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Meet the New SPAC Circus Ringleader: The PIPE Investor


Meet the New SPAC Circus Ringleader: The PIPE Investor

Since late 2019, when the special purpose acquisition corporation, or SPAC, returned to the public markets with a new twist, a circus of activity has breathed new life into the markets for privately-held emerging growth companies, forcing open a large window for public exits not seen in decades. In this “SPAC 2.0 boom,” sponsors of SPAC vehicles first raised large pools of blind capital in the public markets and then struck deals to buy emerging growth companies for ~10x the cash raised plus rollover equity and a second pile of cash in the form of a PIPE.

What is a PIPE, and why is it used for a de-SPAC merger?

“PIPE” stands for “private investment in a public entity,” often priced at a discount or containing a “sweetener” for the PIPE investor to make a more significant commitment than it would otherwise in the public market. The PIPE fundraising process happens after an LOI for a de-SPAC is signed, but before a definitive merger agreement, and is signed and announced concurrently with the latter. Then the SPAC and the target work together to prepare a joint registration statement and proxy filing on Form S-4 and seek SPAC stockholder approval, which requires the U.S. Securities and Exchange Commission to review and clear the de-SPAC transaction. Once the de-SPAC merger closes, the company files a resale registration statement to register the shares of common stock and warrants underlying the PIPE.

PIPE investors include investment funds, hedge funds, mutual funds, private equity funds, growth equity funds, and other accredited large institutional and qualified institutional buyers of publicly traded stock. The PIPE is well suited to complement the SPAC in a de-SPAC merger because of the speed of execution and because it does not require advance SEC review and approval.

SPACs have tapped PIPEs to bring in additional capital in a shorter amount of time to close de-SPAC mergers. Because of the nature of the SPAC process, there is often uncertainty surrounding the amount of cash that will be on hand following the merger. When combined with the SPAC proceeds in trust, the funds from the PIPE work together to provide liquidity for sellers and post-closing capital for the business to grow.

To be clear, in SPAC 2.0, the enterprise value of the target is so many multiples of the SPAC proceeds in trust that a PIPE has become ubiquitous to bridge the value gap. The Morgan Stanley data showed that on average, PIPE capital almost tripled the purchasing power of the SPAC, and for every $100 million raised through a SPAC, adding a PIPE added another $167 million.

Raising funds via a PIPE deal is comparable in some ways to an IPO roadshow in that there is a pitch to potential investors. However, PIPE deals are only open to accredited individual investors, and the share price is determined by reference to the de-SPAC merger valuation. When looking for PIPE investors in SPACs, targets look for high-profile names whose investment at a specified helps to validate the deal. This investment by well-respected investors can help to mitigate some of the risks that come with SPACs.

While PIPE deals are seen as an attractive option partly because they avoid many SEC regulations, all the attention SPACs have received, and their incredible spike in popularity has drawn the attention of regulators. This could mean additional regulations are on the horizon for both SPACs and PIPEs. But for now, these two continue to be an attractive combination for those looking to bypass the traditional IPO process.

What is SPAC 2.0 and why is the PIPE investor the ringleader?

SPAC 2.0 was essentially the cash in the SPAC vehicle combined with a new private fundraiser in the form of a PIPE merged into a privately-held emerging growth company. The resulting party for SPAC IPOs, de-SPAC transactions, and even traditional initial public offerings, or IPOs, continued through the end of the first quarter of 2021, with hardly even a little intermission for the first COVID lockdown. According to data compiled by Morgan Stanley, in 2020, PIPEs generated $12.4 billion in additional funding for 46 SPAC mergers.

The SPAC 2.0 structure had something for everyone:

-the emerging growth company got a public exit without having to go through a traditional IPO

-the emerging growth company stockholders got a snap spot-valuation based on three-year out financial projections not available in conventional IPOs

-the emerging growth company got a public acquisition currency in the form of listed stock, validation in the public markets via the stock exchange listing, and cash to the balance sheet to power growth

-stockholders in the emerging growth company could negotiate for some amount of immediate liquidity

-stockholders in the emerging growth company got long-term liquidity via the public trading market

-SPAC stockholders and PIPE investors got access to emerging growth companies that weren’t otherwise going public

-SPAC sponsors made their “carry” in the form of 20% of the equity in the SPAC (pre-dilution) plus warrants in some cases and a path to liquidity with a short lock-up period

-SPAC sponsors could rent out their names, network, and prestige and get a quick exit

While in SPAC 1.0, the SPAC sponsors would take over the target and operate it like a private equity buyout fund for long-term capital growth, in SPAC 2.0, the SPAC sponsors are like bankers, raising capital and then handing over the keys to management of the emerging growth company in exchange for a commission.

But the lights went out for the SPAC party in April 2021 when President Biden appointed a new chair to lead the Securities and Exchange Commission. Upon taking office, new SEC Chair Gary Gensler effectively closed the market for SPACs by announcing a compliance review, putting long-standing SEC policy and rule interpretations in doubt. Transaction participants reported that SEC staffers reviewing their pending transactions started asking questions, requesting changes, and appeared in no hurry to clear pending “de-SPAC” deals.

The market for new issues froze up, and the demand for de-SPAC transactions ground to a halt. The trading index for recently “de-SPAC’ed” public companies dropped double-digit percentage points.  Investors started to lick their wounds.

When the SEC began clearing SPAC mergers again in early summer 2021, it was not as simple as just turning lights back on and taking its foot off the brakes. That is because PIPE investors, who provide fresh capital to the company that is merging with a public SPAC vehicle (commonly referred to as a “de-SPAC transaction”), have taken their place as the new ringleaders at the SPAC circus. The amount of capital PIPE investors are willing to put into a de-SPAC transaction at a given valuation and what sweeteners have become the deciding factor as to whether a de-SPAC transaction can get done.

