what’s inside Editor’s Note How do you raise money for your new life-sciences venture when you’ve been turned down time and again? Think big, says Helicos’s Stanley Lapidus (page 6). Huge, even. How do you build the right team for your startup? “It’s common to hire people you know,” says Brightcove’s Jeremy Allaire (page 8). “I didn’t do that.” How quickly do you staff up? “If you strongly believe in your idea,” says JumpTap’s Dan Olschwang (page 11), “I believe in going full speed ahead.” Why would you start yet another company when your success in technology has given you the independent means to indulge your real passion: racecars? Because, says Optaros’s Bob Gett, the lure of the open source model was as irresistible as the open road (page 16). Think big. Be smart. Start strong. 2 risks&rewards Keep going. Those are the mantras When the Money’s Gone Plus: It’s easy to be green; heading fueling growth across an industry that, offshore; due diligence on open software; dealing with data experts agree, is catching a new wave. breaches; Stan Lapidus’s big ideas; careful dealmaking; and the They’re also the mantras behind this skinny on D&Os, M&As, SOX 404 and document retention new magazine—which we hope you’ll find instructive, useful, inspiring and 8 COVER STORY even entertaining. Building the Team How—and whom—to hire (hint: not your friends), what—and how—to pay (hint: stock options have lost some luster). Plus: Weighing the intangibles; casting a wide net; navigating FAS123R Winter/Spring 2006 14 interview A Custom Publication Produced for iRobot’s Helen Greiner and Colin Angle “A key element of Goodwin Procter LLP entrepreneurship is not taking things too seriously, while always by Leverage Media LLC believing you can make it. And if you don’t, you are always Dobbs Ferry, NY employable elsewhere.” Editor: Michael Winkleman 16 TECH4TECH Art Director: Carole Erger-Fass Production Director: Unclogging the Blog Plus: The move Rosemary P. Sullivan toward personalization; Bob Gett’s new ride; Copy Editor: Betty Pellet seven good reads; investing in insecurity; Cover Photo: Chip Simons protecting against consumer class action law- suits; and legal challenges for content providers © copyright 2006 by Goodwin Procter LLP. 20 a look back All rights reserved. The 30-Ton Big Idea Sixty years ago, John Mauchly and J. Presper Eckert led a team that launched the ENIAC—ushering in a brand new era in technology. And then they moved on. This publication may be considered advertising under the ethical rules of certain jurisdictions. risksBY JEFF HEILMAN AND PETER& HAAPANIEMIrewards TREND WATCH: More Greenbacks for Green Energy WHAT TO DO WHEN YOU ARE 69 Cleantech D&O ISSUES: Equity Investments RUNNING OUT OF MONEY 55 Total Equity 49 $425.4 M At a Minimum Capital Invested $368.8 M in Cleantech $311.7 M Seek Counsel 8.1% % of Overall Just being on a company board is Your revenue is dropping, your debt is est course is to act on the least suspi- Equity Capital risky in the Sarbanes-Oxley world rising, and payroll is coming due. You cion of distress, for inattention to the Too often, says Goodwin Procter 6.7% Invested in Cleantech of increased scrutiny, and venture may not know it, but you may have legal obligations of insolvency can bring business law partner Lizette Pérez- 6.1% capital and private equity firms entered the insolvency zone, and shad- severe penalties.” Deisboeck, companies are already in with multiple board seats can be owy, potentially dire times are ahead. the zone before they seek legal coun- Q3 2004 Q2 2005 Q3 2005 especially vulnerable. What to do? Apply Business Judgment sel. “The options for managing insol- SOURCE: CLEANTECH VENTURE MONITOR, THE CLEANTECH VENTURE NETWORK Fortifying traditional compa- Insolvency requires that the fiduciary vency decrease the longer you wait,” ny indemnification, Directors and Recognize You’re In the Zone duties of directors and officers expand she says, “and companies frequently Officers liability (D&O) insurance The first challenge is recognizing that from driving shareholder profits to chase risky salvage operations. The Kyoto Protocol, global warming, the war in Iraq, and concerns about is essential for protecting board you are close to, or already in, the zone. ensuring the best interests of all corpo- “Early involvement of counsel the energy infrastructure in the U.S. are among the drivers bringing hydro- members from personal liability. This is a gray area, says insolvency and rate constituents. That means shifting allows you to design and monitor an gen-powered cars, organic food, fuel cells, energy-efficient skyscrapers business reorganization specialist Gina duties to maximize recovery of credi- informed plan that can protect directors and other clean energy products and services