win in-house counsel day melbourne · win in-house counsel day, melbourne 18 march 2016 5 ......
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WIN In-House Counsel Day Melbourne Wednesday 16 March 2016
PREPARING YOUR BOARD FOR WINNING FROM
THE THREAT AND OPPORTUNITY OF NEW
TECHNOLOGIES
Joel Cox
David Hallam
TECHNOLOGY IS IN FOCUS FOR
GOOD REASON….
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THE US HAS EXPERIENCED THE
BOOM…
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US VC INVESTMENT AT 2 X PRE-RECESSION IN 2015
Source: PitchBook 2015 Annual US Venture Industry Report and Upfront Ventures 2016 Review
STRONG ANGEL, SEED AND LATER ROUND GROWTH
THE US HAS EXPERIENCED THE
BOOM…
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Source: PitchBook 2015 Annual US Venture Industry Report and Upfront Ventures 2016 Review
SIGNIFICANT PICK UP IN AUSTRALIAN TECH AND VC
ACTIVITY…BUT THE SECTOR IS SMALL
FY2016 to see circa 2 x capital raising by Australian VC funds
compared to FY2015
Significant increase in tech IPOs on ASX
VC exits in FY2016 likely to be highest for many years
Tech M&A experienced significant growth in CY2015
Global - $422.5B compared to $224.1B
Asia Pac - $95.36B compared to $49.3B
AUSTRALIAN INVESTMENT IN TECH
HAS POSITIVE MOMENTUM…
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Source: AVCAL Yearbook FY2015, Merger Market 2015 Report and DLA Piper analysis
CORPORATE AND MULTI-NATIONAL ACTIVITY IN TECH IS
STRONG IN AUSTRALIA
AUSTRALIAN INVESTMENT IN TECH
HAS POSITIVE MOMENTUM…
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AND THE INNOVATION STATEMENT
SHOULD MOTIVATE MORE…
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"Innovation is about new and existing businesses creating new
products, processes and business models. It is also about creating a
culture that backs good ideas and learns from taking risks and making
mistakes."
OUR RECOMMENDATIONS….
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Assist key persons to ask the right questions about tech
Collaborate
Understand venture capital
Understand corporate venture capital
Skill more legal members in IP procurement
Strengthen IT governance
Consider how the legal, finance, HR and strategic functions can
promote (rather than frustrate) innovation
Understand emerging innovation strategies
18 March 2016 WIN In-House Counsel Day, Melbourne
ASSIST KEY PEOPLE TO ASK THE
RIGHT QUESTIONS…
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WHAT ARE THE OPPORTUNITIES AND THREATS FROM
TECHNOLOGY?
Who is responsible for technology?
How is technology creating emerging competitors and changing the
strategies of our direct competitors? Are we prepared for these
changes?
What is the lead time to develop emerging technology and how quickly
can we realistically adopt it?
How can technology equip us to enter new markets?
How should technology and innovation influence our HR, legal and
finance function?
What are our key IT risks to our day to day operations and are we
comfortable with them?
How are new technologies increasing customer expectations?
18 March 2016 WIN In-House Counsel Day, Melbourne
BUILD RELATIONSHIPS AND
STRATEGIES TO COLLABORATE….
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CONSIDER VENTURE CAPITAL
ESSENTIALS….