PIPE investors no longer accept transaction terms as proposed and have started to make new commitments contingent on adjusted valuations, redemptions of SPAC sponsor promote securities, and better alignment to create better after-market trading conditions. Knowing what PIPE investors want and how much they will pay has become the new ticket to success in the SPAC market. This makes the PIPE investor the new ringleader in the SPAC 3.0 cycle.


Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.


Rise of the Machines: Two Factors Driving Automation

Today I want to talk a little about automation. I’ve talked earlier about the future of work, and there are some obvious trends like remote work and digital transformation. But automation is a significantly growing field, especially in retail markets. Trends in the industry respond to market pressures that affect the supply of and demand for labor. When human labor is cheap, automation will be used less. When human labor is scarce or expensive, automation will be used more. Today, I want to focus on two key market pressures that are driving demand for more automation.

First, declining birth rates are signaling potential labor shortages in the future. According to the CDC, in 2020, the total fertility rate (TFR) for the U.S. dropped to 1637.5 births per 1000 women, a decline of 4% compared to 2019. While some might blame the pandemic for the decrease, the 2020 number follows a downward trend that started in the 1970s. With fertility below the replacement rate of 2100 births per 1000 women, the U.S. labor force may be starting to decline. With an aging population and fewer workers, companies will likely be forced to increase automation or increase pay to attract and retain employees.

Second, rising labor costs are already encouraging companies to experiment with more automation. Depending on which pundit you ask, you will get very different answers as to why labor costs are rising now, but whatever the reason, businesses are grappling with higher personnel costs. As an article in Forbes recently noted, “The law of supply and demand says this scarcity makes existing workers more valuable, letting them insist on higher pay and better conditions.” As a result, some companies are turning to automation.  Fast-food chains are experimenting with automated fry cooks. The drive-thru is also poised to see more automation. Other experiments include cashier-less grocery stores and last-mile delivery.

Retail automation, therefore, seems poised for growth, but automation likely will not be a good fit for every job. Peanut the robot, for example, demonstrates that automation cannot effectively replace wait staff yet, but you may have noticed an increase in self-checkout lines in many stores. Kiosk ordering at restaurants has also been rising in popularity over the last few years, and as noted above, fast-food restaurants are experimenting with highly automated systems. In many cases, automation has the advantage of driving down operating costs. Robotic systems, for example, may have high capital costs, but they do not tire or want health benefits like human workers. Therefore, robotic systems can reduce long-term costs and save companies money.

All of these automation systems build on technology trends that have been growing for years: voice recognition, touchscreen interfaces, online shopping, and robotics, to name a few. Companies investing in these spaces will likely do well once retail automation really takes off. Some may worry that automation will eliminate jobs, but that likely will not become a serious problem. Throughout history, automation has eliminated some jobs while creating others.  I recommend worrying less about the jobs that automation will eliminate and instead focusing on what new kinds of jobs will be enabled by the new technologies.


Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.

blockchain technology

Solving Supply Chain and Security Problems with Blockchain Technology

In the last few years, blockchain has become a buzzword in the tech industry. The concept entered the public consciousness through Bitcoin, which uses a specific blockchain as a core component of its consensus algorithm. Back in 2017-2018, many experts were proclaiming “blockchain, not Bitcoin,” while today, Bitcoin’s latest meteoric rise and ensuing crash has flipped that narrative on its head. But while blockchain technology is often associated with cryptocurrencies, its application is powering the fourth industrial revolution and mainstreaming applications. In cybersecurity, blockchain technology can help improve security and resiliency, at a cost.

To understand blockchain-based cybersecurity, one must first understand some basic principles of how a blockchain works. A blockchain is one form of distributed ledger technology (DLT), meaning that it is used in distributed systems. Distributed systems offer greater resiliency than centralized systems since a decentralized network has no single point of failure, but that resiliency comes at a cost. Without a single source of truth for the network, reaching consensus can be difficult. A blockchain typically serves as part of that consensus mechanism—establishing a reliable record for the system to use.

Implementations vary between different blockchains, but in general, a blockchain takes some chunk of data and connects it cryptographically to the previous chunk of data, forming a chain of data blocks—a blockchain. That data can itself be encrypted using public-private key pairs so that only authorized users (or owners) can access the records.

Typically, each block of data includes a header, which summarizes the contents of the block. That header includes a cryptographic hash of the previous block’s header, and that hash forms the link between each block. Because each block builds on and explicitly references the contents of the previous block, a properly implemented blockchain is extraordinarily difficult to alter. In order to change a block’s data, every block after that block must also be edited to build on the new hash of the altered block. Consequently, older blocks are much harder to change than newer blocks.

The immutability and decentralization of a blockchain make it well-suited to certain applications. For example, financial institutions can benefit from unambiguous, cryptographically provable ownership records. Bank of America recently announced that it joined the Paxos network to speed up settlement times for stock trades, while JPMorgan has settled billions of dollars of transactions on a private version of Ethereum. From healthcare records to private genetic data, blockchain technology is also revolutionizing the medical industry. Legally, blockchain implementations could help businesses by providing a reliable, auditable data record.

As we digest the takeaways from the late spring 2021 crypto-crash, gas fees required to process transactions over Ethereum blockchain networks and environmental costs associated with Bitcoin mining need to be reexamined. But what are gas or transaction fees? While “gas fees” refers to the computing power required to securely execute a transaction on the Ethereum blockchain, they can be analogized to the transaction fees to process any crypto-currency transaction. On the Bitcoin blockchain, fees are required to pay the network’s miners to accept and verify a transaction.

While these gas fees and mining fees are an essential part of the security behind the scenes, they have become substantial deterrents to the growth of the digital asset marketplace. Startups that can create cost-savings in gas or mining fees to process transactions will be well-positioned to lead the next generation of blockchain security solutions.

