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Transforming #MeToo into the industry’s first investor clause

22:25 | 13 January

Elizabeth Gore Contributor
Elizabeth Gore is co-founder and president of Alice, a free multi-channel platform powered by AI technology that guides business owners by providing access to funding, networks and services.

“Keep your head high and give them hell.”

My grandma, Opal Thompson, once wrote that to me in a letter, like the dyed-in-the-wool, strong Texan woman she was. It is now tattooed on my forearm for all to see. Memories of her powerful presence and great advice have been a North Star on my path to entrepreneurship, as well as the kick in the pants I have needed along the way to confidently go toe-to-toe with nonbelievers in my industry. “Honey, you need to work harder and smarter than men and get ‘er done,” she once told me. It may sound folksy, but it’s gotten me to where I am today.

Last October, my fearless cofounder Carolyn Rodz and I “gave them hell” with an announcement of which I couldn’t be prouder: our small business growth platform Alice just closed a Series A round of funding. That’s a major accomplishment that I think is newsworthy in its own right. But, the headline is even better. We required a morality clause in the funding agreement, legally demanding repercussions in the event of racial, gender, or sexual orientation discrimination.

As we were pitching Alice for funding, Carolyn and I went back to the fundamentals of why we started Alice for small business owners in the first place. Our platform exists to break down barriers to growth for our community of more than 100,000 business owners — especially entrepreneurs who are women, veterans, people of color, or members of the LGBTQ+ community.

Whether that means access to tips and best practices or funding opportunities of which they otherwise wouldn’t be aware, our job is to help small business owners “get ‘er done” — whatever that means to them. For us, there is an immense responsibility in being a comprehensive resource that small business owners trust to help them grow their ventures. We’re always encouraging our owners to try new approaches and go big in every aspect of their development, and that includes pushing owners to challenge institutions that stand in the way of their successes.

One institution that has long stood in our way is the silent perpetuation of discriminatory and predatory behavior by influential investors. While we’ve seen a rise of so-called “Weinstein” clauses drafted in the wake of the watershed #MeToo movement two years ago, most of those cases refer to protections for investors against investee executives who have outstanding allegations.

This is an important step in the right direction of instilling accountability at all levels of business. But we were left asking ourselves, “what happens when an investor is the one #MeToo’d?”

We at Alice were troubled by the lack of legal consequences for key decision makers, from board members to venture capitalists, given the reputational harm their actions could inflict on the businesses they touch. So to protect the reputation we have worked so hard to build for Alice and to protect the business owners who seek us for help every day from across the globe, Carolyn and I decided to lead by example and take a stand with our own investors. We took the “Weinstein” clause and flipped it, giving our board members the agency to use corporate governance mechanisms to vote for removal of any board member in the event of a #MeToo event, racial discrimination, or sexual orientation discrimination incident. Simply put, Alice and its investors are not afraid to show you the door if your behavior doesn’t serve the best interests of our community of entrepreneurs.

Including this provision was crucial to our vision for the company as we continue to grow. It echoes our core values of inclusivity within our online business community. And, as our users seek venture capital, we want them to know that they have the right to stipulate what should be common sense legal protections while still securing the funding they need. We have provided the clause openly here so everyone can take advantage — and not have to pay the legal bills we did.

Making sure that this information is available to anyone who wants it is part of our commitment to ensuring that everyone in business gets a fair shake. To have other founders include morality clauses like ours in their funding agreements is as important to me as the fact that we did it ourselves. We must make this a trend.

Our morality clause is also important to us as we strive to improve the broader business community and the way we all seek funding. Small businesses represent nearly 95 percent of all U.S. employers and support the careers of more than 50 percent of Americans.

But, while the small business landscape is changing into a New Majority, with more women, people of color, and LGBTQ+ folks starting businesses every day, the demographic of venture capitalists is much slower to change. To date, 89 percent of venture capital deciders are still men, and of all the investments they make, only 2 percent of them are in female-owned businesses. Less than half of a percent of women who receive venture capital are Latina, and the representation is even worse for other minority communities of entrepreneurs.

By now, Carolyn (who is Latina herself) and I have learned that we have to make our presence known in a business world that has often excluded us. And as more #MeToo behaviors come to light across industries, we’ll be able to protect our businesses and entrepreneurs making lasting impacts on our communities.

As we look to the next chapter of Alice and its expansion into new markets in 2020, we will continue to share our unique funding story with hopes that other small businesses will be inspired and empowered to do the same.

Venture capitalists be warned: the New Majority of entrepreneurs is here to stay, and our morality clause is just the beginning of a new path to small business success.

I think Grandma Opal would be proud.



