Corporate Venture Capital Essentials

Insights on venture capital (VC) investing by corporations

October 20, 2015

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TABLE OF CONTENTS• Panel• Why Establish a Corporate VC Unit?• Challenges in Establishing a Corporate VC Unit• How Does a Corporate VC Attract Potential Companies?• Current Market Practice, Terms and Conditions For VC Transactions• Unique Rights a Corporate VC Unit Requests (Requires)• What is Expected From a Corporate VC Unit After the Closing?• Corporate VC Unit Timeline For Exit/Liquidity• How Does a Corporate VC Unit Measure Success?• Ethical Issues to Consider• Sample Term Sheet

PANEL:• Ziv Glickman, Senior Legal Counsel, SanDisk

Corporation• Kate Merrill, Deputy General Counsel,

Intel Corporation• Gregory Mulligan, General Counsel, Evonik

Corporation • Todd Finger (moderator), Partner, McDermott Will &

Emery LLP

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WHY ESTABLISH A CORPORATE VC UNIT?• To partner with potential acquisition candidates• Seeking a commercial advantage• Return on investment (ROI)• Accessing new technology, patents or know-how• Accessing and analyzing market data and trends• Promoting and maintaining a reputation as a leader

of innovation • Preventing competitors from obtaining a business or

technological advantage4

CHALLENGES IN ESTABLISHING A CORPORATE VC UNIT • Establishing a “vision”• Getting internal “buy-in”, including from

C-level personnel• Hiring/finding internally the proper personnel• Establishing a large enough “fund” to do multiple

transactions (with sufficient reserves for follow-on investments)

• Getting transactional support from within the corporation – e.g., diligence, expertise, etc.

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CHALLENGES IN ESTABLISHING A CORPORATE VC UNIT (cont’d)• Compensating the corporate VC unit team

competitively• Ensuring a corporate VC unit will enhance the

corporation’s reputation• Familiarizing corporation with the industry, issuers,

the management/ technology team(s), the identity and strategy of competing investors, the competition, etc.

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HOW DOES A CORPORATE VC ATTRACT POTENTIAL COMPANIES• How do you position yourself, and your corporation?• Will you co-invest with other investors? • What are the basic minimum rights that a corporate

VC must get - i.e. are there any deal breakers?• Is entering into a commercial agreement a condition

precedent to a closing (which could slow down a deal, and increase transaction expenses)?

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CURRENT MARKET PRACTICE, TERMS AND CONDITIONS FOR VC TRANSACTIONS • Preferred Stock: senior vs. pari passu; participation

rights, etc. • Dividend: accruing dividend vs. if and when declared

(which they rarely are)• Anti-Dilution Rights: weighted average• Redemption Rights: often have it, rarely exercised• Protective Provisions: how extensive are the

protective provisions, and do they run to all of the preferred stock, or specific series of preferred stock

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CURRENT MARKET PRACTICE, TERMS AND CONDITIONS FOR VC TRANSACTIONS (cont’d) • Preemptive Rights: subject to customary

exceptions• First Offer and Co-Sale Rights: subject to

customary exceptions• Bring-Along Right: who can exercise the bring-

along, and what protections, if any, are there for shareholders

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CURRENT MARKET PRACTICE, TERMS AND CONDITIONS FOR VC TRANSACTIONS (cont’d) • Information Rights: annual and quarterly, but

sometimes monthly; right to see budget before finalized

• Board/Observer Rights: director (with fiduciary duties) or observer (who is your director/observer?)

• Registration Rights: can holders of preferred cause the issuer to file an IPO?

• Expense Reimbursement: typical, and most often subject to a cap

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CURRENT MARKET PRACTICE, TERMS AND CONDITIONS FOR VC TRANSACTIONS (cont’d) • Other Types of Securities: convertible debt,

warrants, etc.

Consider using the form National Venture Capital Association (NVCA) documents to save time and money when investing in an early stage company – Securities Purchase Agreement, Certificate of Incorporation, Right of First Refusal & Co-Sale Agreement, Voting Agreement and Investor Rights Agreement

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UNIQUE RIGHTS A CORPORATE VC UNIT REQUEST (REQUIRES)? • “Right of First Offer” (or similar right) for an

acquisition transaction• “Right of First Offer” (or similar right) for a

commercial transaction• Contemporaneous license agreement• Ability to exit investment without complying with

transfer restrictions if it later presents legal, regulatory or reputational issues

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UNIQUE RIGHTS A CORPORATE VC UNIT REQUEST (REQUIRES) (cont’d) • Rights to receive data or information outside of

customary information rights• Protection against later pay-to-play (P2P) rounds;

corporate VC units often do not have the same reserves as traditional VC firms

• Rights to provide future financing to the issuer, to the exclusion of other potential financiers (such as competitors)

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WHAT IS EXPECTED FROM A CORPORATE VC UNIT AFTER THE CLOSING?• The expected role is more than a mere financier• Ability to guide and advise the issuer on relevant

business issues, based on the corporation’s experience and knowledge of the market

• Joint development agreement (JDA), purchase or supply agreement, marketing and sales agreement, etc.

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WHAT IS EXPECTED FROM A CORPORATE VC UNIT AFTER THE CLOSING? (cont’d)• Ability to open doors and make introductions to

potential partners and clients• Introductions to potential clients• Facilitate the testing of their technology• Market check

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CORPORATE VC UNIT TIMELINE FOR EXIT/LIQUIDITY• Strategic transactions, timeline may be dictated by

internal reasons• For a pure investment (focused on ROI), timeline may

be three to five years

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HOW DOES A CORPORATE VC UNIT MEASURE SUCCESS?• ROI• Access to new technology and personnel• Acquisitions or commercial transactions

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ETHICAL ISSUES TO CONSIDER• Information sharing within the corporation• Corporate VC unit directors duties and obligations if

issuer enters into commercial relationship with the corporation, or a competitor

• Issues that arise when the issuer raises money from a competitor or is collaborating with a competitor

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Sample Term Sheet