If your company is considering implementing blockchain technology, consider carefully what information needs to be stored. My advice is to evaluate whether you need to use a blockchain. It is a powerful and useful technology, but it is not the right tool for every job, regardless of how popular it is. Unlike a traditional database, data stored on a blockchain effectively cannot be altered, so you need to make sure that whatever records you include compliance with all applicable laws and regulations. A mistake here could be extraordinarily difficult to fix. In some industries, the benefits will be well worth the risks. In other industries, the transaction costs need to first come down.

Some solutions to consider for industries where blockchain makes sense today:

-Bide your time. Wait it out. The market is evolving rapidly, decentralized and dynamic. With so many costs with no consolidation, new competitors are entering the market every day, and chances are that fees will reduce as a percentage of the transaction over time.

-You could also look for new blockchains or wrappers that “wrap around” existing blockchains to support more transactions, relieving congestion and offering lower fees.

-Partnering with value-priced wallets offering scaling technologies enabling lower fees is also an avenue to explore.

In the end, blockchain cybersecurity simply leverages the immutability and decentralization of a blockchain to make tampering with data more difficult while reducing centralized points of failure and giving users more control over their data. Ignore the hype, and evaluate whether this technology is right for your use case. Periodically reevaluate. This is a dynamic technology, and so is the market.


Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley.  Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.


M&A Includes Smart Navigating of Culture Issues When Merging

Mergers and acquisitions are a common part of the corporate life cycle. For example, in the tech industry, many established companies will expand into new markets by buying startups that are innovating in emerging fields. But integrating a tiny startup into a much larger company can be challenging because they may operate in very different ways. Any merger could face similar issues, even with companies that seem similar. However, companies undergoing a merger can mitigate these clashes by recognizing each organization’s cultural distinctives and seeking thoughtful changes that benefit the combined whole.

A number of years ago, Deloitte conducted a survey to investigate issues of culture in mergers and acquisitions. The report defined culture as “the long-standing, largely implicit shared values, beliefs, and assumptions that influence behavior, attitudes, and meaning in a company.” In other words, corporate culture is how employees as a group think and act, and sometimes, cultural differences can become serious enough to derail integration.

As a simple example, a small startup might have Ping-Pong tables in the break room and provide sushi lunches for everyone on Fridays. These niceties may be less likely to persist at a large company with a stricter culture, so a merger between the two corporations could lead to disagreements between “fun” and “serious.” While disagreements over perks might frustrate employees, cultural differences can be much more serious, such as how leaders make decisions or how managers relate to their subordinates.

The first step to reconciling cultural differences is identifying them. As Deloitte notes, “The most insightful cultural observers often are outsiders, because cultural givens are not implicit to them.” Consider engaging key people from both companies to work on the cultural differences and decide how to reconcile them. This cultural integration team should hash out the details of what the key differences are, what needs to be kept, and what needs to be changed.

Early in the integration process, have the team start identifying how each company operates. Management style is an important aspect, but you should also consider how employees interact with each other and with managers within the company. Try to identify the implicit assumptions that both companies have. Once you have identified these assumptions, determine which ones align with the goals and vision of the combined company. Keep what will help.  Change what will not.

Throughout the process, make sure that the integration team communicates clearly what is happening and why. But do not simply dictate what changes will be made. Genuinely ask for input from employees at both companies. Keep them in the loop. Many people are wary of change, but transparency and being willing to listen will help prevent alienating anyone, which will encourage employees to stay.

When cultural integration is handled well, the combined company benefits from the strengths of the original organizations. McKinsey points out that “A merger provides a unique opportunity to transform a newly combined organization, to shape its culture in line with strategic priorities, and to ensure its health and performance for years to come.” Seize the opportunity and build a new corporate culture that benefits everyone involved.


Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley.  Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.

quantum computing

Quantum Computing Advantage: Today and Tomorrow

To date, the power of computing has enabled a remote economy, remote healthcare, remote collaboration, remote education, secure and contactless transactions, and intelligence that surpasses the human mind. New quantum computing power will usher in a brand new era — providing massive rewards to the companies and countries leading in the space, leaving laggards in the dustbin of history.

Paving a New Road Ahead

We didn’t need MIT to name quantum computing a breakout technology back in 2017 and again in 2020 to know quantum computing is paving a new road ahead. Recently, Google solved a problem in just over three minutes with a quantum computer that would have taken a supercomputer longer than 10,000 years to solve. While excellent news, not many understand what a quantum computer does, and many investors don’t know what quantum computing means for their portfolio. Still, the quantum computing opportunity has never been more relevant than it is today.

In the last few years, quantum computing has been making traction, with many companies building systems that aren’t powerful enough for most real-world use cases yet, but still, show promise. Tomer Diari, an investor from Bessemer Venture Partners, told TechCrunch, “Quantum computing will drive a paradigm shift in high-performance computers as we continue pushing the boundaries of science deeper into the realms of science fiction.”

The Leader in New Tech

In last year alone, several breakthroughs from research, venture-backed companies, and the tech industry have unlocked the challenges in scientific discovery. This has moved quantum computing from science fiction to reality and armed it to solve significant world problems.

Companies like Atom Computing leveraging neutral atoms for wireless qubit control, Honeywell’s trapped ions approach, and Google’s superconducting metals, have all seen first-time results, setting the stage for the first commercial generation of quantum computers.

At just 40-80 error-corrected qubit range, these systems could deliver capabilities that surpass classical computers, which will, in turn, speed up the ability to perform better in areas like thermodynamic predictions, chemical reactions, resource optimizations, and financial predictions. Companies like Microsoft, IBM, and Intel, and Google are further ahead than anyone else has been to unlock the quantum computing scope. As many technologies and ecosystem breakthroughs begin to converge, the next year will be a decisive moment.