to the mass market. Roger Young companies should not Martin, a partner at Goodwin Procter. tors. “Rigorously apply the business and officers while fulfilling the duties L. Krakoff, a partner at Boston-based technology VC firm Sigma + wait to purchase D&O insur- “Courts apply two tests,” she explains. judgment rule—good faith decision- owed to shareholders and creditors,” Partners, notes that “the Green Revolution and energy conservation will ance but should have some min- “If liabilities exceed assets, you have making—to all corporate moves,” she adds. “Do you indemnify directors attract investment dollars in 2006,” adding that GE, for one, “has invest- imal coverage early on. ‘balance sheet’ insolvency. ‘Cash flow’ advises Martin, “for now, directors and and officers and carry sufficient liability ed in alternative energy sources such as wind power.” In addition, what insolvency means you cannot meet con- officers may face potential personal lia- insurance? Is your minute-keeping and has come to be called Cleantech is experiencing significant investment More venture capital and pri- tinuing financial obligations when due, bility for any action that disfavors the reporting up to date? Will investors on growth in the alternative energy and water purification segments. Also vate equity firms are requiring such as loans or payroll. There is no creditors, which can include loans from the board who are now also creditors be focused on agriculture, manufacturing and transportation, clean technolo- their portfolio companies to standard test, however, and courts or the company, inflated salaries, dividend conflicted? Counsel knows how to assess gy companies pulled in around $56 billion worth of global investment capi- have at least some minimal accountants frequently find insolvency payments to shareholders and failure to the risk factors.” tal last year, according to industry tracker New Energy Finance. Key Q3 coverage at the outset—to be by one test but not the other. The wis- pay taxes or wages.” 2005 statistics from The Cleantech Venture Network’s Cleantech Venture evolved over time—with some Consult with Creditors Monitor clearly show that VCs are banking on a cleaner, greener future, as N O D even offering policies through While funding options such as bridge Cleantech came in sixth overall for total U.S. venture investments in the R A E R their own insurance brokerages. loans or second liens may save the quarter, the fifth in a row showing growth. —J.H. X E L A company, says Martin, writing per- Y B T R There is no formula for how sonal checks is inadvisable, and com- A H much coverage to carry, but the panies should consider the prospect C basic test is how much risk the of restructuring in bankruptcy. board is willing to tolerate. “Once in the zone,” she adds, “the i n Litigation risk and the likeli- emphasis shifts to preserving corpo- 4 Open Source Software 6 Lessons from the Front hood of major transactions are rate assets and optimizing creditor What it really means for you Stan Lapidus on his big ideas among several factors dictating recovery. Consulting with creditors s actual coverage amounts. before making a move such as bank- The SOX Hop Document Retention i ruptcy is often advisable.” Section 404, the new pressure point Minimizing surprises and liabilities d For companies being sold or Overall, says Pérez-Deisboeck, be going under, a multiyear run- realistic. “If negotiating a deal— 5 Offshore Development 7 Anatomy of a Deal e off policy provides continuing which may or may not close—can The ins—and the outs From the terms to the timing protection for directors and potentially return 50 cents on the officers while riding out the dollar, but winding down will return Data and Privacy Mergers & Acquisitions statute of limitations on possi- 20 cents, in many cases, the prudent Into the breach Creating the perfect union T T O ble claims. —J.H. C decision will be, take the 20. Last- S Y O R minute saves are rare.” —J.H. 2 big ideas big ideas 3 risks&rewards WHAT OPEN SOURCE REALLY TAX ISSUES: Charting the Offshore Path MEANS FOR YOU Complying For growing companies, the option of off- “Many providers will set up external dash- shoring software or product development boards that let you see where things stand with SOX 404 holds the promise of low-cost resources and problems that come up.” While open source software continues IP infringement, which can leave a and fast 24-hour work cycles. To make the to spur innovation and save individu- company responsible for defending Startups and public companies most of these relationships, says John Balancing domain expertise and exclusivi- als and companies money and develop- itself against any claims. alike are subject to a complex array Egan, a partner in Goodwin Procter’s ty.