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VENTURE CAPITAL 101
Average lifecycle of a VC backed tech company is 8-12 years
Risk is mitigated by VC through a "de-risked" business model,
liquidation preference and portfolio approach
Routine capital raising journey – pre-seed, seed, seed-AA, series A,
series B….IPO/exit
VC funds back founders and a particular business model
VC funds have a detailed investment thesis that they develop over
many years
Fixed costs and a scalable business model are a key focus
18 March 2016 WIN In-House Counsel Day, Melbourne
SPECIFIC VC INVESTMENT TERMS
OFTEN DO TWO THINGS…
They limit risk for an investor if plans do not work
out…while backing management to innovate
Liquidation preferences – participating and non-participating
Down round protection – a ratchet or weighted average anti-dilution
protection
Limited negative control rights
Drag right and buy out participation
Founder vesting conditions
ESOP – 10-15%
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AND VC FUNDS HAVE A WELL
DEFINED SHOPPING LIST…
Large addressable market
Big need you can fill
No competition
A natural monopoly is important – network effects, patent etc
Unfair advantage / Disruptive Technology
IP is often the “secret sauce”
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AND VC FUNDS HAVE A WELL
DEFINED SHOPPING LIST…
Annuity revenue – which they can help to "hockey stick"
A fit with an investment, sector, pricing/customer acquisition and product thesis
The right team
3 founders
People who have done it before are a safer bet
Pop: capacity for an exit at a high multiple of initial investment – at least 10 x
A sense of urgency and an appetite for risk
CORPORATE VENTURE ACTIVITY IS STRONG
INTERNATIONALLY
THAT CAN BE ADOPTED FOR
CORPORATE VENTURE CAPITAL…
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1.501
2015
29.4% CAGR
2011
Industrial
7.8% Consumer
7.3%
IT 14.6%
25.4% Financial
14.7% Media
Services
4.2%
8.7%
11.5% Health
Telecoms
Breakdown by corporate industry vertical
Transport
Energy 3.0%
2.7%
# of active CVC units
536
Source: GCV Analytics
AND CORPORATE VENTURE IS MORE
THAN JUST INVESTMENT…
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Innovation M&A
Corporate Venture
Capital
Incubation
Commercial Piloting
Innovation Center of
Excellence
Innovation Partnering
Access to new markets
and revenue
Corporate Innovation
M&A
Corporate Venturing
Strategic Alliances
JV and Licensing
R&D
Inte
gra
ted
In
no
va
tio
n
AND INVOLVES EMERGING
INNOVATION STRATEGIES….
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Captive startups
A "build and solicit" strategy
Startups controlled by a corporate to achieve innovation in a silo
Often designed to pursue a new strategy, take opportunity of new
technologies or to benefit from a competitive gap
Repeat entrepreneurs are usually important and they require
equity
Fast follows
Innovation M&A
Acqui-Hires
Proprietary IP acquisition, SaaS and licensing
Joint ventures
18 March 2016 WIN In-House Counsel Day, Melbourne
EMERGING INNOVATION
STRATEGIES….
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Emerging IP procurement practices
SaaS, network effects and fintech
Australia continues to be a high priority market for US tech multi-
nationals, creating great partnership opportunities
OnDeck Capital, HomeAway, Pandora, Uber and WeWork all
selected Australia as a key priority recently
Size of market is appealing for sandbox or beach head
strategies
18 March 2016 WIN In-House Counsel Day, Melbourne
FROM A RISK PERSPECTIVE,
STRENGTHEN IT GOVERNANCE…
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Ensure your organisation understands key IT risks
Understand how to measure risks, contingency plans and who is
responsible for them
Cyber attacks
IT system failure
Vendor failure
Technical failure
API and third party failure
Regulatory non-compliance
Consider insurance and business interruption implications
18 March 2016 WIN In-House Counsel Day, Melbourne
AND ASSIST TO PROMOTE
INNOVATION….
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Ask how can the legal function better promote innovation?
Re-consider your approach to regulatory compliance with innovation
in mind
Many fast growth tech companies use business models that
require a re-assessment of the regulatory regime – i.e. peer to
peer lending and many other fintech models
Emerging technologies require creative legal thinking
Internet of things, bitcoin and blockchain, driverless and connected
cars and artificial intelligence all have regulatory hurdles to be
overcome
18 March 2016 WIN In-House Counsel Day, Melbourne
AND ASSIST TO PROMOTE
INNOVATION….
