenthetically, there are people who think that disclosure of CEO-to-median employee pay ratios will lead to a reduction in executive pay. Talk about crazy.) I learned a long time ago – from the mouth of Pearl Meyer herself – that every attempt to rein in executive pay by legislation, regulation or disclosure (i.e., shame) has failed. Why did anyone think this would be different? In other words, limiting executive compensation is like what Mark Twain said (or not) about the weather – everybody talks about it, but nobody does anything about it. At least nothing that works.

Well, maybe not. It seems that Dan Price, the CEO of a company called Gravity Payments in Seattle, who’s been making over “a million-dollar salary,” decided this year that he would do something about it. Specifically, he cut his compensation and decided that everyone in his company would make at least $75,000 per year. You’d think that he’d be given laurel wreaths or maybe a ticker-tape parade, at least in some circles of compensation-land, but you’d be wrong. There have been articles (i.e., screeds) written by some in the industry that he’s going about it all wrong, that it’s not a solution that can be applied on a broad base, and so on. He’s even been referred to as crazy.

Continue Reading Crazy is as crazy does – compensation run amok?

Director fiduciary dutiesA recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and those advising them on compensation-related matters.

In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.

Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).

The defendants argued that Continue Reading Chancery Court Holds Board to Heightened Fiduciary Duty Standard in Connection with Equity Awards