In the future, everyone will be famous for 15 followers

02:30 | 11 January

David Teten Contributor
David Teten is an advisor to emerging investment managers and a Venture Partner with HOF Capital. He was previously a partner for 8 years with HOF Capital and ff Venture Capital. David writes regularly at and @dteten.

Many investors — including me — spend most of our day doing the same things people have always done in our job: in my case, due diligence, deal execution, etc. However, being a “microinfluencer” is now part of the job description.

In the future, everyone will be famous for 15 followers. Traditional celebrities or influencers with millions of followers have a large service industry and tech stack to serve their needs. But the standard toolkit of a microinfluencer is still evolving.

The challenge is that my time and money budget for “influencing”–content creation and marketing– is minimal. Also, since I’m not trying to be a full-time marketer, I can’t use some of the standard celebrity techniques. I can’t pick fights on Twitter; date other celebrities; or swear a lot at conferences. These vectors work for a lot of celebrities and for some businesspeople and politicians, but I’m uncomfortable with them and it will impede my ability to do the rest of my job. Plus, my wife doesn’t let me date celebrities.



Cross-border investments aren’t dead, they’re getting smarter

00:15 | 11 January

Yohei Nakajima Contributor
Yohei Nakajima is an investor at Scrum Ventures, an early-stage venture capital fund based in San Francisco, and Senior Vice President at Scrum Studio, helping global corporations connect and work with innovative startups.

In recent years, the venture capital and startup worlds have seen a significant shift towards globalization. More and more startups are going global and breaking borders, such as payments giant Stripe and their recent expansion to Latin America, e-scooter startup Bird’s massive European expansion, or fashion subscription service (an investment in our portfolio) Le Tote’s entrance into China.

Likewise, more VC Funds are spanning geographies in both investment focus and the limited partners, or LPs, who fuel those investments. While Silicon Valley is very much seen as an epicenter for tech — it is no longer the sole proprietor for innovation — with new technology hubs rising across the world from Israel to the UK to Latin America and beyond.

Yet, many have commented on a shift or slowdown of globalization, or “slobalization,” in recent months. Whether it be from the current political climate or other factors, it’s been said that there’s been a marked decrease in cross-border investments of late — leading to the question: Is the world still interested in U.S. startups?
To answer this and better understand the hunger from foreign investors in participating in U.S. funding rounds, both from a geographic and stage perspective, I looked at Crunchbase data in U.S. seed and VC rounds between the years of 2009 to 2018. The data shows that cross-border investments are far from dead — but they are getting smarter and perhaps even more global with the rise of investments from Asia.



2019 saw a stampede of fintech unicorns

21:10 | 9 January

Dana Stalder Contributor
Dana Stalder is a partner at Matrix Partners, where he invests predominantly in fintech, consumer marketplaces and enterprise software.
Jake Jolis Contributor
Jake Jolis is a partner at Matrix Partners and invests in seed and Series A technology companies including marketplaces and software.

Two years ago, we created the Matrix FinTech Index to highlight what we saw as the beginnings of a 10+ year mega innovation wave in financial services.

The trillion-dollar financial services industry was going to be turned on its head over the next decade, and we were just getting started. At the time, the top 10 publicly traded U.S. fintech companies had just surpassed the $100 billion mark in terms of total market capitalization, 12 unicorns had emerged in the category, and the U.S. VC industry had just poured in $6.7B — a record at the time.

As we predicted last year, the innovation cycle continues, and we are transitioning into its mid-phase. So what happened in U.S. fintech in 2019? In short, monster growth.

On the public side, fintechs delivered resoundingly. PayPal alone gained $26B in market capitalization. On a return basis, the public Matrix FinTech Index continued to crush every major equity index as well as the financial services incumbents. Nicely matching our forecasts, our Index delivered 213% returns over the last three years. The Index outperformed the financial services incumbents by 151 percentage points and the S&P 500 by 170 percentage points.



Deciding how much equity to give your key employees

20:15 | 9 January

Lewis Hower Contributor
Lewis Hower connects Silicon Valley Bank and VC/startup communities as a Managing Director with SVB Startup Banking.

Anu Shukla had found the perfect VP of Engineering to help her build her latest startup, a company called RewardsPay. By that point, she had founded or cofounded several venture-backed startups (she’s up to five). The standard, she knew, was a roughly 1.5% to 2% stake for a key employee at the executive level.

But Shukla knew sometimes you need to give up more to get the right person. “At that point, there wasn’t much cash in the company,” Shukla says of RewardsPay, the company she founded in 2010 to help consumers convert rewards points into a commodity they could spend elsewhere. “This is the person we were asking to come in and build the technology and build our technology team,” she adds. He was also someone with experience who could command a sizable salary from a more established company.

Shukla ended up giving him a 3% equity share in the company. He needed to remain motivated to stick around for the long-run, Shukla explains, “and we also knew through subsequent rounds of funding he would become diluted.”

Tech’s main currency is built on a range of factors

Equity, typically in the form of stock options, is the currency of the tech and startup worlds. After dividing initial stakes among themselves, founders use it to lure talent and compensate employees for the salary cut that they almost inevitably will take when joining a startup. It helps keep employees motivated with the tantalizing prospect of a big payday when the company is sold or goes public.

But how much equity should founders grant the first engineers hired to help them build their product and the new hires that follow? What about that highly coveted VP of Sales brought on once a company has a product to sell? And what about others a young startup seeks to enlist in the cause, including key advisors whose insights and connections might increase its chances of success or perhaps an outside director with the right expertise to join a nascent board of directors?

Properly parceling out equity is a challenge for first-time founders. What stake an employee deserves depends on a range of factors, from skills to seniority and employee badge number.

“Is this employee #5 we’re talking about or employee #25?” asks serial entrepreneur Joe Beninato, who has founded or cofounded four startups and worked at another four. “What’s the experience of the person coming over? You have to look at each situation individually.”

1% or .05%? It depends on position and seniority

Yet while complex, several online guides provide compensation benchmarks that help founders think about the size of each slice of the company they give away when recruiting talent. Index Ventures, for instance, has published a handbook aimed at helping entrepreneurs figure out option grants at the seed level. At a company’s earliest stages, expect to give a senior engineer as much as 1% of a company, the handbook advises, but an experienced business development employee is typically given a .35% cut. An engineer coming in at the mid-level can expect .45% versus .15% for a junior engineer. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing.

And just because someone gets a big title, it doesn’t mean you should give away the store. “We see a lot of role and title inflation going on at the seed stage, which is best avoided,” warns Reshma Sohoni, co-founder and general partner at Seedcamp, a European seed fund quoted in the Index handbook. “At this stage, you are unsure of who is going to continue the adventure with you.”

Timing trumps seniority and experience

When Shukla was building her team at RewardsPay, she gave the earliest engineers joining her team an equity share of between .5% and 1%, depending on both experience and a person’s salary requirements. Some were willing and able to work for a minimal salary and higher equity, whereas others asked for higher cash compensation because of their personal circumstances. Regardless, Shulka says, “the early team you put together definitely gets a lot more stock than later employees.”

Indeed, in many circumstances, the timing of an employee’s decision to join has a disproportionate impact on how much equity is offered. It makes sense: the earlier someone commits to your startup, the more risk the hire is taking on.

If a key hire is the third person joining a two-person team, he or she can almost be considered a co-founder and may get as much as 10% of the company. But if a head of sales or VP of marketing joins once a startup has a product to sell and promote, they may get between 1% and 2%, depending on experience.

“The percentages really vary dramatically,” Beninato says. “I don’t want to say it’s like a decaying exponential, but it’s something like that. The first people get more, and it goes down over time.”

Time for an employee option pool

Eventually, founders need to think about creating an employee option pool — a more disciplined way to award equity over shaving off more shares with each new hire. “After a seed round, you want to have that employee pool at around 10% or 12%, plus or minus,” says James Currier, a four-time founder who is now a managing partner at NFX, an early-stage venture capital firm. Calibrating the precise size of that option pool, Currier and others say, depends on a company’s hiring ambitions over the coming 12 to 18 months — through a next funding cycle.

Again, online guides can help. The Holloway Guide to Equity Compensation, for instance, is an 80-page handbook that explains arcane terms such as “cliffs,” “claw backs,” “single trigger” and “double trigger” that any entrepreneur must know to even understand what their lawyers and advisors are telling them. The guide also identifies landmines to avoid and breaks down the equity ownership of a pair of sample companies whose employee pools range from 9% to 20%.

Over time, founders will need to tinker with the option pool as everyone’s shares are diluted with each venture round. “After an A, you want to put it back to 10 to 15%, depending on how many managers you need,” Currier says. Adds Anu Shukla, “Usually, the VCs are going to ask for a completely empty option pool where every share is available.”

Prepare to negotiate

The size of the option pool must be part of the negotiations with any venture capitalist — and founders would be wise to have thought about the issue before sitting in a VC’s conference room. “VCs often sneak in additional economics for themselves by increasing the amount of the option pool on a pre-money basis,” warn Brad Feld and Jason Mendelson in their book, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. At that point, the option pool is coming from the founders’ shares and those of their earliest investor so Feld and Mendelson encourage founders to push back if they feel the VCs are asking for an unduly large option pool.

“The entrepreneur can say, ‘look, I strongly believe we have enough options to cover our needs,’” Feld and Mendelson advise. To protect the VCs, they say, offer full anti-dilution protection in case the founders are wrong, and they need to expand the option pool before the next financing.

No one gets everything at once

Equity awards, regardless of their form, are subject to vesting schedules. Traditionally, startups have used a four-year benchmark with a one-year cliff: no ownership until an employee has worked twelve months, and then 25% for each year worked (or an additional 1/48th for every month worked). Yet there’s also the growing recognition that building a successful company usually takes a lot longer than four years, and options are about retaining people to build something great. As a result, longer vesting schedules are becoming more commonplace.

The growing time it takes companies to go public or be acquired is also affecting other stock option terms. Typically, employees have had up to 90 days after leaving a company to exercise their options, which can be costly and come with a large tax bill. Now companies are sometimes extending that period well beyond 90 days so that an employee won’t end up with nothing if they leave long before they can turn their equity into cash.

Boards of advisors and directors

Equity is also suitable for drawing a different kind of talent to your company: experienced people in the field who won’t come to work for you full-time but, if their interests were aligned with yours, might serve as advisors who increase your chances of success. (At this stage of a company, non-founder board members are likely to be its investors, so their equity will be commensurate with the size of their investment.)

Currier, the serial entrepreneur turned venture capitalist, says he typically offered between .1% and .3% of the company to attract an advisor to one of his companies. “What you’re hoping for is that one advisor who tells you something that triples the value of your company,” he says. “The problem is you don’t know which one of the five or six people you’d brought in as advisors will be that person. So you pay them all .2% and hope one gives you that idea that more than pays for itself.”

The takeaway: cash is limited, but so is equity

Giving out equity may feel painless. After all, it’s an easy way to preserve your cash as you staff your startup with top-notch hires that can significantly increase your chances of success. But take the time to understand the value of what you’re giving away, and bring discipline to the process early by creating an employee pool. Then if you have to spend a little extra to get someone really exceptional, as Shukla’s RewardsPay had to do, you’ll know where you stand.



How startups fill the gap between revenue and investment

18:21 | 9 January

Joe Procopio Contributor
Joe Procopio is a multi-exit, multi-failure entrepreneur. Joe is currently building Spiffy, and previously sold Automated Insights, sold ExitEvent and built Intrepid Media.

I get tons of inbound from entrepreneurs and founders, from first-timers with an idea to CEOs with millions in annual revenue, and they all ask what basically boils down to the same question:

“I’ve taken my startup this far, how do I get the money to take it to the next level?”

In 20 years of building companies, roughly half of our companies have taken some form of investment to go after a much larger payoff than our existing revenue would allow. It wasn’t something we celebrated, it was something we felt was mandatory. In other words, there was no other way and outside funding became our best hope.

When you have revenue and you chase funding, you should know what you’re getting into and you should exhaust every other avenue before you decide that someone else’s money is a better bet than your customers’ money. 

Remember: the easier the path, the lesser the payoff. 

The easiest path: venture capital funding

I know it’s heresy to talk about how easy it is to raise money. It’s actually not, and I’ll be the first to admit it: your odds are poor, it’s going to take all your time and energy, and you’re going to be beholden to a bunch of people who have a different vision of your idea than you do.

But if you need scale money, this is the only shortcut.

Now, I say “scale money” because you should only be seeking VC money to scale your business, not establish it. The odds of getting funded for an idea with no current revenue and no current growth are infinitesimally slim. 

So let me start with some truth for the earliest of early-stagers. You’re going to have to walk a harder path, so keep reading.

If you do have revenue, the first thing you have to show a VC associate, the gatekeeper of the firm, is how your existing revenue is going to grow 10x to 100x over the next three to five years. This is standard VC math. 

I’ll leave it to others to debate the logic and/or fairness of the process. My point is that you can put any multiplier you want on zero revenue and the result will still be zero. Even if you’ve got $1,000 in monthly revenue, then that’s about $10,000 in annual revenue, and at best, at 100x, the investor is thinking you might be worth $1 million if all the stars align. 

Most VCs won’t touch a valuation that low unless you’ve got a track record. If you don’t, you’re kind of wasting your time putting a deck together. 

Don’t waste your time. Your startup is probably better than that. You just need to prove it.

The not-so-easy-path: find a rich person



Dear Sophie: what do I need to know about recent changes to the H-1B lottery?

18:45 | 8 January

Sophie Alcorn Contributor
Sophie Alcorn is the founder of Alcorn Immigration Law in Silicon Valley and 2019 Global Law Experts Awards’ “Law Firm of the Year in California for Entrepreneur Immigration Services.” She connects people with the businesses and opportunities that expand their lives.

Today, we’re launching “Dear Sophie,” an advice column that answers reader questions about immigration, particularly with regard to the tech sector.

“My goal is to help people understand immigration laws in a way that lets them overcome borders and pursue their dreams,” says Sophie Alcorn, an immigration attorney based in Silicon Valley. “I believe every question (and answer) helps bring clarity to many and would love to feature yours in my next column.”

Future “Dear Sophie” columns will be accessible for Extra Crunch subscribers; use promo code ALCORN to purchase a 1- or 2-year subscription for 50% off.

Dear Sophie: I lead People Ops for an early-stage enterprise SAAS startup. My company is giving me the green light to hire internationally, but I’ve never gone through this process. I’ve heard there have been some changes to the H-1B lottery. What do I need to know to get started?

— Curious in California

Dear Curious:

Congrats! Glad to hear your company is taking this step — it’s great for the success of your company, and it’s awesome that you’re helping them take on this important challenge. I’m super excited about the changes to the H-1B lottery this year because they are going to benefit early-stage startups quite a bit.

For some context: in the past, it was cost-prohibitive for small companies to invest in preparing an H-1B petition package for a potential hire. There was no way of knowing in advance if a candidate would beat the lottery’s odds and be the one person chosen out of every three applicants. Starting in 2019, candidates with advanced degrees from American universities received an extra bite at the apple, but that still didn’t mean it was a sure thing.

For the upcoming round, the government is adopting an electronic registration system. This change is great for small businesses because you don’t have to invest in legal fees to prepare H-1B petitions until you know that your candidate was already selected and has the opportunity to apply.

As you probably already know, an H-1B is a nonimmigrant visa that lets professionals with bachelor’s degrees or equivalent work experience in specialized fields (such as science, IT, medicine, accounting, law, engineering, mathematics, etc.) gain employment with an American company. This employment needs to be for positions that require their level of expertise at companies that have the budget for their resources.

Most of the requirements for the H-1B visa are set by law, but the details do change once in a while. The government hosts an annual lottery because there is a statutory cap on the total number of new H-1B visas allowed every year, and recent demand outweighs supply.

The government just announced that the lottery format is changing. Here’s what you need to know about the upcoming changes to the lottery, most of which will take effect in Q1 and Q2 of 2020 for jobs starting as early as October 1st, 2020:

  • There will be a new electronic registration system with a $10 non-refundable fee:
    • register online between March 1 and March 20, 2020 to participate; don’t miss this window!
    • fees will be $10 per candidate;
    • the government will select candidates after the initial registration period ends and no later than March 31, 2020.
  • Companies can then file H-1B petitions for anybody who was selected.
  • There will be a 90-day window to submit completed petitions.
  • Upon filing, your company will be required to pay the standard applicable government filing fees (usually roughly $1,500-3,000 for small companies).
  • Premium processing is currently available for an optional $1440 extra. The government will take action within 15 calendar days if you use this option. We’ll see if this option remains available.

There’s a lot of great information out there on the H-1B visa and status, but it’s been under strict scrutiny lately — especially in tech lately. I recommend contacting an immigration attorney for guidance early before the registration window opens.

When People Ops folks like you reach out to me, they want to know how to start preparing now. Here are my most common tips for early-stage startups:

Ask employees and candidates seeking H-1B to gather their documents (such as transcripts, diplomas, resumes, past immigration documents, etc.) as early as possible. I also recommend talking to an attorney to determine if they’ll need education or experience evaluations and if so, getting them done early.

I also recommend they do the following to prepare their early-stage startup for success:

  • ensure that the company’s FEIN Number has been validated with DOL (ask an attorney for help)
  • choose the proper job title with the guidance of your immigration attorney
  • brainstorm the corresponding job duties/description
  • gather the necessary documents from your company
  • take screenshots of your company’s website
  • put together a portfolio of your company’s marketing materials
  • have the company’s latest pitch deck ready to share
  • make sure the company’s taxes are current and you have the returns

As you can see, there’s a good amount of attention to detail required from you, but with some time and a legal team to support you, you’ll do great.

Bringing the best talent to your company benefits everyone involved and is important work. I wish you the best as you begin this process and encourage you to reach out if you need a little help!

Submit your questions to immigration attorney Sophie Alcorn here; all questions will be answered confidentially.



Who will the winners be in the future of fintech?

19:32 | 22 December

Nik Milanovic Contributor
Nik Milanovic is a fintech and financial inclusion enthusiast, with a decade of work across mobile payments, online lending, credit and microfinance.

So what happens when fintech ‘brings it all together’? In a world where people access their financial services through one universal hub, which companies are the best-positioned to win? When open data and protocols become the norm, what business models are set to capitalize on the resulting rush of innovation, and which will become the key back-end and front-end products underpinning finance in the 2020s?

It’s hard to make forward-looking predictions that weather a decade well when talking about the fortunes of individual companies. Still, even if these companies run into operating headwinds, the rationale for their success will be a theme we see play out over the next ten years.

Here are five companies positioned to win the 2020s in fintech:

1. Plaid

In 2014, I met Zach Perret and Carl Tremblay when they reached out to pitch Funding Circle on using Plaid to underwrite small and medium businesses with banking data. At the time, I couldn’t understand how a bank account API was a valuable business.

Plaid’s Series C round in 2018 came with a valuation of $2.65 billion, which caught a lot of people in fintech off-guard. The company, which had been modestly building financial services APIs since 2012, recently crossed the threshold of 10 billion transactions processed since inception.

For those unfamiliar with Plaid’s business model, it operates as the data exchange and API layer that ties financial products together. If you’ve ever paid someone on Venmo or opened a Coinbase account, chances are you linked your bank account through Plaid. It’s possible in 2020 to build a range of powerful financial products because fintechs can pull in robust data through aggregator services like Plaid, so a bet on the fintech industry is, in a sense, a derivative bet on Plaid.

Those 10 billion transactions, meanwhile, have helped Plaid understand the people on its’ clients fintech platforms. This gives it the data to build more value-added services on top of its transactions conduit, such as identity verification, underwriting, brokerage, digital wallets… the company has also grown at a breakneck pace, announcing recent expansions into the UK, France, Spain, and Ireland.

As banks, entrepreneurs, and everyone in-between build more tailored financial products on top of open data, those products will operate on top of secure, high-fidelity aggregators like Plaid.

The biggest unknown for aggregators like Plaid is whether any county debuts a universal, open-source financial services API that puts pricing pressure on a private version. However, this looks like a vanishingly remote possibility given high consumer standards for data security and Plaid’s value-added services.

2. Stripe

Predicting Stripe’s success is the equivalent of ‘buying high,’ but it is hard to argue against Stripe’s pole position over the next fintech decade. Stripe is a global payments processor that creates infrastructure for online financial transactions. What that means is: Stripe enables anyone to accept and make payments online. The payment protocol is so efficient that it’s won over the purchase processing business of companies like Target, Shopify, Salesforce, Lyft, and Oxfam.

Processing the world’s payments is a lucrative business, and one that benefits from the joint tailwinds of the growth of ecommerce and the growth of card networks like Visa and Mastercard. As long as more companies look to accept payment for services in some digital form, whether online or by phone, Stripe is well-positioned to be the intermediary.

The company’s success has allowed Stripe to branch into other services like Stripe Capital to lend directly to ecommerce companies based off their cashflow, or the Stripe Atlas turnkey tool for forming a new business entirely. Similar to Plaid, Stripe has a data network effects business, which means that as it collects more data by virtue of its transaction-processing business, it can leverage this core competency to launch more products associated with that data.

The biggest unknown for Stripe’s prospects is whether open-source payment processing technology gets developed in a way that puts price pressure on Stripe’s margins. Proponents of crypto as a medium of exchange predict that decentralized currencies could have such low costs that vendors are incentivized to switch to them to save on the fees of payment networks. However, in such an event Stripe could easily be a mercenary, and convert its processing business into a free product that underpins many other more lucrative services layered on-top (similar to the free trading transition brought about by Robinhood).



Just because it’s legal, it doesn’t mean it’s right

01:16 | 21 December

Polina Arsentyeva Contributor
Polina Arsentyeva, a former commercial litigator, is a data privacy attorney who counsels fintech and startup clients on how to innovate using data in a transparent and privacy-forward way.

Companies often tout their compliance with industry standards — I’m sure you’ve seen the logos, stamps and “Privacy Shield Compliant” declarations. As we, and the FTC, were reminded a few months ago, that label does not mean that the criteria was met initially, much less years later when finally subjected to government review.

Alastair Mactaggart — an activist who helped promote the California Consumer Privacy Act (CCPA) — has threatened a ballot initiative allowing companies to voluntarily certify compliance with CCPA 2.0 to the still-unformed agency. While that kind of advertising seems like a no-brainer for companies looking to stay competitive in a market that values privacy and security, is it actually? Business considerations aside, is there a moral obligation to comply with all existing privacy laws, and is a company unethical for relying on exemptions from such laws?

I reject the notion that compliance with the law and morality are the same thing — or that one denotes the other. In reality, it’s a nuanced decision based on cost, client base, risk tolerance and other factors. Moreover, giving voluntary compliance the appearance of additional trust or altruism is actually harmful to consumers because our current system does not permit effective or timely oversight and the type of remedies available after the fact do not address the actual harms suffered.

It’s not unethical to rely on an exemption

Compliance is not tied to morality.

At its heart is a cost analysis, and a nuanced analysis at that. Privacy laws — as much as legislators want to believe otherwise — are not black and white in their implementation. Not all unregulated data collection is nefarious and not all companies that comply (voluntarily or otherwise) are purely altruistic. While penalties have a financial cost, data collection is a revenue source for many because of the knowledge and insights gained from large stores of varied data — and other companies’ need to access that data.

They balance the cost of building compliant systems and processes and amending existing agreements with often thousands of service providers with the loss of business of not being able to provide those services to consumers covered by those laws.

There is also the matter of applicable laws. Complying with a law may interfere or lessen the protections offered by the laws you follow that make you exempt in the first place, for instance, where one law prohibits you from sharing certain information for security purposes and another would require you to disclose it and make both the data and the person less secure.

Strict compliance also allows companies to rest on their laurels while taking advantage of a privacy-first reputation. The law is the minimum standard, while ethics are meant to prescribe the maximum. Complying, even with an inapplicable law, is quite literally the least the company can do. It also then puts them in a position to not make additional choices or innovate because they have already done more than what is expected. This is particularly true with technology-based laws, where legislation often lags behind the industry and its capabilities.

Moreover, who decides what is ethical varies by time, culture and power dynamics. Complying with the strict letter of a law meant to cover everyone does not take into account that companies in different industries use data differently. Companies are trying to fit into a framework without even answering the question of which framework they should voluntarily comply with. I can hear you now: “That’s easy! The one with the highest/strongest/strictest standard for collection.”  These are all adjectives that get thrown around when talking about a federal privacy law. However, “highest,” “most,” and “strongest,” are all subjective and do not live in a vacuum, especially if states start coming out with their own patchwork of privacy laws.

I’m sure there are people that say that Massachusetts — which prohibits a company from providing any details to an impacted consumer — offers the “most” consumer protection, while there is a camp that believes providing as much detailed information as possible — like California and its sample template — provides the “most” protection. Who is right? This does not even take into account that data collection can happen across multiple states. In those instances, which law would cover that individual?

Government agencies can’t currently provide sufficient oversight

Slapping a certification onto your website that you know you don’t meet has been treated as an unfair and deceptive practice by the FTC. However, the FTC generally does not have fining authority on a first-time violation. And while it can force companies to compensate consumers, damages can be very difficult to calculate.
Unfortunately, damages for privacy violations are even harder to prove in court; funds that are obtained go disproportionately to counsel, with each individual receiving a de minimis payout, if they even make it to court. The Supreme Court has indicated through their holdings in Clapper v. Amnesty Intern., USA. 133 S. Ct. 1138 (2013), and Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016), that damages like the potential of fraud or ramifications form data loss or misuse are too speculative to have standing to maintain a lawsuit.

This puts the FTC in a weaker negotiating position to get results with as few resources expended as possible, particularly as the FTC can only do so much — it has limited jurisdiction and no control over banks or nonprofits. To echo Commissioner Noah Phillips, this won’t change without a federal privacy law that sets clear limits on data use and damages and gives the FTC greater power to enforce these limits in litigation.

Finally, in addition to these legal constraints, the FTC is understaffed in privacy, with approximately 40 full-time staff members dedicated to protecting the privacy of more than 320 million Americans. To adequately police privacy, the FTC needs more lawyers, more investigators, more technologists and state-of-the-art tech tools. Otherwise, it will continue to fund certain investigations at the cost of understaffing others.

Outsourcing oversight to a private company may not fare any better — for the simple fact that such certification will come at a high price (especially in the beginning), leaving medium and small-sized businesses at a competitive disadvantage. Further, unlike a company’s privacy professionals and legal team, a certification firm is more likely to look to compliance with the letter of the law — putting form over substance — instead of addressing the nuances of any particular business’ data use models.

Existing remedies don’t address consumer harms

Say an agency does come down with an enforcement action, the types of penalty powers that those agencies have currently do not adequately address the consumer harm. That is largely because compliance with a privacy legislation is not an on-off switch and the current regime is focused more on financial restitution.
Even where there are prescribed actions to come into compliance with the law, that compliance takes years and does not address the ramifications of historic non-compliant data use.

Take CNIL’s formal notice against Vectuary for failing to collect informed, affirmative consent. Vectuary collected geolocation data from mobile app users to provide marketing services to retailers using a consent management platform that it developed implementing the IAB (a self-regulating association) Transparency and Consent Framework. This notice warrants particular attention because Vectuary was following an established trade association guideline, and yet its consent was deemed invalid.

As a result, CNIL put Vectuary on notice to cease processing data this way and to delete data collected during that period. And while this can be counted as a victory because the decision forced the company to rebuild their systems  — how many companies would have the budget to do this, if they didn’t have the resources to comply in the first place? Further, this will take time, so what happens to their business model in the meantime? Can they continue to be non-compliant, in theory until the agency-set deadline for compliance is met? Even if the underlying data is deleted — none of the parties they shared the data with or the inferences they built on it were impacted.

The water is even murkier when you’re examining remedies for false Privacy Shield self-certification. A Privacy Shield logo on a company’s site essentially says that the company believes that its cross-border data transfers are adequately secured and the transfers are limited to parties the company believes has responsible data practices. So if a company is found to have falsely made those underlying representations (or failed to comply with another requirement), they would have to stop conducting those transfers and if that is part of how their services are provided, do they just have to stop providing those services to their customers immediately?

It seems in practice that choosing not to comply with an otherwise inapplicable law is not a matter of not caring about your customers or about moral failings, it is quite literally just “not how anything works,” nor is there any added consumer benefit in trying to — and isn’t that what counts in the end — consumers?

Opinions expressed in this article are those of the author and not of her firm, investors, clients or others.



Negotiate for ‘better’ stock in equity-funded acquisitions

22:03 | 20 December

Timothy R. Bowers Contributor
Timothy R. Bowers is the Managing Partner of VLP Law Group LLP.
Andrew P. Dixon Contributor
Andrew P. Dixon serves as Counsel with VLP Law Group LLP.

For many founders, building and selling a successful venture-backed company for cash is the ultimate goal. However, the reality is that some companies will instead receive an equity-funded acquisition proposal in which equity of another private venture-backed company, rather than cash, represents all or a significant portion of the purchase price.

Because all equity is not created equal, it is important for founders to understand how to negotiate for better equity in the context of such an acquisition proposal. This article explores what better equity looks like and some strategies founders can use to negotiate for that equity.

What is “better” equity?

To know what “better” equity is for the seller, it is necessary to understand what the “worst” and “best” stock is in the context an equity-funded acquisition by a private company buyer. The “worst” stock is plain common stock which does not enjoy any special rights and is subject to contractual restrictions which diminish its liquidity profile. Common stock sits at the bottom of the priority stack (after debt and preferred equity) in the event the company dissolves or is sold — thus, it is least valuable. Variations of transfer restrictions (e.g., a prohibition on private secondary sales) may further diminish the desirability of common stock by making it difficult or impossible for the holder to achieve liquidity outside of an M&A event or initial public offering (IPO).

In contrast, the “best” stock is (1) the acquirer’s most senior series of preferred stock, coupled with (2) additional contractual rights enhancing such stock’s liquidity profile. For our purposes here, we’ll call this “enhanced preferred stock.” All things being equal, founders and VCs should have a strong preference for enhanced preferred stock in an equity-funded acquisition for several reasons:

  • Usually, the most senior series of preferred stock will enjoy a liquidation preference ensuring that a certain amount of proceeds (commonly equal to invested capital) from a sale of the company flow to stockholders of that series before proceeds are distributed to junior preferred and common stockholders.
  • Unique contractual rights not shared by common stockholders, like special voting rights with respect to major events and transactions, unique information rights, pro rata investment rights with respect to future financings, rights of first refusal and co-sale rights, increase the stock’s relative value.
  • Beyond the standard set of rights that are usually enjoyed by all preferred stockholders, additional contractual rights of and reduced restrictions on enhanced preferred stock make it more likely that the holder of such equity will achieve liquidity of some or all of its holdings prior to an M&A event or IPO. Such additional rights may include one or more of the following: time or event-based redemption rights (i.e., the right to force the acquirer to redeem equity at a specified price in the future), other liquidity rights tied to future financings or commercial transactions (e.g., the right to sell stock to the investors in the next equity financing), covenants of the acquirer to permit and support private secondary sales and registration rights (i.e., the right to force the acquirer to register stock with the SEC, thereby allowing for unrestricted resale by the holder).

“Better” stock lies somewhere on the continuum between the common stock and enhanced preferred stock poles, with the type of stock and bundle of rights associated with such equity determining its precise location. Additional contractual rights and reduced restrictions may significantly improve the desirability of common stock and perhaps place the holder in a better position than it would have been as a preferred stockholder. For example, a seller able to negotiate the right to sell a certain amount of common stock to investors in the acquirer’s next preferred stock equity financing could be more favorably positioned than the holder of senior preferred stock without any enhanced preferred rights.

Negotiating for better stock. With a framework for understanding what better stock means, below are several strategies sellers can employ in M&A negotiations to obtain better stock than that initially offered by the buyer.

Avoiding dire situations and preserving leverage. Leverage matters in every negotiation and any strategy that ignores this reality is doomed to fail. To state the obvious, the first strategy to negotiate for better stock in an equity-funded acquisition is the first strategy in preparing for any M&A event: companies should do all they can to avoid being in a dire fire sale situation when a buyer comes knocking on their door. If the seller is a failing company seeking a sale as a last ditch effort to avoid shutting its doors, even the best strategies may be useless in negotiation since as soon as the buyer says “no”, the seller will likely fold its hand and agree to the deal offered.


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