Four Principles for SME Financing - Additional Revenue Streams via IP Monetization?

I recently had an interesting discussion with some of my entrepreneur clients about financing. This gave me the thought that I could perhaps try to share some ideas for those engaged in early financing rounds. We were discussing a question that was rather much as follows: 

“How much funding should we seek from investors, considering that we have two alternatives: A and B. If we select A (which is a joint project with our customer), we need significantly less capital than with alternative B, and we might be in a very beneficial situation in the subsequent rounds if we are able to construct workable demonstration facility as a customer project. Alternatively, we can opt for alternative B, immediately going for our own business model where we naturally would need a larger investment. So what’s your view?”

Sound familiar? Let me shed light on some key issues to consider. Of course this is not really a question for a lawyer, but we ended up providing a recommendation that entrepreneurs should keep the funding amounts small in the early rounds when the valuations are lower and then scale up the amounts in the later rounds when it is a lot more clear how money can create value and when the valuations will be higher. These very same words were used by Fred Wilson in an excellent post on valuations vs. ownership in more detailed terms, a VC and principal of Union Square Ventures—really worth checking out.

If you choose option A, as this company did, they might still need some funding for their operations and the following points could help you:

M&A activity in Finland is relatively high and this autumn we seem to have increasing movement among the foreign investors, at least in the form of contacts towards our firm, TRUST. However, valuations have traditionally been lower in Finland, which seems to indicate that companies are sold at the development phase earlier than similar companies in, say, Sweden. To some extent, this is due to the lack of funds, problems with First North and inactive bond markets for SMEs unlike in Norway, for example. Opting for VC too early might mean that investors are not competing against each other as there might just be one VC investor. Naturally, this also influences the deal terms and how much control your are able to maintain after the first rounds. 

Even in option A, you would need funding and some issues to be considered:

First, the terms of payment in cleantech and/or mechanical/process technology deals tend to be more front-loaded nowadays — an issue which would generally make customer deals more tempting (don’t be afraid of using this option and negotiating payment milestones carefully using guarantees to provide safety to the customer). 

Second, Finnish companies should be more active in seeking patent and technology licensing arrangements to finance their operations (your foreign competitors use these tools as well — say if the process can be used for coal in addition to other substances and coal is not within your core business, you might consider licensing the coal application to China for example. Feels like making money for nothing, right?).

Third, consider industrial players as investors either from the customer or supplier side. Business angels have shorter investment cycles and they are unlikely to provide further funding or they do not have ample resources at least. Also you need to take into account that industrial players might have different business interests as they are not necessarily making their profit from the exit within the next 5 years. Also consider, e.g., conversion of your suppliers’ deliveries as contributions-in-kind; less need for funding and smaller “financing cap” between the customer payment and time when you have to pay for your supplier. The optimal solution would be to draft customer and supplier agreements back-to-back so that there would not be any financing cap, but this is not always possible in long-term industrial projects.

So to summarize our thesis, “not too much money too early”, “best to have several investors”, “consider alternative business models to support your business”, “consider alternatives for VC investors”. Hopefully this helps!

Cheers,

               Jan

Attorneys at Law TRUST. Ranked Among the Leading Finnish M&A and Financial Law Firms!

This is quite exceptional topic, but it is a quite exceptional day as well! But in any case I had to write a word about this even though someone might consider this as condemned "self-marketing" but let me assure you that the intention is just the opposite. 

The respected IFLR1000, which is an annual guide to the world's leading financial and corporate law firms covering over 120 jurisdictions worldwide, has listed our firm TRUST. among the leading Finnish law firms in M&A and Banking & Finance today!!! 

The aim of IFLR1000 is to provide clients of law firms throughout the world with easy-to-use rankings and profiles of the leading firms in each country organised by practice area, accompanied by analysis of the market trends and business environment.

They base the rankings and analysis on their own extensive independent research, which is conducted by dedicated journalists in offices in New York, London and Hong Kong with a goal to produce the most objective and informative guide possible. 

This is part of our statement:

"Boutique firm Trust is headed by partner Mika Lehtimäki who is supported by partner Jan Lindberg. It was only established in 2011 but has been building a reputation for itself in the past few years and gaining recognition from the market for its work. Its working method is to focus on a small number of clients with more "intensity" and through this the team believes it can achieve the best quality."

