Wednesday, 2 April 2014

Invitation to Spring's Top Event on M&A, IP and Corporate Law 15.4.2014

Hi everyone,

I have been very busy during the last few weeks or month actually, and I have slightly scaled down my article activity and blog postings. The situation is improving, however, as a new section of our M&A series is being edited and most likely we will be published next week. There we focus on definitions and key drafting and negotiations points so I think it will definitely be worth reading!

What we have been doing and what has taken our time from social media is that we have had some interesting transactions lately from wide variety of sectors from IT to telecom and finally to forestry. What has been a pleasure to notice is that while many of out previous deals have had a divestment or outsourcing angle (typically involving some IP as opposed to, say, pure HR angle), this spring has brought us also buyer-side deals. So there seem to be more confidence in the markets in this respect so that is a good piece of news. Also our partner Mika has been active doing and planning bond issues and that is of course not all what we have been doing, but we have also arranged a seminar for all of you to enjoy!

More detailed program can be found from here and please note, registration time is ending soon:

What we have had in mind is that we could talk a bit about valuations of IP, what issues investors should focus on if they are investing in IP-driven companies and for banks, can IP really be used as a security? In many cases there is a requirement that "your company should own IP rights but is it really so?". This topic is introduced to us by Erkki Yli-Juuti, a business-driven IP professional behind some of the largest deal in Finland from Nokia, Broadcom, Renesas Mobile and to our information soon SSH. This theme will be followed by Juha Karttunen, a managing director of Sisu Partners and the leading Finnish investment banker who will share his experiences on M&A process leadership. He will guide us through the difficult procedural steps from valuations to targets selection and documentation, "must here" - speech even for all us M&A activists.

Our own lawyer and latest recruit Kiira Lehtonen will provide an update cyber law and data protection matters and where we are with the latest Commission proposals. It might be too early but Shareholders' Rights Directive is coming and if it will be published I will promise that we have it in our agenda!

Hope to see as many of you there as possible and see you then!



Tuesday, 25 February 2014

Incorporating Industrial Projects under Finnish Law - Some Basic Considerations

This time I write about projects, as the full range of industrial investments and R&D projects have been been my passion for several years now. For a lawyer, life could not get much more interesting than sitting on the driver's seat of a windmill project (check out Finnish windmill project players here), BtL facility project or similar cleantech initiative (check out cleantech investment opportunities and events  here) where intellectual property, patents and know-how in particular, play an important role. Perhaps it is not only that but the fact that you face a variety of difficult legal questions and risks at once and try to navigate through these unchartered waters with a group of investors, technology vendors, customers and owners each typically having their own different business objectives and agenda. We have been very involved with these assignments and had them in mind while this post was written. Yet, the rules outlined below can apply to any other R&D project that needs to be separated from the parent. 

There could be wide variety of reasons behind incorporating a project. There might be, e.g., the the establishment of a joint venture with a business partner, or a company might seek funding and contemplated funding structures, such as private equity, necessitate certain legal form. The incorporation might also be prudent due to the mere fact that one wishes to separate new ventures and risky projects as their own legal entities and this way they protect their core business from additional risk exposure. Whatever the driver is, when this incorporation is decided, we hear the following question presented quite often: how do I actually incorporate our project as a separate legal entity with a view of a forthcoming investment round or transaction? If this sounds familiar, let me show some viewpoints to the issue.

There are several issues influencing the decision but, naturally, tax neutrality is one of the starting points as one does not want to end up paying taxes unless mandatory. It s not always easy to achieve tax neutrality in IP driven R&D projects. Typically there is a requirement that you have to have a viable business entity. Another element is that in many cases it is difficult to say that the project has a positive value as the project might consist of a mere Tekes (public funding body, see more here) loan coupled with some patents and personnel. The latter can be solved with additional capital contribution.

Also it should be noted that there is another point in tax neutrality that is not related so much to incorporation per se but more precisely to a subsequent sale or investment round. So in some cases, if you already know how the following transaction will be done, some structures are preferable over others. As an example, if you wish to achieve tax neutrality for your share deal which is planned to take place soon after incorporation, you must take into account that in some incorporation forms it is required for tax neutrality, among other matters, that you must own the shares for a period of twelve months. Here you might wish to consider partial demerger in stead. We prepared a short summary of the structuring points that would be relevant that would guide you forward in your incorporation exercise and hopefully this helps. We have listed here incorporation types, how target business may be selected, with a view towards subsequent transaction what are the requirements for tax neutrality (capital gain) and finally ownership structure considerations. 

