Private Companies and Startup Governance: with Evan Epstein, Heidi Roizen and Dan Siciliano.

Nov 7, 2023

Guest

Dan Siciliano

Guest

Evan Epstein

Guest

Heidi Roizen

Guests include Evan Epstein, Heidi Roizen, and Dan Siciliano. They discuss topics such as the role of independent directors in venture-backed companies, fiduciary duties, conflicts of interest, and the negative impact of structured deals. They also emphasize the importance of good governance, shareholder protection, and understanding financial concepts in private company boards.

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Episode notes

Introduction

00:00 • 1min

Introduction and Panelist Biographies

01:27 • 4min

The Role of Independent Directors in Private Companies

05:05 • 24min

Negotiation Process and Representation of Common Shares in a Startup

29:01 • 11min

Exploring a Case of VC Breaching Duty of Loyalty and the Risks of Inside-Led Rounds

40:04 • 5min

Importance of Diligence and Understanding in Private Company Boards

44:40 • 12min

Resigning from the Board and Protecting Shareholders

57:00 • 2min

Importance of Good Governance and Structured Deals in Private Companies

58:39 • 4min

0:00 -- Intro.

1:27 -- About this podcast's sponsor: The American College of Governance Counsel.

2:23 -- Intro of Webinar (and speakers) by Nancy Easterbrook, Executive Director of SVDX.

5:33 -- Start of webinar by Dan Siciliano, Chair of SVDX.

6:40 -- Some differences between private (VC-backed) and public boards.

9:23 -- The role of independent directors in venture-backed companies.

14:00 -- Specific issues in VC industry: preferred vs common shares and impact on director fiduciary duties and dual-fiduciary duties. The Trados case (2013).

18:14 -- An edge-case proposed by Heidi Roizen: voting as a director vs voting as a shareholder. The "sanctity of the preference stack" vs management carve-out.

23:44 -- How "bad" directors can negatively impact companies and the proper use of special independent committees to "cleanse transactions." The role company counsel. Funding managing incentive plans (MIPs).

29:39 -- Two lessons for independent directors from Heidi Roizen: 1) "avoid messing with waterfall distributions" and 2) run a thorough process.

33:52 -- Important take-away from the Trados case: fiduciary duties are owed to the common stockholders.

40:00 -- The Basho case (2018), where a VC investor was ordered to pay ~$20m in damages for using contractual consent rights granted to it as a preferred shareholder together with “hardball” negotiating tactics to force the company to the brink of insolvency and leave it with no choice but to accept “oppressive” financing terms. Inside rounds vs outside rounds.

42:27 -- Other thoughts to encourage independent directors in venture-backed companies from Heidi Roizen. "You have to understand the payouts." "As a VC: lead, follow or get out of the way." "We can either be the crusher, or the crushee, but either way something is going to get crashed here." "Sometimes (...) the best thing you can do is say, look, I'll get out of the way.
You guys do what you want. We're in the risk business (...) almost half of our deals don't return the capital we put in. And so to be assholes about stuff is a bad idea. You may win the battle, but lose the war, right? You may, you know, twist somebody's arm and get your couple million back, but no entrepreneur is going to want to work with you anymore."

49:09 -- On director education for venture-backed companies. New program to launch from UC Law SF and Cooley in San Francisco in March 2024! *For more details: contact Evan Epstein at epsteinevan@uclawsf.edu.

51:03 -- Why there are so few independent directors in venture-backed companies? Heidi Roizen: "I think they're undervalued by both investors and entrepreneurs." On board education: Heidi recommends Brad Feld's books, including Venture Deals and Startup Boards. Book mentioned by Evan: Founder vs Investor (by Zalman and Neumann).

56:03 -- Heidi's recommendation for independent directors of companies running out of cash: "If the company you're on the board of has only a year or less of runway, you already should be speaking up. If your company has nine months or less of runway, you should already be beginning a process to be sold. And if your company has four months or less of runway, I would resign from that board as an independent. I would speak early, speak often, and if nobody's paying attention to you, I would actually get off that board." "[A]ll the problems happen when you have bad process and when you run out of money."

59:06 -- The enhanced role of the board in this downmarket. Heidi: "Structured deals are board for startups."

You can follow Evan on social media at:

Twitter: @evanepstein

LinkedIn: https://www.linkedin.com/in/epsteinevan/

Substack: https://evanepstein.substack.com/

You can follow Heidi on social media at:

Twitter: @HeidiRoizen

LinkedIn: https://www.linkedin.com/in/heidiroizen/

The Startup Solution: https://threshold.vc/podcast

Threshold VC: https://threshold.vc/

You can follow SVDX on social media at:

Twitter: @svdx1