Investors Are Spending

Recently, Quantum computing startup Rigetti Computing raised US$79 million in a Series C funding round, which was led by Bessemer Venture Partners and intended to advance its efforts in making quantum computing commercially viable, according to Business Times. EDBI, Singapore’s Economic Development Board, Franklin Templeton, Alumni Ventures Group, DCVC, Morpheus Ventures, and Northgate Capital, also participated in the round.

“This round of financing brings us one step closer to delivering quantum advantage to the market,” said Chad Rigetti, founder and CEO of Rigetti, a company that builds and delivers integrated quantum systems over the cloud and develops software solutions optimized for hybrid quantum-classical computing. Hybrid models like this one leverage quantum and classical computations – a more practical quantum computing approach.


In a piece published in Science, researchers in China used quantum mechanics to perform computations in minutes. This would have taken billions of years using conventional machines. The research, which used photonic quantum computers, shows what claims to be the very first definitive demonstration using a “quantum advantage” to solving a problem that would have been impossible with classical computers.

However, as mentioned above, last year, Google built a quantum computer that they said achieved “quantum supremacy” and performed computations in minutes that would have taken the most powerful supercomputers tens of thousands of years. Google’s quantum computer was programmable. Google’s claim has been contested throughout the quantum computing field and many argued that a classical supercomputer could have performed the computations faster with a better algorithm. This back-and-forth and the fact that the area can’t agree on whether to call these achievements “quantum advantage” or “quantum supremacy” shows quantum computing is still a developing technology.

Looking Ahead

A quantum computer comprises qubits that can store an infinite number of values while still providing a single measure. Still, a regular computer can only store one value in one register, according to Forbes. Like A.I., the quantum world is entirely built on probabilities, which has led us to be engulfed in fascination with the possibilities and chances on the horizon. Both the hardware and algorithms have a long way to go until they grace our level of environments. It’s not an unattainable innovation, though – it’s reachable enough to learn and research for now.

Recent signs show that the lab’s progress is starting to transfer into commercial products, specifically in cloud computing. Xanadu announced a partnership with AWS to bring its open-source quantum software library PennyLane to the cloud computing giant. Additionally, IBM reached one of the most accepted general quantum computing performance measures on one of its systems.


Louis Lehot is a partner and business lawyer with Foley & Lardner LLP, based in the firm’s Silicon Valley, San Francisco and Los Angeles offices, where he is a member of the Private Equity & Venture Capital,  M&A and Transactions Practices and the Technology, Health Care, and Energy Industry Teams. Louis focuses his practice on advising entrepreneurs and their management teams, investors and financial advisors at all stages of growth, from the garage to global. Louis especially enjoys being able to help his clients achieve hyper-growth, go public and to successfully obtain optimal liquidity events. Prior to joining Foley, Louis was the founder of a Silicon Valley boutique law firm called L2 Counsel.


Tales from the Trenches: Founder Equity and Founder Agreements in the Pandemic

From day one, it’s crucial to put your company on the right path. With proper planning, you can avoid a number of common problems that would make investors run for the doors, such as co-founder disputes, tax issues, and cap tables. Startup equity is one of those things that most founders struggle with unless they have an MBA.  But as with all of life, founders’ paths may grow apart for different reasons. It’s one thing when the “divorce” is peaceful, but sometimes situations become very complicated. In a blink of an eye, you’re fighting over the “custody” rights with someone who was previously on your side.

With the added stresses of the pandemic—working from home or working from anywhere—and the pivots required for businesses to adapt their models and work styles to the new normal, we are seeing significant pressure placed on the relationships between founders and other founders, between boards and founders, and between investors and founders.

Founder equity splits. When considering how to initially split founder equity among the various co-founders, some of whom may be present, and some of whom are merely a twinkle in your eye, startups should think long term.

First, consider the relative contributions each person will make.  While everyone says they are “all in” at the start, are they quitting their jobs? Have they invented something? Is their role critical to fundraising or engineering? Who is adding the most value now, and who will add value later? What cash is available? Get clear on these issues from the start and understand that they will evolve over time.

Types of startup equity. As to the types of startup equity, they are generally structured as common stock at formation. The price per share is usually insignificant, or what is referred to as “par value,” a “peppercorn,” or close to zero. This is referred to as “sweat equity,” which is vested over time.

Founder stock terms can also include some of the elements typically found in preferred stock, such as governance rights, liquidation preferences, and super-voting rights. Special founder terms can be a red flag for venture capital investors, and for that reason, particular consideration should be given as to whether such terms are reasonably obtainable.

At formation, cash investors typically receive a convertible note, a simple agreement for future equity, or series seed preferred stock. Some founders put in cash at the formation and structure the cash investment in one of these instruments.

Who gets what? There are four groups of people who typically get equity in the early stages:  founders and co-founders, advisors, investors, and employees, and consultants. Who gets what is more art than science, and there is no simple answer. Numerous websites offer purported “co-founder equity split” calculators and practical advice.

Equity incentive plans. Stock options are the typical currency for employees, consultants, and advisors of startup companies. Restricted stock units, restricted stock awards, phantom stock, and a large assortment of hybrid instruments may also exist.  In early-stage and venture-backed startups, the currency is usually a stock option. Stock options can be structured in a number of ways for tax purposes. Typically, they can be “incentive stock options” or “ISOs.” If options do not qualify for ISO status, they are referred to as “non-qualified” stock options, or “NSOs.” An ISO gives an employee the right to buy shares with the profit taxed at the capital gains rate, not the higher rate for ordinary income.

Vesting. Founder equity, like stock options, typically vests over time. Founder equity is usually subject to repurchase by the company, with one-fourth of the equity ceasing to be subject to repurchase, or vested, after a one-year cliff. After that, founder equity vests monthly or quarterly until the culmination of four years from the formation. Sometimes, repeat entrepreneurs can obtain equity without offering the right of repurchase or reverse vesting, or with reduced vesting, but four years is the standard.