The key guide however is that you need foresight for your structuring efforts, you need to have a clear target in mind what you want to achieve and then build the legal structure accordingly. One of the most common structuring pitfalls is that one incorporates a project too late only before an imminent financing round and then you might end up into long discussions on taxation risks and possibly you also end up having innovative investment structures that are not always the easiest ones to sell forward. Good luck for your structuring considerations!

At the same time I want to mention that TRUST arranges a spring kick-off event on 15th April 2014 at Bank starting at 8.30 a.m. Once again we have an interesting agenda with varying topics from M&A, corporate finance and IP & technology. More information to follow and request and invitation by sending us e-mail. Hope to see many of you there!



Friday, 17 January 2014

SPA Series Part 4: How To Negotiate M&A Deals In Finland?

So now (someone might say finally) it is time to return to our SPA blog series. It has been a bit busy start of the year and it seems that at least the number of divestments is not decreasing any time soon (see more on out practise from TRUST's website by clicking here or here). Well, I thought that I would do this blog before I start my Christmas vacation but I was too busy, my apologies! So let’s go straight to the topic and outline some of the first clauses of the agreement. But, before that, some risk allocation issues and core terms from that perspective.

If we start with the definition of the parties, the previously noted point on differences between the business transfer and share transaction should be noted. In the former, the seller is the company while, in the latter, the seller is the owner of the shares. Typically these SPA agreements start with the following wording or something similar:

“THIS SHARE PURCHASE AGREEMENT is entered into by and between

[Name of Purchaser], [(Business Identity Code [])], [address of Purchaser] (Purchaser), and [Name of Seller], [(Business Identity Code [])], [address of Seller] (Seller).


WHEREAS, the Seller owns [all of the][or:___] issued and outstanding shares (Shares) of [] (Business Identity Code []), [address] (Company); and

WHEREAS, the Purchaser is willing to acquire from the Seller and the Seller is willing to sell to the Purchaser the Shares subject to the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth in this Agreement, the parties hereto agree as follows:”

As said earlier, a share purchase agreement is, like any other transaction agreement, an agreement on the allocation of risks and liabilities concerning the object of the deal. In other words, the agreement tries to find a proper balance between the purchase price paid on the one hand and the risks and liabilities assumed by the purchaser on the other hand. Of course, there is a correlation: if the purchase price is higher, fewer risks and liabilities are assumed by the purchaser and the other way around.

The allocation of risk and the negotiating tactics of the parties are influenced by several factors and it is always a point that needs experience—how to create a proper strategy to exit your deal especially with a view on optimising your business targets, e.g., deal value. Typically, the points one should consider include:

(i) negotiating position;

(ii) aims of the parties;

(iii) time constraints;

(iv) risk tolerance; and

(iv) understanding of the core business.

During the transaction process, information concerning the object of the transaction and the risks pertaining thereto and liabilities becomes available to the purchaser, most frequently through the due diligence review or through a separate disclosure by the seller.

The purchaser cannot usually refer to a defect that he was aware of before entering into the transaction. Therefore, if the purchaser is, through due diligence or otherwise, aware of a particular problem, but chooses not to share it with the seller, the purchaser will run the risk of being unable to claim damages suffered as a result of a breach by the seller.

In order to achieve a proper balance between the purchase price and the risk and liabilities assumed by the purchaser, findings based on the due diligence review (read more on this due diligence from here) or disclosure by the seller can be addressed in several ways, depending on the severity and content of the finding. As a starting point, the alternatives for addressing the findings include:

(i) restructuring and redefining the target;

(iii) adjusting the purchase price or the related price mechanism;

(iv) conditions precedent;

(v) representations and warranties;

(vi) specific indemnities; and

(vii) execution of transitional and other related agreements.

