Benjamin Lundström and I met on a startup advisory board.  In this informative interview, Benjamin gives valuable pointers to entrepreneurs about what to focus on in terms of their legal exposure.  We chatted over Skype in September 2008.

Why work with startups; What legal aspects to focus on as an entrepreneur

Alex Farcet (Q):  Can you give me some background about yourself?

Benjamin Lundström (A): I am an attorney-at-law and partner in the leading Nordic IT-law firm of Bender Von Haller Dragsted which I co-founded in 2000.

I am responsible for the law firm’s corporate commercial unit covering company law and employment law. I am a certified litigation lawyer and mediator and I also serve as court mediator at the High Court.

In addition to that I am active on the Danish entrepreneurial scene:  I am a past member of the Danish Entrepreneur Association and a current member of the Venture Cup jury and Connect Denmark’s spring board panel.

I have a civil law master degree from the Copenhagen University and a common law master degree from the University of New South Wales, Australia. I also completed an international program at the University of British Columbia, Canada.

(Q):  I see that your company specialises in working with IT companies, is that your only focus area?

(A):  We focus on the IT industry. However this is a broad term covering various legal areas.

Our company has three main focus areas under the IT-umbrella:
1) IT-law/Internet law
2) Corporate law (company law and employment law)
3) Public Procurement

I’m the only lawyer in the firm not working with IT-law as a main focus as my focus is Corporate Law, Employment Law and Dispute Handling.

(Q):  You also advise startups?  Do you work with intellectual property (IP) as well?

(A):  In the area of IT-law/Internet law and Coporate law we have a long tradition of working with startups as well as blue chip companies. The IT-law involves heavy IP-issues in which we have leading expertise.

I have great interest in startups – not least because it’s almost a matter of “life or death” in this phase and I can really make a difference. Also the drive that the entrepreneurs show is highly motivating.

(Q):  Are you focused on balancing your customer portfolio, i.e. not having too many small startups or being too dependent on a few large customers?

(A):  Great question: Actually we are very aware of the diversity of our portfolio and maintain a spread between blue chip companies, startups and public clients. That way we are able to handle the different state of the market.

(Q):  Why do you bother working for startups at all (other than the personal aspect of working with ‘life and death’ highly motivated people)? Is it a sales channel for you – i.e. they represent future big customers?  And if so, do you therefore select who you work with based on potential?

(A):  I guess it is threefold: Firstly from an ideological point of view we need more good startups in DK to be able to maintain our welfare state. Secondly the personal motivation of working with highly engaged and skilled people. Thirdly we see it as a success parameter when our early stage clients get all the way to an exit.

Last year a couple of our clients that we assisted from “birth” had their IPO.

(Q):  That must be fun to be part of!

(A):  Being able to assist from birth to success is unique.

(Q):  I know from personal experience that when it comes to lawyers (and others, e.g. accountants), you often get what you pay for.  How do you convince startups with limited cash to invest in top advice?

(A):  Actually I don’t. My main objective is to lay down the different areas of challenges. Then it is up to the company – with my guidance – to give the different challenges priority. As such there is no absolute requirement to streamline every corner of your business – but you NEED to be aware of the content of your “closet”.

When it comes to obtaining my services I often make arrangements for a flexible payment plan and a discount for early startups. Also success parameters could be included.

(Q):  What are the main legal aspects a young entrepreneur should focus on?  The obvious one is intellectual property. (To build on your analogy, what should they look for in the closet?)

(A):  The main areas are 1) legal structure i.e. to choose the right company setup. 2) The agreement between the shareholders is very important to clarify the expectations and to set the rules for the cooperation. This is a very important aspect of preventing and handling conflicts, which inevitably will arise at some point. 3) IP is also important but it all depends on the specific business. Of course you need to make sure to retain the IPRs of your product and services to the extent this is material for you business. Also you need to address the IPRs of others to make sure you have the freedom to operate. 4) Tax is important and goes hand in hand with the legal structure. 5) Standard agreements with your customers and business partners are also essential to be able to scale and grow your business. 6) Employment agreements when it comes to having employees are a must – I have seen numerous startups loose their proceeds on claims payments from employees because they haven’t addressed the contractual aspect of the employment. Also the startup needs to check whether to incorporate non-competition clauses and non-solicitation clauses in their contracts to protect the business in a vulnerable state.

(Q):  You are scaring my readers!

(A):  Disclose and prioritize !!!!

(Q):  Expand on that, by disclose do you mean ‘be open about your position?’

(A):  I mean: You need to know your business and the legal aspects of running it. That said there is no natural law saying that you need to deal with all the issues. That’s a question of priority. Often times this require a sound financial analysis of how you optimize your business short term and long term.
[pagebreak] (How to approach intellectual property rights; What to watch for when negotiating with VC’s and Equity funds; Specific aspects of the law in Denmark

(Q):  Building on this: Every young startup, especially the ones trying to raise money from VC’s or equity funds, is told to obtain patent protection.  But in many cases, they couldn’t afford to enforce them, or perhaps they can’t afford to get global coverage.  What’s your advice in that case?