Stock options are not actual ownership, and there is no cash outlay upon grant. These options become exercisable after one year from the initial vesting date, which is usually the date of grant, and they vest in monthly or quarterly installments until four years have transpired from the initial vesting date. In order to exercise stock options, the holder pays the exercise price, which for tax purposes must correspond to fair market value upon the date of the grant. Unless the option has ISO status, upon subsequent exercise and sale, it would be taxed at ordinary income tax rates.

Cap tables. Founders are well served to ensure that their companies use a technology-enabled vendor to store the company’s capitalization records in an automated, secure, and cloud-available format.

409A valuations. In a nutshell, Section 409A of the Internal Revenue Code provides a safe harbor. It suggests that the IRS will not challenge an exercise price as being below fair market value if a third-party independent valuation firm established the fair market value, and that value was approved by the board of directors, all within the prior year of the grant. While there is much fine print and some exceptions, a 409A valuation is generally important to obtain once a year and after each financing round. This risk of doing nothing is that the IRS could argue that the option was granted below fair market value and impose a higher tax rate on the income or gain.

When things change. After your company’s formation is complete, the founder equity has been divided, the equity incentive plan approved, and stock options doled out, life goes on. The world turns, and things change. Co-founders join, co-founders leave, co-founders fight, key employees join and depart, venture capital is raised, and M&A transactions come and go.

Founder roles adjust over time. It’s only natural. So, as well, should their salaries, bonuses, commissions, downside protections, and equity stakes. These are all easy to adjust when things are going well, but what about when things go sideways? Management carve-out plans can provide incentives for people to struggle through a tough spot.

Founder break-ups and departures. When founders leave, the first questions asked are whether the equity is vested and what happens to it. If unvested, the company should repurchase it at the issue price. For vested equity, founders will want it bought back at fair market value, and investors won’t want precious dollars going out the door to provide liquidity to someone who is leaving. Deals are struck where founders have something that investors want, like super-voting rights, board control, and exit rights. When the parties can’t agree, founders who push the envelope too far risk getting recapitalized and diluted, being terminated for cause, undergoing investigation, and having their information rights clipped. Does the founder have the right to severance? Is it enough to buy peace?  Non-competition agreements post-termination of employment are generally not enforceable in California, so this can be another carrot that departing founders can dangle in exchange for a buyout of their shares. Will the remaining team know where the bodies are buried, or is a consulting agreement with the departing founder required to make sure her or his services are available when needed? Was there a bonus due? A commission? Inevitably, companies and departing founders will need to get along to ensure a good exit.

Mergers and acquisitions. It is not uncommon for companies to be put up for sale when a founder departs, and market participants expect it.  So for boards and founders in a deadlock, is it the right time to bring things to a boil? Who constitutes the universe of potential strategic and financial buyers? Is it feasible to raise a growth equity round or “minority recap” with primary and secondary capital to reshuffle the C-suite and the cap table? Is a management carve-out plan needed? A new retention plan? Or restructuring? Potential scenarios abound…

What happens next. Invariably, after a founder divorce, the parties need to find a way to get along…in the board room…to raise capital…to help sell the business…to market the message…to evangelize the mission.

Things sometimes fall apart. Founders have to know how to keep things together until the next off-ramp is in sight.


Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities, and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions. 

digital wallet

Digital Wallet Usage Soars in a Post-Pandemic World: Big deals in Venture Capital, IPOs and M&A are Following the Digits

In the wake of the global pandemic, alternative payment methods have been required to transact business at nearly all levels of the economy. The market for alternative payments was already going through a natural transition before social distancing and lockdown dramatically accelerated growth in the digital sphere.

Over the last decade, digital wallets have grown from a niche payment option to a global phenomenon – with 22 percent of point-of-sale spend globally in 2019. Asian consumers and American millennials are used to seamless payments for daily transactions – with increasing expectations for simple, secure ways to make payments. Today, Asia leads the world in digital wallet adoption, and Chinese leader Ant Financial is on the precipice of what will perhaps be the largest IPO in the history of the world. But eye-popping financial results at PayPal and Square, fueled by Venmo and Cash App, are proof that digital payments are gaining traction with mainstream American consumers.  Investors have taken note.

Big deals in venture capital, IPOs and M&A transactions are following the money, as digital payments are becoming ubiquitous in both new and emerging markets. Smart investors will be well advised to beware of the lurking regulatory and legal issues faced by digital payments businesses before transacting.

What are digital wallets?

Digital wallets, also known as mobile wallets, are consumer-focused apps that facilitate payments, typically via smartphone. Mobile banking apps tend to accrue fees or recycle money into loans, but digital wallets don’t. In the late 1990s, commercial versions of digital wallets became popular, with PayPal as one of the first well-known examples. Soon after, the technology reached mainstream once smartphones came into our lives. In the U.S., companies like Zelle and Venmo have gained momentum by creating simple peer-to-peer mobile payments. Big tech companies are betting big on digital payments, evidenced by Apple Pay, Google Pay, SamsungPay, WhatsApp Pay, and more.

Digital wallets in Asia – a duopoly

Today, Asia is the hub for digital wallet innovation. While the trend is speeding up in many parts of the world, digital wallet adoption in Asia is unparalleled. In fact, in China, digital wallets account for 48 percent of payment volume and seven percent of e-commerce spend. Mobile wallets have been successful in Asia because they provide a solution that is better than cash.

The innovation in Asia has coincided with the rise of smartphones and super apps use, which helped the area get ahead. Additionally, digital wallets in APAC countries make up 58 percent of regional e-commerce payments and have surpassed cash at point-of-sale. But, their ubiquity in Asia presents a barrier to startup opportunity, as tech giants dominate certain countries in the region. For instance, Ant Group’s Alipay and rival Tencent’s WeChat Pay maintain a mobile payments “duopoly.” According to The Economist, in Asia, Alipay and WeChat Pay account for 54 percent and 39 percent of the country’s mobile payments market by value, respectively. These companies are processing trillions of dollars in transactions each year, while in economies like Japan and South Korea, credit cards are still the most popular form of payment. In other regions like South Asia and Southeast Asia appear to offer more room for startup growth. Meanwhile, India is home to 34 percent of digital wallet deals, followed by Singapore at 19 percent.