If a finding cannot be readily addressed through any of the above measures, or if the necessary measures are not feasible, e.g., for tax reasons, the finding may be a deal breaker, resulting in the transaction becoming too unattractive to pursue. Typically there are several ways to deal with these findings and very often issues and even significant findings can be handled in different ways to reduce or eliminate the risks. One example is an online gaming company established by two engineers at the late 90s. They started coding an engine for an online game and later on went to establish a company. We were performing a due diligence investigation in connection with a financing round where we represented a foreign venture capital fund. Although everything else was pretty much in order, the company was at the time of financing round already quite large with dozens of employees, these founders had never actually assigned the intellectual property rights of the engine to the company. Naturally, it was defined as a condition precedent for the deal and eventually these persons obviously agreed to assign these rights. However, should the situation be different, if, for example, we could not have received this signing for the assignment documentation, we would have been faced with a deal breaker. This was the case in connection with a biotech firm and its gene bank, but that is another story.

The most difficult findings to deal with are the first two above. This is because they go to the very heart of the target and might change the whole contemplated deal structure. As an example, a share deal’s due diligence review might reveal very high litigation risk or potential environmental liabilities related to a certain property. This might mean that the purchaser is only interested if the structure is changed to an asset deal which makes it possible for the purchaser to exclude from the scope of the transaction any liabilities relating to the litigation or the contaminated property.

An important point to note is that a seller often wants to make extensive disclosures in order to limit or avoid any liabilities under the agreement, in particular under the representations and warranties or disclosure letter. This is a point to which we will return in later postings. A purchaser should normally approach such disclosures with caution and should not accept them without considering their full implications, particularly in light of the findings in the due diligence review. These are issues one must always go through with people who have the best visibility to the field of business and target.

As a rule of thumb, a purchaser should only accept disclosures that are fairly made and sufficiently exact in their scope for the purchaser to be able to fully appreciate all their implications and decide on appropriate action. Also in some cases, the purchaser may want to disclose to the seller certain intentions relating to the special use of the object of the transaction. The purpose of such disclosure is to broaden the seller’s liability.

Some points on the above recitals and object of the transaction clauses are probably needed as well. The recitals convey background information to the transaction. Even though the recitals describe the intentions of the parties, the recitals should be straightforward and simple. In particular, a recital should not state a purpose that is broader than what the agreement seeks to accomplish. Begin each recital with “WHEREAS,”. The recitals constitute a list; end each recital with a semicolon and the second to last recital with “; and”. This is the “linguistically correct” way to do these, or at least so I was thought. Recitals may also have an important role to play if there is a complex transaction,  because then it should give an overview of the whole deal and all related agreements so that a third party who has not been involved in the deal would easily get an understanding of the overall picture. This also affects competition law analysis, especially as IP-intensive deals, for example, are typically connected with several IPLAs (intellectual property assignment agreements) or IPAAs (intellectual proper assignment agreements) going from the purchaser to the seller and the other way around. If you are interested in IP issues, a good starting point might be IP handbook which also contains some reference agreement models (available from

The object section identifies the object of the transaction. The object of the transaction should be clearly and unambiguously defined so nothing specific about that. Typically, template recitals assume that all issued and outstanding shares of the target company are the object of the transaction. If not, the recital and definition of “Shares” should be amended accordingly.

So next we continue with definitions, but before that I want to wish to you a splendid year 2014!



Friday, 3 January 2014

Most Interesting Trademark Issues from 2013: From gTLDs to Specsavers and SkyDrive!

Happy New Year 2014!

As 2013 is now officially closed, it is time to look at the most interesting pieces of news from IP world and this time I thought that I write about trademarks. There are many good listings on trademark cases and issues that should be worth our attention, but personally I believe that WTR daily e-mail service is one of the most reliable (we have also submitted some articles to that as well if I recall so it must be good)! They have created a splendid survey on trademark issues and cases which have been on their "most read" blogs listing during the last year and while there is naturally a European focus in this, there are definitely issues that are relevant also here in our domestic markets and naturally these further  highlight market developments. 