I just wish to take this opportunity and thank all our clients and colleagues for their kind words and this only makes us work even harder!!! And of course thanks my friend and magnificent colleague Mika as well for the splendid road so far during the past few years and I'm eagerly waiting all those interesting things that the future will brings in front of us! ;)

Cheers, 

                 Jan

Subconscious Copying, Identical Works and Inspirations - Scope of Copyright Similar to Patent Monopoly?

There is an issue I started thinking about several years ago. It was interesting, so I also wrote a short story while I spent some time at the distinguished Oxford University. As there have been several copyright-related issues on our tables recently at TRUST., I though about writing something on this topic myself as well but, please, bear in mind that the background for this originates from the precedents and literature from the UK and not so much from Finland, where we unfortunately still suffer from a relatively scarce amount of precedents despite our brand new IP court. The point of this article really is that I have always fancied the idea that we could have actually two identical copyright protected works (and by this I mean identical or very similar, of which Led Zeppelin's past actions serve as a good example, as pointed out my good old friend - listen from here) existing in the world while under patents it is at least substantially more difficult. Perhaps one exception is filing applications on the exactly the same date (which I gather might still involve some practical difficulties but I am glad I do not have to be an expert in these patent filing procedures). However, in this online world we are currently living in, it can be questioned whether this is really the case for copyrights as almost all the works are available globally and, then, how can you actually prove that you did not copy? Or should subconscious copying constitute an infringement at all? And taking this into account, are the scope of protection awarded by the patent (here exclusivity to make, offer to sell and so forth) and copy-right (protection against, e.g., copying, making available to the public, as an example) fundamentally so different when such issue is dealt with in courts?

Let's see in detail. There are two different types of infringements and this helps analyse subconscious copying. Primary infringement is concerned with people directly involved in the restricted activities. The other form, secondary infringement, is concerned with people who operate within the commercial context and are indirectly involved in the restricted activities, for example by way of dealing with infringing copies. It is held that the mental element is not as important in the case of primary infringement as it is in the case of secondary infringement. The reason for this additional mental element in the case of secondary infringement can be based on the requirement of knowledge. Since a person is not performing directly restricted activities, secondary infringement is justified only if and to the extent he/she was aware of the wrongfulness of his/her actions. In direct infringement, a person him/herself is per-forming restricted activities. Is it, however, to hold him/her responsible even if he/she is not aware of the infringement? I would argue (obviously) that subconscious copying should amount to infringement on the grounds of “originality”, “harm” and “unjustified enrichment” arguments. On the other hand, economical argumentation does not seem to provide an answer to this question due to the fact that copyright is not a right of monopoly in the sense that if a person using his own skill and labour creates independently the same or similar work, it is held to be non-infringing and this char-acteristic feature inevitably seems to result in welfare losses.

The case closest to this point is Francis, Day & Hunter vs. Bron, in which the plaintiff claimed that the defendant, a publisher, and Mr. de Angelis, a composer of a song “Why”, had infringed his copyright in song “In a Spanish Town”. In the trial, Wilberforce J. held that the copying had not been intentional despite the fact that the songs contain many similarities. Mr. de Angelis denied not only copying but also that he had consciously heard the song. In his judgement, Willmer L.J. considered subconscious copying first as a psychological possibility and came to the conclusion that if such subconscious copying is to be found, it is required that there is a proof of familiarity with the work alleged to be infringed. The main problem in this infringement issue was establishing the causal connection between the defendant’s work and the plaintiff’s work (emphasis here by the author), since, as mentioned above, copyright is not a monopoly right. Willmer L.J. also seemed to accept Mr. Skone James’ proposition that a causal connection can be presumed if there is a substantial amount of objective similarity. Furthermore, Mr. Skone James argued that the denial by the defendant can be seen as evidence to rebut the causal connection but it is not conclusive. It should be noted that if the defendant can show sufficient counterevidence, for example, that both works were inspired by the same source, his work might be held to be non-infringing. So, from this perspective the subconscious work can be held to be infringing.