Digital wallets in the United States – opportunities and challenges

Digital wallet adoption is now accounting for 24 percent of e-commerce spend in the U.S., according to data from Worldpay. Digital wallets are going up against an engrained credit-card dominated system that uses rewards and travel programs to stick to customers over the long term. While QR codes have been a powerful lever for mobile wallets in Asia, the trend is just beginning to arrive in the U.S.  Key retailers like Starbucks and Walmart have added QR codes to the register option, and their use in the U.S. during the pandemic has enjoyed the substantial benefit. For example, QR codes are being implemented by restaurants to allow customers to order and pay for meals on a contactless basis, enabling safety and cost reductions from disposable menus and less waitstaff.

Attacking the U.S. market for digital wallets involves special challenges:

-Looking beyond the initial transaction to compete with sticky loyalty programs, and indeed, find ways to incentivize customers.

-Higher transaction volumes between the different value chain players require interoperability and centralized infrastructure.

-Security and compliance costs to secure the highest quality, lowest risk and great number of customers.

Venture capital investment

So far in 2020, digital payments companies, Stripe, and Adyen raised giant piles of cash from venture capital and other investors. Leading digital payments investors include Coatue, Insight Partners, DST Global, Blossom Capital, and numerous sovereign wealth funds. While the amount of capital that venture capital firms deployed into emerging growth companies declined 11% on a year-over-year aggregate basis in Q3 2020, fintech deals were up, with digital payments leading the surge. Payments solutions embedded in the end-user experience for non-financial businesses are gaining traction, together with data collectors and infrastructure players.

Accelerating M&A in digital payments

While the eye-popping venture capital financings of unicorns like Stripe’s $600M Series G preferred stock capital raise (at an estimated enterprise value of $36B) made headlines, digital payments solutions also drove significant M&A volumes in 2020.  This was evidenced by three acquisitions by the U.S.’s largest credit card networks American Express, Mastercard, and Visa. In January of 2020, Visa transacted to acquire Plaid for a total potential value in excess of $5B. In June of 2020, Mastercard transacted to acquire Finicity, a financial data aggregator, for a deal value in excess of $1B.  In August of 2020, American Express announced its acquisition of fintech lender Kabbage, aiming squarely at the small business market with a broader set of payments products.

In the digital wallet world, the ability to collaborate with other value chain players – and even new industry entrants – could be one of the most unique and innovative features of a successful company. This phenomenon was evident in Visa’s announced acquisition of VC-backed Plaid. Depending on how they leverage the network effects, industry leaders can find a way to capitalize on the massive amount of data that exists along the value chain. This data will help create and own standards and to design platforms for improved overall customer experience.

Regulatory issues with digital wallets

Due to regulations, digital wallet players are very regionalized. For example, Apple Pay is a big player in the U.S. but has zero presence in India. Additionally, Facebook’s WhatsApp Pay roll out in India has been held up by countless regulatory issues. Specifically, Asia’s fragmented regional regulatory landscape comes with an array of legal challenges. For example, licensing procedures may vary across geographic markets – without more consistency, and the different local regulatory requirements may result in increased costs and the amount of time required for companies to expand their digital wallet footprint.

In the United States, compliance with federal and state money transmitter laws is a byzantine enterprise, and often just the tip of the iceberg in terms of regulatory compliance.  In addition, digital payments businesses must comply with:

-The Consumer Financial Protection Bureau and its prepaid rule, which requires a regulated entity to provide a consumer with two disclosures prior to acquiring a prepaid account. Legal challenges to the prepaid rule are gaining steam, but in the meantime, compliance should be architected into the business model.

-Anti-money laundering rules issued by the Financial Crimes Enforcement Network (or FinCEN) if the business provides “money services.”

-Banks and bank affiliates must also comply with the Bank Holding Company Act.

-The Office of the Comptroller of the Currency, or OCC, can provide a further layer of regulation on top of embedded functionalities. A federal regulatory movement is afoot to combine the byzantine layers of regulation between the federal government and the various state and local agencies into a single federal system.  State regulators are pushing for a passport system like Europe where regulation by one state would suffice for all states “opting in”.

During the pandemic, some non-U.S. and U.S. federal and state regulators have implemented regulatory sandboxes, where requirements are temporarily relaxed to provide spaces for new platforms to test new technologies.  Policies should support access, rather than raise barriers to adoption.  The smartest startups are engaging with regulators, while architecting compliance into the product roadmap, to ensure regulatory compliance.

Meanwhile, investors should do their due diligence prior to committing capital, as in addition to all of the regulatory compliance issues, digital payments companies are vulnerable to a data breach, cyber-attack and theft, and are often built with software containing lines of code with open source.

The future of digital payments looks green.

Good advisors can help navigate key business, regulatory, and legal issues at the formation stage, in the scaling phase, and then to achieve optimal exits from digital payments’ businesses.


Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying, and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies, and investors with sound legal strategies and solutions. 

life sciences

Life Sciences Real Estate in the Time of COVID-19

Increased funding plus employees that need an office makes the Life Sciences real estate sector resilient in a global pandemic.

The life sciences industry has become one of the most talked-about sectors as the entire world races to find a vaccine for COVID-19. In the first six months of 2020, investors have spent more than $16 billion on life sciences, while the National Institutes of Health (NIH) continues to increase its grants. In 1994, NIH gave out $11 billion in grants, and by the end of 2019, that number jumped to $39.1 billion – fueled by COVID-19-related therapeutics, antibody tests, and vaccines. Additionally, the aging U.S. population needing life-sustaining care, wellness-conscious millennials, and a prescription drug market on track to reach $1 trillion by 2022 has also played a part.