We are of the same opinion with the author Trevor Little when he says that "After covering the development of ICANN’s online expansion for over five years, it is perhaps not a surprise that a blog noting that new gTLDs finally became a reality after the first of the new strings were delegated to the root zone took top spot in the list of ‘most read’ blogs in 2013". But what are the other actual top stories  of which one would be aware of is more difficult question, well this is what WTR's statistics say about this:

  • gTLDs (and their subsequent brand challenges)
  • potential overhaul of European trademark environment ("Draft legislation by the European Commission concerning the European Trademark System which leaked to public")
  • Apple and Samsung battle for title of world’s most valuable brand
  • Logo-free initiative highlights the power of designs and trade dress
  • With Harris + Hoole coffee shops, Tesco takes phantom branding to the next level (on phantom brands, check out Lyndsay Peck's article from here to give you some background)
  • Rapid rise of the ‘cronut’ gives pointers for early-stage trademark strategy
  • Open source principles influence Debian’s new trademark policy
  • INTA 2013 ("probably always on the list")
  • ECJ decision in Specsavers v Asda: a 'significant win' for brand owners
The full story of WTR Blog's can be read from: here

I would add one interesting case to the list which is Sky International and others (Sky), owners of various UK and Community trade marks for Sky, who sued Microsoft Corporation and an associated company ("Microsoft") for trade mark infringement under Article 9(1)(b) and Article 9(1)(c) of the Community Trade Mark Regulation and the equivalent UK national provisions; and for (ii) passing off.

Relevant Articles are the following:

"...(b) any sign where, because of its identity with, or similarity to, the Community trade mark and the identity or similarity of the goods or services covered by the Community trade mark and the sign, there exists a likelihood of confusion on the part of the public; the likelihood of confusion includes the likelihood of association between the sign and the trade mark;
(c) any sign which is identical with, or similar to, the Community trade mark in relation to goods or services which are not similar to those for which the Community trade mark is registered, where the latter has a reputation in the Community and where use of that sign without due cause takes unfair advantage of, or is detrimental to, the distinctive character or the repute of the Community trade mark."

In this case both claims where upheld (See more details from here). Briefly in this case Sky produced a TV set-top box which included digital storage so that viewers could both record and replay content, and, around 2005-6, it started transmitting its content over the internet and we all know Microsoft, which launched its "SkyDrive" product in 2007. This product provided consumers with an online storage facility for document files, photos and the like, which they could then access from anywhere on the internet and make them  available for sharing with others. There was likelihood of confusion as "Sky" would be bound to be seen as the dominant element of the SkyDrive sign: the average consumer would therefore see "Sky" as fulfilling a trade mark function rather than the SkyDrive mark as a whole.

Please note the procedural evidence point (which is why help desk calls are recorded!) - there had also been evidence of actual confusion in the form of calls to the Sky helpline.

I will revert to Nordic and Finnish IP issues in general (and not only to trademarks!) and litigations shortly afterwards with analysis but in the meanwhile feel free to post proposals for top 10 Finnish IP issues from 2013 - what is your favourite? Submit you views and we promise to give to you an analysis! We would perhaps give our vote to good will protection under Finnish law which is discussed also in our earlier blog: Thoughts on Goodwill Protection and Trademarks in Finnish IP Litigations!



Sunday, 8 December 2013

How to use Technology as "Contribution in Kind" under the Finnish Companies Act? - Experiences from Our Cross-Border M&A Management

Hello, dear readers,

First off, I want to congratulate once more our Finnish Information Processing Association, FIPA. The occasion is their 60th birthday, so greetings go to Robert, Tiina and the rest of the team! They organized a very interesting seminar some days ago on recent developments in the Finnish ICT sector. There were plenty of great speakers, Mikko Hyppönen, Ari Rahkonen and Turkka Keskinen just to mention a few. The product of the decade in Finland was also elected and Linux won the category—perhaps not surprisingly. We can say so congratulations for that achievement as well!

Then, to our topic. I promised that this time I would continue our M&A blog but, as it happened, I got so much carried away from technology issues yesterday, so I thought that I’d write something about technology and M&A. More precisely, it would be corporate law. I decided to talk a bit about technology licensing and use of technology as a contribution in kind. This is actually a real-life situation with cross-border elements and we can imagine that the background is that a Finnish technology company (leader in its field) is doing an M&A arrangement with its competitor in one of the BRIC countries. The following gives to you an outline of the relevant sections of chapter 9 of the Companies Act:

Section 12 — Contribution in kind
(1) If, instead of cash, the subscription price is paid in full or in part with other assets (contribution in kind), the assets shall at the time of conveyance have a financial value to the company at least equal to the price thus paid. An undertaking to perform work or provide services shall not be used as contribution in kind.
(2) The share issue decision shall contain a mention of the payment of the subscription price in kind. In addition, the decision shall contain an account specifying the contribution in kind and the price covered by it, as well as the circumstances relevant to the valuation of the contribution and the methods of valuation. If the provisions in this subsection have not been complied with, the subscriber shall prove that the contribution had a financial value to the company equal to the subscription price. Any shortfall shall be paid to the company in cash.
(3) If the subscription price is paid in cash on condition that the company is to acquire assets against consideration, the provisions on contribution in kind apply correspondingly to the acquisition.

Section 14 — Registration of new shares
(4) If a share has been paid for in kind, also a statement by an auditor on the account referred to in section 12(2) and on whether the assets had a financial value to the company at least equal to the price thus paid shall always be attached to the registration notification. (461/2007)

Two alternative options for executing the deal were discussed at the beginning:

A. the company would issue new shares first to itself and then hand over such old shares (pay attention to word "old" so these are no longer newly issued) to the buyer. According to the CFO, the original intention presumably was to avoid some of the above Companies Act’s formalities, such as the above-mentioned accounts specifying the contribution in kind and the price covered by it, as well as the circumstances relevant to the valuation of the contribution and the methods of valuation, or auditor statements on valuation; or

B. the company would make use of an official Companies Act’s contribution in kind structure. In other words issuance of new shares in which the value of the technology is used as a payment.

The idea that the CFO originally had in mind with option A was that with this solution, the price for the handover of our technology and the price for the shares would be set off (“they give us shares with a value and we give the technology with a value and neither party pays anything”). However, under Finnish law, if you hand over your own shares (like in option A) it is technically the same as an issuance of new shares. The second point is that if you pay the subscription price under circumstances where a precondition is that the subscribing company will acquire assets or services from the issuer (or for example from its inner circle so in theory it could be anyone), then it is again technically a contribution in kind under the Companies Act.

Could we circumvent formalities of the Companies Act in this way like CFO planned in option A? Well, the issue was actually discussed when the Companies Act was implemented and the answer is no. Valuation of technology is difficult we all must admit especially nowadays when the technology can be seen in many cases to have strategic value (as opposed to mere calculations based on revenue flows and enforcement). In general the value of a technology-based company or valuation of mere technology as such is more connected with the time and place—what is the value needed to execute the deal?— rather than following statistics or making mathematical calculations regarding the “right price”. As the Board has a general obligation to work for the benefit of the shareholders, it is definitely something that they need to evaluate on their shareholders’ part whether the minimum value is at least equal to the value paid for the shares and circumvention is not unfortunately possible. As a general guidance, my recommendation to questions such as, “what is the right price?” is that it is not the right price that is relevant but whether the technology has “at least the claimed value”. Here the issue is to analyse the story behind the valuation, typically giving you an idea whether the pricing is correct or not. If you have any hesitation, consider requesting fairness opinion from a third party, such as the good people from KPMG who have a top notch team for this. It was also discussed how to value the technology in this kind of event, but I think it deserves another posting.

But this is not the whole story. Especially in a cross-border environment, the investment was about to be made to a BRIC country and therefore the applicable legislation was not Finnish. This makes the situation slightly different and one should evaluate whether local law says anything about these kinds of arrangements.

One also needs to evaluate the taxation elements in this deal. Are in-kind structures and sale of technology treated differently in taxation? Tax authorities do not recognize set-off as a legal construction and therefore issuance of shares and sale of technology would be treated independently. If you end up “selling” your technology, then you probably end up paying taxes as well, while contribution in kind is typically tax-neutral. I am not a taxation law expert and this is a generalisation that I will make even at the risk that this might be slightly incorrect. Also this tax issue was put forward for more detailed review to our local partner.

To sum up, we ended up recommending a traditional in kind structure unless the local applicable law would have brought to the table any new aspects. Please note that this story is simplified in a manner that not all cross-border elements and taxation issues are reviewed here, but hopefully this helps you forward in technology transactions!



