This edition of “Ask the Expert” is brought to you by Orrick. We asked the FFA community what questions they had for Laura Rose Bloxham, Senior Associate and Founding member of Orrick’s technology companies practice in the PNW. Read on for her insights.
Orrick is a tech-focused, full-service law firm passionate about entrepreneurship and guiding the success of early ventures. We provide advice on tactical approaches to companies and investors, from incubation to strategic exit and future growth opportunities. Leveraging our global resources, as well as deep-rooted relationships in Silicon Valley, we provide critical insight into this rapidly evolving and increasingly competitive marketplace.
Q: What are some of the most common legal blindspots you see founders encountering during this crisis?
One common legal blindspot we have seen is founders and executive teams neglecting to loop in their existing stakeholders as they try to move quickly. Every business needs to be agile in responding to rapidly changing global circumstances, but this cannot be at the expense of good corporate governance. In addition to satisfying their fiduciary duties, the Board and the company’s existing investors can be a resource during this time, and should always be involved in strategic decisions regarding the business, capitalization and the like. It’s also important to keep clear records of the information that is sent to the Board, and the discussions at the Board level, and make sure they are up to speed on the current state of the business so that they can make informed decisions.
Takeaway: Engage your board and existing investors early and often. Make sure the Board understands what is happening with the business and that you have a clear record of keeping the Board engaged and informed.
Another potential blindspot is how operations are handled under the stay-at-home orders. There are numerous new state and city ordinances in place in response to the crisis, some of which are changing on a weekly basis, in addition to the state and federal laws that generally govern employee furloughs, reductions in force, leave of absence and the like. Founders have been under pressure to make rapid decisions about their workforce and need to remember to analyze the legal implications of these decisions in addition to the financial implications. We have a wealth of resources on this topic available on our Covid-19 Resource Center, and founders should reach out to their HR advisors and legal counsel regarding specific situations.
Takeaway: Follow local, state and federal guidance. Make sure your HR team has the resources they need to set informed policies, develop an action plan, and execute on those action items.
Q: From your perspective, what risks are founders unknowingly taking or exposing themselves to?
We are seeing enhanced risks in a couple of areas that founders may not be focused on right now. One of these is cyber-security. Many employees are working remotely and company network systems and support are under increased strain. In addition, phishing attempts are on the rise as threat actors take advantage of this moment of crisis. It is easier for employees to fall victim to email scams while caught up in stress, fear and panic.
Takeaway: Ensure your information security teams are vigilant. Implement an incident response plan now so it is in place when needed.
As founders navigate supply chain disruptions, it is also important to be aware of the impact that the crisis may have on their customer and supplier contracts. We have had several clients ask whether Covid-19 related disruptions constitute force majeure that might excuse performance under contracts. There is no bright line answer to this question – force majeure clauses can vary widely by industry and among individual contracts. In some cases, if there is no contractual force majeure remedy, there may relief under common law. We have offered a general framework for analysis on the Resource Center I mentioned above, and answers to several related questions such as how to handle a distressed customer or supplier, and what legal protections a company may have if they are unable to perform under a contract.
Takeaway: Read each of your mission critical contracts to better understand your potential obligations and remedies under the specific contract. Consult legal counsel to discuss any common law remedies that may be available.
Q: What should founders always seek legal support for (i.e. avoid trying to do on their own)?
The number one item on my list is never make any proposed changes to company capitalization without first seeking legal support. Examples of changes to company capitalization include some not so obvious things such as employee equity issuances, commercial warrants, accelerating vesting for terminated employees, etc. Some founders will loop in legal counsel when raising money from investors, but try to manage “day-to-day” equity transactions in between financings on their own. This can get very expensive in the long run because these types of actions require specific procedures under applicable corporate law. Often if issuances are not done properly, the company is not able to go back and issue the equity grants at the prior price without significant adverse tax impact; and occasionally lengthy and expensive ratifications under the existing corporate documents are required.
Takeaway: Any contemplated change to the company’s capitalization should be done with the input of your counsel. In addition to employment laws and regulations, remember that rapid hiring and firing decisions made in the face of changing circumstances often implicate capitalization changes.
Q: What should founders be thinking about as next steps / looking to the future?
The return to work raises a lot of questions for founders right now: when and how can employees get back to work? How can we create a safe workplace for employees? What policies and procedures should we put in place? What legal risks are we facing upon return to work? We are recommending that companies appoint a Return-to-Work Program Manager and task force, dedicated to managing this process, understanding the risks and executing on a strategy that makes sense for the company. Loop in your legal counsel to advise on the requirements specific to your office locations and help the company understand the big picture risks in developing a return-to-work plan. Remember that some employees may have individualized needs that implicate disability, discrimination and privacy laws. These should be handled delicately and discretely on a case-by-case basis.
Takeaway: There are numerous business, safety and legal concerns to be considered as we look towards returning to business as usual. Consult with your advisors to develop a thoughtful plan, and remember that one size does not fit all.
Laura is a founding member of Orrick’s technology companies practice in the Pacific Northwest. She is passionate about working with founders to grow their business at every stage. She serves as a trusted advisor to her clients in multiple capacities: providing strategic advice in the boardroom, designing and executing financing strategies, negotiating complex transactions from venture financing to successful exits, and supporting day-to-day legal needs of executive teams.