VC Investing in a Challenging Global Economy – Legal Issues October, 2013 Baltic M&A Conference Riga, Latvia

1. VC Investing in a Challenging Global Economy – Legal Issues October, 2013Baltic M&A ConferenceRiga, Latvia Richard Allan Horning Reed Smith LLP T +1.650.352.0509 M +1.415.412.4479 Skype: Richard_Allan_Horning Email: rhorning@reedsmith.com Web: www.reedsmith.com

2. Our Locations

3. We help the technology startup grow from this

4. to this

5. vcinvestments by region (1995-2013)

6. vcinvestments by region (1995-2006)

7. Consequences of The Bubble • Fewer Venture Funds • Fewer Funded Deals • Fewer LP’s • Less Money from LP’s • Retreat to “Safety?” of Later Rounds • Focus on Low Capital Intensive Businesses • Increase in Corporate VC Investing • Series A Funding Crunch • Near Death of the Tech IPO Market • Still Some Spectacular “Home Run” Successes

8. Consequences of The Bubble

9. Consequences of The Bubble

10. Consequences of The Bubble

11. Consequences of The Bubble

12. Consequences of The Bubble • Rise of Alternative Sources of Funding • Crowd Sourcing • Kickstarter • Super Angels • Product Financing with Royalty • More Convertible Notes at Early Stage • Secondary Market for Stock in Startups • SEC Rule Changes Permitting General Solicitation of Reg D Offerings (JOBS Act) • Shortage of Skilled Programmers

13. Consequences of The BubbleThe Hiring Dilemma

14. VC Considerations What’s New in the Present Environment ? • Team • Opportunity • Scalability • Protectability • “Monopoly” • Exit Plan

15. Legal Structures for access to capital • The “Flip” as a Precondition for Silicon Valley Equity Capital • Usually Has Tax Consequences for Foreign Shareholders Acquiring the DE Stock, But Careful Planning May Minimize the Hit • Local Equity Capital Will Generally be in the Form of Preferred Stock • Local Equity Capital Implies Board Seats and Restrictions on Complete Freedom to Operate Without the Consent of the Investors • Venture Debt Deals, Often Milestone Based, With Warrants and Short Payback Periods: All Assets Pledged • Convertible Notes in the Angel Round Giving Way to VC Style Deal Structures in Many Cases • New Public Solicitation Rules • Crowd Funding • Royalty Based Product Funding

16. Exit Planning From The Start

17. Exit Planning From The Start

18. Exit Planning From The Start

19. Exit Planning From The Start What New ? • Most VC Backed Companies Die (approx. 50%) • Few Companies Go Public (< 1%) • The Rest are M&A Candidates • Purchased for Assets • Purchased for Team • Purchased for Growth

20. Exit Planning From The Start Q3 2012 Exits by VC Backed Companies • IPO 57 • M&A 487 2012 Exits by VC Backed Companies • 49 IPO • 487 M&A

21. Exit Planning From The Start What New ? • Intense Scrutiny of Open Source Code • Intense Scrutiny of Patent Portfolio – Offensive and Defensive • Renegotiation of Contracts Good for a Startup But Not Good for Oracle • Hold Backs Have Become More Complex • Earn Outs Have Become More Complex • MAC Clauses Have Drawn Much Attorney Negotiation Time • Management Carve Outs in the Liquidity Event Qua Management • Golden Parachute Issues Remain

22. Exit Planning From The StartThe Leadership Issue

23. Exit Planning From The Start Corporate Structures • Corporate Tax Planning • Patent Holding Companies • “Double Irish” • Founders with Personal Holding Companies Impact of FACTA Impact of US Multinational Cash Successful Startups from the Bubble are now Buyers

24. Among The Future Imponderables • What happens when borrowing costs rise, and conservative investments have returns significantly higher than the inflation rate? • What is the impact of anti-immigrant feeling and lack of reform? • What is the impact of the high cost of attending the top tech oriented universities in the US? • Is there a “Moore’s Law” on the rate of globalization, and how does increasing globalization impact innovation and entrepreneurship and the willingness of investors to fund local initiatives that must outgrow their home markets?