Wednesday, 20 November 2013

IT Disputes and Project Management - Some Thoughts from Talentum's Seminar 20.11.2013

Excellent fall for everyone! I though that I write this time some words about today's seminar at Talentum in which I had a pleasure of giving a speech. Despite my presence the speaker list was very impressive containing Mikko Manner of Roschier, Kai Erlund of Krogerus, Markus Kinni of Deloitte, JP Rautiainen of Kesko, Tytti Hallavo of Sininen Meteoriitti, Max Mickelsson of Microsoft and Mats Welin of Hästö just to mention a few. I have to say that personally it was just magnificient to be in such a good company and even if the morning was very grey and rainy, and just to illustrate whether conditions, even my dog did not want to go out, I was full of energy and truly eager to go there. It turned out an event to be worth waiting for and I must say I have seldom been in such an interactive event - perhaps it was not surprising as so many of us were passionate about IT projects and disputes! 

My below slides are in Finnish unfortunately, but I started with outlining some general industry trends from the past decade and so, development of license and service fee matrixes, role of contract negotiations in general and following with the reasons why so many IT projects fail. Some main themes relate to project management tasks and how project management should change if we are facing with a potential IT dispute. I also raised some points on the selection of appropriate measures for a specific dispute and how to evaluate cancellation, termination, discontinuation obligation, damages, unjustified enrichment and price reduction arguments and burden of proof issues. I would argue that more attention should be paid to error tolerance where we have a quite high threshold still despite the fact that the world is changing at an ever increasing pace towards something I call "Quality-driven IT Contracting". 

Some more detailed issues should probably be mentioned as well and one not so widely discussed legal issue in our jurisdiction is the relationship between price reduction and damages claims. I would argue that more attention should be paid to the limitation of liability clauses to limit potential exposures in this respect. I would personally not necessarily support the view that the intention of the parties is that limitation of liability clauses automatically also limit the amount of price reduction claims. Enrichment prohibition should naturally be taken into account whether the claim is damages, price reduction or both.

Another point is that sometimes one also see termination of a project on the basis of termination for convenience (as opposed to material breach) followed by damages claim AND unjustified enrichment claim. I have a clear view on the merits of this latter claim, but what do you think? I will save something for the next discussion or post your view and I might reply.

Check my slides from: here

Mikko Manner's presentation followed mine, covering IT audits and key points were that "...audits are more than license compliance audits; they are useful tools for the business, CIOs and lawyers alike for a variety of purposes, as long as all involved have the right approach and implement the approach properly in the agreement and real life alike". Very valuable points and also good contracting issues were discussed. As auditing is here to say, from license audit perspective I raised an issue that perhaps license management and auditing could play more important role in on-going services agreements and this way taken into more efficient use - not only for the license compliance purpose, but for a wider use to benefit customers in their corporate governance.

Then we had a panel discussion chaired by Kai Erlund which centred, at least I would summarize it, around the theme of "communication". The latest IT trends are based on cloud solutions and BYOD, and lots of discussions took place on the selection of the right negotiation team (and "who is actually the customer"), communication of the customer's business requirements such as NFRs and FRs properly and generally on understanding of the suppliers business logic in cloud environment. It seem to be agreed that neither agile nor waterwall methods provide a bullet proof solution to avoid budget, time or scope disputes, but at least by good communication (also contractual reporting) you minimize risks.

The day was concluded by Mats Welin who gave a speech on litigation process perspectives. In the project management organization it is important to understand what is needed if we end up in a litigation and we need to provide evidence to support our case what are, e.g., additional personnel costs arising out of a breach. Failing to implement right measures will almost certainly mean that the arbitration or ordinary court will deem that you have not provided "sufficient evidence". So in other words, the project management should need to change the focus a bit when litigation seems probable and adopt new kind of measures. From legal side I had a discussion on price reduction and are courts allowed estimate the amount of price reduction like they can estimate damages (OK 17:6), and further it was discussed, a question asked by Otto Markkanen of Castrén & Snellman, that can you raise price reduction claim in an IT contract dispute if Sale of Goods Act is excluded. Interesting points and not necessarily simple - I have a view, Mats has a view, but tell me yours? This is the best part in these seminars - sharing ideas and experiences and learning more! And finally thanks to Talentum and Salla Korhonen in particular for magnificent arrangements!

More to follow on this as well and next time I will write about M&A again - new blog under the way!



Thursday, 24 October 2013

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!