Fenwick team leads resilient early stage companies through uncertain times

Despite an unsteady stock market, lawyers in the coronavirus task force at Fenwick & West LLP said venture capitalists are looking to invest in companies they believe are resilient enough to withstand the fallout from the pandemic.

"A lot of investors think now is a great time for that because they see companies that will do well and emerge stronger than ever after coming out of this pandemic," said start-up and venture capital group co-chair Cynthia C. Hess. "At prior down cycles, many great companies have been born out of those cycles, and so I think investors are looking for those types of companies."

The practice's other co-chair, Mark A. Leahy, said one thing he's hearing from clients crafting deals like this is they want it done fast. Companies are trying to compress the normal time frame "dramatically," so they can bring in much-needed cash to the business, he explained. And while deals are happening quickly, Hess said investors are trying to protect themselves against the shaky market.

"There's a lot of uncertainty in today's market, and venture investors don't know where the bottom is or how long this economic downturn will take to recover," Hess said. "If they're putting in money now, they want to make sure that they're protected on the downside if, in fact, this company has to raise money at a later time at an even lower valuation."

Some of Fenwick's clients are concerned about ambiguities in the Coronavirus Aid, Relief, and Economic Security Act, specifically as it relates to investors, Leahy said. For businesses to qualify for loans, they must have less than 500 employees. An interpretation of this rule could mean different businesses with the same venture backer could be disqualified from using the loans, he said.

Mark Leahy

"There's a concern that if you have venture capital investors that have control or don't have control of the company, that you have to not only look at your employees, but employees of their other portfolio companies," Leahy said. "Those rules of affiliation are hopefully in the process of being clarified, particularly as they relate to venture-backed companies."

Top of mind for the firm's clients on the business side, which Leahy and Hess said are mostly in technology and life sciences, is how to conserve cash. Sometimes that means negotiating real estate agreements with landlords or negotiating pay cuts, but Leahy said they often get drawn in on the employee side when companies must consider furloughs and layoffs. Some clients have employees with stock options, and if they are being laid off, employers are trying to give them more time to exercise their stock options, Hess said.

"The typical incentive stock option granted to employees gives someone 90 days following termination to either exercise the vested portion of the option or else it lapses," Leahy said, explaining employers they advise are giving laid off employees more time to decide what to do with their stock.

Some clients have been able to shift in the online market to sell different parts of their business, Hess said. She noted her late-stage venture clients Nextdoor, the online forum for neighborhoods, and Molekule, an air purifier seller, are doing well. Hess also mentioned a client that's adapting well to the online environment: home hair coloring system Madison Reed.

"They also have color bars where people go in and have their color done, their root touch-ups and whatnot, ... using the Madison Reed products," Hess said. "Now that business is completely but temporarily shut down. But the online sales from Madison Reed at-home hair color are going through the roof."

Small business clients are also looking to the CARES Act for help, according Leahy. The legislation was signed into law Friday, and before President Donald J. Trump signed it, Fenwick & West had an explanation up on the site. Leahy said that was crucially important for their clients, who he said are clamoring for information about the bill. The Fenwick team is helping clients understand how the legislation could help them survive financially rather than resort to layoffs and furloughs, he said.

"We're not telling them you need to lay people off," Leahy said. "What they do is they have a plan, or a proposed plan, that affects employees, and they need to understand what the implications under relevant employment laws are and under the provisions of the CARES Act."