(A):  Well – if it is a requirement (and I agree it often is) you need to approach it in steps. First “cheap” step is to file an application. Then you are in the loop with Patent Pending. You will then be in business and will have sufficient time to assess whether it will make sense to pursue the patent registration. When it comes to enforcement I would start on a different path: Firstly, if the purpose of you patent is to give you assurance of your freedom to operate the enforcement issue is not a main priority. If you have a patent well established companies will most definitely try to avoid infringement and you could become a target for an acquisition.

That said you should carefully assess whether to apply for a patent. Aspects such as the speed of the technical development in the area and the risk of disclosing the construction of your product could contradict a patent application. Some startups would rather focus on moving faster than the competitors than spending money on patents.

(Q):  Back to a previous topic, can you expand on the payment issue?  Do you ever get paid through alternative means, for example through shares?

(A):  Yes, that has happened. Sometimes we can agree to convert a portion of our fees into a few shares. However we need to stay absolutely independent of the client, so there are limits. Other possibilities are payment plans (credit terms), discounted fee rates, and success payments. E.g. if an investment round fails the fee could be reduced to an agreed base amount, etc.

(Q):  I’m sure you often see the same. shall we call them ‘tricks’ which show up in investment proposals from professional VC’s or equity funds trying to get a great deal for themselves.  Any obvious ones entrepreneurs should watch for?

(A):  Absolutely. But you need to understand where the VC is coming from. The VC has no intelligent information or knowledge of the target even though they will conduct a due diligence. So there is an information asymmetry which the VC needs to address to protect the investment. This is a topic that I could speak about in length. Anyway as the target company and as the entrepreneur you NEED to obtain proper advise on the investment contracts that you are required to sign. Oftentimes these a negotiable in detail and you can achieve quite a substantial benefit from negotiating the deal. Some of the most important clauses to negotiate are: 1) The VCs preferential rights to receive dividends and to appoint board members 2) veto rights 3) anti-dilution clauses 4) non-competition clauses 5) warranties. The anti-dilution clauses are extremely complicated and most entrepreneurs (and lawyers) don’t really understand the actual effect.
 
Basically the anti-dilution clauses provide the VC with an opportunity to have his shareholding adjusted in connection with subsequent investment rounds. In some cases the anti-dilution clause will lead to a massive dilution of the entrepreneur’s shareholding. So be aware and make sure that you have a detailed understanding of the mechanics of such clauses. Also the non-competition clauses are important but oftentimes legible. Make sure however, that if you as an entrepreneur are fired without due cause that the non-competition clause is eased. I could continue for hours on this subject. It is very interesting and important.

(Q):  What are warranties?

(A):  Warranties are the guaranties that the entrepreneurs give the VC – e.g. that the company owns all IPRs and that no claims have been made against the company etc.

(Q):  And have you dealt with foreign VC’s and do they behave differently?

(A):  I have dealt with both local and international VC’s. They are different as most people are. Generally the Danish VC’s are very fair and professional. It’s a small world (in Denmark). Internationally you will find all kinds of VC – but most important you will be able to find somebody that can help you with your internationalization. That’s when clever money really matters.

(Q):  My audience is English-speaking entrepreneurs based in Denmark, by default foreigners (to begin with at least).  Are there any aspects of Danish law, which might be surprising to foreign entrepreneurs?

(A):  Well yes. Denmark is well regulated as a civil law nation. People from common law countries are oftentimes surprised with the simplicity of contracts derived from a regulated area. I.e. the contracts do not have to reiterate what is in the statutes. When it comes to the actual content of the law people from outside the EU are always surprised because of the nature of laws – they are different from one country to another. Within EU the harmonisation is deep, so the local laws are somewhat familiar. The employment law gives the most surprises. In Denmark the employment law is very flexible. Maybe the most flexible in the civilised world. It is very easy and cheap to dismiss employees if you comply with simple principles.

(Q):   Are there any interesting trends in IT (or general) law in Denmark, i.e. is there more litigation? And what is the legal culture here, i.e. is there an objective to settle most of the time and is that changing?

(A):  A very interesting trend is the newly introduced court scheme for mediation. Now – as litigating parties – the court offers mediation as a mean of dispute resolution.

Denmark is moving into the area which the US, UK, Canada and Australia has been for years with great success. Litigation involves:
High legal fees
Time and resource commitments to an ongoing process
Lost productivity and distraction
Diversion of management attention from the core business focus
Personal and organisational stress and pressure

Mediation can be defined as a voluntary, non-binding, “without prejudice” method of resolving disputes. The mediator is specifically trained to assist parties in settling disputes, being an impartial neutral catalyst who helps the parties to arrive at a mutually agreed solution. The mediator has no power to impose a settlement on either party. The process is cheap and quick and offers solutions that the court could never render.

(Q):  Last question: what’s a good customer for you?

(A):  A client with whom there is mutual confidence and who works with high integrity and professionalism in an area where I have expertise.

Thank you very much.