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Understand what is legal best practice for emerging technology
Fintech – legal teams needs to approve new ways of delivering
financial services
Block chain – requires a willingness to share information in the
public arena
Network effects – legal teams need to assist to foster natural
monopolies built by network effects
SaaS – customary contracting terms to promote annuity revenue
Data marketplace and analytic models – sharing of de-identified
information
Internet of things, artificial intelligence and robotics – require new
terms for IP procurement and contracting
18 March 2016 WIN In-House Counsel Day, Melbourne
AND ASSIST TO PROMOTE
INNOVATION….
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Employment and R&D practices are central to innovation
Flexible working arrangements
Innovative ways of people retention are becoming common place
R&D partnerships
ESOP grants – VC funds insist on a 10-15% allocation of share
capital
Time based vesting is standard
Startup concessions can be advantageous if you qualify
18 March 2016 WIN In-House Counsel Day, Melbourne
KEY INNOVATION STATEMENT
INITIATIVES
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Tax breaks for early stage investors in start-ups
20 per cent non-refundable tax offset on investment to be capped at
$200,000 per investor, per year
e.g. $200,000 investment x 20% = $40,000 offset. Therefore tax liability for
the year is reduced by $40,000.
10 year capital gains tax exemption will also be available to investors who
hold their investments for at least three years
Eligible startups must:
be an innovation company (subject to current consultation)
be incorporated during the last three income tax years
not listed on any stock exchange and have expenditure of less than $1
million and income of less than $200,000 for the previous income tax year
18 March 2016 WIN In-House Counsel Day, Melbourne
KEY INNOVATION STATEMENT
INITIATIVES
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Revised ESVCLP rules tax offset for investing
Early stage venture capital limited partnerships provide for AU tax
free investment in companies with <$50m in assets and for carry
to be taxed on capital account
Further ESOP reform
A start-up can defer all tax and put ESOP options on capital
account if the strike price is market value
Other tax measures
Increased access to company losses
Self assessment on intangibles
18 March 2016 WIN In-House Counsel Day, Melbourne
CROWD FUNDING REFORM
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Crowd funding to be legislated for Australian public companies with a
turnover and gross assets of less than $5 million
Eligible companies can raise up to $5 million
Individuals can contribute up to $10,000 per company per year
through crowd funding
Legislation awaiting royal assent and regulations pending
18 March 2016 WIN In-House Counsel Day, Melbourne
DLA PIPER RESOURCES –
EMERGING TECH
Leading expertise Internet of Things
Data Centres
Cyber Security
Patent Wars
Big Data
IT Litigation
Emerging tech resources IT Contract Health check
Global Mobility
Technology Start-up Pack
IP Rights in Data
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DLA PIPER RESOURCES –
SUPPORTING STARTUPS
An Introduction to DLA Piper's Emerging Growth and Venture Capital Practice
OUR DISRUPTION AND INNOVATION
GROUP
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Bringing our Silicon Valley heritage to the world
A group dedicated to fast growth technologies and to the
transactions and legal support required to maximise returns
from them
WE ADVISE ACROSS ALL STAGES OF
THE TECH LIFECYCLE
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Capital Raising • Series A and up
(some seed rounds)
• Convertible notes
• IPOs (ASX and international)
• We can intro US VC funds
Tech M&A • Buy and sell side
• Acqui-hires, bolt-ons and global beachheads
• Strong US tech network can assist to find buyers
IP and Global Growth • IPR Rights
• SaaS Terms
• Global growth
• ESOP adoption
• Board governance
WE ADVISE INVESTORS AND
FUNDS ON ALL LEGAL ASPECTS
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Fund set up • Fund
documentation
• All tax aspects
• Marketing
• Management terms
Investment process • Template
investment documents
• Streamlined due diligence
Exit Transactions • Dual Track
• US and ASX IPOs
• Further VC capital raising
REPRESENTATIVE VENTURE
FIRM CLIENTS
38 An Introduction to DLA Piper's Emerging Growth and Venture Capital Practice