It is also possible to look at the process of skill and labour from the perspective of originality. In the Interlego AG vs. Tyco Industries plc case, the plaintiff owned intellectual property rights to Lego bricks. The defendants intended to manufacture a competing system in Hong Kong, and is was alleged that this infringe the plaintiff’s copyright in designs for the bricks. In this case, Lord Oliver considered the concept of originality and argued that a mere process of copying, which requires application of skill and labour, does not render the work original. He also argued that there should be some material alteration, which suffices to make the work an original work. The point here is that if a person is subconsciously copying, he is not using his own but someone else’s skill and labour, and I argue that this aspect also renders the treatment of subconscious as an infringement justified. In other words, he is not using right kind of skill and labour.

Subconscious copying can also be understood from the perspective of “harm” caused by subconscious copying to the original creator. This requires that we presuppose some kind of general duty of care towards other people, which includes a requirement that we should not take fruits of someone else’s labour. It should, however, be noted that the argument of harm is justified only to the extent that the original copyright holder is actually worse-off as a result of infringement. Michael J. Spence classifies harm to three different subcategories, which are also relevant when analysing the harmful effects caused to the original creator by the copier despite the fact whether copying is conscious is not. First, material harm can result if the copier and the original creator operate in the same markets in competition. Second, the original creator might suffer emotional harm. Third, cultural harm might result if the work in question would no longer be of any value to him in relation to the others in the community.

Another line of argumentation might be based on unjustified enrichment. By taking someone else’s work even accidentally or, as in this case, subconsciously, the copier is unjustifiably enriched at the expense of the original creator. If it were allowed, the result would be analogical to allowing unfair competition in the event of misappropriation of intangibles. In the case of intangibles, the problem of the argument relates to the issue of imitation and how much is taken and similarly in the field of copyright the question is whether substantial part is taken or not.

From the economical perspective, copyright nature seems to lead to some restrictions. Since—at least in theory—copyright itself is not a right of monopoly, two independ-ent authors may create the same work and in this respect waste resources. Therefore it is difficult to see how allowing or forbidding subconscious copying would lead to more effective allocation of resources or help save resources. 

However, when, in practice, e.g., all music or pictures are available online as said above—I return to the one of the first questions—if you have this case in a court, can you really have two identical copyright-protected works existing at the same time? I would say not likely if a causal connection can be presumed out of substantial objective similarity, which I think is a correct line of argumentation by the way and provided that the works are not inspired by the same source like for example a picture of Finnish rural landscape where you have a field full of hay and blue sky above. This leads to another interesting question, which I will discuss later, namely, when there is a copyright infringement between objectively similar works inspired by the same source.

Until next time!! Cheers, Jan

SPA Series Part 3: How To Negotiate M&A Deals In Finland?

Splendid September for everybody also here from Attorneys-at-Law TRUST.! It is time for our next posting in our M&A negotiation series. Below, you can find a timeline illustrating how an M&A negotiation process might proceed in real life. In addition to examining these dynamics, I also want to raise some, perhaps neglected, points from the patent and privacy point of view for those readers who are more familiar with “an ordinary” deal structure.

As in any commercial transaction, it all starts from a contact with the potential acquirer, an action which can be taken by the seller or the target directly—or it could be an investment bank having an assignment from the seller to find a potential buyer. 

The first thing to bear in mind is the non-disclosure agreement. Now, there are two different non-disclosure agreement (NDA) models that one might use depending on whether there is a direct contact between the buyer and the seller or investment bank (submitting first teasers and then later information memoranda).

Do you know what the differences are between an ordinary mutual NDA and NDA made by a venture capital firm or for the purposes of an investment bank submitting information memoranda? Well, we are not going to tell you everything—perhaps at some later point. Let us just assume at this point that an NDA serves two purposes. First, controlling the exchange of information; and second, the use of this very information in the future.

Before any detailed information is exchanged, an NDA should be in place. Furthermore, before the parties proceed to due diligence, which means an investigation of the target typically from financial, legal and technical perspectives, the seller or its representative may have asked for indicative bids from one or more buyers, possibly this way trying to limit the number of companies performing detailed investigations of the firm. This is not always the case and it might be that first the parties negotiate a “term sheet” and after that there is due diligence. As a third option, there might be the signing of the entire share purchase agreement after which the due diligence process is carried out before the deal is closed.

