Editor: Would you describe your background and experience in the area of venture capital and private equity?
Reed : I was general counsel at a technology company for about five years before I went to Charles River Ventures, where I spent eight years. Initially, my role at Charles River was focused on representing their portfolio companies, drawing upon my former general counsel experience. Having built the law department at my former technology company from scratch, I was basically doing what I called the "law department in a box" - the portfolio companies we funded all had the same repetitive, fairly commodity-like legal needs at their inception. For several of our portfolio companies I essentially served as their general counsel, including attending board meetings and taking minutes. After the bubble burst, my job at Charles River transitioned into one more focused on doing deals, overseeing investments and raising funds. The sort of "rapid response" team legal services I had performed for the portfolio companies became less important to the portfolio companies since the rush to market was over. I ended up doing more strategic consulting on legal issues to our portfolio companies, rather than run-of-the-mill things, such as when they had some kind of litigation crisis, HR issue or whenever they were involved in a M & A deal.
Editor: Lowenstein is relatively new to the Boston area. What prompted the firm to open a Boston office? And will it be a full-service office in time?
Reed : While I am the sole lawyer in the Boston office at present (we plan to add another in a matter of weeks), the office is a full-service office. So much of legal work these days is "virtual" as in my case. One of the reasons I joined Lowenstein is that I felt it was one of the few firms that has truly managed to transcend geography by setting up a domain expertise, which amounts to a virtual work space, where experts operate in the venture capital space - both on the investor side and the company side. It really doesn't matter much where you reside since as we work on projects, some of my team is in New Jersey and some in New York. In fact, my secretary is in New Jersey.
Editor: Someone I interviewed recently indicated that venture capital companies are shying away from biotech because it takes much longer to realize a return, instead preferring software or media companies. What are you seeing?
Reed : I think that it depends on the individual specialty of the firm. They all have money and are competing in terms of the value of services rendered. My old firm Charles River did not do any life sciences deals. All of our partners at Charles River have fairly deep operating company backgrounds in telecomm, enterprise software, and the like, and hence that's what we invested in. I would not say interest in biotech is diminishing. In coming to Lowenstein I found a platform for broadening my client base beyond the deals done at Charles River, as well as with respect to the kinds of companies I could represent. At Lowenstein we have a very strong life sciences team owing in part to the large number of pharma companies in New Jersey. Several colleagues at the firm have followed my path in going from being in-house to an outside firm. One of them is Mike Lerner, who was general counsel of a very large biotech company where he started out as one of the founders and grew it to a massive size.
Editor: How much of the deal-making do you get involved with in terms of working out the terms of LBOs or venture capital financing?
Reed : We like to get involved at the term sheet stage where we can add a lot of value. Even in the short time I have been with Lowenstein my deal horizon has broadened in seeing so many deals from firms at different stages and different geographies. My firm is very proactive in talking to investors, keeping them educated about how to structure deals so that they can win them in the first instance and make money over the long run.
Editor: What levels of due diligence do you advise your clients to undertake, whether they are buying a start-up or acquiring a going concern on the private equity side?
Reed : I first met Lowenstein on the other side of a deal when their team really caught my attention owing to the pragmatic way in which they addressed the due diligence question. Many firms have standard due diligence checklists and procedures that they apply like a Procrustean bed to any kind of deal, from early-stage venture to LBO, which is fundamentally misguided. Even with venture deals, you need to understand what your client's risk tolerance is, what their exit objective is, how much they want to spend, if there are any particular IP issues, if this a spin-out from a university or a hospital or an unusual source. Then you absolutely need to tailor the diligence efforts to the risk profile of the target. Prior to cranking up the due diligence machine, the attorney needs to hold a conversation with his client in order to get to know the background behind the transaction.
Editor: Do you also represent start-up companies as they present themselves for financing to venture capital firms?
Reed : Absolutely. Our firm is very proactive in acting as a broker between companies looking for money and the investor community because of our very wide and deep relationships in the venture community. My partner Ed Zimmerman and I, in fact, helped a client with a term sheet yesterday - the term sheet represented a very viable deal, but we advised that the client not accept the first offer - do a market check by talking with other potential bidders. By the time midnight arrived we found six or seven other expressions of interest from venture capital firms. We find that when we perform an intermediary introduction, we get the attention of the top-tier firms since we are someone they know and trust.
Editor: Did you help the entrepreneur in putting together the business plan originally?
Reed : My partner Ed Zimmerman did review the initial presentation. With another group of clients I represent who are quite young and doing their first start-up, I found their business plan somewhat nave in presentation although it was a great business idea. I spent a lot of time working with them in refining it. Since they have no money as a start-up, my time is my investment in them until they get funded and then I can represent them. In addition I provided them with a ton of introductions to possible management team members. In a sense I am doing a lot of the things that venture firms do, because I have that expertise and network from Charles River - refine the pitch, help them find investors the way v.c.'s do for their own companies when they are out in the market looking for follow-on funding and introducing them to very credible management team members who will also help them attract money when they have a less experienced management team.
Editor: When drafting documents for a venture capital firm in the first stage of a purchase of a start-up, do the documents generally form the basis for later stage financings or do you have to start afresh with each new stage of financing?
Reed : It is so important to get it right with a set of documents that will form the template for later financings. When I came in-house as the first general counsel at Charles River Ventures, I found myself working on Series B and C deals where I had not been involved in the Series A, and found that the original Series A documents that set the template in many cases had non-trivial bugs and/or ambiguities.With this realization, I developed the NVCA model financing documents. This is a standard set of documents that have been debugged and which can be used in later rounds of the financing for the same company as well as in other deals. Editor: So in fact you have a model tailored for each transaction.
Reed : Yes, that's right. You start out with the same base case, because the basic business terms are essentially the same - a Preferred Stock equity financing. And secondly, a clear set of terms, somewhat rare for legal documents.
Editor: How do you suggest to your venture capital clients that they prepare a portfolio company for an IPO or purchase by a strategic buyer in terms of their corporate structure, audited financials, compliance with SOX, etc.?
Reed : I think it is very important to start thinking at the very first board meeting about exist strategies. I think it should be an agenda item at every board meeting. Is it an IPO or is it a trade sale? Who are the potential buyers? And then at every board meeting, ask: what have we done to increase our appeal to those buyers? what have we done to make those buyers nervous that their competitor is looking at us? have we been to the major trade shows where all our potential buyers go where they can observe us having meetings in the corner with their competitors? All those kinds of positioning things make a difference and they commence on day one of the investment.
Editor: Do you see business opportunities for your clients in the light of the subprime crisis in terms of good companies and their assets that are not able to obtain financing?
Reed : I think there may be opportunities for venture capitalists to buy for relatively little money portfolio companies that still have a fundamentally sound business proposition but have been struggling for years, with the existing investors burned out and not wanting to put in any more money. This offers an opportunity for somebody with vision to re-start it, particularly if what had been lacking is introductions to key customers and the like, introductions that a new VC might have the rolodex to make, and infuse some new management expertise.
Editor: What do you see as the future for both venture capital and private equity?
Reed : I'm fundamentally optimistic. We are very fortunate to be in an industry which is much like tenure track positions at universities. Investors need to take the long-term perspective and be in a transaction for the long haul, which venture capital is legally structured to do - in venture capital a typical horizon for the partnership is 10 years and it's quite common for firms to add an extension term.
A new development for private equity in particular is NASDAQ's Portal, which allows private companies to list unregistered securities on a private bulletin board accessible only to qualified institutional buyers, thereby expanding liquidity options for companies and investors. There are always new vehicles for ownership becoming available in this exciting area.
Published March 1, 2008.