In an effort to continue research, development, and production, life sciences companies, owners, and operators of laboratories and office space are fast-tracking the use of current and new technologies.

The Importance of Technology

Over the years, technology has improved the R&D landscape of life sciences by significantly reducing costs. Connections between tech and biotech are creating more targeted drug development, replacing the previous time-consuming theories. Nowadays, interaction simulations can be run at the click of a button, and clinical trials can be done quicker and cheaper through technology efficiencies. Artificial Intelligence (AI) has become so valuable in finding links in the ever-growing global data resources. Also, it has created more platforms and business opportunities for biotech companies to utilize.

These days, many work-from-home policies are hard to apply to the work done in labs. So, life sciences companies have relied on scheduling and remote communication tech to coordinate calendars for on-site employees to conduct activities that cannot be done at home. Calendar tools with features that allow all employees access to real-time scheduling software have also become more widespread. And some companies have even sped up the integration of cloud-based platforms into ongoing research. This movement toward remote research tools has been inspired by the pandemic, allowing researchers to analyze data from home and focus during their time in the lab.

Market Applications

The pandemic has forced pharmaceutical companies to confront new challenges to traditional methods when conducting clinical trials. Many life sciences companies have had to ramp up fast, integrate virtual engagement into their clinical trial protocols, all while using telehealth technologies to connect with trial participants more widely than ever before.

In fact, in March 2020, the U.S. Food and Drug Administration issued guidance bolstering clinical trial sponsors to “evaluate whether alternative methods for safety assessments (phone contact, virtual visit, alternative location for the assessment…) could be implemented if necessary.  Some industry experts this transition to more tech-focused engagement would have taken many more years without the momentum ignited by the pandemic.

Additionally, COVID-19 has had a monumental impact on how technology is used in today’s drug development and drug applications. Many life sciences companies are increasing the use of AI in the search for a vaccine and identifying existing drugs that may be repurposed for therapeutic solutions. AI can make data collection and analysis so much more efficient in clinical trials and can be used to synthesize data too fast to determine drug candidates’ safety and efficacy.

Who’s Investing?

Today, with a significant focus on health and wellness, life science companies expand with large investments from financial and corporate venture capital groups. As a result, investment capital is surging into the life science market. The U.S. is the leader for investment by a lot, with China right behind it, having had some large investment rounds. While the life science market is healthy, other industries are in distress. As we all know, retail is in trouble, and corporate offices are struggling, especially in the wake of COVID-19. With the increased telecommuting, the future of the office sector is uncertain. So, life sciences have become a focus in the real estate industry, making it attractive to investors looking for an opportunity.

There is a lot of VC money being invested in life sciences, so these companies are well-capitalized. This sector has traditionally weathered economic challenges well. Think tech crash of the early 2000s and the Great Recession as examples. Since life science companies like to invest in their premises and stay long term, rents are higher, making life sciences a really attractive investment opportunity right now. Rents are continuing to increase, with sustained growth in most areas, and that growth has been consistent over time, making for a smart investment.

Key Issues to Watch For

To manage the impact of the COVID-19 pandemic, owners and managers of properties that house life sciences offices, manufacturing, and laboratory space have been able to apply many of the pandemic-related solutions that they have used elsewhere. Given that many labs are typically single-tenant buildings, landlords can cater to unique concerns. However, life sciences tenants can be less experienced than others, presenting landlords and property managers with an opportunity to add value by providing tenants with advice on the solutions they have seen work effectively across the buildings they own and manage, such as sanitization and touchless technologies.

Long term, some see the pandemic and corresponding focus on the design and repositioning of spaces for tenants as a continuing driver toward developing healthy buildings. The users of life science office and lab space are more than likely to be some of the most highly-educated consumers of real estate in any market. For them, the management of space in a sustainable way has become an expectation instead of a plus. Moving forward, competitive advantage will be the integration of health and wellness facilities and technologies as we enter the post-COVID-19 “new normal.”

Where Do We Go From Here?

Looking into the future, as the life sciences boom continues in the real estate industry, owners and operators must be aware of how they and their tenants can harness the right technology to address the obstacles from the pandemic. To successfully market spaces to biotech, pharmaceutical, and medical device companies, real estate developers must be mindful of this challenge, as their users are likely to be more tech-savvy than the average real estate consumer. On the other hand, owners of older spaces hoping to reposition them as an office or lab space must convince potential tenants to integrate innovative technologies as effectively as developers of new modern spaces.

As real estate owners, investors, and operators move into the post-COVID-19 world with a focus on life sciences, they will need to demonstrate to the market that they have a keen understanding of current issues and solutions applicable to life sciences tenants and how the right technology can solve them.


Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities, and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions. 


Blockchain: The Next Big Tech Paradigm Shift

While most of blockchain’s success over the past decade has been linked to bitcoin, Ethereum, and other cryptocurrencies, distributed ledger technology is now poised to move into mainstream applications and launch new opportunities in multiple markets.

Technological change has followed a predictable path over the past fifty or so years. Chips and devices got smaller, more processes were automated, and life became more convenient. Since the beginning of 2020, we have seen a rapid uptake in the pace, not to mention the massive adoption of technologies into our everyday lives. As we adapt to a long-term period of social distancing, the paradigm in which technology evolves has been upended, and every member of society has had to quickly find new technology-based solutions to accomplish tasks previously taken for granted. In the coming decade, technology will shift from automating and replacing manual labor to replacing routine cognitive work, and blockchain is poised to be a key driver of the “fourth industrial revolution.”