In the due diligence process, one has to bear in mind that information is one of the most valuable assets of any company. It is not very unorthodox that potential competitors bid just to catch a glimpse of the assets or even confidential patent applications! Furthermore, if there are competitors in the process, one very important thing often forgotten by even the largest of law firms not familiar with patent-intensive business sectors is that in a due diligence process one may enable patent exposure if competitors are permitted to perform technical due diligence. Your competitor might, e.g., find something that is covered by their own patents and try to assert these patents against you or a third party acquirer with an intension to block business.

Slightly carried away from the original theme, consider a possibility for including a patent mining or non-assert clause in this situation IN ADDITION to limiting the access to relevant documentation in practice. A non-assert clause is like a covenant not to sue. I assume that this is a more familiar clause for most of you. However, a patent mining clause might be more unfamiliar. Here is an example of its idea:

“I promise to you that if I receive information I do not use this information to file patent applications, perform infringement analysis or for other similar purposes. If there are any issues to the contrary and I, e.g., file an infringement claim against you, I promise to prove that I have acted as stated in this clause”.

If you have not prepared a term sheet before due diligence, then it could be prepared simultaneously. As it appears, most commercial issues are clarified in the term sheet likewise the deal structure. However, in many cases it may be too early to fix the deal structure at this stage as relevant information might arise in the due diligence process that influences the decision, whether it is a share deal or asset deal altogether.

An example might be that originally it would have been agreed that the transaction is done as a share deal because that the seller typically is better off as they might get a tax neutral deal. In due diligence, it is, however, established that certain IP assets and third-party technology licenses are within the company and those would be very important to the other affiliates and business units of the seller. Of course, these assets might be transferred or assigned to the seller or its affiliates as a condition precedent to the closing to the seller (which takes time that you may not have). Alternatively, it might be worth considering whether the buyer would agree to execute a business purchase agreement and limit the transaction to “transferred assets” while they would perhaps get a license to the retained assets. This way the buyer might even pay a bit more of the assets, as they may be able to make deductions in their taxation. All these depend on the particular circumstances surrounding the deal. So, after the completion of the term sheet, heavy negotiations usually take place ending with the SPA. The deal structure is something that we need to deal with separately and it is not covered in this current blog posting.

Some post-closing issues typically arise already before the SPA is signed, and one thing involves transfer of data necessary to continue business without interruptions.

If you are transferring personal data, one should keep in mind the perhaps slightly neglected issue that even in this case the theoretical starting point is the “consent” of the person whose information one is about to disclose. There is one statement from the Finnish Data Ombudsman 14.9.2009 (1467/44/2009) in which it is stated:

“Ennen yritysjärjestelyn toteuttamista voidaan myös harkita työelämän tietosuojalain 3 §:n mukaisesti työsuhteen oikeuksien, velvollisuuksien, etujen tai työtehtävien erityisluonteen kannalta välittömästi tarpeellisten tietojen luovuttamista esim. henkilötietolain 8 § 2 mom. mukaisena tavanomaisena luovutuksena. Tällöin edellytyksenä on, että työntekijöiden ei-arkaluontoisia henkilötietoja voidaan luovuttaa tarkoitukseen, joka on yhteensopiva rekisterille määritellyn käyttötarkoituksen, kuten palvelussuhteen hoidon kannalta, jos työntekijöiden voidaan olettaa tietävän henkilötietojen tällaisesta luovuttamisesta. Henkilötietojen luovuttaminen on myös mahdollista tarpeellisuusvaatimuksen täyttyessä työntekijän suostumuksella.

Tietosuojavaltuutetun käsityksen mukaan on tarkoituksenmukaista, ettei kaikkien työntekijöiden nimiluetteloa yksityiskohtaisine palkkatietoineen sekä työsuoritusarviointitietoineen luovuteta uudelle mahdolliselle työnantajayritykselle ennen yritysjärjestelyn toteutumista.

- Henkilötietolaki (523/1999) 3 §, 5 §, 6 §, 7 §, 8 § 1 mom. 1 kohta, 5 kohta, 6 kohta, 8 kohta, 8 § 2 mom., 9 §, 10 §, 24 §, 32 § ja 33 §, 34 §.

- Laki yksityisyyden suojasta työelämässä (työelämän tietosuojalaki, 759/2004) 2 §, 3 §, 4 §, 4 §:n 3 mom., 5 §.

- Työsopimuslaki (55/2001) 1 luku 10 §

- Laki yhteistoiminnasta yrityksissä (334/2007) 4 luku 15 §, 6 luku 32 §”

  

So, in summary before closing, the rule of thumb is that disclosure of personal data should be limited. As the relevance of this area of law is increasing (and significant sanctions have been imposed), it is worth investigating this unchartered territory further. Perhaps, we next address the realm of NDAs even though I promised not to do so. This should give to you a vivid picture how the process “flows” forward in a timely manner.

Until next time and we want to cite one of my favorite academics, Karl Popper, who said: “If we are uncritical we shall always find what we want: we shall look for, and find, confirmations, and we shall look away from, and not see, whatever might be dangerous to our pet theories.”. There are no objective truths in an M&A process, and we invite you to disagree with us, comment and contribute your insight and we all learn more!

Social Media Policies - What Issues to Cover?

Social media policies have been discussed many times purely from employment law perspective, and in particular, how employees’ acts and omissions in the social media should be evaluated in the employment relationship's termination and cancellation situations. So in other words in typical cases which may lead to long disputes unless considered and handled appropriately. 

Social media is, however, much more complex creature than it would first seem to be having relevance to several other disciplines. For example, to overall sales policies, webstore terms, brand strategies, IT, data protection, or taxation just to mention a few examples. Adan Smith, director from Wragge & Co has written an excellent article to this effect on social media marketing titled: "Don't make a # of it: Social media and marketing" which is definitely worth reading if you are considering policies and marketing in social media. The writing is available from here. He states the very truth that "Even with the most thorough planning, experience suggests that things can and do still go wrong. Businesses should have a well thought out crisis management policy in place, just in case". One example might be the famous case of "water bottle price" in a restaurant owned by one of the Finland's top chefs Hans Välimäki. As the price for a water bottle was very high, it caused significant negative consumer campaign in the social media. I do not know whether there was a policy in place in this case, but even the best policies might prove not to be bullet-proof. However, if you are planning to set up one you might face with a problem where to start and what issues should be covered. Let me show you a couple of points: 

"1. What are the objectives of the policy?

• Permissive
• Restrictive
• Neutral

2. When the policy enters into force and how changes are communicated?

3. Should social media policy be the same or different for different businesses or business units?

4. Should technical measures to be implemented to prevent access to one or more social media services?

5. How the employer monitors communication in social media?

6. What is the personal responsibility of an employee in social media?

• Employees' duty of loyalty
• Differences, if any, between communication during one's free time as oppose to working time
• Specific liability issues, e.g., for governmental officials

7. How to introduce yourself in social media?

• Use of your own name
• Use of employer's name and your working position
• Use of employer's trade name, trademarks or other symbols or logos
• Use of employer's e-mail

8. Stakeholders to be recognized when you communicate in the social media?

• Other employees
• Management
• Owners
• Customers
• Potential customers
• Suppliers
• Partners
• Competitors

9. How the use of social media can be beneficial for an employer?

• Product reviews
• Reclamations
• Correction of incorrect information
• Support

10. How to behave in social media?

• Examples how people may understand communication differently?
• Illegal, aggressive, obscene and similar messages
• What is the process for handling violating or infringing materials?

11. How to handle contracts and IPRs in social media?

• Contracts and their meaning in social media
• Compliance with license terms regarding material in social media
• Reference to the policy regarding usage of third party materials (citations, pictures and similar)
• Personal undertakings in employment and directorship agreements, shareholders' agreements and similar

12. How to ensure data security and confidentiality issues?

• Installations of programs to employer's environment
• Closed/open environments
• Policies regarding confidential information
• Identification of confidential information
• How compliance is monitored?

13. Insider information in social media?

14. How much time I can use in social media?

• Positions/tasks
• Relevant/irrelevant communications

15. How to comply with privacy issues in social media?"

To this last point I must focus in detail later due to the fact that the current EC privacy law regime is in transition. Why this is important is that the current proposal contains, e.g., provisions stating that the authorities "shall" issue fines for a breach of privacy and this fine may be so high as up to two percent of the global turnover (as oppose to "may" that might give us poor mortals some room for discretion). Therefore, this is one of the key issues also in social media policies, but currently it is not sure whether there is sufficient political support for this initiative, or whether it will be postponed.

Well I have now covered some points to help you to get started - until next time!