SPEAKER_00: all right with me again becky degraw from wilson sassini becky and i have been through many legal adventures some of them were a lot of elbows being thrown around becky and i down there in the paint pick and roll trying to defend ourselves from craziness other times it's just we're shooting three-pointers everything's going in sometimes you lose sometimes you win uh but uh you always want to have a great legal coach on your team and that's that's becky for me and my team thank you for all the late nights and weekends when we have to get on crazy phone calls especially the last couple years it's been crazy 2022 bonkers 2023 less bonkers and it's kind of um a high and low right now

SPEAKER_08: seeing so many great young startups uh at reasonable valuations taking their time and being thoughtful having reasonable expectations evaluations and deals getting done green shoots everywhere for me as an early stage investor but oh lord my late stage portfolio is uh it's it's literally like i go from tending this beautiful garden becky and then i now i'm in like a war zone and bombs are dropping

SPEAKER_10: everywhere around me pick the day and you're not alone i'm not alone in this what's what's life been

SPEAKER_00: like for you these last six months when all of a sudden ai startups and everybody can't you know google facebook twitter everybody's laying off and we know what happens when that happens three or four people start sitting around a cafe and say hey maybe we should start a company since it's so painful to work at some of these big companies and they're not hiring anyway and now we have all these great

SPEAKER_12: new startups the process has renewed itself and we're right in the thick of it yeah the cycle begins again

SPEAKER_15: right um but yeah i think that's exactly right you know we're seeing a lot of activity in that seed

SPEAKER_17: and age stay stage where you've got really experienced um uh talent that would typically be at perhaps one of the big tech companies and they're not and they're deciding to do their own thing now and that's always been the case but i think it's been a little bit more of a forcing function uh of getting kicked out of the nest maybe a little earlier than what they thought they were going to to to do that and you know i mean it's it's there's a lot of doom and gloom out there like if you read you know any of the the blogs and look at the stats of oh it's down it's down it's down

SPEAKER_21: it is absolutely down as you said in your later stage portfolio don't get me wrong the deals aren't really happening the valuations are down lots lots of doom and gloom on that side of the equation

SPEAKER_22: but on the seed side it's actually still really really hot and especially especially yeah i mean that's kind of its own own bucket we'll just put that by itself we'll put it by itself call it a mini bubble

SPEAKER_25: frothy maybe frothy frothy i think that's a good one cappuccino yeah um but on the the seed side you

SPEAKER_28: know like pre-money valuations are actually up like if you look at the data like compare and that's that's like even compared to what i call the frenzy right the friend the the funding frenzy that we had like

SPEAKER_17: that really began in like the latter part of 2020 and certainly rolled through all the 2021 and a little bit of early 2022 things were crazy things like if you if you look at quarter of a quarter year over year numbers and you're looking at okay how does 2023 stack up against 2021 yes we're going

SPEAKER_28: to be down we're going to be down like crazy because that was such an outlier in terms of where the

SPEAKER_00: numbers were but some of those late stage correct were um almost like ipos i mean so there's there's a lot of big numbers in there when you see those charts you're like oh my god it's down so much the number of deals is not going to be down as much as the dollar amount per deal so you might not have some 300 million dollar or 600 million dollar investment happening in some late stage company that everybody thinks is going public next year yeah yeah that's definitely true on the later stage

SPEAKER_35: stuff on the on the seat and the a you know i mean like those are those are pretty consistent in

SPEAKER_17: terms of like the dollars being invested in those those companies but but the valuations are holding um you know even compared to that that frenzy they're they're they're kind of holding and when

SPEAKER_34: you compare it certainly to kind of pre-frenzy we're we're up um in that market so that market is

SPEAKER_32: doing you know really really well still and there's a lot of activity there we'll have them pull up a

SPEAKER_40: chart here for a second this is a chart um that just shows the cdl value uh in billions of dollars

SPEAKER_00: um angel deal value um you know sort of stacked on each other and yes if you go back to you know we were just to draw a line q1 of 2023 is going to look you know pretty comparable to where we were in 2018 2017 right if you just show our line straight across and really the abnormal part started in 2020 2021 was really weird 2022 also a little bit weird and we're just normalizing so that slope from the peak yeah it's gone down it might go down again but uh we're seeing great companies and if you were to draw the average line here it probably would go from 2013 at 1 billion just straight to you know like the two and a half 3 billion level so uh per quarter so yeah

SPEAKER_17: and and we we also um we publish what we call our entrepreneurs report you can grab it off from our website but we go through and we kind of look at the quarterly and the annual stuff and do a bunch of comparisons have some charts in there and we try to summarize like the the high level financing trends so if anybody's interested in and that take a look yeah and so when uh in these later stages

SPEAKER_00: you know when you're starting a company you got a nice clean slate everything fresh documents there's no stack of liquidation preferences there's no preference stack of you know somebody who invested

SPEAKER_48: in 2018 19 20 20 21 all none of that's conflicting so that's super easy um but one of the things you do

SPEAKER_00: have to deal with with these later stage and even some of the mid-stage ones is if they're going to do a down round um you know just figuring out how to reprice options and because people might be underwater and so people got their stock options they were given a strike price a price at which they could buy a share of the company as an employee i'm the cfo i'm the head of growth i got a million dollars in shares i got a half million dollars in shares i was pay a dollar for them but now the company's worth less than a dollar so now everything's underwater how does one deal with that mechanically legally tax implications everything yeah and i will say we are seeing

SPEAKER_17: a lot of these right now and it's it's just that right that that scenario that you you mentioned of companies raised at a really really high valuation and even if they haven't done another financing that

SPEAKER_34: was a down round like certainly if you did down if you did a down round your valuation your 409a valuation that's used to price your options is going to come down as well but even some companies that haven't actually gone out and and done the raise are being impacted they have to get these 409 evaluation reports every 12 months and just given the general macroeconomic factors that are out there some of the valuations are dropping and dropping precipitously exactly dropping fairly significantly yeah and so so we are seeing this a lot right now um i will say if you're in the bucket

SPEAKER_28: uh in that category of uh i might need to do this is it's a good time you're not going to get a lot

SPEAKER_00: of pr about it because everybody is doing it so um you have the old air cover um if you i guess stripe went through this i don't know if they're a customer here so i have to be careful here but we saw stripe and some other companies say hey we're worth 100 billion one point now 50 billion we i think it's the mature thing to do because it's good for employees if the employee strike price is too high and they're underwater it's it's not uh it's hard to keep them incentive because the savvy employees the top people in the company have been through this before maybe they worked at google and before that they worked at microsoft or amazon so they understand a 409a the value of these shares they understand the markets changed so who drives this at a company i'm always interested in which party drives this is this hr the board in the ceo or maybe the management team saying hey this doesn't quite seem fair the people who came here at 2018 are in at one penny we're in a dollar we know the 409 says 50 cents like i need to get my options repriced if i'm going to stick around here yep exactly it's

SPEAKER_17: usually the management team that that drives it um and you know a lot of times they're they're interested in in driving it because they also have you know grants that are at the the higher price so you know the first thing would be to get a you know get a fresh 409a valuation report so that you have something from an independent valuation firm that you can say yes this is the value of the company and say okay we have options that are out there priced at a dollar per share this says it's 50 cents

SPEAKER_34: per share what are we going to do about that um what you want to think about in that scenario is like what are the goals that you're trying to accomplish with with a repricing and then from there you can back into all the various decision points that you'd have to make like who gets to participate is it just

SPEAKER_17: current service providers are you going to offer it to former service providers that may still have options that are outstanding is it all employees and consultants or just employees uh what if you have directors and officers that have option you know under price or underwater um options do they get to participate so kind of depending again on what is the goal coming out of out of this so the goal

SPEAKER_00: ostensibly would be to keep talented people at the company and not to sound like a marauder but if you're no longer at the company most people would say that's not our issue they're no longer here they're on their own so if you left the company on your own accord or we laid you off and you're at a dollar should we take the time to do this for you the only reason to do it would be pr or to be a mensch i guess i'm trying to figure that out and so most boards would have some sort of conversation like oh we really care

SPEAKER_08: about everybody's there but we don't have to do this so we're not going to do it i mean that's what i would that's what i've experienced yeah absolutely and it almost always is current service providers

SPEAKER_17: you know whether you pick up the consultants too is a question um as to to who is included there really the only time that boards really stop and pause and say should we offer this to former folks and that's usually in the rift scenario right where we we just let go a lot of people and it was kind of sudden and should we give them a little something extra to maybe help them exercise their

SPEAKER_78: auction grants before they expire and they lose the opportunity to exercise them so and this this is

SPEAKER_00: where fairness comes in um because it's a special circumstance so these aren't people who are fired or left uh they weren't fired for cause they didn't leave for a better opportunity this is in between those two we we did a riff because we're trying to save money as we talked about in a previous episode that one sounds to me like a logical thing to do okay they were priced at a dollar maybe we put them we give them some relief here and then they just get a letter to them that says by the way your options are now repriced or something sign this piece of paper to be repriced

SPEAKER_28: if only it were that easy and this is where it gets more complex okay um so one one of the big

SPEAKER_17: decision points after you figure out who is do the participants have to give anything back in return mm-hmm so are we just going to say your options were a dollar we're going to just reprice them and magically they're now 50 cents per share and that's it no changes anything else or sometimes it's coupled with okay i'm going to give you that but in exchange maybe you take a haircut on some of

SPEAKER_32: the shares that are subject to the option maybe we extend the vesting on some of oh we get to keep

SPEAKER_00: you around a little longer so we'll put these down around a little bit uh but you're going to need to vest them over instead of two more years we're going to put it back up at four so life's a negotiation we're going to reprice this and everybody's best interest but we want a little more commitment

SPEAKER_17: that makes sense yep so a little you know quid pro quo there is i'll give you this you you got to give a little something too if you have that that type of uh structure in place then you will need to get the participants to opt in right you can't unilaterally say i'm going to do this to you i'm giving you a

SPEAKER_34: good term but i'm also taking something ah so they have to opt in so that they would have to opt in in that scenario of like if we are going to say we're going to extend your vesting or we're going to ask you to give back you know some number of shares so they could keep the original deal or take the new

SPEAKER_98: one yep it's kind of that's that's kind of the idea behind it then there's somebody at some cap

SPEAKER_99: table software company or a lawyer with a spreadsheet who has to then maintain a list

SPEAKER_00: of who's on the new deal and who's on the last deal this is mechanically a bit of work for the cfo

SPEAKER_101: and or law firm and and the other piece that goes into this is you probably have more than five or ten

SPEAKER_17: people that are impacted by this if you're talking about these later stage companies right maybe there's 50 100 folks that you know may fall into this category when you are making that offer to them that basically is covered by what we call tender offer rules and anytime you're in tender offer

SPEAKER_34: land it just means we have more disclosures that we have to do to those stockholders and we have

SPEAKER_17: to keep the offer open to those optionees in this case not stockholders but optionees for a period of at least 20 business days so there's more process around it there's like an actual whole formal process that has to be followed with this disclosure and this opt-in they have like an election they have to

SPEAKER_00: have to be informed to make a rational decision which means you have to tell them your revenue maybe how much you're burning the growth rate is that right some amount of data the little bit of

SPEAKER_15: the gray area like certainly if you're a public company it's really clear what you have to do on

SPEAKER_21: the private company side it's less clear as to what you have to provide and that's where you know really understanding the very specifics of where you're at with the business what you're asking them to do may also determine how much you know disclosure is comfortable or not so definitely a little bit of a gray area but that's a whole topic of conversation and something that lawyers will need to prepare and

SPEAKER_34: go through that tender offer process i will say all that said all that said not very many right now in this environment are asking for something in return most are just saying you know what we need to

SPEAKER_32: keep you this is a huge step down we're just going to give you the 50 cents in our example makes sense

SPEAKER_99: life is hard right now people are fried post-covid post-market correction you know it's been a lot of

SPEAKER_08: seesawing i think everybody could use some normalcy and getting a nice little thank you you know somebody's

SPEAKER_00: sending you you know a little ice cream you know in that little frozen container somebody somebody sent me a celebrity sent me some ice cream and uh i was like hassan minaj sent me ice cream after i went to see his show and he sent me this beautiful box of jenny's ice cream i'm like you gave me tickets to

SPEAKER_08: your show but i just always thought like what a classy guy right and this is a classy thing for a board and for the founders to do for their management it's classy it's unexpected it's just a little ice cream it's a nice thank you sending somebody a box of chocolates and just do the right thing in this and so for management teams that want to broach this with their the the way to do this is not go to the

SPEAKER_00: board but to go to your founders the ceo and say and cfo and say hey you know as a group we're underwater yeah we listen to becky uh and jay cal discuss this on this week in startups uh here's the video anyway we could maybe be thoughtful about this process you want to be gentle there because you don't want to come across as being like a union leaders or you know being uh aggressive or aggro

SPEAKER_15: you want to have it feel constructive yeah yeah for sure um and there is no good d goes unpunished

SPEAKER_17: uh that goes along with this too um if the company just gives it away with no consideration received there is a potential corporate waste claim that could be made so there's fiduciary duty con you know

SPEAKER_21: considerations that need to need to happen and you know talk to have the board talk through what are the the justifications and why should we be doing this um even if we we do that where like i'm not asking

SPEAKER_17: for anything from you if folks hold an iso an incentive stock option that only employees would hold if they hold that basically this is cons every pricing of that would be considered a re-grant it's considered a modification so what that means is we basically have to reset the holding the the holding

SPEAKER_34: period for time from time of grant to receive the beneficial tax treatment so there is a little give

SPEAKER_17: there because depending on how long these isos have been outstanding long-term tax treatment versus

SPEAKER_34: short term and just whether they qualify for that better iso treatment upon exit so so complicated

SPEAKER_28: there's a lot of there there really is that's why i was like oh if it's only that easy we just send

SPEAKER_00: you a note yeah i mean and so now the board's got to decide hey as we've talked about in previous episodes hey we got a certain amount of runway we got to do a down round where do we even prioritize this right and and we've got to keep this company up and running and we've got competitors and we've got this ai threat and this is you know what makes our lives so interesting and it's great to just have awesome counsel with you along the rides uh with these riffs just as we wrap up here um has there been just broadly in the industry not talking about your specific customers and clients this is always general just you know me and becky just you know chewing the fat discussing the broader topics we're not talking about any specific companies have the riffs caused blowback um and what have we learned anything about like how to do them as a best practice because i don't think i've ever seen at scale riffs like this at big companies obviously these smaller companies go out of business but this has been

SPEAKER_125: a lot of riffing i must say there have there have been and i think like that air cover is a good

SPEAKER_17: good uh analogy here too you know like when when a company does does a riff and they're kind of the only ones doing it they catch a lot of heat from it like oh my god what's going on over there um we're seeing it very widespread we're seeing multiple rounds of of riffs at very respectable companies um

SPEAKER_28: so so that that is happening i mean it's a it's a difficult area right now i would say one of the most

SPEAKER_17: difficult things is because of covid we have had our workforces remotely distributed employment law and that's including riffs is governed by the state where the employee is located oh my lord so i would say if you're doing a massive riff get an employment lawyer involved you can call me and i will get an

SPEAKER_125: employment lawyer involved that's not my area of expertise but i know enough to know like you you really

SPEAKER_00: need somebody to hold your hand one of the things i've learned from this process was that some startups and mid-sized companies didn't know where their employees were so employees you know they didn't tell employees they could move but then they found out hey you know this place tired all the

SPEAKER_136: time it's like yeah they're on a different time zone or six hours four hours no literally people went

SPEAKER_00: to hawaii people went to you know london or italy and you're like yeah you know you got a background that's blurred or whatever it's one thing but you know you start to see florence behind you're like what time is it over there 11 o'clock at night you're working um and this then leads to employment tax uh jurisdiction issues and and how much you have to give in severance and the process and then also some employees i think were not very thoughtful about this either and they're living in a different country they're not considering their visas their taxes etc so people kind of freelance this a little bit got a little loosey-goosey and it was a technical term in the business yes i would say

SPEAKER_125: that that definitely took place around the employment situation over the last couple of years and still

SPEAKER_17: has having impact now with as most recent topics of riffs um and then this long-term work from home

SPEAKER_00: i mean we all have feelings on it just personally like i do like to be at home with my kids sometimes i do like to be able to go to tahoe and do a little skiing a little extra skiing is always nice but i also i'm going back to an office because i want to be with people a little bit more putting aside our personal preferences as in terms of best practices and then and legal processes what's changed for startup founders is it really about having like a great uh personal employer organization peos or great provider to help you with that on the on the technical sides um or how are law firms dealing with this is this becoming like a practice internally where you got to start up with 20 people and you're like my lord employment agreements have to change because we have people in japan florence you know and hawaii and

SPEAKER_17: you know wherever yeah so your offer letters your employment agreements your ip assignment agreements they're all governed by the state where the individual is located so the california form is different than new york right like new york can have a non-compete in it california cannot otherwise

SPEAKER_21: it's invalidated certain states require certain things to be included or not included so that that was a a pain point for a lot of clients particularly startups of like i have somebody in montana and now i

SPEAKER_17: have to pay my law firm to put together a custom form for one person in montana well but we did we we are always trying to kind of push the envelope a little bit on the innovation side of things we have a platform it's called neuron where we're trying to automate a lot of things and one of the first things that came out on that was in corporations we do like board consents for you know option grants and some other kind of routine uh things but what we launched earlier this year was actually a 50 state employee consultant onboarding process where if you're a client you can go into the neuron platform you can say i want to hire an employee in montana and here's the information you can walk through online it'll tell you ask you the right fields we have all of the templates now and then basically it's not it's not a um basically think of it as a automation with a white glove service like there's a real person that will get that input and say oh there's a red flag here or nope this is all great put it in the form and let's go so we we specifically work to create that to deliver

SPEAKER_28: what folks need to just get people hired and have them on the right forms to not cause problems later

SPEAKER_155: as we wrap here uh how do you uh the firm look at ai a lot of people are are well let's let's take

SPEAKER_00: the firm out of it let's be just generally speaking are attorneys using chat gpt and other ais to um you know are they playing with them right now is anybody using them in practice and when you've you know played around with them are you impressed uh are you in awe are you concerned what what's the what's the general vibes as the kids say these days what's the vibes in the legal

SPEAKER_125: community about ai not replacing lawyers but augmenting lawyers yeah all of the above concerned

SPEAKER_21: oh scary yeah i'm impressed all that um so no we we are and i will say like uh a lot of companies um including uh law firms including us like have put out a ai policy um you cannot give legal advice

SPEAKER_28: based off from chat gpt oh wow you have to remind everybody in your company just just a reminder

SPEAKER_21: that's not what we're paying you not open ai that's uh not what we're allowed to do we still have ethics and uh illegal practice of law matters if you you do that but um but that aside all right like it it is kind of it's fun like we definitely are playing with it so um i recently moved into the role of a co-chair of our emerging companies practice and one of the things that we are focused on is like i was saying like this whole innovation automation and we're looking at all sorts of stuff and we are certainly looking at ai in terms of supplementing things that we can do as well um when i when i play with it myself and we have our uh chief uh innovation officer go through and play with it and kind of come back to the co-chairs um and we have looked at it quite a bit it's it gets you it gets you a much

SPEAKER_17: better answer than google does right there's always going to be the little nuances you know like the the

SPEAKER_28: the high level stuff it's doing pretty good at and it's it's pretty scary like when i compare that to maybe like if i asked my one of my first year associates a question yeah chat gpt is probably

SPEAKER_00: probably got a leg up that makes sense um and ultimately what my thesis is we're going to see a lot more startups that are able to have more efficiency so they'll do more with less a 10 person company will do the work of a 20 person company a 20 person company will do the work of a 40 person company so i think we're just gonna see a lot more startups because there's so many problems to solve what happens in legal is it a lawyer can service more clients and charge less money for things that are de minimis to do that are boring for lawyers i mean you guys are you know you're you're the you're the top lawyer so you're always gonna have the top clients there's always gonna be a lot of nuance for major customers and innovative customers but you know i guess this impacts like maybe the lower end law firms the the the more affordable ones how does it shake out for the industry

SPEAKER_17: do you think i i mean i i think it'll be a good thing you know overall right like there's a lot of stuff that for particularly for startup clients that is very routine but man it's got to be done right like option grants like you mess that up you have bad tax consequences it's not like oh we'll just go back and ratify it now like it's it's real dollars when you mess that type of stuff up so we can but it but it's very simple like once you like if you follow these steps every single time if you get it right we can automate a lot of that and we can kind of put in triggers to make sure the bad thing

SPEAKER_28: the regular the red flags are getting you know uh flagged and processed the right way so i think i think it's a good thing i think i think the way that you said it is right is like there's a lot of things that you don't you don't need to pay my hourly rate for like my hourly rate is to provide hopefully valuable strategic advice about complex transactions i've seen those bills becky but i've had those bills land on my data whoa becky but you want to make sure that we're simple stuff but

SPEAKER_17: you want to make sure the simple stuff is done right too sure which means yes we pass it down to the lowest level that we can but why not automate some of it and that's really where where we're focused on on saving some time because at the end of the day like we only have so much time

SPEAKER_125: and we'd rather be doing the cool more complex stuff too rather than okay you have 20 safes let me go in and type in each one of them and send them out i mean sometimes the work being done by

SPEAKER_00: lawyers is clerical data entry sometimes double checking and then i don't know what percentage of a young lawyer's time that is but it's got to be 20 or 30 wrote something like that i'm guessing

SPEAKER_29: yeah and we're basically trying to squeeze that to where yeah you got to learn how to do it but

SPEAKER_181: once you learn how to do it let let the computers do it they're they're a little bit better with

SPEAKER_182: mistakes i mean i don't know if you i think you caught the tail end of this like i did there was

SPEAKER_00: a typing pool there was a messenger pool in the building did you catch the end of that where people were typing stuff up and there was uh a doc a document a photocopy pool and a document delivery

SPEAKER_28: service in the in the building or no i mean we have we we still have a document processing center that

SPEAKER_181: yeah helps with various things um whether it's deliveries or couriers or or whatnot but it's um

SPEAKER_99: in far less use than it ever used to be i just remember coming in and installing the computers at

SPEAKER_00: like i don't know if it was cahill gordon or sherman sterling somewhere in the 90s when i was installing local area networks and document management systems and they were like see this room where they photocopy

David Friedberg: everything and see this room where they type everything like document management is going to get rid of all this and i was like huh what are you gonna do with all these people like they used to be uh like uh

SPEAKER_08: the mail rooms at some of these places were huge and there was a person who would walk around before

SPEAKER_11: email with inter-office mail there was a thing called inter-office mail did you catch the inter-office

SPEAKER_52: mail you missed it yeah i've always been on email so inter-office mail i'm a little bit older than

David Friedberg: you baggie there was you had you had envelopes and you would write the number of a person's office and

SPEAKER_08: put the document in and then somebody would walk around and pick up inter-office mail you put it outside your office in a little folder and person would bring it to another floor and drop it off for somebody and then you would cross out the person's name and then you write jacal you know room 512 and then you cross it out becky room 617 and that was email before email all right listen that

SPEAKER_29: that sounds like a nice slower pace of life it was it was different yeah you would be like oh let

SPEAKER_08: me run those documents up to you walk up you get a cup of coffee you drop the documents off have a little chit chat everything was yeah it was super slow and charming now everything's the speed of life all right everybody go to thisweekinstartups.com basics very simple to remember this weekinstartups.com basics to see all the basics i do with becky uh over the years so many of them uh we've done together just to help founders we'd love to help founders becky and i both are aligned in that and if

SPEAKER_53: you want a great partner wsgr wilson cincidi great firm my lawyers thanks becky