The paradigm shift into the “fourth industrial revolution” was first postulated by Klaus Schwab in a 2015 article published by Foreign Affairs, and refers to the evolution in the way we live, work and relate to one another, enabled by extraordinary technology advances. According to Schwab, these advances are merging the physical, digital and biological worlds. The social distancing measures required to respond to the global pandemic has put this fourth industrial revolution into overdrive.

What is blockchain, and why will it ascend over the next decade?

Blockchain’s influence will affect all aspects of your life, including how you work and purchase goods from clothes to groceries to houses. Everything.

Simply put, blockchain involves recording information in a way that creates trust in the data recorded. Blockchain is proof that you own something digital—whether it is a bitcoin or your personal health records. Blockchain proves you are the owner of whatever digital information you have on the distributed, decentralized public ledger.

Initially, blockchain was created along with bitcoin to give power back to the people. Since its creation, it has expanded well beyond cryptocurrencies and is growing exponentially. Estimates suggest that blockchain technology has been adopted by more than one-third of the world’s companies.



We already live in a digital universe. We no longer visit Blockbuster to rent movies, and very few of us have DVDs. Instead, we use Netflix, Hulu, and Amazon Prime to watch our shows and movies. We order all manner of products online. Blockchain has become essential because it allows us to own our digital goods, assets, and data.

A blockchain can be trusted as a source of truth. Suppose certain information (data) was included in the blockchain sometime in the past, but the data may not be correct. Records on the blockchain are immutable and provide an unalterable trail. A mistake can only be corrected by adding another block to the chain with consent from all participants. A blockchain records tangible and intangible assets among a network of peers that use the same software, algorithms, and cryptography to maintain the records.

Currently, there are two types of blockchain: permissionless (public) and permissioned (private). Participants use pseudonyms to protect their identity with permissionless blockchains, and there is no identification of participants. On the other hand, permissioned blockchains are protected by access privileges. Participants are authenticated, and a super-user may control the network. Permissionless blockchains are considered more reliable because of the consensus principle.

Blockchain currently enables many uses, including Tokenization to protect sensitive data, unalterable timestamping, the transfer of assets through a payment channel, and the facilitation of smart contracts. To date, blockchain has been used to make more processes more efficient by replacing components or by providing an entirely new blockchain service. The most well-known example of blockchain’s usage is cryptocurrency, but its possible applications are still being explored across many industries.

Why companies are integrating blockchain solutions

By 2023, the global blockchain market is set to reach $20+ billion, indicating how quickly businesses are expected to adopt blockchain solutions. The most prominent and influential companies worldwide have all turned their attention toward blockchain. Tech giants like Apple, Microsoft, Google, Amazon, and Facebook are investing billions in powerful technology. And, Wall Street wants in, too. What makes blockchain so attractive to business?

First and foremost, it reduces operational costs by obviating the need for a centralized authority. Removing intermediaries is crucial for business because it reduces costs and points of contact, improving company efficiency and growth. What could be better in the eyes of a business leader? Estimates suggest the adoption of blockchain technology will save than $100-$150 billion by the year 2025. Blockchain’s adoption will reduce the costs of personnel, support, operations, IT, data breaches, and much more.

In addition to blockchain’s efficiencies and security, it allows for the completion of transactions in seconds rather than days. Transaction speed is especially important in international interchanges.

We previously survey the investment environment for blockchain-based businesses here.

Despite blockchain’s many advantages, it is imperative that we understand the legal implications, risks, and opportunities its use presents.

Legal issues to watch for

Stakeholders in blockchain solutions will need to ensure that their products comply with a legal and regulatory framework that was not conceived with this technology in mind. From a commercial law standpoint, smart contracts must be contemplated for negotiation, execution and administration on a blockchain, and in a legal and compliant fashion. Liability, first and foremost, needs to be addressed. What if the contract has been miscoded? What if it does not achieve the parties’ intent? The parties must also agree on applicable law, jurisdiction, proper governance, dispute resolution, privacy, and more.

There are public policy concerns that should be taken into account in shaping new laws, rules and regulations. For example, permissionless blockchains can be used for illegal purposes such as money-laundering or circumventing competition laws. Also, participants may be exposed to irresponsible actions on the part of the “miners” who create new blocks. Unfortunately, there aren’t any current legal remedies for addressing corrupt miners.

Potential solutions

As lawyers and technologists ponder these issues, several solutions are being bandied about. One possible remedy involves a hybrid of permissioned and permissionless blockchains. Some transactions require intervention by a responsible party, such as when Know Your Client regulations are in play. All participants in blockchains and smart contracts where data is exchanged are data controllers. This means participants must comply with all data protection requirements.

Another consideration is what goes on the chain or what, instead, goes in the smart contract and off-chain. While it is possible to include provisions regarding liability, jurisdiction, and other legal aspects in the smart contract, this allows no room for interpretation because it is based on conditions. A better solution may be to have a real contract stored off the chain, but linked to it with a hash-secure value, for added confidence.

The ongoing regulatory push for more data with trends like controlled free trade, increased border security, and accreditation of economic operators, leads to higher compliance costs. This means that parties trading globally need higher supply chain visibility and security. Data that is both high quality and secure and trade compliance systems that can cope with the electronic exchange of data, are requirements.

Global trade involves many parties beyond the buyer and seller, such as customs and regulatory authorities, financial institutions, shippers, brokers, and insurers. There are multiple exchanges of data among those participants, presenting opportunities for implementing a blockchain to trigger and record invoices, bills of lading, and customs compliance.

Welcome to the future

As blockchain technology matures, global trade supply chains will increasingly use the technology, with the authorities monitoring transactions and compliance with customs declarations, duty payments, and sanctions rules. Further, combining blockchain with the Internet of Things will give manufacturers the ability to track products, manage risk in distribution networks and demonstrate good corporate governance.

While no one can predict how the future will unravel, it seems clear that blockchain will play an important role.


Louis Lehot is the founder of L2 Counsel. Louis is a corporate, securities and M & A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team. 

L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions.