having a say on directors protecting their residential addresses

in a nutshell

Submissions are now open for a bill that would allow directors of New Zealand companies to keep their residential addresses private if they have concerns about their own safety or the safety of someone they live with.

We have worked with people who have legitimate safety concerns about their residential address being publicly available. We support people being able to keep that information out of the public eye and we plan to make a submission in support of the bill.

the detail

Currently, directors’ residential addresses are publicly available on the Companies Register (at the Companies Office website). Those addresses are publicly available because the Companies Act 1993 requires them to be.

The amendment bill would allow directors to apply to the Registrar of Companies to substitute their residential address on the public record with an address for service. To do so, a director would need to:

provide a statutory declaration verifying that public availability of the director’s residential address is likely to result in physical or mental harm to the director or a person the director lives with
provide a substitute address for service (which can’t be the same as the company’s registered office or address for service), and
pay a fee (the amount of that fee is currently unknown).

The bill has passed its first reading and is now at the select committee stage.

The bill isn’t perfect – we’ll note in our submission some material issues that we hope the select committee process will address. However, we welcome it as the first development in this area that we’ve seen since 2018.

next steps

You can make a submission on the amendment bill on the Parliament website. The closing date for submissions is 11.59pm on Thursday, 02 May 2024.

You’re also welcome to get in touch with us if you would like to discuss our submission.

post-money convertible notes

Back in 2018, Y-Combinator (YC) updated their core investment instrument and launched what is now known as the post-money SAFE.

We analysed the post-money SAFE back in 2020 – see our blog here https://env-kindrikconz-staging.kinsta.cloud/blogs/a-primer-on-post-money-safes-in-new-zealand/. The main difference between a pre-money and post-money SAFE is that, on conversion, under the pre-money terms the calculation of the number of conversion shares does not include the conversion of the SAFE itself and any other convertible instruments in issue (other convertible securities).With a post-money SAFE all of these other convertible securities are included. The end result is further dilution for existing ordinary shareholders on conversion of the post-money SAFE.

But what about convertible notes? Have they remained drafted on a pre-money basis or, like the SAFE, has the market moved towards the more investor friendly post-money position?

Convertible notes v SAFEs

The terms of convertibles notes differ from SAFEs. SAFEs remain outstanding until a conversion event occurs, or the company has a liquidity event. So, in effect, there is no repayment obligation. In contrast, convertible notes have a maturity date and generally accrue interest. Therefore, startups have no time pressure to close an equity financing under a SAFE. Whereas under a convertible note, they might need to get it done within say 18 months, or the note could be repayable. For that reason, SAFEs are generally the preferred document for founders.

The market has certainly followed YC’s lead when it comes to SAFEs. Most SAFEs we now see are the post-money version. However, the same can’t be said for convertible notes, for which conversion into shares is still calculated on the more founder friendly pre-money calculation. Looking at templates available online, whether provided by law firms (including our own!), VCs or industry bodies, this looks to be the consistent approach across the board. That said, we do occasionally see them on deals where investors are looking to secure a better position or when they simply draft the document incorrectly.

Round up

Founders should be cautious here and take advice at the term sheet stage so there is no ambiguity when everyone comes to drafting the final instrument. If any post-money instrument is used, it may require founders to rethink the valuation cap on the deal.

Investors could argue that there is nothing intrinsically different between a SAFE and a convertible note in terms of how equity should be calculated on a conversion event. I.e. why shouldn’t the number of shares be determined on the same basis for each?

However, YC’s justification at the time of launching the new SAFE was that it makes the conversion calculation simpler and creates more certainty over the future dilution. Which is certainly true. But YC’s model is about speed and efficiency and they invest in multiple companies in their intakes. A SAFE is also a pretty founder friendly investment instrument, and rarely negotiated much. A convertible note, on the other hand, has other disadvantages to founders and more onerous terms, in particular, interest and repayment obligations. Notes also tend to include information rights, a most favoured nation clause, events of default provisions and other covenants that don’t typically appear in SAFEs.

Taking that into consideration, our view remains that convertible notes should be drafted on a pre-money basis, and that post-money notes remain non-market.

10 questions to ask before taking investment from an “eligible investor”

Below you’ll find a checklist of 10 questions that you should be asking, if you are raising capital from NZ investors and are intending to rely on the eligible investor exclusion under the Financial Markets Conduct Act 2013 (FMCA) to bring on board one or more of your investors.

background

The questions reflect recent guidance from the Financial Markets Authority (FMA) in its report released in October 2022. That guidance clarifies the FMA’s expectations of companies (and other entities) who are seeking to rely on the eligible investor exclusion in order to qualify for a lighter compliance burden for their capital raising activities.

10 questions to ask when presented with an eligible investor self-certificate

The questions below assume that you’re a company raising capital, and a prospective NZ investor has just sent you their eligible investor certificate.

Is the certificate for the person actually making the investment, or an entity controlled by them?
Have all of the details been filled in and is the certificate signed?
Is the certificate dated no more than 2 years ago?
Has the investor listed in detail their grounds for self-certifying that they have sufficient experience to qualify as an eligible investor in the certificate?
Is there a connection between the grounds listed in the certificate and the proposed investment? E.g. if the investor is subscribing for shares in your company, does the certificate include a description of their specific experience in investing in private companies? Beware any certificate that lists irrelevant or vague experience.
Has a financial adviser, qualified statutory accountant or lawyer (independent adviser) signed the certificate, confirming that – having considered the grounds for the investor’s certification – they are satisfied that the investor has been sufficiently advised of the consequences of the certification, and they have no reason to believe that the certification is incorrect or that further information or investigation is required as to whether or not the certification is correct?
Have you checked and confirmed that the independent adviser is independent of your company, and has not provided professional services to your company (or a member of your corporate group) in the last 2 years?
Are you comfortable the investor does actually have the experience they have described in their certificate?
Is the certificate a standalone document, separate from any investment or transaction document?
Is there a warning statement on the front of the certificate of the kind required under the FMCA and its regulations? See our template certificate for an example of that warning statement.

If you can’t answer yes to all of the above, you’re best to hold off until you have sought further information and evidence.

Let us know if you would like any help.

in need of a refresher?

Confused about what the eligible investor exclusion is, or otherwise in need of a refresher about the broader context? Check out our guide to securities law for tech companies raising capital here. We’ve recently updated that guide to reflect the FMA’s report.

In a nutshell, if you want to take investment from an NZ investor (regardless of the amount), under NZ law you have two options – (1) comply with the full suite of information disclosure and offer registration requirements set out in the FMCA, including preparing a product disclosure statement and registering your offer on the Disclose Register, or (2) ensure that one of the specific exclusions set out in Schedule 1 of the FMCA applies to each of your investors.

If your investor qualifies as a wholesale investor, a Schedule 1 exclusion applies to them. There are several categories of wholesale investor defined in the FMCA. Eligible investor is one of those categories. To be an eligible investor, the investor must self-certify in writing that they:

are an eligible investor on the grounds that they have previous investment experience that allows them to assess the merits of an investment or class of investments, their information needs in relation to an investment or class of investments, and the adequacy of any information provided, and
understand the consequences of certifying themselves as an eligible investor.

The investor must also obtain written confirmation of that certificate from a financial adviser, qualified statutory accountant or lawyer that is independent from the entity raising money.

why should you care?

Yes, it’s the investor’s responsibility to fill out their certificate and arrange for an independent adviser to confirm it, but it’s the company who will face the consequences of relying on a shonky certificate. The potential consequences include civil or criminal liability, not to mention reputational damage.

looking for a template?

A template wholesale investor certificate that can be used for eligible investor self-certifications can be found on our website.

economic downturn and startup term sheets

The global economic downturn has inevitably hit the startup and venture capital ecosystem. Investors in startups, like everyone else, are impacted by falling stock prices and fund valuations, distracted from investing new money and busy supporting existing portfolio companies. These factors make it harder for startups to raise money right now.

But for those startups that are still raising money, what is the approach of investors? Is the VC term sheet about undergo a change?

valuations

Startup valuations are falling. For those companies that have raised a previous round of financing, founders will want to avoid a down round – a fundraising in which a company issues shares at a lower price than the previous investment round – at all costs, as doing so may trigger investors’ anti-dilution rights. If anti-dilution rights are triggered, founders could face significant further dilution.

If company cash is low, existing investors may need to support a new financing. If so, founders will need to negotiate hard with both new and existing investors. Anti-dilution rights can be fully or partially waived on a fundraising at the end of the day. If anti-dilution rights are triggered, founders may then need to ensure that they remain sufficiently incentivised following the dilution, for example via an increased portion of the company’s ESOP.

extension rounds and convertible notes

Extension rounds at the same price as the last financing round may be an alternative to a down round. With no increase in valuation, startups will want to classify such investments as a bridge or extension. Therefore, expect to see investment rounds using preference share class terminology such as series A2, series B+, pre-series A or similar.

We also anticipate more convertible notes will be used in the market. This not only avoids initial dilution but pushes the whole difficult discussion on current valuation to another day. This, of course, also has its disadvantages. To some extent, founders are just kicking the valuation debate down the road and it will still have to be addressed at some point. In the current market, it also seems inevitable that SAFEs will be less common than traditional convertible notes carrying repayment obligations. We also expect investors to be more aggressive on setting lower valuation caps and fluctuating price discounts depending on the timing of conversion into equity.

tranched investments

Now is the time to get money into the business to give it runway for a decent period of time. Tranched investments conditional on financial performance are best avoided by startups at the best of times. Right now, it is very difficult to forecast traction and performance over the next 12-18 months. Unfortunately, given the uncertain economic environment, investors may well think the opposite and insist on structuring investments in tranches subject to KPIs.

warrants

Warrants, which provide an option to purchase more shares at a future date at a fixed price, may also be a tool for investors to use in the current environment. The exercise price of such warrants is key – the lower the price, the more potential dilution. If warrants are issued and/or exercisable down the line, based on company performance, the true share price of the financing round may be considerably less than initially agreed.

redemption / buy-back rights

Investors sometimes include redemption or buy-back rights which entitle them to their money back in certain circumstances. Usually this is where there is some kind of event of default by the company or its founders.

However in difficult times, investors tend to broaden the circumstances in which such redemption or buy-back rights can be enforced (e.g. financial performance deteriorates or being unable to satisfy a key commercial arrangement or deliverable). In this uncertain economic period, investors may look to de-risk transactions even further using such a mechanism. Founders should be cautious about agreeing to any broad redemption or buy-back rights triggered by anything other than a material breach or default.

liquidation preference

Liquidation preferences provide investors with downside protection if a company is either sold or wound up. In such an event, investors are entitled to receive an agreed amount of the proceeds before anything is paid to other shareholders. During the good times, founders and startups have become accustomed to 1x non-participating liquidation preference in most cases – a generally accepted VC market standard. With stormy clouds above, we can expect that to change, with liquidation preference carrying higher multiples, and also participating preferences returning.

Further, for companies that have raised previous rounds of investment, incoming investors are more likely to seek a senior class of shares, than rank alongside existing preference shareholders, which is common in normal market conditions.

exit rights

Exit rights give investors a way to sell their shares if the company hasn’t got to a liquidity event (e.g. a trade sale or IPO) within a set period. We may see shorter time periods before these rights kick in. The remedies provided to investors vary, but we could see more instances of the following:

a right to require the company to buy-back investors’ shares at a specified price (for example, based on fair market value)
investors having the option to reconstitute the board giving them greater voting control
an obligation on the board to engage an investment banker to find a buyer, coupled with a drag-along right so that shareholders (including founders) can be forced to sell at a price determined by investors

venture debt

Finally, venture debt is likely to become a more important source of financing in the short term, in most cases complementing an equity financing. As an alternative capital raising option for high growth companies, venture debt is a good option for entrepreneurs looking to extend their runway, using an instrument that results in less dilution.

round up

Right now VC firms and other investors will be taking a closer look at downside protection in their term sheets. Of course, not all investors are predatory, nor will the majority take advantage of the difficult economic climate to seek further influence in startups. But now is certainly the time for founders to reach out to lawyers at the term sheet stage to understand what is, and what isn’t, market standard, and how this may be changing.

Your New Contractual Obligations for UK Data

With the UK’s withdrawal from the EU, the UK is transitioning from its reliance on EU GDPR requirements for the transfer of UK personal information outside of the UK.

The UK’s own requirements are finalised, and there are a range of measures, processes and controls that businesses need to implement when transferring UK personal information from the UK, including updating their contracts to reflect the UK’s new contractual requirements (the new UK contractual requirements).

If your business handles personal information relating to any individual in the UK and it is transferred outside of the UK, e.g. you’re a SaaS business with UK customers, there are likely 2 ways this could go. If your business:

transfers UK personal information to, and handles it in, New Zealand only, then you will not need to implement the new UK contractual requirements because the UK thinks NZ provides an adequate level of protection. But, countries like Australia and USA are not considered adequate. So if your business uses sub-processers in a country that isn’t adequate (and this is true of most SaaS businesses that use AWS or Azure as they don’t currently have NZ data centres), this exception will not apply to you
transfers UK personal information to, and/or handles it in, a country that doesn’t have adequacy (an external transfer), then you need to include the new UK contractual requirements in your customer contracts.

how do you comply?

If your business makes external transfers, then your customer contracts will need to include the new UK contractual requirements by the dates discussed below. The UK regulator has issued templates that you can adapt and use in your contracts to meet the new UK contractual requirements (see https://ico.org.uk/for-organisations/guide-to-data-protection/guide-to-the-general-data-protection-regulation-gdpr/international-data-transfer-agreement-and-guidance/). These are:

the International Data Transfer Agreement. If you don’t have a data processing agreement, this document includes all of the provisions you need to include in your contract to meet the new UK contractual requirements
the UK Addendum. If you already have a data processing agreement (i.e. that meets EU GDPR requirements for international transfers), then this is the document for you. It expands on the EU GDPR requirements so that your data processing agreement will meet both the EU GDPR requirements and the new UK contractual requirements.

key dates

21 September 2022 – from this date, any new contract you sign that covers an external transfer needs to meet the new UK contractual requirements
21 March 2024 – until this date, your older contracts (entered into on or before 21 September 2022) are deemed to meet the new UK contractual requirements for external transfers if they comply with EU GDPR requirements
21 March 2024 – after this date, you cannot rely on EU GDPR requirements to meet the new UK contractual requirements for external transfers. By this time, you must have varied your existing contracts to cover the new UK contractual requirements.

what do I do if this applies to my business?

You should update your templates to include the new UK contractual requirements so that they can be rolled out by no later than 21 September 2022 and prepare a plan for how you’ll transfer existing affected customers to the new UK contractual requirements in time for 21 March 2024. If you have regular contractual reviews and renewals, that will be a good time to raise this with your customer.

Welcome to the 2022 graduates

What do you do when NZ’s intermediate and senior lawyers are all escaping on their OE post-COVID-19? Well, we can’t speak for others, but we’ve double-downed on our graduate hires this year.

Our latest hire, Sam Sorensen, joins Zoë Vaunois, Bella Berry, Sophie Prebble, and Thomas Lamberton. We’re thrilled to have them on board and are enjoying their energy and enthusiasm – hopefully, we won’t beat it out of them. Although there are enough of them that they could easily stage a coup …

You’ll be seeing our graduates helping on a wide range of Kindrik Partners work as we think jumping in boots and all is the only way to go.

Kindrik Partners advises Orbica on its $2.8m seed round

We are delighted to have advised Christchurch-based geospatial and artificial intelligence company Orbica on its $2.8 million seed round. The round was led by Pacific Channel, with participation from Ngai Tahu (through its New Economy Fund) and Enterprise Angels.

Orbica was founded in 2017 by Kurt Janssen with the goal of using emerging technology to deliver innovative solutions in the geospatial industry. Today, Orbica is pioneering the development of geospatial artificial intelligence (GeoAI) and next-gen geospatial data management to increase the adoption of geospatial data in today’s modern enterprises.

The funding will allow Orbica to build on its existing solutions and knowhow with a view to democratise access to geospatial data and tooling well beyond the traditional silos of ‘GIS’.

Partner Fiona MacKinnon says: “Orbica’s business focuses on long term relationships with its customers and making complex information accessible – two things that particularly resonate with us. Kurt is an impressive founder with a great team and we’re looking forward to seeing Orbica capitalise on the fantastic work it has done so far, fuelled by this new funding.”

kindrik partners advises quantifi photonics on series C raise

Kindrik Partners is delighted to have advised Quantifi Photonics, an emerging leader in high-density photonics test and measurement, on its recent series C US$15 million capital raise.

The round was led by Intel Capital, the venture capital arm of Intel Corporation, and was fully supported by existing New Zealand investors Pacific Channel, Nuance Connected Capital, Simplicity, K1W1, NZ Growth Capital Partners and UniServices.

“Intel Capital’s investment will help us carry out our strategy and seize the market for the high-value test instruments required to support the rapidly growing transceiver market, which is projected to exceed US $14B by the year 2026,” says Dr Andy Stevens, CEO and co-founder of Quantifi Photonics.

Partner Julie Fowler says of the deal “This was a great example of how quickly a deal can be closed when the company and the lead investor work to the same timetable. It was a pleasure working with all parties to get this investment transaction across the line”.

Your End of FY To-Do List: Opting out of default financial reporting requirements

This is the second in a Kindrik Partners series on company admin to be thinking about when 1 April comes around each year. The first one dealt with AGMs. In this blog, we’ll introduce the default financial reporting requirements that apply to many companies under the NZ Companies Act 1993, and help you navigate opting out of them if you wish to.

Did you know?

If your company has 10 or more shareholders, the Companies Act requires you to:

prepare financial statements in accordance with generally accepted accounting practice
have those financial statements audited in accordance with the Companies Act, and
prepare an annual report for shareholders in accordance with the Companies Act.

Did you also know? You don’t have to live your life like this. If your shareholders are on board, and you navigate the what’s and when’s of the opting out regime under the Companies Act, you can opt out of one or all three of these requirements. Of course, staying on top of your financial position as a company – and communicating with your shareholders on a regular basis – are essential to good governance, but you may prefer to take care of these in your own way rather than following the default approach.

How do you know if you’ve hit/exceeded the 10-shareholder threshold?

The golden rules are:

count the number of shareholders as at the first day of the financial year in question
count only holders of voting shares, and
count joint holders of share parcels (e.g. spouses/partners or trustees) as a single shareholder.

Who can opt out?

Any company with 10 or more shareholders can choose to opt out of one or all three of the default requirements, unless:

the company’s constitution expressly provides that section 207I of the Companies Act does not apply, or
it is a large company under the Companies Act, or it is a public entity. (In early April 2022, a large company is a company with >$66m in assets, or revenue > $33m, on a consolidated basis in each of the last 2 accounting periods).

What can you opt out of?

Any, or all three, of the default requirements described above.

If you have hit the 10 shareholder threshold and want to opt out of one or all of the default requirements – what do you do now?

You’ll need to get your shareholders on board, and you’ll need to keep a close eye on the calendar. Opting out of one or all of the default requirements requires a resolution approved by at least 95% of the votes of those shareholders entitled to vote and voting on the resolution. That resolution must also be passed within a specific time period.

For most companies, the opting period – within which a company can arrange for its shareholders to pass a resolution opting out of one or all of the default requirements in respect of a particular financial year – starts on the first day of that financial year (usually 1 April), and expires at the end of the day on the earlier of these two dates:

the date that falls 6 months after the start of that financial year. This will be 1 October if your financial year starts on 1 April, and
the date of your annual meeting of shareholders (AGM) to be held in that financial year. If you need to hold an AGM under the Companies Act, in most cases you’ll need to hold it on/before 30 September.

So, if you’re reading this in May 2022, and you want to opt out of the default financial reporting requirements for the financial year that runs 1 April 2022 to 31 March 2023, you’ll most likely need your shareholders to pass that resolution before midnight on 1 October 2022, or before midnight on the date of your AGM (if you’re holding an AGM in 2022), whichever comes first.

There are two ways to pass the opting out shareholders’ resolution:

by calling a meeting of shareholders before the opting period expires (your AGM would do, if you’re already holding one) and asking shareholders at that meeting to pass a resolution opting out of the relevant requirement(s). You’ll need a 95% majority of the shareholders attending the meeting and voting on the resolution to vote in favour of that resolution, or
by circulating a written resolution, which must be signed by shareholders holding at least 95% of the company’s voting shares before the opting period expires.

What can’t you opt out of?

This opting out process doesn’t affect your obligations under the Companies Act to keep accurate accounting records, and it doesn’t affect any bespoke financial reporting requirements that may apply under your company’s governance documents (i.e. the constitution and/or shareholders’ agreement). Finally, you’ll most likely still have to prepare financial reports for tax purposes – your friendly accounting/tax advisor will be able to give you a steer on that.

Your End of FY To-Do List: AGMs

This is the first in a small series that Kindrik Partners is working on, pulling together company admin to be thinking about when 1 April comes around each year. In this piece, we’ll help you work out whether you have to hold an annual meeting of shareholders (also known as an annual general meeting or AGM).

Do I have to hold an AGM?

Yes, if you’re an NZ company, unless:

your company is super new. You don’t have to hold an AGM in the same calendar year that you’ve been incorporated. You have an 18-month window after incorporation in which to hold your first AGM

you can tick all of the following boxes:
there is nothing required to be done at that meeting
the board has specifically resolved that it’s in the company’s interests not to hold a meeting because there’s nothing required to be done at an AGM (i.e. the board has considered, and decided, that there’s nothing that the shareholders should be given an opportunity to discuss, comment on, or ask questions about), and
the company’s constitution doesn’t require an AGM to be held. If your constitution is based on our template, you should be able to tick this box but it’s worth double-checking. The changes to the NZ Companies Act 1993 allowing the flexibility around AGMs described here were made in 2017, so many constitutions (including some based on older versions of our template) may still require you to hold an AGM every year.

How do I know if there is anything that needs to be done at an AGM?

If you’ve got financial reporting matters to handle: We’ll cover default financial reporting matters in detail in a separate blog but briefly, if you have 10 or more shareholders then you’ll likely need to work through some default financial reporting requirements that apply to you under NZ law at the AGM. For example:

passing a resolution appointing an auditor for the financial year that just started, or
signing off on the financial statements and annual report for the financial year that just finished (that tends to be part of the business of an AGM but doesn’t require a specific resolution).

You may also want to hold an AGM to seek shareholder support for opting out of some or all of those default financial reporting requirements for the financial year that just started.

If your governance documents have bespoke requirements: Your constitution and/or shareholders’ agreement (if you’ve got one) may include bespoke financial reporting requirements that apply in addition to the default requirements described above, and/or non-financial matters to be dealt with at an AGM (e.g. dealing with director rotations/retirements). Give them a scan to double-check.

If you’ve got other business to handle: Appointing new directors? Switching out your constitution for one that doesn’t require an AGM to be held each year? Got a major transaction on the horizon? Shareholders can pass resolutions of that kind at any time, but if there’s something looming that requires a shareholder decision, consider whether it makes sense to take care of it at an AGM.

If I do have to hold an AGM, when do I have to hold it?

Find the magic date that fits each of the following criteria:

not later than 6 months after the company’s balance date. If your balance date is 31 March (like most NZ companies), this means holding your AGM before the end of September, and
not later than 15 months after your last AGM (if you held one).

I technically have to hold an AGM but I’d prefer not to hold a meeting itself – what are my options?

You can do everything you otherwise would have done at a shareholders’ meeting via a written resolution. This may not work for you if you have a large shareholder base (too unwieldy), or if your shareholders are likely to want to discuss the matters in detail (addressing questions all at once at a meeting might be preferable to death by a thousand emails).

If you go for a written resolution instead of holding a meeting:

your written resolution will need to be signed within the same timeframe that would have applied to your meeting (i.e. before the magic date passes)
you’ll need signatures from a supermajority of your shareholders, even if the resolution would only have required a simple majority if you’d held a meeting. The size of that supermajority will depend on the content of the resolution. For most resolutions, you’ll need (a) at least 75% of the shareholders by headcount, and (b) shareholders who together hold at least 75% of the relevant voting shares. There are a couple of scenarios where that threshold might be higher:
if your constitution or shareholders’ agreement specifically requires the threshold to be higher than that for the particular resolution (your governance documents can’t make that threshold lower, by the way), or
where the resolution is asking shareholders to approve the company opting out of any default financial reporting requirements that will otherwise apply to that financial year under the Companies Act (more on this to come in a separate blog). In which case, you’ll need shareholders who together hold at least 95% of the company’s voting shares to sign the resolution, and
you’ll need to send a copy of the final dated resolution to those shareholders who didn’t sign it, if you pass the resolution with signatures from enough shareholders to meet your supermajority threshold but without getting signatures from all of your shareholders. That must be done within 5 working days after the resolution is passed. We suggest you talk to a friendly lawyer if you are passing a written resolution without getting signatures from all of your shareholders, because you may also need to send the non-signing shareholders a summary of the minority buyout rights that apply under the Companies Act in some situations (where a shareholders’ resolution approves certain constitution changes, a major transaction, or an amalgamation in certain circumstances).

It looks like I’m holding an AGM – where to from here?

If you do have to hold an AGM, there are some hoops to jump through to call the meeting (sending out the notice of meeting to your shareholders) and to hold the meeting itself. Keep an eye out for some more content on those points shortly. Everyone loves a cliff-hanger.

Kindrik Partners advises Appboxo on series A financing

We’re delighted to have advised Singapore-based Appboxo on its US$7 million series A funding round led by RTP Global. Existing investors, Antler and 500 Global, together with new investors SciFi VC, Gradient Ventures also participated.

Appboxo’s platform lets developers convert their apps into super apps, either by building their own micro-apps or accessing them through their “showroom” marketplace for developers. The company is already used by 10 super apps across Southeast Asia, India and South Africa

The fundraising is intended to grow the business’s two products – Miniapp, a SaaS platform with SDKs and APIs for building and launching mini-apps and Shopboxo https://www.shopboxo.io/ which lets businesses set up and customise online stores via mobile. Whilst Appboxo is currently focussing on Asia-Pacific, the intention is to enter new markets including Europe and the US. The company has scaled extremely fast in the last two years establishing new partnerships on the back of the significant growth in ecommerce and emergence of super apps in Southeast Asia.

kindrik partners advises blackbird ventures on series B investment into first AML

We’re pleased to have advised Blackbird Ventures on its recent investment into First AML, an Auckland-based digital ID authentication and anti-money laundering startup. First AML raised a total of $30 million in its Series B, with the round led by Blackbird Ventures, with other investors including US investor Headline, Bedrock Capital, Icehouse Ventures, and Pushpay’s Eliot Crowther.

First AML is an end-to-end due diligence platform that makes it easier to authenticate customers. The platform focuses on streamlining due diligence for complex transactions where several organizations and people may be involved and has clients in the professional services, legal, and real estate sector.

First AML was founded in 2017 by Milan Cooper, Bion Vehdin and Chris Caigou. Cooper and Caigou were former corporate bankers who saw the pain of AML onboarding and developed the platform as a response to the issue. The company expanded to Australia earlier this year and intends to use the funds to expand into Europe, as well as looking at Singapore and the United States. First AML has said that it also plans to increase its headcount from 90 to 180.

Partner Julie Fowler says of the deal, “It was great helping Blackbird with their investment into First AML. At Kindrik we’ve felt the pain of AML regulations ourselves and the solution that First AML offers makes it easier to meet our compliance requirements. We look forward to seeing how First AML continue to grow and are thrilled at Blackbird’s continued commitment to the New Zealand startup ecosystem.”

kindrik partners advises reg-tech startup APLYiD on $7m series A round

Our team has advised APLYiD, a kiwi reg-tech startup on its recent $7 million series A round. The round was led by UK-based Octopus Ventures, with Australian firm Tribe Global Ventures also participating.

Founded in 2018 by Claudia Smith and Russell Smith, APLYiD has created an easy-to-use SaaS solution to help its users comply with their KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements when onboarding new customers.

APLYiD’s mobile-first application automates the verification process required by companies to meet their AML anti-money laundering requirements. It uses biometric technology to automatically match ID photos with a selfie of the document holder to verify their identity. The out-of-the-box system is used by the likes of financial services providers, law firms, car rental businesses, and remittance services.

With its new round of funding, the company intends to focus on product development, growing its team, and international growth. The round coincides with the official opening of APLYiD’s UK office in London.

Partner Lee Bagshaw says of the deal, “APLYiD has created an elegant digital AML solution to help businesses stay compliant with customer onboarding processes whilst reducing inefficiencies and time taken. This is increasingly important for businesses in sectors such as financial services and legal as they tackle KYC compliance requirements and the threat of digital fraud. We look forward to seeing how they continue to grow with this latest round of funding.”

Read our other recent deal announcements here.

kindrik partners advises blackbird ventures on pre-series A investment into partly

We’re pleased to have advised Blackbird Ventures, a venture capital fund based in Australia and New Zealand, on its recent investment into Christchurch-based automotive parts data startup, Partly. Rocket Lab CEO Peter Beck, co-founder and CEO of Figma Dylan Field, Hillfarrance Ventures and Icehouse Ventures also participated in the round.

Partly is innovating in the traditionally offline automotive part industry by providing an elegant SaaS-based solution that makes it easier to list complex fitment data of automotive parts, as well as creating a marketplace that aggregates this information and makes it easier to discover, sell and buy compatible parts.

Partly was founded in 2020 by Levi Fawcett, Nathan Taylor and Mark Song. Before creating Partly, CEO Levi Fawcett was a part of Rocket Lab’s senior engineering team. Today, Partly operates in 20 countries and intends to use the raised funds for product development and to grow its team across New Zealand, Australia, and Europe.

Partner Julie Fowler says of the deal, “It was great helping Blackbird with their recent investment into Partly, and to see another New Zealand tech startup get an injection of capital to help tackle a global problem. We look forward to seeing how Partly will use their funding to accelerate transformation in the industry.”

kindrik partners advises agritech startup Hectre on its $3.5 million pre-series A round

We’re pleased to have advised Hectre, a New Zealand-based orchard management and fruit sizing software company, on its recent $3.5 million capital raise.

The oversubscribed round included existing Enterprise Angels, Afterwork Ventures, and new investors WM Borton Investments, the investment arm of Borton Fruit, early adopter Count Maximilian Kolowrat-Krakowsky, and Ivan Seselj, founder of NZ SaaS company Promapp.

Hectre’s Orchard Management app enables fruit growers to digitize their orchard operations, reducing manual recording, wasted time and wasted fruit, with the aim of increasing operational efficiencies and overall business sustainability.

Their fruit sizing software, Spectre, uses AI to provide fast and accurate fruit size and colour estimations for growers and packers, both of which are critical considerations in the fruit industry.

Hectre was founded in 2016 and has grown to a team of 21. Hectre’s technology is now used in 11 countries including the US, Spain and South Africa.

With its new round of funding, the company intends to expand its team, grow its sales and marketing and customer success function, as well as invest in product development and innovation.

Partner Lee Bagshaw says of the deal, “New Zealand’s agritech sector is turning out some interesting innovation that the world is starting to recognise. It was a pleasure helping Hectre with their latest capital raise, and we can’t wait to see how they grow.”

2021 half year capital raising numbers and trends

Our venture capital lawyers in New Zealand and Singapore have had a busy first half of the year again, as venture capital funding for technology businesses continues its incredible growth despite the tumultuous last 18 months.

A recent article by Crunchbase indicated that global venture capital funding in the first half of 2021 has shattered records with more than US$288 billion invested worldwide (compared to the US$110 billion record only just set in the second half of 2020). This reflects what we have seen in the jurisdictions where we advise tech companies and investors.

deal activity so far

In the first half of this year, we helped companies or investors close 66 fundraising transactions across both NZ and Asia. Our experience is that the number of transactions tends to increase in the second half of the year, so we expect to comfortably top 100 capital fundraising deals for the third year in a row.

Of the deals completed so far in 2021, 39 were fundraisings involving Southeast Asian startups, with 27 from NZ. This reflects what we have seen in the last few years and the fact that Southeast Asia is the larger market. Many countries in Southeast Asia have of course experienced significant Covid lockdowns whereas the main problem for NZ startups has been the ability of their key people to travel and engage with overseas markets.

Approximately 17% of the financing rounds in NZ used convertible notes compared to 56% in Southeast Asia. This represents somewhat of an increase from normal in Asia. Along with the usual small investment rounds, several of those convertible notes in Asia represented substantial bridge financings in the USD5-10million range, as investors supported existing portfolio companies.

On around 15% of our deals so far this year we advised on the investor side. This has helped us gain further insights into the latest approaches on term sheet presented by investors, who in the main, have not looked to impose materially more onerous financing terms on startups.

What is more challenging currently are the discussions between companies and existing investors for those companies that have been impacted significantly by the pandemic and its restrictions, and who may not be facing a forced exit or financings at a down round.

themes emerging in 2021

SaaS remains a huge part of the NZ tech ecosystem, with around one-third of our deals being in that vertical. Though NZ exporters battle the challenge of distance from larger markets, the country’s remoteness doesn’t play the same factor for its SaaS businesses – IT services exports in the year to May were reportedly in excess of $4billion, with key markets in the US, Australia and Europe.

In Southeast Asia, many of the companies we’ve advised so far this year on financing rounds operate in e-commerce, logistics, healthtech, and fintech. Companies from Singapore and Indonesia are getting the lion’s share of the funding, with the latter seeing some major funding rounds in particular.

We suggested last year that equity financing deals might take longer to close. That trend has continued in 2021 too. Companies are often opting to close initially with a lead investor, and fill the rest of the round via a rolling, or second, completion.

The use of SAFEs is on the increase in NZ and particularly in Southeast Asia where they are now almost as popular as traditional convertible notes. The principles of the YC’s post-money SAFE also seem to have become the market standard.

Our data continues to show that despite the pandemic, fundraising into disruptive technology has boomed despite partially or fully closed borders. It’s an exciting time to be working in the tech space.

introducing our latest guide: top 10 legal templates for startups

From capital raisings to drafting governance contracts, we help startups every day with their legal needs. We’ve created a new guide to help founders find their feet: Top 10 Legal Templates for Startups.

This guide contains basic tips when putting this paperwork in place. Having these documents in order can help your startup further down the line, particularly when raising investment. With each template, we cover what it does, when a startup might need to use it, and essential points that founders should wrap their heads around.

All legal agreements we cover in the guide are also available for download free on our website. These templates include explanatory notes to help founders and non-lawyers complete the agreement.

Have questions about our guide or one of the templates? Feel free to get in touch with us if you’d like some help adapting one of the agreements we’ve recommended.

Access the guide by filling out your details below:

Kindrik Partners advises Fruitometry on $2.6m round

We’re thrilled to announce that our corporate team has advised startup Fruitometry on its recent $2.6m investment from Seeka, New Zealand’s largest kiwifruit grower.

Fruitometry was founded in 2019 by Chris Miller and Mike Ullrich. The company provides digital services to orchardists and pack houses using artificial intelligence, which can estimate the volume of a fruit crop by scanning orchards.

The latest round of funding will be used to help the business accelerate its product development.

Partner Julie Fowler says of the deal, “Fruitometry is an example of some of the fantastic innovation that New Zealand’s agritech scene has been producing. We’re pleased to have been able to assist with their latest investment, and we can’t wait to see what they do in their next stage of growth.”

hope when dealing with fickle counterparties?

Part of our day job involves haggling over the scope of contractual rights and powers. Often this is centred on whether a party should act reasonably. While there will always be exceptions, shouldn’t people simply behave reasonably? This logic is not shared by all.

Canada’s highest court recently confirmed a duty to act in good faith when exercising a contractual discretion.

The Supreme Court held that if your contract allows you a discretion (e.g. the power to decide or do something), you must that exercise that discretion reasonably. That exercise will be reasonable where it aligns with the purpose for which the discretion was included in the first place. If you exercise a discretion for arbitrary, capricious or irrelevant purposes (e.g. to punish the other side), you will breach your duty to act in good faith.

In Wastech Services Ltd v Greater Vancouver Sewerage and Drainage (GV), GV could direct waste to sites of its choosing. Wastech was paid a different rate based on the chosen site. When GV directed Wastech to send waste to a less profitable (for Wastech) site, Wastech sued for bad faith. Wastech wasn’t successful (the court held GC’s discretion was included to give GC the flexibility to maximise efficiency and minimise its costs), the duty was confirmed and will go a long way to giving comfort to suppliers on how a customer may behave.

Of course, this involves looking at why a discretion was included in a contract in the first place. But, in NZ, the courts already have broad rights to look at discussions behind the contract, so applying this duty in the NZ setting would fit well.

We’d love to see the decision followed by the NZ courts. In the meantime, if the other side won’t to agree to act reasonably, think about clarifying in your contract the reasons why a discretion is included. This may help to limit how it is exercised.

kindrik partners advises starnow on acquisition by backstage

We’re pleased to have advised StarNow, a New Zealand-based talent platform for actors, models, influencers and musicians, on its sale to US-based talent broker Backstage.

StarNow was founded by Trade Me alumni Cameron Mehlhopt, Jamie Howell and Nigel Stanford in 2004 during their OE in London.

Cameron says that he is “immensely proud” of what the team has achieved at StarNow, and to have worked on a venture that “really made a difference to the careers and lives of hundreds of thousands of performers and content creators.”

In its press release announcing the deal, Backstage acknowledges StarNow’s “commanding market position in Australasia”, and that its acquisition marks a significant milestone in the company’s evolution.

Partner Fiona MacKinnon says of the deal, “It was great working with Cameron and the StarNow team on this deal. It’s also very exciting to see alumni from successful tech companies go on to create their own successful companies and exit on their own terms – we hope this snowball effect continues and generates even more success in the NZ tech scene.”

Keen to learn more? Explore our m&a resources for kiwi companies.

Kindrik Partners advises Portainer.io on US$6m series A round

We’re pleased to have advised container management startup Portainer.io on its recently completed series A funding round. The round was led by Bessemer Venture Partners, with Movac, Sonae Investment Management, K1W1 and AmpliPHI Ventures also participating.

Portainer.io was founded in 2017 by Neil Cresswell and Anthony Lapenna as an open-source product to simplify the deployment and management of container-based environments.

Portainer.io’s open-source offering currently has over 500,000 regular monthly users. It has also recently launched an enterprise offering, Portainer Business, targeted at the CTO and CISO community that offers enhanced control and security for corporate environments.

The team most recently raised a US$1.2M seed round in August 2020. The series A round will be used to fund Portainer.io’s worldwide user expansion and product development, as well as to continue to scale and develop Portainer Business.

Partner Julie Fowler says of the deal, “We’re thrilled to have helped Portainer.io with their seed round and now with their Series A – they are an ambitious team that is growing fast and we look forward to seeing how they get on with such great backing”.

Read our other recent deal announcements here.

Kindrik Partners advises PropertyNZ on its acquisition by Trade Me

We’re thrilled to have advised PropertyNZ (Homes.co.nz) on its acquisition by online marketplace and classified advertising juggernaut Trade Me, who operates Trade Me Property, an online real estate platform. Completion of the transaction is subject to Commerce Commission clearance and other conditions.

Homes.co.nz is an online platform for listing real estate and property data. The platform includes property information on over 1.8 million houses, is used as a valuation tool by home owners, real estate agents, and prospective home buyers, and has also expanded in recent years to include solar power calculators and inspiration features – all of which is designed to help New Zealand homeowners manage, maintain, and enhance the value of, their properties.

We’ve advised PropertyNZ since its inception in 2014, including through capital raising rounds as it navigated expansion, so we’re very pleased for the PropertyNZ team to see an exit to an industry leader like Trade Me.

what happened in 2020 for our commercial team

It’s been a few years since our commercial team has summarised their year that was, and we don’t want you to think we’ve been twiddling our thumbs while the corporate team had a record year.

Like every business, we had fears that COVID would slow both us and our clients down. But putting aside the amount of time we spent on Zoom and Teams meetings, that’s not what the stats suggest. It’s great to know our clients were still getting deals done despite lockdowns and this massive global event. Our commercial team worked on around 700 contracts, which represents a 17% increase from the last time we reported.

Our Singapore office has helped (although not exclusively) with this growth. While our practice there has been focussed on venture capital work, our SE Asian clients are increasingly seeking our help on their other commercial deals.

Here are some trends we’ve noticed from 2020 (and these trends are consistent with what we saw when we last reported):

privacy continues to be top of minds for our clients. GDPR remains a big focus for kiwi companies doing business in Europe. Coupled with the changes to NZ privacy laws (the new Privacy Act 2020) and the new CCPA (California Consumer Privacy Act), we have drafted and reviewed more than our fair share of privacy policies and data processing agreements
millennials and Gen Zedders are impacting on our clients – the use of influencer agreements (for anyone over the age of 35: paying people to promote your products on social media) is on the rise
as a service (think SaaS, IaaS, HaaS and all other aaS) continues its dominance over traditional licensing deals. And many clients, recognising their limitations, are working hard to find in market partners to resell or promote their products offshore.

But like you all, the impact of COVID (and other events outside our clients’ control) was never far from our thoughts. We’ve spent a lot of time advising clients on force majeure, frustration, disaster recovery, and business continuity. And that has included some interesting and rewarding jobs, such as:

helping clients with insurance claims, including for tornado damage and for a shipping delay caused by a mutiny – sadly the ship’s captain (unlike Bligh) didn’t to survive the mutiny …
advising on contracts related to COVID tracing and COVID risk reduction, including one contract that made available digital workers to fight the cause.

2021 has started with a hiss and a roar. We look forward to providing you with team updates soon.

Māori & Pasifika startup Kwotimation raises pre-seed round for online tradie platform

We are thrilled to have advised automated quoting platform Kwotimation on its recent pre-seed capital raise. The venture capital firm Hillfarrance led the $500,000 round, followed by investors including Flying Kiwi Angels, Angel HQ and Humi Group.

Kwotimation’s co-founders Josh Faraimo and Jarome Cavubati initially met at school in the Wairarapa and went on to work together for 10 years running the tiling business Tiling.co.nz. It was there that they found a way to automate the quoting process for their business. Josh recounts customers going from waiting 5 days to receive a quote to waiting 5 minutes, and receiving $370,000 worth of accepted quotes within 2 months.

Both co-founders are proud of their Māori and Pasifika roots, Josh being of Ngāti Toa and Tokelaun descent, and Jarome being of Fijian descent. This made Kwotimation a natural fit for Kōkiri’s 2020 accelerator program where they met their mentor and lead investor Rob Vickery of Hillfarrance.

“Raising this round gives us the freedom to build a platform that will help transform a sector where only approximately 15 per cent of businesses have a website,” Josh says.

“We could have used it to make the business big and crush other tilers, the little guys, but instead we decided to share the software so we could all enjoy and benefit from it.”

Kwotimation intends to use the money raised to expand and scale its platform. It was a pleasure to advise on Kwotimation’s transition from tradie tilers to tech startup founders and we watch their progress with much interest.

2020 capital raising transactions

No one could have predicted the events of 2020, not even the trend-spotting venture capitalists. For many startups it’s been a year of survival, re-sizing or even pivoting. Amidst the worldwide turbulence and uncertainty, capital raising transactions continued to flow across our offices.

For the second year in a row, our New Zealand and Southeast Asia teams helped close more than 100 deals in a calendar year – 146 to be exact.

Our New Zealand team advised on 64 deals (c.f. 42 in 2019), while our Singapore team advised on 82 deals (c.f. 74 in 2019).

amount raised

We reported earlier in the year our findings on how kiwi startups anticipated the impact of Covid-19 and how it impacted their decisions around capital raising. Our numbers show that their resilient attitude bore out and capital raising largely went ahead as planned, even with international turbulence.

Overall, our data suggest that financing rounds were smaller and more conservative in 2020 than in previous years, with startups raising a combined $370m across the firm (compared to $470m raised in 2019).

Of this, Southeast Asia startups took home $248m with our NZ startup clients receiving $122m of investment this year.

Excluding small raises involving a solo investor and small non-institutional pre-seed rounds, the average NZ round size was $2.2m. The median round size for NZ financings was $1m.

The average raise in Southeast Asia was $3.2m, with a median of $2.1m. This is slightly higher than last year’s $1.6m. This number includes an increase in the amount of bridge financings that we advised on, with VCs looking to support existing portfolio companies through the uncertain times.

investment structure

Equity financings continue to be the most common investment structure in both New Zealand and Singapore in 2020 – 69% of the rounds in NZ and 61% of rounds in Asia were equity rounds. Convertible notes continue to become a much more permanent fixture in the NZ ecosystem compared to a few years back.

looking ahead in 2021

In terms of NZ, we anticipated at the beginning of 2020 that the Government’s new $300 million Elevate NZ venture capital fund might start to have an impact on the availability of growth capital in NZ. So far we have seen investments into the likes of Blackbird Ventures and Pacific Channel, and 2021 may see further progress.

Business travel is of course scuppered for now. In the past, many NZ startups have looked offshore for follow-on investment. This was hindered in 2020 without the possibility of in-person meetings. Whilst investment deals are still being concluded remotely we have heard stories of NZ-based startups postponing investment rounds because they cannot get in front of international investors.

This might be an opportunity for NZ’s investor community to step in during 2021. Given NZ’s success with Covid-19 leading to a level of normality in the startup and investment community (outside of some badly hit sectors), we also might see greater foreign investment into NZ companies in 2021 when the doors start to open again.

In Singapore, a lot of our VC clients paused somewhat in 2020 whilst they reviewed existing portfolio companies. Deals were still concluded, just at a slower pace. With a lot of dry powder we’d expect to see a greater return to action this year by the Southeast Asian VC funds. Those companies who hunkered down for survival in 2020 may well need to go out and seek funding.

Covid-19 also slowed down the emergence of new startups with in-person accelerator programmes essentially halted in Singapore. As these re-emerge in 2021, we should see an increase in seed investment transactions in the second half of the year.

Finally, whilst we don’t publish the numbers, we saw a notable increase in the number of exit transactions in both NZ and Asia. This reflects the global trend which is currently seeing a significant number of tech M&A deals. 2021 should have more of the same.

*all $ amounts are NZ$ unless otherwise specified

a summary of the changes in the new privacy act

Unless you’ve been living under a rock, you’ll know that NZ’s privacy laws are about to undergo their biggest transformation since the Privacy Act became law in 1993. The changes, and the new Privacy Act 2020 (the Act), come into force on 1 December 2020. So, you’ve still got a few weeks to make sure all of your ~~ducks~~ secret squirrels are in a row.

key change 1 – notifications of privacy breaches

Under the new law, you’ll be required to notify the Privacy Commissioner and affected individuals if you have a privacy breach that causes, or is likely to cause, serious harm. In her blog on mandatory notifications, Georgina Leslie discusses when you need to notify a breach, what counts as serious harm, and what exceptions apply (hint: not many).

key change 2 – disclosures overseas

The new law also implements a new privacy principle (commonly known as IPP12). Under IPP12, unless you have very clear consent from affected individuals, you can only disclose personal information overseas if comparable privacy safeguards are in place. These safeguards could be under contract or via similar privacy laws to the Act.

There are 2 exceptions that will help a lot of kiwi businesses. IPP12 won’t apply to cloud providers who simply store or handle information on your behalf (i.e. they don’t use it for their own business purposes) or if the disclosure is to a foreign business operating in NZ (on the basis that this business already has to comply with the Act).

Georgina also discusses this in more detail in her blog on IPP12.

If IPP12 applies to you (or you think it might), the Office of the Privacy Commissioner has released model terms that you can include in your contract with the overseas person receiving the transferred information to ensure there are comparable privacy safeguards in place. This is a fill in the blanks document. It is important that you think carefully about what should be included in the sections to complete and that you include as much detail as possible.

updated templates

We’ve updated two of our templates to reflect the new Act. Check out our updated privacy policy and website terms of use. As a heads up, these changes are pretty minor and assume that IPP12 doesn’t apply to the person using the documents. If it does, you may need some extra protections – this is discussed in the covering notes.

stay in touch

We plan to update you over the next few months on how the new law is bedding in and to give some tips and tricks on how to make sure your business is complying with the Act. Stay tuned.

disclosing personal information outside New Zealand – what you need to know

In an increasingly global world, businesses need to disclose personal information to companies outside of NZ for many reasons, including for data hosting and storage. The new Privacy Act 2020 (the Act) comes into effect from 1 December 2020, bringing with it a new privacy principle requiring NZ businesses to ensure privacy protections apply to personal information sent overseas.

This blog is our second in a series on upcoming law changes. To learn more, check out our first blog on mandatory breach notifications or subscribe to our newsletter. And keep an eye out for our new template privacy policy that we’ll release shortly.

what is information privacy principle 12 (IPP12) and when does it not apply?

IPP12 enables NZ businesses to disclose personal information to a foreign person or entity who is subject to comparable privacy safeguards. This seems broad, but there are two key exceptions:

cloud providers: if the recipient of the personal information is an agent for the storage or processing of the information, and the agent does not use the personal information for its own purposes, the provision of personal information is not treated as a disclosure

foreign business also operating in NZ: if the recipient of the personal information also carries on business in NZ (e.g. by offering services to New Zealanders through a website, holding NZ registered trade marks, or if its business involves the collection, use or disclosure of personal information in NZ on a repetitive or continuing basis) then the recipient is already subject to the Act, and you can disclose on this basis. However, the recipient will obviously need to comply with the Act and you should make sure your contract with them requires this.

what if IPP12 applies?

Before disclosing personal information overseas, you must be satisfied that you have reasonable grounds to believe that the disclosure is permitted under IPP12. To be permitted, you must either be satisfied that comparable safeguards are in place or have the relevant individual’s authorisation to disclose their personal information to the recipient.

comparable safeguards

So how do you know if comparable safeguards are in place?. You can do this two ways:

in your contract: ensure your contract with the recipient has privacy safeguards comparable to the Act. The Office of the Privacy Commission (OPC) has developed model clauses to add into their contracts to ensure comparable safeguards are in place. These clauses are fill in the blanks, so you still need to ensure they are accurately populated. However, these clauses are intended for SMEs with simple privacy disclosures. if your disclosure of personal information is complex and ongoing, or involves sensitive information (e.g. health information), you should develop your own clauses that address your particular needs in light of the requirements of the Act.

comparable privacy laws: if you have a reasonable basis to believe that the recipient is subject to comparable privacy laws to the Act (so the personal information will be protected in a similar way as if it were disclosed in NZ), you can disclose. To be satisfied, you will need to assess the privacy laws to which the recipient is subject, including thinking about the scope of their privacy laws, the protections in place, if individuals can access and seek correction of their personal information, and if, in the recipient’s country, there is an appropriate complaints process and independent oversight and enforcement similar to the OPC in NZ

In regulations, the Government may prescribe that a country has comparable privacy safeguards, meaning no additional steps would be needed before you disclose personal information to a business in that country. No regulations will be in place when the new Act becomes law.

authorisation

If you aren’t satisfied that there are comparable safeguards, you can still send personal information overseas if disclosure is authorised by the individual to whom the information relates. But, authorisation is not as simple as a short note at the bottom of your privacy policy. You will need to ensure affected individuals are expressly informed that the business you are disclosing their information to may not protect their information in the same manner as in NZ. And you must inform them clearly and upfront, about the way their information will be used, for what purpose, and by whom.

You’ve got 3 weeks to make sure your overseas disclosures of personal information meet the requirements of the new Act. We suggest you review your relevant contracts now to ensure that you are ready to comply when the changes happen on 1 December 2020.

don’t just rely on the companies office for your share register – here’s why

Clients often ask – why do we need a share register if we already have our Companies Office website records?

We understand that this seems like double-work. On face value the share register and Companies Office website records serve the same purpose. But scratch a little deeper and there are some compelling reasons why a company should put in place, and maintain, a share register.

why keep a share register?

Every company needs a share register because:

it’s a legal requirement
it’s evidence of share ownership
it differentiates between classes of shares.

legal requirement

NZ law requires every company to keep an up-to-date share register that ticks the boxes required under the Companies Act 1993. The Companies Office website records don’t tick the relevant boxes. It’s as simple as that.

evidence of share ownership

Under NZ law, the share register is conclusive evidence that a person owns shares in a company. The Companies Office website records reflect the information in the share register, but are not themselves evidence of legal title to shares. Registering an issue of new shares, or a transfer of shares, to someone on the Companies Office website carries no weight unless that issue or transfer is also recorded in the company’s share register. If a share transfer, for example, was registered on the Companies Office website but not also recorded in the share register, the transferor remains the legal owner of the shares.

It’s for this reason that you’ll usually find a share purchase agreement, or an investment agreement, requires the company to deliver a copy of the updated share register on completion of the relevant transaction. An investor or purchaser wouldn’t be pleased to find out they didn’t own shares they’d paid for because of an administrative oversight.

classes of shares

Companies Office website records don’t (and can’t) differentiate between ordinary, non-voting, preference, or any other classes of shares. Your share register can (and should). Without an accurate share register, it’s easy to lose track of who owns what.

This obviously isn’t an issue for a company for so long as it only has ordinary shares on issue. It can become a sticky issue when you have more than one class of shares – particularly when it comes time to pass a shareholders’ resolution, distribute a dividend, or liquidate the company.

next steps

Putting together a share register should be straightforward, and is likely to be something you can take care of yourself. Check out our share register template if you need or want to give it a go.

This is part of a series of simple stuff blogs in which we’ll cover some of the day-to-day questions that come up. Feel free to get in touch if there’s something you’d like us to cover in a future blog.

ask an accelerator: startmate

We’re speaking to accelerators to find out more about them and what they’re looking for in kiwi companies. This week we’re speaking with Michael Batko from Startmate.

tell us a little about Startmate

Startmate is an industry agnostic, intensive 12-week accelerator programme originating out of Australia. We have just expanded to New Zealand.

We started up in 2011 when there was no startups or venture capital in ANZ. Being an accelerator created by previous founders and primarily mentored by founders gives us the necessary empathy for the founders that we invest in – it means that everyone has been there, knows the journey and the pain.

We invest $75,000 in each company, at either their latest valuation or at $1m, and work with them before showcasing the cohort to investors at a demo day. The unique thing about Startmate is that every mentor invests their personal money into the cohort they mentor. That means that every six months we go out and fundraise from our pool of mentors and alumni.

you’re related to Blackbird Ventures – how closely are you linked to the VC?

Startmate actually pre-dates Blackbird. Startmate’s founder, Niki Scevak, went on to form Blackbird. Technically, we are a fully owned subsidiary of Blackbird and are lucky to have their full support but operationally Startmate is its own brand and community. We have all major VCs such as AirTree, Squarepeg, and rampersand investing into Startmate as a fund and our alumni. We see ourselves as the Switzerland of the startupland, a place where everyone comes together to pay it forward to the next generation of founders.

Startmate was originally an Australian accelerator, but you’re in the middle of your first NZ cohort. Can you tell us about them?

The reason why we started the New Zealand cohort was because we started seeing a lot of applications from great New Zealand founders and we invested into several of them, which meant that they needed to relocate to Australia.

It got to the point where we thought, “why are we asking them all to relocate here? We can relocate there.” And so we began speaking to mentors and eventually launched our kiwi presence with a core group of 30 New Zealand mentors.

The twist in the story of course is that with Covid-19 we’ve become a fully remote cohort. But we’re finding that because it’s a virtual cohort, mentors from both Australia and New Zealand can engage with our companies – there’s more cross-pollination going on.

We have invested in five companies for our first NZ cohort:

Landlord Studio, a SaaS platform for landlords
Woork, a workflow automation and lead gen platform for real estate agents
Sonnar, providing a content platform for people with hearing difficulties
Zerojet, creating electric jet propulsion systems for small boats and tenders
Pypervision, providing fog dispersion at airports

Our demo day is approaching on the 15th October and we’re excited to showcase the progress they’ve made month on month.

what’s the timeline like for the next intake?

Our deadline for applications to be a part of the second cohort is in early November for a mid-January start date.

anything else you want founders to know?

Twice a year we run office hours where we open up applications for startups to access our extensive mentor network. We match startups with a relevant mentor based on the needs of the startup for a 30 minute 1:1 mentoring session.

If you’re interested in getting a feel for what our programme is like, our office hours can give you a sense of the ‘founders helping founders’ culture we have at Startmate.

safe harbour from insolvency duties to expire on 30 September 2020

MBIE has issued a reminder that the covid-19 safe harbour for directors will expire on 30 September 2020. If you are a director of a company having financial difficulties, the expiry of the safe harbour is a good time to take stock of the company’s prospects, and your own appetite for risk.

A reminder of what the safe harbour is

As a director of a company that is unable, or at risk of becoming unable, to pay its debts as they fall due, you are faced with two options – investigate insolvency options (liquidation, administration, etc.), or continue trading in the hopes that the company’s prospects continue. For directors, the choice to continue trading comes with the risk of being found personally liable for the debts incurred while the company was trading while insolvent, if the company ultimately fails.

NZ put safe harbour legislation in place earlier this year, allowing directors a shield against personal liability for those debts in specific circumstances. The safe harbour applies where the actions or decisions incurring the debt were taken between 3 April 2020 and 30 September 2020. We’ve discussed that safe harbour in detail in an earlier blog.

That safe harbour is now about to expire. While there is scope in the legislation for the timeline to be extended beyond 30 September 2020, and/or for another safe harbour period to be put in place, we haven’t seen any sign of that happening yet.

what does the safe harbour expiring mean?

Directors will not be able to use the safe harbour defence against claims that they breached either of the two directors’ duties set out below, in relation to debts incurred on or after 1 October 2020.

Directors must not allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
Directors must not agree to the company incurring an obligation unless, at the time the transaction is entered into, the director believes on reasonable grounds that the company will be able to perform the obligation when required to do so.

If directors are sued, and found to have breached either of those two duties, they can be held personally liable for some or all of the company’s debts.

what next?

If you’re a director, consider your company’s financial position and trading and/or capital raising prospects. Ask yourself – “is this company viable?” (A question never far from a director’s mind). Then ask yourself – “am I comfortable with the risk of being found personally liable for the debts incurred by the Company if it fails?”

If the answer to either of those questions is no, it may be time to consider resigning as a director and/or getting started on a formal insolvency option.

updated shareholders’ agreement template for product companies

We’ve updated our shareholders’ agreement template for product companies, as part of a recent spring-clean of our governance templates.

What’s changed? We’ve clarified that the non-compete and non-solicit restraints in the shareholders’ agreement apply only to founders/key people. Investors generally don’t expect to sign up to non-compete/non-solicit restraints themselves, so it made sense to narrow the scope of that provision in the template (which originally captured all shareholders, but which we often found was changed to refer only to founders/key people). We’ve also added a clause approving the establishment by the company of an employee share option plan, and confirming shareholders’ approval of shares and options issued under that plan.

The shareholders’ agreement is designed to go hand-in-hand with our template constitution (which we also updated recently). Much like the constitution, it’s one of our most popular templates.

Feel free to get in touch if you have any questions about the updated shareholders’ agreement, or you’d like some help putting one in place for your company.

what you need to know about mandatory privacy breach notifications in the new privacy act

The long-awaited overhaul of New Zealand’s privacy law is almost here – the new Privacy Act 2020 (the Act) comes into force on 1 December 2020.

The Act is a much-needed update to ensure New Zealand’s laws keep up with the privacy issues faced by us all in 2020 and beyond – a privacy landscape that has little in common with the issues faced in 1993, when the current Privacy Act came into force.

As well as strengthening existing privacy protections, the Act includes new requirements for New Zealand businesses, such as new reporting and notification obligations.

This blog post is the first in a series of blogs on recent and upcoming privacy law changes. Subscribe to our newsletter or keep an eye out for our privacy blogs on changes to the EU-US Privacy Shield, disclosures of personal information to offshore companies, and our new template privacy policy.

you must notify certain breaches

One of the biggest changes is the introduction of a mandatory privacy breach notification, bringing New Zealand into line with international best practice. You must notify the Privacy Commissioner and affected individuals of notifiable privacy breaches as soon as practicable after becoming aware of it.

A privacy breach includes unauthorised or accidental access to personal information, or disclosure, alteration, loss or destruction of personal information. That breach will become notifiable if it is reasonable to believe the breach has caused serious harm to an affected individual, or is likely to do so.

what counts as ‘serious harm’?

Things to consider when deciding if there is serious harm include:

the action you took to reduce the risk of harm following the breach
whether the personal information is sensitive (e.g. health information)
the nature of the harm that may be caused to affected individuals
who obtained (or may obtain) personal information as a result of the breach
whether the personal information is protected, e.g. by a password or encryption.

If you have committed a notifiable breach, subject to some limited exceptions (discussed below), you must use a prescribed form to notify the Privacy Commissioner and affected individuals. If it isn’t reasonably practicable to notify affected individuals, you must give public notice of the breach.

This notice must be given as soon as reasonably practicable after becoming aware of the breach. In practice, this means you must quickly assess whether the breach is notifiable, and if it is, you must provide the notice as soon as possible.

are there any exceptions?

There are carve-outs to the notification requirement for affected individuals, as follows.

You do not need to disclose if doing so would prejudice maintenance of the law, endanger a person’s safety, or reveal a trade secret.
You may delay notifying affected individuals if to do so risks the security of other personal information held by you and those risks outweigh the benefits of informing affected individuals. E.g., if you identified a security vulnerability, you may wish to delay informing affected individuals until the vulnerability is fixed. As soon as the grounds for delay no longer exist, you must inform affected individuals of the breach.

Despite these carve-outs related to affected individuals, you must always notify the Privacy Commissioner of the notifiable breach as soon as practicable.

Failing to give the notice without a reasonable excuse may result in a fine of up to $10,000 or the issue of a public compliance notice. Given this, we suggest you err on the side of caution when assessing whether to notify a breach.

what should you do?

Now is a great time to check your privacy policy to ensure it will comply with the Act. It’s also a good chance to:

review and update your internal practices and systems to ensure they align with what will soon be required under the Act. Think about including processes to enable you to quickly detect breaches, to respond promptly to minimise harm, and to provide notice of a breach if required
develop a clear view of what personal information you hold, including where it is stored and who accesses it
provide additional training to staff who handle personal information.

If you’d like us to review your privacy policy in light of these recent developments, get in touch.

updated constitution template

We’ve updated our template constitution. The new template is now available here.

The updates mainly reflect changes to underlying legislation – including the rules in the Companies Act 1993 relating to holding annual shareholder meetings, and the changes to the definition of “code company” for the purposes of the Takeovers Code. Other changes are editorial corrections, and tweaks to reflect practical experience since the template constitution first went live in 2014.

The template constitution has been one the team comes back to again and again. It’s one of our top 20 most popular templates, and has been accessed almost a thousand times this year alone.

Feel free to get in touch If you have any questions about the constitution, or you’d like some help adopting one for your company.

a primer on ‘post-money’ SAFEs in new zealand

In the last few years, we’ve seen an increase in the number of convertible notes used on NZ cap raises. Some companies and investors have been using SAFEs – the instrument created by Y-Combinator (YC) several years ago. In 2015, we created our own Kiwi SAFE template which you can access here.

About two years ago, YC reinvented the SAFE and launched what is now known as the ‘post-money’ SAFE. As we’ve been receiving a few questions lately on how these work, here’s a brief analysis.

quick reminder – what’s a SAFE?

A simple agreement for future equity – in short, it’s an instrument convertible into shares similar to a KISS or convertible note. What’s different with a SAFE is that it doesn’t typically have any interest accruing, nor any maturity date and repayment obligation. They are therefore seen as a founder friendly investment tool to raise capital.

Like KISSes and other convertible notes, SAFEs typically convert into shares on the basis of a conversion price which is usually an agreed discount to the price of the next equity round, but which is subject to an overall valuation cap – i.e. whichever gives the lower price for investors.

so, what changed with the ‘post-money’ SAFE?

post-money SAFEs don’t dilute each other (bad news for founders)

The main change is that the new SAFE uses a post-money valuation cap instead of pre-money. The drafting change is fairly subtle to see: the definition of Fully Diluted Capital in the SAFE is amended to reflect the new principle. However, the impact can be significant. It means that the company’s valuation for calculating the conversion is “post” (i.e. after) the conversion of any other SAFEs or convertible instruments issued by the company, but prior to the valuation of the company immediately after the equity financing round. This results in further dilution for founders on conversion and potentially to any other investors that do not hold post-money SAFEs.

Just to be clear and to dispel a myth, by ‘post-money’, this is post all other SAFEs and convertible notes, but not post the next equity financing as well, as some founders have asked. That really would cause dilution!

Under post-money SAFEs, the post-equity financing option pool is no longer factored into the pre-money calculations, which actually benefits founders from a dilution perspective. Under the original SAFE, option pool expansions resulted in SAFE investors receiving additional shares. However, overall this doesn’t balance out the additional dilutive effect outlined above.

you’ll only feel the impact with multiple rounds of SAFEs

It is worth pointing out that for a company that only ever raises one SAFE investment round, a post-money SAFE has no real impact. Rather, it comes into play when more than one series of SAFEs or other convertible notes are issued. In NZ, we see this much less commonly than say in the US or Asia where substantial amounts are often invested using SAFEs and other convertible instruments, and not only in the first round of investment.

easier to calculate cap table (good news for founders)

YC’s view at the time of launching the new SAFE was that it makes the maths simpler for everyone and creates more certainty over ownership and dilution. Which is probably true. But if you issue more than one round of SAFEs or other convertible notes, and you use post-money SAFEs, founders will likely experience more dilution on conversion than they would have done under the original YC SAFE, simple as that.

In light of this, if presented with a post-money SAFE, founders may want to negotiate up the valuation cap to mitigate against the dilutive impacts potentially coming into effect.

what else did YC change?

The original YC SAFE granted holders a pro-rata right on the next financing round. The new SAFE doesn’t automatically include this. Instead, YC put out a separate side letter on their website under which these additional pro-rata rights might be granted. In NZ, we don’t tend to see pro-rata rights included in convertible notes and SAFEs too often, and founders should discourage their inclusion.

Also, the old SAFE could only ever be amended by the holder. The new SAFE on the other hand permits amendments by written consent from a majority of SAFE holders. This is something we think is valuable on all convertible instruments, i.e. the holders effectively make decisions on a consensus basis, avoiding one single small investor taking a different view holding things up.

other key points to remember about a SAFE

Not specific to the new post money version, but whenever drafting or reviewing a SAFE, keep these tips in mind:

Look out for most favoured nation (MFN) provisions. These enable early investors to have the benefit of any rights granted to future SAFE holders which might be more beneficial. If nothing else, it can be a burden reissuing new SAFEs on these better terms to lots of prior investors.

SAFEs typically convert automatically on completion of the next equity financing. There should ideally be no minimum amount to be raised to trigger this automatic conversion under a SAFE. Some investors like to include a threshold to ensure it is a legitimate fundraising round. Always be careful you do not go too high with this so as to prevent automatic conversion of the SAFE.

A SAFE (like all convertible instruments) should include language to the effect that, on conversion, holders will only have the benefit of their lower conversion price for the purposes of liquidation preference and anti-dilution rights. This can be achieved through issuing a separate class of “shadow” preferred shares, or just by drafting carefully the relevant provisions in the constitution and shareholders agreement put in place on the equity round.

round up

As SAFEs are not super common in NZ, we’re not proposing to update our template for now to create a post-money version. However, if you are presented with any kind of SAFE right now, it will most likely be the post-money version, so come and have a chat to us.

all aboard? : a warning for managing minority shareholders

The recent NZ Court of Appeal case of Dold v Murphy [2020] CA 313 illustrates how important good governance arrangements are where minority shareholders are involved, and the dangers of taking those minority shareholders for granted.

the take-aways

Governance arrangements should be top of mind if minority shareholders might be joining your share register. If you’re setting up an employee share option plan (ESOP) or share purchase plan, spend some time making sure your constitution and/or your shareholders’ agreement includes drag-along rights on terms that make sense for your company, so the minority can’t hold up an exit. A little governance housekeeping upfront could pay very real dividends in the future.
Beware the disgruntled minority. Particularly if they drafted your shareholders’ agreement.

background

Mr Dold, Mr Murphy and Mr Jacobs owned Cruise Whitsundays Pty Ltd, a tourism company based in Australia. Mr Dold and Mr Jacobs each had a 46.9% stake, and Mr Murphy’s stake was 6.2%. The group received a lucrative offer to buy 100% of the shares in Cruise Whitsundays. Mr Murphy, feeling under-appreciated and underpaid for the work he had put into Cruise Whitsundays, gave the other 2 shareholders an eleventh-hour ultimatum – agree to pay Mr Murphy a further AUD 4 million between them from their sale proceeds, or Mr Murphy would refuse to sign the deal.

The majority shareholders felt they were being held to ransom, but ultimately agreed. The deal completed and proceeds were distributed to the 3 shareholders by the end of October 2016. By December 2016, Mr Dold had commenced proceedings against Mr Murphy, claiming (among other things) breach of the Cruise Whitsundays shareholders’ agreement, breach of fiduciary duty, and economic duress. Mr Dold was unsuccessful on all counts.

governance arrangements

The Cruise Whitsundays shareholders’ agreement (written by Mr Murphy – a nice detail) contained no drag-along or similar rights. Briefly, drag-along rights allow a selling majority bloc of shareholders to compel minority shareholders to sell their shares to a third party buyer on the same terms. You’ll find an example of drag-along rights in our template constitution.

In the absence of any drag-along rights, the Court found there was nothing in the shareholders’ agreement to bar a minority shareholder seeking a premium for the sale of his or her shares, noting the “unusual but happy position” a minority shareholder might find themselves in, in that case – “of being able to command a premium for his or her shares – either from the third party purchaser, or from other shareholders anxious to see a complete takeover (on the basis that the whole was more valuable than the sum of the individual parts)”.

The Court didn’t exactly applaud Mr Murphy’s actions – describing them, variously, as “mercenary”,“offend[ing] courtesy”, and “both unexpected and ungenerous”. But it did confirm his right to take them, and generally his entitlement to act in his own self-interest.

next steps

Keen to ensure your governance arrangements will assist with a smooth exit? We can review your existing constitution and shareholders’ agreement (if you’ve got them), and help you put some in place if you haven’t. Get in touch with us to discuss further.

fiona mackinnon appointed director

With immediate effect, the board of Kindrik Partners Limited has appointed Fiona MacKinnon as a director of the company.

This appointment reflects the seniority, reputation, and skills that Fiona has acquired over the past 10 years of practice. Kindrik Partners’ chief executive, Victoria Stewart, said “Fiona started her legal career with us over 10 years ago. During this time, she has continually exceeded client expectations and has shown a strong commitment to providing focussed and practical legal advice.

“Fiona’s appointment is well-deserved. She is a dedicated and supportive colleague and we look forward to working with her, and watching her develop, in the coming years.

Fiona MacKinnon is a senior corporate lawyer at Kindrik Partners.

2020 half year capital raising numbers

Our capital raising lawyers in New Zealand and Singapore have had a busy first half of 2020, even as Covid-19 impacts globally on fundraising. As at end of July, we had helped clients close 58 financing deals in the first half of the year, slightly above where we were at the same point last year.

Last calendar year we advised on more than 100 deals – 116 to be exact – so it looks like this year we may be on track for that kind of number again.

Of the deals we’ve helped close so far this year, 39 were fundraisings by Southeast Asian companies, and the remaining 19 in NZ (12 of the recorded deals were started in 2019 but completed in 2020). Our numbers (compared with previous years) implies that startup financing, particularly in Asia, has remained pretty resilient. The availability of capital in Southeast Asia, with the particularly vibrant VC scene in Singapore, has ensured financings have ticked over during lockdowns.

It is fair to say that we have seen more bridge financings amongst existing clients than normal, compared to fundraising for new companies. As investors look to support existing portfolio companies over the next few difficult months, many companies have had to change their investment strategy. Venture debt may play an increased role alongside traditional equity financing in more deals we see going forward. Thankfully, to date, we’ve not seen many down rounds, but these could increase over the next 12 months unless founders can find alternative financing structures.

There’s a lot of discussion in the market about how the pandemic has changed the investment landscape, with deals being pulled or delayed. Fortunately, we’ve not seen too much evidence of that in the tech space so far. Deals are taking slightly longer however, and we expect more investor friendly terms to appear.

Stay tuned – we’ll be keeping a close watch to see how fundraisings in tech companies in our key markets continue to look over the rest of 2020.

new employee share option plan templates

Our template employee share option plan deed and template share option offer letter have been firm favourites in our template library since we introduced them in 2014. Today, we’ve added a new set of templates, giving companies more choice for putting an ESOP together.

Take a look at our new employee share option plan terms template and accompanying offer letter template.

The new employee share option plan terms and offer letter templates depart from our existing ESOP templates in a couple of ways – structure, and claw-back opportunities. In this blog we’ll explain which one is a better fit for your company.

new structure: easier to implement for larger teams

Our existing ESOP option deed and offer letter templates require a company to complete, and arrange to have signed, an option deed and offer letter for each employee.

The new templates take a different approach. The employee share option plan terms (global) document is a global set of terms which apply to a company’s ESOP as a whole. The terms describe the general t’s and c’s (how and when options can be exercised, what happens on a liquidity event, when options might be cancelled, what claw-back arrangements apply, etc.).

With our new templates, any time the company is ready to grant options to a team member, the company rolls out an offer letter describing the details of the team member’s grant (number of options, exercise price, vesting schedule), but otherwise referring back to the employee share option plan terms document by attaching it as a schedule to the letter. No more worrying that you’ve issued options to different team members on inconsistent terms, and no need to deal with signing any more than one document.

For this reason, we think anyone setting up an ESOP with more than 5 participants will benefit from these new ESOP templates. This structure is commonly used in ESOPs overseas, and is becoming increasingly common in NZ.

new claw-back provisions if an employee leaves

The new templates include optional drafting for use by companies who wish to provide for some level of claw-back of the recipient’s vested options, and any shares that have been issued to the recipient upon exercise of vested options, if they cease to work for the company.

Claw-back arrangements give the company the ability to remove ex-team members as shareholders, and flexibility to reissue more options to incoming team members out of the overall ESOP pool. They won’t be appropriate for every company, though (in which case the optional drafting can be deleted).

when to use the individual ESOP option deed and offer letter

We’re expecting the new templates to be popular. However, the original ESOP option deed and offer letter still have their place, so those templates aren’t going anywhere. The option deed and offer letter templates are your better bet if, for example, you’re a small company who’s only intending to grant options to one or two people, and/or you’d like to be able to customise the t’s and c’s for each ESOP participant.

Happy ESOP-ing, and feel free to let us know if you’ve got any feedback.

simmonds stewart to change name to kindrik partners

From Thursday 16 July 2020, Simmonds Stewart is changing its name to Kindrik Partners.

Victoria Stewart, the firm’s chief executive, said “We are at a new stage in our company’s life and we wanted to reflect that with a new name.”

“We’re so much more than a couple of surnames, we’re a group of exceptional lawyers. Finding a new name wasn’t easy, but we’ve landed on one that we all like and we think it will represent us well into the future”.

The firm wanted a name that reflected how it operates. “We think Kindrik captures a sense of confidence and strength. We’re a nimble firm that has broken the traditional mould to achieve great outcomes for our clients. We bring that confident and capable presence to the table.”

“Plus, we just love how Kindrik sounds” says Stewart.

hello to our new staff

We’re excited to welcome a new senior solicitor, Anna Lee, and two new graduates, Zoe MacKay and Tim Graham, to Kindrik Partners.

Anna and Tim are based in our new-located Auckland office, with Zoe based in Wellington.

Anna joins us after eight years working in the US office of a New Zealand startup, where she assisted with closing multiple capital raising rounds of over US$50m from large strategic and institutional investors across the US, EU and Asia. She also handled a variety of commercial agreements including technology development and R&D services agreements.

Tim and Zoe will be assisting both our corporate and commercial teams with the legal work that we do for our tech clients.

It was certainly an interesting time onboarding the newest members of the team during a national lockdown. Company-wide Friday night drinks and quarantinis on Zoom were one way to boost spirits during this time (pictured). These days, we’re pleased to be back in our offices to welcome them properly into the fold.

more tech company investments to be subject to OIO approval

On 16 June the Government introduced a temporary emergency notification regime for overseas investors in response to the economic impacts of Covid-19. This new notification requirement will be reviewed every 90 days but will remain in place while the effects of Covid-19 justify it. Given the severe economic impacts of Covid-19 in NZ, this is likely to be with us for some time.

new notification requirements

Overseas investors must now notify the Overseas Investment Office (OIO) of all investments, regardless of value, that would result in:

more than 25% overseas ownership of a New Zealand business or its assets; or
an increase in an overseas investor’s existing holding beyond 50% or 75% or up to 100%.

Typically, NZ tech company investment transactions would not have triggered OIO requirements other than for very large investment/exit transactions – due to the $100 million threshold, and because sensitive land is not typically involved in such deals.

Now investors must notify the OIO before a transaction is given the green light, regardless of value, and any transaction documentation must be conditional on a direction order being made by the OIO.

Once investors notify the OIO, they will complete an initial assessment within 10 working days to make sure the transaction is not contrary to New Zealand’s national interest. The OIO advises that most transactions will proceed after this initial assessment. A small number of transactions may, however, require a more thorough assessment which could take up to a further 30 working days (or even longer) and could result in conditions being imposed or the investment being stopped. The OIO will keep applicants up to date during the process.

how to notify

The overseas investor needs to complete and submit a notification form, which includes the following information:

the investor’s name and ownership information
the nature and size of the assets to be acquired
why the assets are being acquired
whether there are any links to foreign governments.

There is no cost to make a submission.

The OIO will only publish direction orders with conditions, prohibition orders, and disposal orders. Transactions that proceed without conditions imposed will remain confidential.

national interest assessment

The Minister of Finance will review certain transactions which come through this temporary emergency notification pathway for consistency with national interest. OIO note that businesses operating in sensitive areas may raise more national interest concerns, while investments that enhance New Zealand’s economic prosperity are less likely to be caught.

The national interest concept was already something the OIO had been looking at. Covid-19 has simply accelerated its introduction. The Minister of Finance has scope to apply broad judgment in deciding whether or not an investment is consistent with the national interest.

Considerations include:

national security, public order and international relations
competition
economic and social impact
alignment with New Zealand’s values and interests
character of the investors.

Even when the Covid-19 emergency notification measures have ended, the national interest test will be permanent.

analysis

For the NZ tech startup ecosystem, OIO approval would not have been on anyone’s radar other than in very few cases. Now the OIO is likely to be inundated with submissions, including on certain tech transactions with substantive overseas participation. Whilst significant overseas investment is rare in tech startups for seed investments, overseas VCs have increasingly been looking at NZ companies for follow-on money. So we expect to see the practical impact of these new measures immediately.

The temporary notification scheme could slow down the transaction even for relatively small investment deals if an overseas investor is taking a significant stake. Investors, as part of providing information as to their character, are likely to be required to supply details of their beneficial ownership. Parties to any deal should factor this into the timetable.

We wouldn’t expect the OIO to have an issue with most tech investment transactions in sectors such as SaaS, services, mobile, web commerce and financial technology. Technology covers a broad field, however. Anything that touches on security, health, infrastructure or telecommunications might require closer inspection by the OIO if it indeed adopts a broad interpretation of national interest.

For more information, visit the Overseas Investment Office website or contact us if you would like to discuss this with one of our team.

covid-19 wage subsidy scheme extended to help certain pre-revenue NZ startups

Last week’s Budget introduced additional funding of up to $3.2 billion for certain businesses via an eight-week extension of the wage subsidy scheme that was originally set to end on June 9.

The extension is available to all Kiwi companies subject to meeting the eligibility criteria, including startups and high growth businesses. To be eligible for the extension, businesses must have experienced a revenue loss of at least 50% for the 30 days before applying, compared to the closest period last year. In comparison, the original wage subsidy scheme only required a 30% revenue drop.

What’s also new is that pre-revenue R&D startups that are recognised by Callaghan Innovation will also be eligible for the extension. This inclusion could be beneficial, albeit for a limited number of companies.

how do pre-revenue startups qualify?

Pre-revenue R&D startups impacted by Covid-19 will be able to treat a fall in projected capital income as a fall in revenue for the eligibility criteria of the scheme. These employers must:

be research and development intensive ‘startup’ businesses
be ‘seed’ or ‘venture’ backed
be Callaghan Innovation affiliated as of 17 March 2020; and
have no other revenue other than government support and seed or venture capital.

notes for high growth businesses

For high growth businesses applying to receive the benefit of the scheme, they would meet the eligibility criteria for the subsidy if their business has experienced a minimum 30% (for the original wage subsidy) or 50% (for the extension) decline in actual or predicted revenue over the period of a month when compared to:

the same month last year, or
a reasonably equivalent month for a high growth business that has experienced a significant increase in revenue, and that revenue loss is attributable to the Covid-19 outbreak.

This mean startups who were flying pre-Covid do not need to look back 12 months to assess whether they are eligible. Rather they can compare against a more recent period. This is particularly useful for startups who often scale fast in short periods and for whom a year-on-year comparison is unfair.

what comes next

As our recent survey on startups impacted by Covid-19 indicated, a majority of Kiwi startups have seen their revenue significantly impacted by Covid-19. Whilst these measures may help business retain employees in the short term, many will still need to raise capital in the next 3-6 months to survive. Or as a minimum, businesses and teams are likely to shrink in size.Are you a Kiwi startup considering raising capital? Explore our list of active NZ investors in technology companies.

kindrik partners advises the last pickle on acquisition by datastax

We’re thrilled to have advised kiwi database consultancy The Last Pickle on its sale to US-based data management company DataStax.

CEO Aaron Morton founded The Last Pickle in 2012 following a stint at Weta Digital where he worked on VFX for the movie Avatar. It was there that he discovered Cassandra, a free and open-source NoSQL database system designed to store large volumes of information with no single point of failure.

The Last Pickle has now developed a number of popular open-source tools for Cassandra, and has created open source solutions for the likes of Spotify, as well as US telco giants T-Mobile and AT&T.

Aaron says, “Cassandra made large scale, highly available databases for many countries around the world. We want to make Cassandra easier to use at any scale, and to make it a realistic choice for every developer. By joining forces with DataStax, we are going to be able to have a much bigger impact.”

“We’ve worked closely with DataStax throughout the years, so we’re excited to make it official. We’re also excited to do more in New Zealand – it’s a good news story for everyone.”

The Last Pickle is DataStax’s first acquisition since Google LLC alumni Chet Kapoor took over as CEO last October. Kapoor says, “DataStax and The Last Pickle are both at the forefront of Cassandra innovation. By joining forces, we strengthen our commitment to NoSQL, the open source Cassandra community, products, and innovation.”

For the Kindrik Partners team, the deal was particularly notable for the record time in which it got across the line. Fewer than 21 days passed between the term sheet being signed and completion – a true test of what can be achieved with motivated parties and a few late nights.

Keen to learn more? Explore our m&a resources for kiwi companies.

kindrik partners once again recognised as leader in legal innovation

We’re thrilled to be named on NZ Lawyer’s Innovative Firms list for the second year in a row.

It’s rewarding to be recognised for the work we’ve done to shake up how law services are delivered in New Zealand. From releasing our free templates and document generators to our free online consults and fixed fee packages for startups, we’ve been busy creating value for our clients and making it more efficient for our team to work.

We also make no secret that we look to the tech sector for inspiration – including finding best-in-breed SaaS tools for our tech stack. Being innovative and agile is in our firm’s DNA. Particularly with the current climate, our ability to operate fully in the cloud has enabled a smooth transition to remote working.

Click here to see NZ Lawyer’s 2020 Innovative Firms list.

[Note: The firm’s name was changed from Simmonds Stewart to Kindrik Partners in July 2020.]

impact of covid-19 on the nz startup ecosystem

Kiwi startups are unsurprisingly feeling the strain of the Covid-19 impacts but are continuing to soldier on, according to our recent Kindrik Partners survey.

who responded

Of our respondents, 61.4% were small startups with 1-10 employees. A further third (34.1%) were medium-sized with 11-50 employees, with the remaining 4.5% having over 50 employees.

We received feedback from startups operating in a wide variety of sectors. These industries included:

Fintech
Travel
Health
Housing
Marketplaces and platforms
Media & Digital Marketing
Software and developer tools

Energy
Engineering
Agriculture / Aquaculture
Education
Artificial Intelligence
Foodtech / Retail

impact on revenue

The startup ecosystem has been hit almost universally, with over 90% of those surveyed being negatively impacted in some way. 3 in 10 founders report they have been heavily or severely hit by the outbreak.

Responses to “Has your business been negatively impacted by the coronavirus outbreak?”

industry observations

The hardest hit verticals – those that reported that they had been ‘heavily’ or ‘severely’ affected – were marketplace & platforms, software & developer tools, and foodtech and retail. We were not surprised to see retail on the list, although clearly during lockdown some F&B businesses have done well.

There were also sectors facing real difficulty that we didn’t necessarily anticipate, namely, health and biotech. Of course, this is a broad sector, with startups in the space often taking longer to get traction and attract investment compared to your average SaaS company.

unexpected observations

We also acknowledge, as was pointed out by one respondent, that we did not make space for those companies who are benefiting from this global event. The surge in popularity of remote tools like Zoom, Slack, and others show that startups enabling connection and business-as-usual while social distancing can benefit immensely.

In fact, Startup Genome’s worldwide survey of startups reports that 1 out of every 10 startups are in industries experiencing growth.

dollars lost in anticipated revenue

When it comes to revenue, 45.5% of our respondents anticipated less than $200k in lost revenue, with around a third estimating annual losses of at least 40% (with some much worse). This is unsurprising, but still concerning to see. Many of these businesses will need to rapidly cut costs or raise new capital in the next 3 to 6 months – probably both – just to survive.

Responses to *“How much potential revenue have you lost or do you think you’ll lose in 2020? (in NZD)”*

Responses to *“What is that loss of revenue as a percentage of your entire expected revenue?”*

impact on fundraising activities

34.2% of our respondents reported that they are raising funds.
65.8% of our respondents reported that they are not currently raising funds.

Of the companies raising capital, 45% are experiencing delays but for 55% it’s business as usual. This reflects our own experience of seeing some cap raising deal flow in the New Zealand market, albeit a lot less.

Two-thirds of the startups who replied are not raising money. Some of these businesses may have raised in the last 6 months, giving them a period of runway to continue running their business.

Lee Bagshaw, a partner in our corporate team, says, “We’ve seen capital raising for Kiwi startups slow down in recent weeks. We suspect investors will prioritise support for their existing portfolio rather than look at new opportunities for the foreseeable future. Aside from difficult conversations around valuation, investors will want to understand what the post-Covid business looks like, not just how will it survive the crisis – it could be materially different.”

(Read our related articles on fundraising during the covid-19 crisis and bridge financing for startups.)

impact on other growth activities

hiring plans

We also asked companies about other expansion plans. A healthy 45.2% of startups have reported they are not cancelling their hiring plans, which is great to see. This shows a healthy optimism and drive to grow. It also means good news for jobseekers.

There could be pain to come for New Zealand’s ecosystem however. The government’s wage subsidy scheme may currently be acting as a lifeline for some start-ups in terms of staff retention.

Startup Genome’s report paints a less rosy picture for startup hiring – since the beginning of the crisis, 74% of startups have had to terminate full-time employees. Their report finds that 39% of all startups surveyed had to lay off 20% or more of their staff, and 26% had to let go 60% of employees or more.

market and product launches

There remains a determination about expansion plans. 53.9% of respondents have reported that they are not cutting back on market launch or product launches due to Covid-19. In other words, those who have a strategy for post-Covid are pushing on.

how long do we expect this to last?

Responses to *“How long do you expect the impact of this pandemic to last?”*

Kiwi founders are taking a long-term view on the impacts of Covid-19. More than 75% of founders think that the economic impact for them will last between one to two years. On a global economic level, we expect this clearly will play out for much longer. However, as in previous economic downturns, some tech startups have thrived and new businesses emerged. We expect that to occur again, but sadly there will be some casualties. This view probably informs the perspective of NZ founders to forge ahead with expansion and product development plans, since the alternative – to wait two years until this all blows over – isn’t viable.

what comes next

This is a once in a lifetime (hopefully) event for the NZ (and global) economy. Our startup ecosystem will need to be resilient to come out the other side, which will require ongoing support from early stage investors.

We expect the startups who responded to the survey to broadly fall into 4 categories.

those effectively on hold until this is over, and survival is the only strategy – for example those in the travel or events space – whose revenue has significantly diminished. Their ability to survive could be dependent on when they last raised capital and having a strategy for the other side of Covid-19

those who may need to pivot – for example, where customer acquisition has fallen and the business needs a new or adjusted business model. This can work, particularly if they have a good customer base who may support a slightly different product, and the team can quickly transition to it

those who are not materially affected – some startups we speak to have lost in some areas but gained in others. Overall, revenue may be negative but not materially. The threat to these companies is really just runway and do they need to raise capital to grow

the winners – businesses that are thriving, for example, healthtech, online collaboration, certain e-commerce. We suspect these are a tiny minority in the NZ ecosystem.

Assessing which category your startup falls into will be key for founders.

Finally, one thing the survey did support is the theory that there remains a not-insignificant amount of resilience and optimism throughout all this. We hope this Kiwi attitude will see them through these extraordinary times.

NZ startup survey: impact of covid-19

Are you a kiwi startup? Click here to take part in the survey.

We want to know more about how the kiwi startup ecosystem is being impacted by the Covid-19 situation. We’ve put together a brief survey that we’re encouraging kiwi startups to fill out.

All responses are completely anonymous and all information collected will be aggregated. This survey will take a maximum of 5 minutes to complete.

We will be sharing the information with the wider community once we’ve crunched the data.

Survey: Impact of Covid-19 on NZ’s startups

lockdown tips: signing docs and passing resolutions during the covid-19 crisis

Update as at 24 July 2020:

Since this blog first went up in April 2020, legislation has been passed confirming (among other things) that parties to security agreements containing power of attorney provisions can sign those document(s) electronically. The change applies only to powers of attorney signed in connection with a security interest between 21 March 2020 and 16 November 2020 (although the legislation does allow for that timeline to be formally extended if necessary). With lockdown having lifted in NZ (and hopefully staying that way, fingers crossed), companies may find that banks continue to require “wet ink” signatures to security agreements, even with this new law having come into effect.

…….

With everyone in lockdown mode, many businesses used to taking care of their corporate admin face-to-face may be wondering how to approach this brave new world.

We thought a quick breakdown of how to go about signing documents, and passing resolutions, when you can’t meet people face-to-face might help.

You might need to pass board or shareholder resolutions in the next few weeks if you are currently in the middle of the following business activities:

cap raising/bridge funding activities like issuing shares to investors, or entering into convertible notes
adopting, amending or replacing your constitution
restructuring activities – particularly if they involve major transactions, business acquisitions or divestments, spin outs, etc.
corporate housekeeping like holding annual shareholder meetings, or opting out of default financial reporting requirements, now that the end of the financial year for most companies is upon us
putting in place ESOPs or other equity incentives for team members

(This article is part of our Covid-19 series. See the full set of articles here.)

signing documents

You should be able to sign everything necessary to keep your business running during this period electronically.

Solutions can be as sophisticated as traceable digital signatures through DocuSign and other platforms, or as simple as using Adobe Reader in Windows, Preview on a Mac, or taking advantage of the user-friendly tools built into many phones, tablets and laptops.

We’ve also found institutions that would usually require traditional signing processes to be followed are willing to consider practical alternatives. A bank in the last few days was comfortable accepting documents having been witnessed on the basis of us watching the clients sign via a video call, for example.

We understand the NZ Government also plans to introduce legislative changes that will allow parties to electronically sign security agreements that contain power of attorney provisions soon. Until that change is made, powers of attorney remain one of the few categories of document that cannot, under NZ law, be signed electronically. A company is often required to execute a security agreement before it can access bank financing, and powers of attorney are a common feature of security agreements, so we welcome this change.

passing resolutions

Whether it’s business as usual, or specific resolutions required to authorise bridge funding for your company, the lockdown shouldn’t prevent you from passing any board and/or shareholder resolutions you need to.

You have two options – in person via Zoom or in writing.

in person via Zoom

If you prefer holding meetings in person, and would like to stick with that approach as much as possible, you could hold a meeting by conference call or Zoom. Broadly, the same rules and process that apply to an in-person board or shareholder meeting apply to any meeting held by conference call/Zoom.

pass a resolution in writing

Different rules apply to written board and shareholder resolutions (more on that below). As long as those different rules will still work for you, practically, we find written resolutions a convenient and practical way to take care of corporate admin.

how to pass a resolution in writing

How do you go about it? Here’s what we recommend:

Check your constitution (if you have one) for any special rules that may apply to written resolutions.
Check your shareholders’ agreement (again, if you have one), for any special rules that may apply to written resolutions.
No special rules under your governance documents (or no governance documents)? – then follow the default rules set out by the Companies Act.

default rules for board resolutions

The default rule for board resolutions is that a resolution in writing is valid if it is signed or assented to by all of the directors. Keep in mind that a majority isn’t enough – everyone on the board needs to sign or assent.

default rules for shareholder resolutions

The default rule for shareholder resolutions – with a few exceptions* – is that a resolution in writing is valid if it is signed by shareholders who:

(i) make up at least 75% of the voting shareholders by headcount; and
(ii) hold at least 75% of the voting shares.

* The few exceptions apply where: a company is seeking shareholder support to opt out of its obligations under the Companies Act to prepare financial statements, have those financial statements audited, and/or to prepare annual reports. In each case, shareholders holding at least 95% of the voting shares must sign the resolution.

tips for passing shareholder resolutions

A few things to note about those default rules for shareholder resolutions:

A company’s constitution can impose a higher threshold than the default, but cannot allow for a lower threshold.
Shareholders must sign the resolution (assent isn’t enough).
Because of the headcount requirement, a small group of shareholders who hold most of the shares won’t be able to pass a written resolution on their own. E.g. in a company of 4 shareholders, 1 or 2 shareholders on their own can’t pass a written resolution even if they hold 90% of the voting shares.
It will make life easier to go beyond the minimum threshold required and get every shareholder’s signature to a shareholders’ resolution, if you can. If you can’t, then you should send a copy of the resolution in its final signed and dated form to any shareholder who hasn’t signed the resolution within 5 working days.
Special rules also apply if you’re adopting a constitution or approving a major transaction – in which case you’re most likely to be in touch with your favourite legal adviser anyway.

need help?

The above isn’t a full breakdown of the rules surrounding written shareholder resolutions (we figure everyone’s already suffering enough). If you have any questions though, we’d be happy to help.

help for startups in financial difficulty during covid-19

Update as at 24 July 2020:

Since this blog first went up in April 2020, legislation has been passed putting into effect the safe harbour measure described in the original blog. A safe harbour is available to directors who may otherwise be at risk of being found personally liable for keeping a company trading between 3 April 2020 and 30 September 2020, and incurring further obligations (debt) while doing so. The safe harbour only applies if:

as at 31 December 2019, the company was able to pay its debts as they fell due (or the company was incorporated between 1 January 2020 and 3 April 2020);
the directors believe in good faith that the company is facing, or is likely to face, significant liquidity problems in the next 6 months due to the impact of covid-19 on the business itself or the business’ creditors; and
the directors believe in good faith that it is more likely than not that the company will be able to pay its debts as they fall due on and after 30 September 2021. In making this call, directors may take into account any matters they consider relevant, including the likelihood of trading conditions improving, and the likelihood of the company reaching a compromise or other arrangement with its creditors.

The legislation allows for that initial safe harbour period of 3 April 2020 to 30 September 2020 to be extended to 31 March 2021 under further regulations, if necessary.

The points below, from our original April blog, continue to be relevant. In particular:

the safe harbour is not intended to enable a company to continue trading where it has no realistic prospect of continuing to trade or operate in the medium or long term; and
these changes aren’t carte blanche to disregard directors’ duties under NZ law during the safe harbour period. Directors’ overriding duty to act in good faith and in the best interests of the company will continue to apply, as will other protections in the Companies Act punishing directors who dishonestly incur company debts.

One final point – the legislation places the burden of proof on directors to show, if necessary, that the safe harbour applies to shield them from liability if a claim is brought against them. With that in mind, we recommend directors check in regularly, and in detail, with their companies and keep records of their decision-making throughout the safe harbour period.

…….

The NZ Government will be introducing legislation to Parliament shortly to make it easier for companies who have been hit with the effects of covid-19 to keep trading long enough to outlast the disruption. Whilst these measures apply to all NZ businesses, these changes are particularly welcome for startups who will face significant cashflow issues over the coming months as investment activity slows down.

The two headline changes are:

a safe harbour from insolvency duties for directors of companies facing significant liquidity problems because of covid-19, and
an existing debts hibernation option.

In this blog we focus on the first change – the safe harbour from directors’ insolvency duties. A short, practical summary of what the safe harbor means for you as a director follows below.

(Click here to go to all our covid-19 related content on our blog.)

what’s the risk being addressed here?

Any director of a startup will be familiar with the question – is this company viable? The answer lies in the balance between the company’s trading prospects and ability to raise further capital if/when needed, and the expenses and other liabilities involved in continuing to trade.

Under the Companies Act, directors are subject to two specific duties that speak directly to that balancing act:

directors must not allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors, and
directors must not agree to the company incurring an obligation unless, at the time the transaction is entered into, the director believes on reasonable grounds that the company will be able to perform the obligation when required to do so.

If directors are found to have breached either of those two duties, they can be held personally liable for some or all of the company’s debts.

what do we mean by “safe harbour”?

Briefly – protection for directors against the risk of being held personally liable for the company’s debts, in specific circumstances.

Under the proposed safe harbour, directors will not be held personally liable for keeping a company trading, and incurring further debt while doing so, over the next 6 months as long as all 3 of the following apply:

the directors believe in good faith that the company is facing, or is likely to face, significant liquidity problems in the next 6 months due to the impact of covid-19 on the business itself or the business’ creditors
the company was able to pay its debts as they fell due on 31 December 2019, and
the directors believe in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within the next 18 months.

why is the safe harbour important?

The prospect of being held personally liable for debts incurred by a company is scary. Particularly for directors who may already be facing uncertainty in their own personal finances due to covid-19. Also, the rules apply to all directors, including investor directors often appointed to the boards of startups.

Faced with the question of whether or not to continue to running a business whose liquidity has become significantly jeopardised due to the impact of covid-19, it’s reasonable to assume that many directors will make the choice to put the business into liquidation if the alternative exposes them to being held personally liable for the company’s debts.

The Government’s proposed change will remove directors’ personal liability as a deciding factor. If directors make the call to continue trading, they won’t personally be responsible for the company’s debts as long as they believe in good faith that their company has a chance to survive covid-19. Directors will be more inclined to continue trading for a while longer, retaining staff and looking for opportunities to pivot or otherwise weather the storm.

am I ok to start taking this approach before the amendments have been formally adopted by Parliament?

We recommend taking a cautiously optimistic approach. The new rules will apply retrospectively from the date of announcement (Friday 3 April) but there is always the risk that the final detail won’t reflect the big picture announcements made.

If you’re a director, give some thought to whether the safe harbour criteria would apply to your company if you were making the call today. If you think the safe harbour would apply, and if your other directors agree (if you have any), then we hope the Government’s announcement gives you some confidence to continue trading, even for the short term until the final detail of these proposed changes becomes clear.

I’m a director of a company and this sounds great – what do I need to remain wary of?

Two things:

directors’ duties and obligations that continue to apply, and
the fact that the safe harbour is only available if your business was otherwise viable before covid-19 came along.

These changes aren’t carte blanche to disregard directors’ duties under NZ law over the next 6 months. Directors’ overriding duty to act in good faith and in the best interests of the company will continue to apply, as will other protections in the Companies Act punishing directors who dishonestly incur company debts.

These changes are also designed to specifically target companies that have suffered as a direct result of covid-19. If your business was facing liquidity issues before covid-19, the proposed safe harbour won’t help you.

To paraphrase Finance Minister Grant Robertson – if your business was a good, functioning, solvent business going into covid-19, it should be able to be a good, functioning solvent business coming out of it. We hope that turns out to be true, and we welcome the proposed changes as a small step to help protect NZ’s startup ecosystem.

Get in touch if you would like further information on this topic.

investor directors’ duties and managing conflicts during covid-19

(This is one of a series of blogs on Covid-19. See the others here.)

Many of New Zealand’s startups have an investor director on their boards. As the economic effects of the Covid-19 pandemic play out, investors’ portfolio companies may quickly become financially distressed.

We’ve looked at areas for investor directors to think about in respect of portfolio companies experiencing financial difficulties.

directors’ duties

reckless trading and incurring obligations

Under the New Zealand Companies Act 1993 (Act) directors must not allow the company to engage in reckless trading or agree to the company incurring an obligation unless they reasonably believe the company will be able to perform it, when required.

on reckless trading: directors must not allow the business to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors, and

on incurring an obligation: a director must not agree to the company incurring an obligation unless, at the time the transaction is entered into, the director believes on reasonable grounds that the company will be able to perform the obligation.

(An example: entering into a loan agreement with no reasonable basis for believing the company will be able to repay the loan when required.)

On 3 April, the Government announced that they were making changes to legislation to help businesses facing insolvency due to Covid-19. Subject to the proposals being agreed to by Parliament, the announced chances will provide a safe harbour from these above provisions of the Act. Directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the next 6 months will not result in a breach of duties if certain circumstances apply. Check out our blog on these safe harbour provisions to learn more.

Investor directors will still need to be mindful of their duties to exercise care, diligence, and skill, and also to act in good faith and in the best interests of company. These duties will continue to apply when the announced changes come into effect.

practical tips for an investor director

Where a company is in financial distress, directors should:

meet weekly, or even daily, to assess the financial position of the company, and

obtain and review up-to-date financial information, including cashflow projections.

If a company projects that it cannot meet payroll, that is likely to be a very good indicator that the company cannot continue to trade. The new safe harbour provisions will of course come into play on any analysis of this.

Directors should keep a paper trail of decisions made, including in all directors’ resolutions and certifications. They should also state clearly any reports, financial statements or projections upon which directors are relying in making these decisions.

managing investor director conflicts

This is an issue specific to investor directors. In normal times, the interests of the company and investor are closely aligned. However, during a period of financial distress, this may change with founders and the investor having different views on strategy. The investor director will still need to meet the same obligations as all other directors and can face the same liabilities and possible claims for breaches of the Act. At the same time, they need to balance this with their obligations to their investor.

To help manage the conflict issue and minimise potential investigation of an investor director’s conduct, consider the following:

ensure a clear separation between shareholder matters and board matters. At this time, the investor director may need to support the board in a transparent way, and cease to be directly involved in decision making amongst investors

consider arranging for an investor director to remove themselves from a meeting or board discussion on topics in which the investor has an interest, to allow for free and frank discussions between the other directors

ensure any communications from investors are made to the board at the same time as the investor director is made aware of the matter – this will help to avoid suggestions of a conflict from the company side

if the financial situation escalates toward insolvency, investors and the board should seek separate legal advice, with someone stepping in to lead this on behalf of the investor group, instead of the investor director

if the investor is a creditor, be mindful of situations that would require the directors to use their powers to prefer the investors’ position over the company’s other creditors

maintain at all times accurate records of all decision making by the board

Are you an investor director and have issues relating to one of your portfolio companies? Get in touch with us. View our other Covid-19 resources on our blog.

covid-19 – can’t perform your commercial contract?

In these uncertain times, businesses are juggling a range of risks. And being able to perform their commercial contracts is one of them. What if you need to be onsite at a commercial premise to perform? What if your key staff are ill? And there are many more what ifs.

(This is one of a series of blogs we’ve written on covid-19. See the other blogs here.)

It may give you comfort to know that you are not alone. We’ve been fielding calls from several businesses who are worried they are breaching a commercial contract, including major supply contracts on which their business relies.

Here’s a few things to think about if you have these concerns.

if you think you can’t perform your contract because of covid-19, be proactive

Talk to your customer as early as possible. Explain your position. Try and offer workarounds or tell them what you can do (even if you can’t meet your contractual obligations). The earlier you advise your customer of potential issues, the more likely it is that you’ll have a sympathetic ear.

read your contract – most contracts include a clause relating to force majeure

This clause usually says that a party is not liable for a breach of contract if that breach is caused by an event outside the party’s reasonable control. Common examples of this type of event are floods, fires, earthquakes, and pandemics (hint hint). This clause may well protect you from liability if you can’t perform your contract due to covid-19. But, there are usually some limits (read your own clause to check whether these apply):

normally you need to notify the other side immediately or promptly that you want to rely on that clause – as we said earlier, proactivity is key
- often, you can only rely on the clause if you’ve tried to perform the contract as far as practicable and have used best efforts to mitigate the impact of the event, e.g. implementing BCP plans
- if you rely on this clause, you are unlikely to get paid for the period of the force majeure – while you have no liability for breach of contract, the other party isn’t receiving what it agreed to pay for
- often, the other party can terminate the contract if you have relied on the force majeure clause beyond a certain time period

If no force majeure, find an interim solution, like a payment plan.

If you cannot make a contracted payment, the force majeure clause is unlikely to protect you – usually these clauses do not cover an inability to pay money. But check your contract to see if this is the case. Where you can’t make a payment, we suggest you contact the other party with an interim solution, e.g. a payment plan. Given the risks facing most businesses, the other party is likely to prefer getting some money over no money.

Each commercial contract is different, so you should read your contract to see if there are any protections in there for you. Also, it’s likely the other party is facing similar risks, so will be open-minded to you raising issues where you have a plan of attack that minimises the impact of your inability to perform.

If you’re reading through your contracts and other questions crop up, don’t be afraid to get in touch. Apart from working remotely, it is business as usual for us. We operate in the cloud and are ready and able to support you through this time.

how covid-19 could affect your startup’s fundraising deal

The unprecedented crisis caused by COVID-19 is having a major impact on all economic activity. Investors in startups, like everyone else, are impacted too. Angel investors will likely be distracted from doing deals. VCs might feel pressure not to deploy capital – particularly as their limited partners will start to be overexposed to venture capital as the value of their other assets falls. All this can lead to less cash for startups.

But what if you are a startup in the middle of capital raising transaction? We’ve done a quick round up of things to consider, depending on what stage of the fundraising process you’re in.

if you’ve got a term sheet

The most important thing to remember is that a term sheet is non-binding. Whilst investors do not typically sign term sheets and then withdraw for market reasons, we are in unusual times. Investors can in theory walk away without any reason which can cause major disruption to a capital raising process.

If you are in the process of receiving and negotiating term sheets, a good tip is to keep any exclusivity period in the term sheet to a minimum (e.g. not more than 30 days) so if an investor does start to waver, the company can move on quickly to other opportunities.

Another tip is to structure the deal to close it quickly. Consider limiting the number of investors and keep existing shareholders up to speed so paperwork can be executed without delays.

if you’ve signed an investment document but the deal has not completed

Whilst investors are legally bound to close the deal and fund the company once they have signed up, share subscription agreements always include a clause that the investment is subject to the fulfilment of certain conditions.

These conditions often include a ‘material adverse effect’ clause – which means that no event has occurred or is continuing which has a Material Adverse Effect (MAE) on the business.

A typical definition of a MAE might look like this:

“Material Adverse Effect” shall mean any change or effect (including but not limited to change in applicable Law) that would have (or could reasonably be expected to have) a materially adverse financial impact to:

the business, operations, assets, condition (financial or otherwise), or operating results of the Company, or
the ability of the Parties to consummate the transactions contemplated herein, or
the validity, legality or enforceability of the rights or remedies of the Subscribers under the Transaction Documents.

This might sound complicated, but essentially a MAE clause allows investors to withdraw from a fundraising deal if there is a change which impacts on the business or its financial performance in a material way.

Whether COVID-19 would be a MAE depends on how the provision is drafted. MAE clauses do not just cover deterioration in the financial performance of the business, but almost anything which materially affects its operations. This could be a termination of a key license, law change, or just an inability to deliver services as before. COVID-19 is of course impacting not just economic activity but also forcing governments to implement new measures on a daily basis.

how big a deal is a MAE in a fundraising transaction?

Possibly not that major in the case of startups and fundraising deals. Unlike M&A transactions which often have longer periods between signing and closing, on financing deals, investors and startups tend to wrap things up quickly so the founders can get back to their day job. Signing and completion are usually simultaneous or within a few days of each other. That means there is little or no time for an investor to withdraw on the basis of an MAE anyway. The exception to this is where there is a rolling close on financing deals, i.e. further money invested after a period of time. Even if investors are legally bound to fund as part of a later tranche, the MAE could come into play at that time, and allow investors to withdraw.

For an investor to pull out of a transaction on grounds of an MAE occurring, the event clearly needs to have occurred after signing the deal. Given COVID-19 is already known to everyone, an investor would therefore have to demonstrate that there was some specific change that occurred after signing. One way that could happen is if the MAE clause specified that it was triggered if the earnings of the business deteriorate by a certain percentage after signing, e.g. 10-20%.

At this time, it may be fair for startups to exclude general market deterioration in the definition of MAE to exclude the overall economic impact of COVID-19 including any measures implemented by governments in response to the crisis.

other tips to consider when fundraising during COVID-19

review warranties carefully

Warranties provided by the company or founders on a fundraising should only cover the period up to closing. However, certain warranties may in effect look forward if they refer to the business plan.

For example, warranties covering the business plan often include the following:

Business Plan

The Business Plan has been diligently prepared by the Warrantors in good faith and each of the Warrantors believes that, as at the date of this Agreement, it represents a realistic plan in relation to the future progress, expansion and development of the Business
The financial forecasts, projections or estimates contained in the Business Plan have been diligently prepared, are fair, valid and reasonable and have not been disproved in the light of any events or circumstances which have arisen subsequent to the preparation of the Business Plan up to the date of this Agreement.
The assumptions upon which the Business Plan has been prepared have been carefully considered and are believed to be reasonable, having regard to the information available and to the market conditions prevailing at the time of their preparation.

In the current economic climate it is virtually impossible for a startup to accurately project its future trajectory even over the next 6 months. Therefore, these kind of warranties may not be appropriate right now, and startups should avoid giving them if possible.

avoid tranched investments and KPIs

Now is the time to get money into the business to give it runway for a period. Investments which include deferred money conditional on financial performance are best avoided by startups at the best of times. But right now, it is impossible to forecast traction in the next 12 months or so. Startups would likely better off raising the full amount at a slightly lower valuation now than going with tranches and KPIs.

watch out for redemption / buy-back rights

Investors sometimes include redemption or buy-back rights which entitle them to get their money back from a startup in certain circumstances. Usually this is where there is some kind of event of default by the company or its founders.

However, occasionally, we’ve seen deals where investors have redemption rights which can be enforced in other scenarios (e.g. failure to complete a restructuring or obtain a new licence to operate, financial performance deteriorates, or perhaps being unable to deliver under a separate commercial arrangement). In this uncertain period, such rights bring considerable uncertainty and risk to startups and should be avoided.

what’s next

Sequoia Capital has released a report saying that COVID-19 is the ‘black swan’ of 2020, and to brace for coming economic shocks. But the developing economic environment shouldn’t put off startups who are looking for money – it’s a case of being wise about the fundraising process, and knowing how to deal with the changing times, and perhaps in time the changing transaction terms.

If you’d like to speak to us about your fundraising situation, get in touch.

an update from us regarding covid-19

Kindrik Partners operates in the cloud and will continue to fully function through the COVID-19 crisis. Our staff are now working remotely. This is to ensure our staff and local communities remain as safe as possible (in line with Government communications).

Apart from working remotely, it is business as usual for us. If you need to contact us, email is best but we are also available on our mobiles. We are ready and able to support you through this time.

auckland office on the move

It’s been 6 years since we moved into our premises in Vulcan Lane and opened the Kindrik Partners Auckland office. We’ve loved our time in Vulcan Lane but our expanding staff numbers mean it’s time for a move. We’re now in the Premier Building at 182 Queen Street – it’s on the corner of Durham Street East and Queen Street, in a gorgeous Victorian office space.

There are some things we’ll miss about Vulcan Lane. Others, not so much. We’ll miss the café’s, bars and shops of Vulcan Lane, but will not miss the buskers serenading us daily. I think we’ve all had enough of Hallelujah to last us a lifetime.

We’re looking forward to all the adventures we’re going to have in the next 6 years, our team is excited to be working in our new space and we’re sure our clients will love the new offices as much as we do. Drop in and see us!

boost for NZ startups with launch of NZGCP’s Elevate

The New Zealand Growth Capital Partners (NZGCP) – formerly New Zealand Venture Investment Fund (NZVIF) – officially launched its Elevate Venture Fund last week. The $300 million “fund of funds” programme will look to partially close the capital gap that has previously existed for Kiwi startups raising growth capital.

about the fund

The Elevate Fund will invest into venture capital funds looking to make series A and B stage investments (round sizes of $2 to $20 million) into NZ startups. Most of the Elevate money will be invested into funds with a NZ connection, while a portion may be invested alongside overseas funds.

It’s worth noting that Elevate will not invest directly into startups. Nor will they be involved in the day-to-day investment decisions of the VC’s funds. Instead, they will select the best fund managers to support, taking into account the overall objectives of the scheme.

investment criteria

With details of the process, application forms and guidance on applying all now up on NZGCP’s website, Elevate is very much open for business. NZGCP have set out some details of the factors potential fund managers are likely to be assessed on. These include:

intention to allocate the majority of capital to series A and B stage NZ businesses
track record as a VC fund manager and/or investing in early stage companies
connections and capability to support their portfolio companies on their journey
fund fit within the wider Elevate portfolio
ability to source matching capital from investors
commitment to developing the NZ VC industry

impact of Elevate on the NZ investment ecosystem

As we suggested in our earlier blog on this topic, in time this could have considerable impact on the current investment ecosystem. In particular, NZ angel investors may finally be able to double down on earlier deals which offer higher returns, i.e seed and pre-series A. With less angel money required to support follow-on rounds and series A deals, there is likely to be more funding available for these kinds of deals, which is good news for new startups.

Secondly, if new VC funds in the market start to compete for the best startups, we’ll hopefully see greater efficiencies on deal execution and more standardised series A terms. We note that the resources section on the NZGCP site now contains the Angel Association NZ model term sheet, shareholders’ agreement and subscription agreement which were refreshed last year, replacing the NZVIF template documents that were used in the market.

We very much hope that Elevate triggers a wave of series A and growth capital investment activity in NZ. And in time we may see the emergence of a more established venture capital industry.

We’ve seen this happen in Singapore, where a similar government initiative called the Early Stage Venture Fund (ESVF) was the stimulus for a regenerated VC industry back in 2013. Today there are now 50+ VC funds in operation, albeit investing across a much larger regional market than here in NZ. New Zealand should take note of Singapore’s experience though. While the ESVF undoubtedly increased the number of series A financings, it took longer to attract into the market the larger funds capable of writing larger series B cheques for tech startups.

Aspire Fund

Separate from Elevate, NZGCP will also operate its Aspire Fund – partnering with other private investors to make direct investments into early stage (proof of concept and seed stage) companies. We look forward to seeing that in action too.

Kindrik Partners has previously advised VC funds from NZ, Australia and Asia. If you are interested in the NZ funding ecosystem or Elevate, come and have a chat to us.

Takeovers Code updated to exclude small unlisted companies

Small cash-poor companies with over 50 shareholders rejoice. New changes to the Takeovers Code mean that it’s now easier for smaller companies to manage their shareholdings without significant administrative and regulatory burdens.

changes to the Takeovers Code

We were stoked to see Takeovers Code changes kick in in mid-January, which will allow unlisted companies with a long share register to escape being caught by the Code until they have significant assets or income.

Under the amended Takeovers Code, an unlisted company will only be a ‘code company’ if:

it has 50 or more shareholders (with voting rights) and 50 or more share parcels, and
it and its subsidiaries together have total assets of at least $30 million, or total revenue of at least $15 million, at the end of the company’s most recent financial year.

Previously no asset or income threshold applied, so a small cash-poor company would be caught by the Takeovers Code as soon as it met/exceeded that 50 shareholder and 50 share parcel threshold.

why it’s good news for smaller companies

The Takeovers Code requirements are unduly onerous for small code companies and for their larger shareholders. For this reason, professional investors will generally steer clear of investing in startups that are at risk of attracting code company status.

The 2016 Takeovers Code (Small Code Companies) Exemption Notice was an ineffective response to those difficulties, and we are pleased to see it revoked in favour of the addition of a turnover and asset threshold.

so, what now?

Well, we still wouldn’t recommend playing fast and loose with your share register, even if your company is unlikely to hit that $30 million asset or $15 million revenue threshold any time soon. There are still excellent reasons to try to minimise the number of shareholders and share parcels on your books – particularly if you’re a high-growth company reliant on regular capital raising. For example, a bulky cap table can be off-putting to third party investors, and unwieldy for boards to manage when trying to secure shareholder approvals in tight timeframes.

We think that there is still a place for a nominee company for minority shareholdings, even if the $15m revenue threshold seems a way away.

2019 capital raising numbers

It has been another incredible year of deal activity for the team at Kindrik Partners. For the first time, we closed more than 100 deals in a calendar year – 116 deals to be exact across our New Zealand and Southeast Asia offices, up from 92 in 2018.

Once again the Southeast Asia team has shown tremendous growth, with 74 closed deals (c.f. 47 in 2018). New Zealand was steady with 42 deals closed (c.f. 45 in 2018).

amount raised

In total, we were involved in closing nearly half a billion dollars of capital raising. Or $470m to be more accurate (c.f. $337m in 2018). Of this, our Southeast Asia clients took the lion’s share with $328m with the remaining $114m going to NZ companies.

The average NZ raise size was $3.4m, but the median was much lower at $832,000. Soul Machine’s massive Series B raise which closed in December caused the big gap between the average and median raise sizes.

The average raise in Southeast Asia was $4.3m, with a median raise of $1.6m. Again, a few hero raises such as Indonesian healthtech Alodokter’s US$33m series C really pushed the average well above the median raise.

While we enjoy the excitement that goes with these big headline grabbing deals, our team takes huge satisfaction from the speed and (low) cost at which we can turn out and close a high volume of pre-seed, seed and Series A investment deals (which are still the life blood of startup financing).

pre-money valuation

The average pre-money valuation for equity transactions in NZ was $18m with a median of $5m, compared to $48.7m and $7.5m for Southeast Asian equity tranasctions. Like the average and median raise sizes, the average pre-monies in both markets are distorted by a few hero deals.

investment instruments

Equity (shares) was the most common investment instrument in both New Zealand and Singapore.

As in previous years, most pre-seed investment transactions and a majority of non-institutional seed rounds in Southeast Asia were made using convertible notes. The KISS note being the most common type of note used. In all, 22 of our Southeast Asian transactions were convertible notes.

Convertible notes were more common in New Zealand this year, both for seed investments but also for raising bridging investment between Series A and Series B. We helped complete 12 New Zealand note deals. For the first time, our percentage of local note deals (28.5%) matched the % of Southeast Asia note deals (29%).

We also helped New Zealand and Southeast Asian companies close a handful of venture debt deals. We think we will see more of these deals in coming years, as some later stage companies in both markets will see this as an attractive alternative to equity dilution.

(Interested in learning more about venture debt? Read our venture series profile on Partners for Growth)

looking ahead in 2020

In New Zealand, the Government’s new Venture Capital Fund (VCF) will inject $300m of new money into the local tech investment scene. The VCF is a fund of funds which will invest into existing and new series A and Series B focussed VCs (for more detail see our blog on the original Venture Capital Bill). This, plus the increasing interest of Australian VCs in the NZ market, as well as the increase in the annual investment ceiling for NZVIF’s seed co-investment fund should see a meaningful lift in NZ capital raising numbers.

Though it’s too early to see what impact COVID-19 will have on capital raising in Southeast Asia, we’ve had anecdotal evidence that business travel has dampened in the region. Although the region remains active, numbers may fall below what we saw last year as overseas investors delay travel to the region, and investors and founders shift more towards remote working tools such as videoconferencing to build trust and confidence through the capital raising process.

*all $ amounts are NZ$ unless otherwise specified

calling all auckland tech companies looking for interns

We’re about to kick off the application process for our techlaw programme in 2020 and we’re looking for Auckland-based technology companies who would like to participate.

how the techlaw programme works

we work with Auckland University in March/April to identify and select law students in the later stages of their degrees who are interested in technology and entrepreneurship, and are keen to gain some real-world legal experience working in a tech company
we then match those students with participating tech companies
the students provide up to 100 hours of work to their matched company
we provide some basic corporate and commercial training materials to the students, and technical support while they are on the job.
Kindrik Partners and our sponsors pay the students rather than participating companies (i.e. this is a free service for tech companies)

how your company can benefit

Typical tasks might include (but are not limited to)

researching legal issues e.g around privacy
drafting resolutions
reviewing agreements
preparing contract databases

the ideal fit

Participating companies need to have some appropriate legal tasks that can be worked on effectively by a student with appropriate supervision and support.

Our preference is to select companies who can provide that supervision and support themselves, with some remote support and mentoring from our team.

Companies that have a COO, Operations Manager, CFO, or in-house counsel on board usually benefit the most from the internship programme.

Limited slots are available. If you are interested in hearing more about the techlaw internship programme, or would like to take an intern this year, please get in touch by the end of February.

Kindrik Partners advises soul machines on US$40m funding round

The official press releases have gone out, so we can finally spill the beans about something huge we’ve been working on.

Shortly before Christmas we helped Soul Machines complete its US$40million series B financing round. As far as we’re aware, this is the largest VC round completed by a privately-owned NZ company, where the company remained NZ domiciled post-investment.

who invested

The round was led by Temasek, a global investment company headquartered in Singapore and owned by the Singapore Government. Other investors included Lakestar (a leading European venture capital firm whose early investments included Skype, Facebook, Spotify and Airbnb), Salesforce Ventures, and existing investors Horizons Ventures and Auckland University’s UniServices.

about soul machines

Soul Machines was founded by Academy Award winner Mark Sagar and serial entrepreneur Greg Cross in 2016. It now has over 120 employees based in offices in the U.S., London, Tokyo, Australia and NZ. The company’s vision is to humanise artificial intelligence to better humanity. Soul Machines creates lifelike, emotionally responsive, digital humans with personalities and characters that evolve over time based on interacting with users.

Soul Machines’ Digital Brain simulates advanced cognitive processes, which control the human-like behaviour and actions of the company’s Digital Heroes in real time. The company has already created Digital Heroes for some of the world’s biggest corporate brands, including Daimler, Procter & Gamble, The Royal Bank of Scotland, Bank ABC, Air New Zealand and ANZ.

what’s next

We’ve been working with Soul Machines since its spinout from Auckland University and series A raise in 2016, so we’re thrilled to see the company complete such a significant transaction.

We’re looking forward to seeing what’s next for this ground-breaking NZ company – luckily they haven’t mentioned a digital lawyer just yet.

venture series: partners for growth

In our venture series we’re speaking to venture funds to find out their thoughts on the current state of the region’s startup and venture ecosystem and what they currently are looking for in companies.

This week we’re speaking to Karthi Sepulohniam, Managing Director at global venture debt firm Partners For Growth.

first off, can you explain a little about venture debt? it’s not as popular a term for entrepreneurs as venture capital.

Venture debt is an alternative capital raising option for high growth companies. It’s a good option for entrepreneurs looking to extend their runway, using an instrument that has less dilution compared to equity raising. It’s also a tool that works well together with equity raising.

With venture debt, a company will borrow money and get a loan over a 3 – 4 year period, over which period of time they pay interest and grant lenders a small equity option. That equity option is far smaller than you would have to give up if you were raising an equity round with a venture capital investor.

We provide debt to a few different types of companies. About half are venture backed, the other half are bootstrapped with no venture capital money. We’re open to VC backed or not. We get deal flow from our existing portfolio companies, and referrals from VC funds, since there’s not a lot of knowledge about venture debt in the startup scene yet.

what’s your take on how the startup and venture debt ecosystem is looking?

What I will say first is a caveat – our focus has been more on Australia and New Zealand. We have our eye on Southeast Asia, but so far we’ve been more opportunistic in the companies we’ve worked with in Southeast Asia. But what I can say about APAC as a region is that venture debt is slowly becoming more well known, with more players entering the scene.

For instance, PFG is the oldest fund that’s been operating in Australia, but 2-3 new funds have entered the market over the last 12-18 months. That said, venture debt in Australia is still more developed than it has been in New Zealand..

why is the venture debt scene in New Zealand underdeveloped?

Venture debt is underdeveloped in New Zealand for two main reasons. One is blind demand. People haven’t heard about venture debt before, and they don’t understand that it’s a new tool of financing that’s available to them, so they’re not going around asking for it.

The second reason is on the supply side. For a long time, there wasn’t a critical mass of high growth companies in New Zealand to make it worthwhile for venture debt firms to enter the market. That has changed given the number of high quality Kiwi technology companies being launched every year. It’s now a bit easier for venture debt firms to turn their attention to New Zealand.

has your approach to investing changed as you have become more active, e.g. risk appetite, deal terms, number of investments?

Yes one thing that has changed is the type of companies we’re choosing to invest into.

In the US we have a minimum threshold of about $10 million in annual recurring revenue. In APAC, if you wait for that, you’ll only see 2-3 companies a year. Same thing in New Zealand. Therefore we’ve reduced our threshold for the APAC market because the market is still growing and we want to be involved, so now we’re prepared to work with companies that are generating at least $3 million annual revenue.

In the same vein, we’ll also finance kiwi companies when they’re younger. We’ve found that kiwi companies have been capital starved for a long time so they’ve learned to be more capital efficient. This means that they don’t have a very large burn rate, which is attractive to a lender.

what kind of startups are catching your eye. How has that changed in the last 12 months?

We’ve seen more and more strong kiwi companies in the SaaS space. We’re attracted to SaaS companies because of the business model – recurring revenue, high margins, granular customers and low churn. Kiwi SaaS businesses also tend to be global from the outset and that’s attractive to us as well.

We also like companies that are tech enabled and growing quickly – companies like Koala Mattress, who are selling a traditional product but using digital channels and an advanced tech stack to deal with supply & logistics and boost their profit margins.

prediction for the startup ecosystem for the next 2 years

Venture debt is going to become a more important source of financing. We expect that around 10-15% of capital invested in high growth companies will be venture debt in the near future. We are already seeing more funds being set up and a definite increase in the number of conversations we’re having with companies in the region.

Another reason I say venture debt will continue to rise is because we are starting to see banks pulling back from lending money to emerging companies for regulatory reasons. It’s getting harder for banks to lend to emerging companies as regulators are asking banks to set aside more money, more regulatory capital, for these types of loans – as these rules become more strict it makes sense for the banks to pull back.

tips for founders pitching to you?

Have a serious think about how venture debt might complement equity raising. It’s not an either/or proposition. The financing we do can come alongside VC money. Fifty percent of the financing we provide in Australia and New Zealand is to venture capital backed companies or in conjunction with venture capital investment.
Demonstrate to venture debt firms the assets you have in the business that you can raise money against. It doesn’t have to be a home or a building; venture debt lenders look to other things that might have value such as sticky customers or a strong IP package.
Venture debt lenders look for all the normal stuff as VCs too – high growth rates, attractive markets. The conversation can be very similar.

Are you looking to raise funds for your startup? Our team of lawyers are market experts in tech and venture capital. We’ve gained this experience the only way that works – by doing deals (hundreds of them) and by immersing ourselves in the tech ecosystem.

If you need help with your term sheet or have questions about raising your round, speak to one of our lawyers.

techlaw profile – nick goldstein

The techlaw internship programme placed several Auckland University law students with fast-growing technology companies and start-ups to get hands-on experience outside of a traditional law firm.

We caught up with Nick Goldstein to talk about his tech law internship experience. Nick joined Ambit AI, a company which develops platforms for conversational chatbots. Earlier in the year, Ambit AI completed a capital raise of $1.75 million to fund international expansion – an interesting time to be at the company.

what are you studying at university (and what year are you?)

A BCom and an LLB. I’m majoring in Finance and Economics for my BCom. I’m in my fourth year of study and I have two more years left.

tell us about your experience at ambit. what was the day to day like?

I went in and out of the office whenever needed – sometimes I would go in for up to 3 days a week. I worked on several different projects such as ESOPs, privacy work, and a variety of other small jobs, like drafting resolutions and even chasing people for signatures on a shareholders’ agreement.

One of the bigger projects I had to do was to compare different ESOPs and write up a list of advantages and disadvantages of each. I had a look at the Kindrik Partners templates and also googled around for information. I found this fascinating and I enjoyed the drafting process.

The company culture was also very cool. They had a regular event called ice cream on Wednesdays. The people were nice as well – I made friends with some of the people I sat next to.

what did you learn?

About the intersection of law and entrepreneurship. I found it really interesting, seeing how law changes things, how it impacts on entrepreneurship and how it makes a difference to the running of a business.

I also learned about good company culture and what a good manager is like. Tim Warren was a great manager. He was helpful and clear. He was good at giving me a task to do and trusting me to go away and do it.

has the techlaw internship dovetailed with your law studies? Or has it been completely different?

Law school is primarily an academic endeavour and focused on theory. They teach things that often are not actually used. I must have heard the word resolution quite a few times in class, but I never really thought about it. I was just like, oh yeah – but I was never taught how to actually draft a resolution. And yet – that’s the type of thing I had to do in the internship – the everyday stuff.

what would you like to do after you graduate?

I don’t know yet, there are lots of possibilities, such as working in a commercial law firm. I would be interested in getting into the investing side of things one day and also going overseas to work. The internship has also definitely bolstered my interested in entrepreneurship.

who would you recommend this techlaw internship to?

Everyone! Law students with an interest in entrepreneurship in particular would find this interesting.

any tips for those considering doing the techlaw internship next year?

Don’t worry too much if you don’t know something – just ask.
Dive in, make the most of it. There’s a lot you can learn. Be proactive.
Making sure you have the time. I’m the CEO of Velocity, the student-led entrepreneurship programme run by the University of Auckland, and I found I had to work hard to balance my responsibilities in different areas of my life.

keen to participate in next year’s techlaw programme? get in touch

We are thrilled to be collaborating with the University of Auckland to provide internships in the fast-moving tech sector to law students. If you are interested in participating in the internship or registering as a company, please go along to our internships page and drop us a line.

dealing with data in contracts

If you provide SaaS products or services to your clients as part of your business, this guide is for you. We’ll cover what you need to know if you handle end-user personal information, and what to consider when contracting for these services.

Handling and storing end-user data for your clients, especially personal information, comes with a unique set of risks. If you are a supplier of tech products or services (such as creating an app that you licence to a client) and your client is using it to store the personal information of their customers, you must have consent to handle personal information, and your customers will seek appropriate safeguards against potential loss or destruction of data.

How this is managed will depend on the subject of your contract, but in this guide we’ll cover some common considerations that will help you mitigate risks and ensure you and your clients are on the same page.

things to consider when you’re potentially handling personal information for your clients:

Know your data: your contract should clearly set out:
- what the data is – data is often broader and more valuable than you think. E.g., data can include personal information, commercially sensitive numbers or calculations, or analytical data about products or services. It is essential that data is clearly defined within the contract
- who owns it – as a supplier, you generally won’t own the data. It is commonplace for clients to supply their data to you, to enable you to provide products and services
- what rights the non-owning party has – consider what rights you need to use it for the duration of the contract, and after termination or expiry. Ensure your rights to use the data to perform your obligations are clearly set out. Is the data something you can get value from? If so, ensure you can use the data (or any resulting insights) to improve your own products and services.
Understand your rights and obligations: ensure that contractual requirements for storing or handling data are clear and that you have the processes in place to comply. Clients increasingly expect minimum requirements around storage and handling of data, so it is important to ensure that any obligation is reasonable and achievable.

Limit your liability: you should ensure that your client is responsible for obtaining all consents required for you to use the data. Ideally, you would be able to exclude all liability or risks in your contract. However, many clients expect high liability caps or unlimited liability, as they are concerned about protecting the data that they have gathered. In this case, include clear obligations in the contract to ensure you can comply.
Know your regulatory regime: if the data contains personal information, you will be subject to a privacy regime, which will change depending where you are contracting, and where you that personal information was collected. For New Zealand companies who are handling information that was collected in New Zealand, this usually means understanding your obligations under the Privacy Act. However, if you’re handling data that was collected overseas, you may need to understand your obligations under other laws. For instance, we have seen an increased focus on privacy compliance in recent years, particularly with the General Data Protection Regulation coming into effect in 2018. While compliance can seem daunting, well–constructed privacy policies add value, and increasingly are seen as a source of competitive advantage as it allows you to use data effectively in your business.  Also, clear, and well thought–out, privacy policies can be a great way to enhance the value of shared information and build the trust of data partners, customers and regulators.

[We have an online tool that helps you generate GDPR-compliant privacy policies. Try our GDPR privacy policy document generator.]

Have an exit strategy: Your contract should address what happens to data when the contract ends. E.g. do you need ongoing rights to use it; what must be returned or destroyed.  The other party may be engaging with your competitors for a replacement service, so it is important that you address what happens when the relationship ends. 
Be future proof: will your needs change over the contract? If so, you could consider annual review periods to discuss fees and the scope of services provided. Or for longer term contacts, you could consider including off ramps like no fault termination rights, after an initial term.

Being responsible and proactive when dealing with data in contracts can minimize risk to your business, maintain trust with clients, and ensure you receive value as you provide tech products and services. If this is something that you’d like to discuss with us, get in touch.

Venture Capital Fund Bill

This year’s Budget announced $300m of new Government funding for NZ’s fledging venture capital industry, and Minister Parker wasted no time introducing a Bill to set up a new fund to manage this money.

In this article we will look at what the Bill covers, who it’s likely to benefit, and how it might affect the New Zealand venture capital landscape.

about the Bill

The draft legislation was tabled in Parliament on 22 August.

The highlights are:

the Guardians of NZ Superannuation (colloquially known as the NZ Super Fund) will manage the fund, which unsurprisingly will be called the Venture Capital Fund (or VCF)
the VCF will be a fund of funds. i.e. it will invest in multiple private venture capital funds (VCs), who in turn will invest in (predominantly) NZ tech companies. We are big fans of this multi-fund approach, as the breadth and competition it will bring to tech investing means good news for companies and founders
the Super Fund will appoint NZVIF to manage VCF’s investment activities. i.e. NZVIF will select the VCs who will receive funding, and will manage the fund’s investment in those VCs.

The Bill itself largely deals with the mechanics of establishing the new fund, and its management and governance.

The interesting commercial details, like eligibility criteria for VCs and the investment criteria that each successful VC will be required to follow, are left to a policy statement to be issued by the Minister.

MBIE released a draft of the policy statement for targeted industry consultation last week. Industry workshops are scheduled for 12 September and 16 September, with the consultation period closing on 20 September. Email vcf@mbie.govt.nz for a copy of the consultation document.

This may seem like a tight timeframe, but the Minister is aiming to have the Bill in force by the end of 2019. The intention, it seems, is to have the VCF deploying funding to the first VCs as early as possible in 2020.

policy statement

The draft policy statement proposes that the VCF:

must invest at least 70% of its funds in VCs with a New Zealand connection, i.e. funds that are NZ tax resident or with a permanent establishment in NZ, and who have at least one senior investment professional resident in NZ
may invest up to 30% of its funds in overseas VCs, provided those funds are earmarked for investment in NZ
may co-invest with its VCs, up to a threshold of 20% of its NZ investment fund and 20% of its international fund.

VCs must match the funding received from the VCF with at least an equal amount of private funding. VCs will need to invest:

75% of their total funds, not just funds received from VCF, in Series A and B raises by NZ companies. Series A is defined as a raise of $2m to $5m, and Series B as a raise of $5m to $20m
Up to 25% of total funds may be invested deals outside this critera – i.e. in seed, Series C or later deals, or in non-NZ entities (with a hard 10% limit on non-NZ investments).

We expect the consultation process will refine these details, probably to give VCs a little more flexibility around investment decision making.

However, regardless of the details, we think the large amount funding on offer, coupled with the developing depth and strength of NZ’s tech sector, will make VCF funding highly attractive to NZ’s investment community.

what will all this mean for the NZ tech sector?

The best-case scenario is that the new fund spurs a wave of professional VC style seed, Series A and B investment activity, as happened in Singapore in response to similar Government programmes. If this happens, this will likely create powerful momentum for the NZ tech sector.

There will be some impact on the current investment landscape:

angels may return to their sweet spot: there will be less of a call on angel and high net worth investors to lead investments in Series A and later stage deals. Over the last few years, this has strained NZ’s investment ecosystem as these expansion/go big or go home investment propositions have soaked up a lot of angel and high net worth capital. We expect angel investors to refocus on earlier stage deals requiring smaller investments offering higher returns, i.e seed and pre-Series A investing
less angel-led follow on rounds: angels will be less called upon to provide follow-on funding to paper over the existing Series A gap. It will be great for companies and angel investors alike to have access to VC investors to pick up the baton and lead future funding rounds
increase in available angel money: with less angel and high net worth money tied up in follow on rounds and leading Series A type deals, we think that over time there will be more angel capital looking for a home. This could see Angel groups looking for new and exciting deal flow, for example University spinouts which are currently not a big feature of our startup ecosystem.

VC funds to watch

We expect to see the likes of Movac, GD1, Tuhua and Punakaiki polishing their resumes and IMs. Some of the PE funds with a successful track record of investing in tech, like Pioneer and Pencarrow, might also be thinking about this opportunity.

We also expect overseas fund managers to think about setting up in NZ to take advantage of the new funding and activity this will stimulate. Blackbird have timed their run to perfection with the announcement of Partner Sam Wong setting up a dedicated, Auckland based NZ fund. It won’t just be the Australian VCs that are interested, we are also aware of interest from some niche investors in the US and Southeast Asia.

VCs will want to get their applications into VCF as early as possible, in order to get amongst the current crop of NZ tech companies seeking out Series A and B funding. Equally, we think the VCF will want to start deploying funding as soon as possible, because investment horizons are long. The sooner the money is deployed, the quicker the NZ VC sector will develop and boost NZ tech companies.

how will VCs win?

As far as the VCs themselves are concerned, we think there are two key elements they will need to address to be successful both in terms of deal flow and investment returns:

nailing their value proposition: because there will be many VCs competing for the same deals at the same time with similar amounts of money available, they will need a well-defined value proposition to pitch to investee companies. This will include domain knowledge, industry connections, founder friendliness and international connections
promoting their connections to other later-stage funds: connectivity to international follow-on funding will be crucial. For many high growth companies, the NZ VC funds will not be large enough to provide funding through to exit, so connections and relationships with larger international VCs will be critical to maximising the growth and exit value of portfolio companies. Even in a much larger and more developed capital market like Singapore, this is still a critical focus for local VCs.

We are excited about the VCF and the energy it will bring to the sector in 2020 and beyond.

We will follow the industry consultation process with interest.

Surgical Design Studio raises $4.3m

We are delighted to have advised Surgical Design Studio on its recent capital raise of $4,300,000. Icehouse Ventures led the round, followed by investors including UniServices, Eden Ventures, NZVIF and Sir Stephen Tindall’s investment arm K1W1.

The company plans to use the investment to commercialise and further develop innovative medical devices for patients recovering from bowel cancer and inflammatory bowel disease. One product, Active-Link, significantly reduces the recovery time of patients who have undertaken bowel surgery. A product launch in New Zealand is planned for later this year and subsequently overseas, pending Surgical Design Studio obtaining regulatory clearances.

Surgical Design Studio kick started its capital raising process by participating in Icehouse Ventures’ Demo Day in June, an event where a group of start-up companies pitch their ideas to a large and diverse network of investors.

Robbie Paul, Icehouse Ventures CEO, says that that Surgical Design Studio’s raise was the largest of the companies presenting at the Demo Day. This is an awesome achievement and we are stoked for the SDS team.

an update from our techlaw 2019 programme

A couple of weeks ago we caught up with our 2019 techlaw interns at our Auckland office.

It was a great chance for the interns to share their experiences so far, and for us to hear their stories about law in the real world.

We were impressed by the range of legal work the interns have been involved in. They have had hands on experience in the operation of tech companies and have worked on documents and legal issues that tech companies need to wrangle on a day to day basis.

The quality of legal work the interns have received is thanks to the fabulous supervisors from our host companies, who generously give their time and experience to supervise and mentor the interns. Many interns mentioned that working with their supervisors has been the highlight of the programme so far.

Interns mentioned how different the practice of law is from the theory they are learning at law school (thankfully, we say). They have also gained some useful insights into the papers they can take to best position themselves for their future careers.

We remain very grateful to the host companies participating in our 2019 programme: Crimson Education, Pacific Channel, Uniservices, Stretchsense, PredictHQ, Ambit AI and 9Spokes.

Keep an eye out for our wrap-up report at the end of the year.

If you’re interested in registering your interest in our legal internship programme in the tech sector, you can click here to learn more. If you would like your company to be involved in the programme for more information, get in touch.

lessons from British Airways’ massive fine for GDPR breach

The UK’s data watchdog, the Information Commissioner’s Office announced earlier this month that it intends to fine British Airways £183.39 million following a cyberattack against its systems last year.

The data breach involved user traffic from the British Airways website being diverted to a fraudulent site, where personal data and credit card information of around 500,000 customers was harvested by attackers. The Information Commissioner’s Office found this to be the result of poor security arrangements. It appears that there was a delay of around 3 months between the breach taking place and it being reported to the Information Commissioner’s Office, which may have contributed to the size of the fine.

what does it mean?

The massive fine demonstrates the seriousness of breaches of the European Union’s General Data Protection Regulations (GDPR), which came into force in Europe in May 2018. It represents approximately 1.5% of British Airways’ worldwide revenue in 2017 (the maximum penalty under the GDPR is 4% of worldwide revenue).

The message is clear – if you are subject to the GDPR and do not treat your customers’ data with the utmost care and fail to follow the correct procedures, you can expect severe penalties if a data breach occurs.

The GDPR will apply to New Zealand businesses if:

they have operations located in the EU and process personal data of individuals in the EU (regardless of where this personal data is processed); or
they offer goods or services to individuals located in the EU (even if those individuals are not paying customers) or monitor the behaviour of individuals located in the EU (including through the use of cookies).

so what should you do?

carry out a data inventory

Carry out a data inventory to understand what personal information you collect and process, and your purposes for doing so. You can’t design an appropriate data security strategy if you don’t know what personal information you hold.

If you operate a B2B e-commerce or marketing website, our GDPR privacy policy doc maker includes questions that help identify the personal information you are likely to collect and process, and the likely purposes for you doing so.

get familiar with your obligations under the GDPR

The Information Commissioner’s Office has an excellent guide at https://ico.org.uk/for-organisations/guide-to-data-protection/guide-to-the-general-data-protection-regulation-gdpr/.

review your data security

The GDPR does not define the security measures that you should have in place – it requires you to have a level of security that is appropriate to the risks presented by your processing.

You should look at what security measures are considered to be industry standard in light of the nature, scope, context and purpose of your data processing. The ISO 27001 standard contains generally accepted guidelines for an information security management system and is intended to be applicable to all organisations, regardless of size, type or nature. For specific types of data, other standards may be relevant – e.g. if you handle credit card data, you may be required to comply with the Payment Card Industry Data Security Standard (PCI DSS).

implement a process for dealing with data breach

Finally, you should have a process in place for dealing with a data breach. Under the GDPR, you must report a data breach that poses a risk to people within 72 hours of becoming aware of it, even if you do not have all the details.

In New Zealand, there is currently no legal requirement to report a data breach. However, the Privacy Bill currently before Parliament proposes mandatory notification where a privacy breach presents a risk of serious harm to an individual or individuals.

Whether or not reporting is required, handling a data breach well will help mitigate the damage to your reputation and your relationship with data providers. The NZ Privacy Commission has useful guidelines and the Information Commissioner’s Office guidelines also include a section on data breaches, including a notification self-assessment tool.

convertible notes on the rise in NZ startup capital raising

Traditionally the vast majority of NZ startup investment deals have been structured as share (equity) investments. NZ angel investor groups, the most active investors in the NZ startups, were wary of KISS notes and other convertible instruments, preferring the governance and control rights conferred by Series A type equity terms.

But times are changing and our data shows convertible notes are on the increase in NZ. In 2018, 30% of the NZ funding rounds we helped to complete were convertible note deals, and this trend is continuing in 2019. This is similar to the ratio of note rounds to equity rounds that we see in Southeast Asia.

This trend is being driven in part by founders, who want to close rounds quickly on terms familiar to international investors. And at the same time, postpone more detailed governance negotiations until they are raising a bigger funding round. The other driver is the participation of international investors in NZ startup funding rounds, who are happy to use KISS notes as pre-Series A and pre-Series B financing tools.

So what trends are we seeing in NZ and how do terms compare to convertible notes issued in other startup ecosystems?

KISS note or SAFE

KISS note or SAFE? Outside of accelerators (the SAFE originated from the accelerator, Y-Combinator) SAFEs are not so common. Investors typically prefer a convertible instrument which includes interest and a repayment date, like a KISS. This is the case overseas as well as in NZ.

interest

The level of interest payable on NZ convertible notes varies from deal to deal. However, rates do appear to be higher in NZ than we see on convertible notes issued overseas. On some notes we’ve seen interest rates as high as 10%, whereas in Singapore, for example, investors often accept rates as low as 1%-2%.

maturity date

What distinguishes a KISS note from a SAFE is the maturity date and repayment obligation. Having a repayment date starts the clock running and puts pressure on the company to close the next funding round within a reasonable period of time.

In NZ, we typically see 18-24 month periods before repayment is required, but this depends a lot on the stage of the company. This is broadly similar to convertible notes issued by startups in other countries.

discount

The discount applied to the price of the next round is a key negotiation point between investors and founders. This is because it serves as a reward to the investors for taking a chance on the company at an earlier stage. Founders on the other hand want to limit this discount as it means the investor will have a higher stake in the company relative to the money that they put in.

In NZ, discounts are in the range of 15-25%, with 20% the most common. Again, this is the same as what you find in convertible notes issued by startups overseas.

valuation caps

Along with the discount, the valuation cap is a key negotiation point.

We have seen that NZ startup founders and investors have had difficulties getting their head around the valuation cap. One reason to do a convertible note in the first place is to avoid having to think about a valuation at all, in the way you do with a fixed price round. We occasionally see valuation caps in NZ notes set too low compared to overseas.

The cap should not have any relation to the current valuation of the business – rather it should represent a maximum price that investors pay if the company scales quickly before conversion.

participation rights

On the deals we’ve seen in NZ, investors often want a right to participate in the next funding round. How this right works varies from deal to deal but is often set at a percentage or a fixed amount out of the total amount raised.

Our advice to startups is to avoid participation rights in notes so they are free to allocate the next cap raise without trying to please lots of noteholders. When we negotiate convertible notes in Asia, we are generally successful at removing the participation right completely.

class of conversion shares

US standard templates normally provide that notes convert into the same class of shares as are issued to investors on the next funding round. This is also the position adopted most commonly in NZ.

We do sometimes see NZ investors agree that the note can convert into ordinary shares, but this is less common and not something VCs or similar professional investors typically agree to.

warranties

In template convertible notes used outside of NZ, such as the 500 Startups KISS, warranties are deliberately light so startups don’t have to spend lots of time on disclosure. Instead, the investors rely on the warranties that will apply on conversion in a subsequent financing (e.g. the warranties that are given in a later Series A round).

Some NZ convertible notes include substantive warranties, which is not entirely consistent with the international keep it simple approach.

reporting and information rights

Overall we don’t see much difference between the type of information rights that investors request here in NZ, than offshore. We recommend that quarterly and annual financial reporting is sufficient (rather than monthly).

If NZVIF are investing, they will likely have additional reporting requirements, but outside of that, NZ investors are pretty sensible on information rights in our experience.

round up

A few years back we would regularly see convertible instruments in NZ which didn’t reflect international market standards (including the template NZVIF convertible note). We saw punitive terms like optional conversion rights for investors, extensive veto rights, and minimum terms for the conversion shares. Some convertible notes were even backed up by a general security agreement (GSA), which would be unheard of overseas. We’ve heard the resulting documents described as toxic by experienced Silicon Valley investors.

The good news for startups is that the market has moved forward in a couple of ways. First, investors are increasingly happy to invest using convertible notes, particularly for small cap raises. Second, the terms of the convertible notes being used are tending to be simpler, similar to our template Kiwi KISS.

We expect the use of convertible notes to increase in NZ startup financings, reflecting founder preferences and (hopefully) increasing levels of professional VC investment activity in the NZ market.

announcing the launch of our new southeast asia website

We are excited to announce the launch of Kindrik Partners’s newly-designed website for Southeast Asian tech companies and startups.

We believe in empowering entrepreneurs and tech companies by giving them tools to self-serve the legal basics. Our goal with our new website is to make it much easier for startups and tech companies based in Southeast Asia to browse and use those resources with a site especially for them.

fixed pricing for common startup jobs

We know that startups are often price sensitive, which is why we’re trying to de-mystify some of the pricing around common activities that people tend to use lawyers for.

We’re experimenting with moving away from the six-minute billable unit to fixed pricing and fee estimates that founders can budget for & rely on.

take a look at our pricing page

open-source ESOP document generator

We’ve retooled our ESOP (employee share option plan) document generator so that people can make their own ESOPs.

It’s never been easier to use one of our document generators. No more registering for an account or using your LinkedIn details – it’s now 100% open and free to use.

We’ll be updating all of our document generators in this new format over the coming months.

easy-to navigate resources section

First-time visitors will find our resources section easier to navigate. For example, we’ve included descriptions of our different templates so you can get understand what the template does at a glance.

Visitors can now also browse by subject-matter, like all resources related to raising a seed round, as well as by type (eg all templates):

new commercial resources

We’ve released three new commercial templates for SEA companies:

watch this space

We’re committed to supporting startups and tech companies in the region with their legal work so that they can get on with growing their business.

If there’s anything you would like to see on our site, get in touch with our Singapore team.

2019 half year capital raising numbers

Our venture capital lawyers in New Zealand and Singapore have been extremely busy for the first six months of 2019, helping clients close 50 capital raising deals by the end of June.

The second half of the year looks to be just as busy, as our team has another 55 deals pending. While not all of those deals will close, the usual Q4 influx of deals to be closed pre-Xmas suggests we are on track to break the 100 completed deal mark for the first time (c.f. 94 in 2018).

Of the deals we’ve helped close this year, 36 were fund raisings by Southeast Asian companies, and the remaining 14 NZ companies.

We expect this ratio to even up over the course of the year however, as 30 of our pending deals are raises by NZ companies and the NZ tech investment market tends to ramp up in Q3 and Q4 in the rush to get deals done before the New Year lull. Stay tuned!

Atlassian’s M&A term sheet

Atlassian made a splash in the tech M&A world recently by publishing their term sheet for strategic acquisitions.

So why has Atlassian gone public with its terms, when acquisition terms are generally a closely guarded secret? Atlassian’s stated aim is to make the M&A process fairer and more efficient, and less painful for sellers.

We suspect another driver behind the unusual (but refreshing) step of letting the world take a look behind its acquisition curtain was to position Atlassian up as a seller-friendly buyer in the hyper-competitive tech M&A marketplace.

So has Atlassian achieved its goal(s)?

The Aussie tech legend scores brownie points for transparency. The traditional approach of keeping acquisition terms hidden allows buyers to claim their term sheets are market standard. This chestnut makes it hard for first-time founders to negotiate, as there is no easy way to judge whether particular terms are standard or harsh (or where on that continuum a term falls).

As Atlassian notes in its blog, making information in available to prospective sellers in the public domain – should make the negotiation process easier to navigate.

Atlassian also scores brownie points for putting forward some seller-friendly terms.

Here’s our rundown of things we like in the term sheet and things that make us go hmmmmm.

three things we like:

Favourable escrow terms: It’s common for us to see buyers holding back 10-20% of the purchase price in M&A deals against warranty claims for up to 2 years post-closing. This is called escrow).Atlassian’s terms mean more money in sellers’ pockets upfront when the deal closes. Its maximum ask is a 5% escrow (if your deal is under $50m – if it’s over $50m you can choose between a 5% escrow, or a 1% escrow and footing the bill for Atlassian’s reps and warranties insurance covering up to 4% of the purchase price). In either scenario, Atlassian’s comfortable with a 15-month escrow period.Atlassian’s escrow terms are substantially more attractive than those commonly offered in tech transactions, and we hope this motivates other acquirers to move in the same directon.

A practical approach to general warranties: For general warranties about the target company (including IP and privacy breach warranties), Atlassian caps the sellers’ liability at the escrow amount, with a 15-month claim period. We’ve seen warranty liability capped at anywhere between 25%-100% of the total purchase price, and claim periods between 12-24 months.Atlassian’s terms are pretty friendly to sellers, and again we hope other acquirers follow suit.

ESOPs covered upfront: The term sheet explains how Atlassian treats existing ESOPs. Generally speaking, vested equity is cashed out, and unvested equity terminated and substituted for an Atlassian scheme. We’re happy to see Atlassian raising this upfront – share scheme details can sometimes be inadvertently left out at the term sheet stage, causing problems down the track.

things that make us go hmmmm (for sellers):

Exposure outside the scope of general warranties: Liability for anything outside the scope of the general warranties is pretty tough – capped at 100% of the purchase price and subject to a claims period of the statutory limitation period, or 6 years (whichever is longer).This special basket includes tax warranties and indemnities dealing with specific issues picked up in due diligence. In the NZ context at least, 6+ years isn’t unusual for tax claims but is a long claims period for any other issues, which we think will be unattractive to many founders and sellers.

Restrictions for core employees: Core Employees (typically founders) identified in the term sheet will receive a percentage of their purchase price in Atlassian shares that vest quarterly with a 1-year cliff, and are required to enter into non-compete and non-solicit undertakings.Hard-baking payments in stock subject to future vesting is potentially pretty touch for founders who have long been fully vested.However, this may not be a big concern if only a small percentage of the purchase price to be paid in stock – Atlassian has left this silent in the term sheet for now.

Waive goodbye (maybe) to benefits: Atlassian reserves the right to require team members to waive existing vesting acceleration rights, change-in-control payments, severance compensation, or other payments that might be triggered by the acquisition.This isn’t common in NZ M&A transactions but does sometimes need to be negotiated. It is more common internationally.

Tipping basket: Atlassian expects to be able to bring warranty claims once the total minimum value of all warranty claims hits 0.5% of the purchase price (known as the tipping basket in the U.S. and as the aggregate de minimis in NZ). 5% seems a bit low to us but to be honest, while lawyers likely to argue about these thresholds we’ve never seen a deal fall over on this point.
Reverse triangular what?: The term sheet assumes the transaction will be structured as a reverse triangular merger – a structure popular in the US for tax and other reasons.Reverse triangular mergers are not something to be attempted without adult supervision. Expect to spend some money on tax and legal advisers if you need to get your head around this.

It’s great to see such an open discussion by Atlassian of their term sheet and process, and we look forward to seeing whether other tech acquirers follow suit.

new series A funding for NZ startups

Last Thursday’s budget included $300m of funding for the NZ tech sector, targeting the country’s venture capital gap. $240 million of the new funding will come from contributions earmarked for the New Zealand Superannuation Fund between 2018 and 2022 and $60m from the New Zealand Venture Investment Fund’s existing assets.

Reading the budget headlines, our immediate question was, will this be a single, new, DFC-like fund dominating the NZ venture capital/series A scene?

Or will it be a fund of funds approach, investing the $300m in existing and new private sector VC funds with a mandate to invest at the Series A stage?

We have spoken out against the single monster fund proposition in the past – see our blog one VC to rule them all.

Luckily for the NZ tech sector, the full Budget release confirms that this will be a fund of funds, managed by NZVIF. So the $300m will be deployed across a range of private sector funds/investors, with a requirement that the money be invested in series A type deals.

This new capital, and its investment in multiple funds, should provide a major boost to the NZ startup and tech company ecosystem. We are also hopeful that it will stimulate the growth of a sustainable venture capital industry in NZ.

Granted, the development of a local VC industry might reduce the opportunities for offshore VCs to invest in early stage NZ companies. However, we expect them to benefit from partnerships with NZ VCs on initial and later stage investment transactions, providing pathways to international capital that are currently pretty limited among NZ investors.

So well done Minister Parker. First for backing the NZ tech sector with a major chunk of money, and second for being prepared to back the development of NZ’s venture capital industry.

(hat tip to Chris Jagger for corrections to an earlier version of this article)

meeting tech companies, founders, and investors at echelon 2019

We’ve recently staffed our first booth at Echelon Asia Summit, one of Southeast Asia’s premiere technology and startup events. It was exciting to chat with hundreds of startups, founders, investors, and venture builders over two jam-packed days.

As always, Echelon 2019 drew a sizable crowd. It was a quality line up of speakers and local tech superstars such as e-commerce giants Lazada and Shopback, table-reservation app Chope, and VCs like Golden Gate Ventures, Venturra, and SeedPlus.

The crowds continued well into the early evening on both days. It was also great to showcase our resources for the startup community, such as our free templates and complimentary 30-minute legal consultation.

If our conversations are anything to go by, it seems the growth of venture builders and accelerators in Singapore is not slowing down.This is great news for the startup ecosystem. There will be more opportunities and support for startups and founders, and a bigger pool of high-quality investment candidates for VCs.

We loved getting out into the Singapore tech community, and look forward to meeting more of you at future events!

Our booth during Echelon (hard to miss us).

meet the VCs – bringing VCs and founders together at techweek19

We were stoked to have a full house at the inaugural Meet the VCs event at the Generator as part of TechWeek19.

It was standing room only for the 100 attendees curated from 60+ companies, as they listened to insights from Australian investors Blackbird Ventures, Shearwater Growth Equity and Partners for Growth, Singapore VC QualGro, and Silicon Valley investor Quidnet Ventures.

New Zealand’s SaaS scene was praised by the panel as a stand out sector. The VC’s also liked the ambition of Kiwi companies to be ‘global from day one’ – it was great to hear this played back from our visitors. The panel also urged the crowd to consider the VC relationship as more multi-faceted than just a pay check and to also consider carefully the advisors and introductions that each place could offer as a partnership.

After some a robust Q&A the VCs were let loose to network with founders over drinks and food. A number of the companies managed to exchange cards with all five investors.

We enjoy creating opportunities like this for NZ tech companies. A big thanks to our partners Balgarnie van Rooyen and Auckland Tourism, Events and Economic Development (ATEED) in putting this event together.

kindrik partners announces new partner

We are proud to announce the appointment of long-term team member Chris Wilson as a partner of the firm from 16 April 2019.

Chris runs our Singapore office where he specialises in venture capital and tech m&a transactions. He was Kindrik Partners’s first full time legal hire in 2007, and has been involved in all of our significant business initiatives since then, including the setup of our Auckland office, the launch of our free online legal templates, and the opening of our Singapore branch. We’ve enjoyed watching him develop as a lawyer over the years, and are stoked to be able to promote him to the role of partner in our firm.

Kindrik Partners has been advising tech clients in Southeast Asia since Lee Bagshaw joined us four years ago, and Chris opened the firm’s Singapore office in early 2017. The firm’s Southeast Asian practice has grown rapidly since then, and now represents over 100 Southeast Asian tech clients and a bunch of VC’s. We also advise Kiwi companies using Singapore as a base.

Chris’ appointment as a partner will aid the firm’s growth in Singapore and across the region. He is already a well-known and highly regarded venture capital lawyer in Singapore. We’re confident his star will shine brightly in the coming years as a leading VC and tech m&a lawyer in both Southeast Asia and New Zealand.

angel association NZ template financing documents

Following a consultation with law firms working with startups (with Kindrik Partners representing founders’ perspective), the NZ Angel Association (AANZ) have released new template cap raising documents. These documents can be found at https://www.angelassociation.co.nz/resources/best-practice/doing-the-deal/.

The templates are designed for seed and series A investment deals. They include a term sheet, a long form subscription agreement and shareholders’ agreement, as well as a constitution.

Those familiar with the NZ Venture Investment Fund (NZVIF) documents will see that the new AANZ templates are similar in style. The expectation is that AANZ will take ownership of these industry standard documents going forward, and that the NZVIF documents will eventually be retired.

Will this transform cap raising for NZ startups?

Unlikely. If founders had hoped for materially simplified documents from this review, they are likely to be disappointed. The documents still have the look of series A documents, yet will likely be used for much smaller seed rounds.

By coincidence, around the same time as the AANZ documents were released, the Singapore Venture Capital Association (SVCA) released their own startup investment templates. Looking at them side by side, they are not materially different. This needs to be put into context however – the Singapore templates are designed for series A transactions in which $2-5million is invested, whereas the AANZ documents will likely be used on smaller deals from $500k upwards.

In other startup ecosystems around the world, convertible notes and SAFEs are commonly used by companies raising up to $1million. We are increasingly seeing NZ companies looking to these instruments for reasons of speed and to avoid lengthy negotiations when raising small amounts of money.

What’s new in the AANZ documents?

The combined NZVIF subscription and shareholders’ agreement has been split into a separate subscription agreement and shareholders’ agreement. This is a positive step and follows international trends. Now the subscription agreement can be consigned to a drawer after claims periods have expired, leaving the shareholders’ agreement as the living document alongside the constitution. Future investors will now just need to review the shareholders’ agreement and constitution, simplifying the next round of investment.

The term sheet now has some helpful footnotes. We’ve found from our own Kindrik Partners templates that user notes are great for guiding through the key terms when raising money from investors.

Are the templates more founder friendly?

The documents are an improvement on the NZVIF documents. One of our issues with those templates had been that they were over-complicated and more intrusive than investors really required on early stage deals. Inevitably, template documents hosted by AANZ, even following this latest review, were always likely to remain investor friendly. For example, items such as tranched investments and milestones, which remain as options, could arguably have been removed completely, given they are now rarely seen on deals.

There is some good news for founders however:

a few of of the more investor friendly terms from the NZVIF templates have been removed completely. For example, there is no longer the option for a full ratchet anti-dilution right with the broad-based weighted average formula being the default position. Given that full ratchets are virtually extinct nowadays, this was to be expected
the default percentage on tag along rights (effectively giving investors to right to sell if a larger shareholder is looking to sell) is no longer set at 20%, but rather at 50%. This is a better position for founders
the footnotes to the NZVIF documents implied that up to a 3x liquidation preference was not uncommon. That view is out of sync with global trends, and thankfully the AANZ templates now refers to 1x non-participating preference as the most common position
any reference to a preferred dividend has been removed. Given startups rarely pay dividends, this is largely academic of course
the new templates are much clearer on pre-emptive rights, for example, whether or not the pre-emptive rights holders have an over allocation as angel investors in NZ often invest follow-on money into NZ startups, it is helpful for founders to understand at term sheet stage what their obligations are on this
the templates also have more optionality in places, for example, on the investor veto rights where certain items are now in square brackets. On our overseas VC transactions, we often see veto rights split into board approved matters and shareholder approved matters to give flexibility to founders on all but the major corporate actions, while still maintaining good corporate governance. The AANZ documents have not taken that approach, however
finally, there is no longer a cap on the adviser fees that the company can incur on the deal. Given it is key that startups have the opportunity to take their own legal advice, this is welcomed

If startups are raising money from one of the NZ angel groups they can expect to be presented with these new templates. If they have other types of investors lined up, then some of our Kindrik Partners templates could be more suitable.

three’s company – our new graduates

We’re thrilled to welcome three new grads to the Kindrik Partners team:

Alex Rankin

Tiffany Ye

Sarah-Jane Christensen

Alex and Tiffany have landed in our Auckland office, and Sarah-Jane has taken up residence with Kindrik Partners Wellington.

Alex will focus mainly on corporate work, while Tiffany and Sarah-Jane are joining our commercial team focussing on contract drafting and negotiation.

One of the great things about working at Kindrik Partners as a new lawyer is the high volume of interesting, fast-paced legal work that our juniors get to do for our tech company clients. It’s an awesome learning environment, and we hope Alex, Tiffany and Sarah-Jane will enjoy working in the tech sector as much as we do.

meet the VCs investor line-up

We’re super excited to announce the line-up of international VCs who’ll be attending the Kindrik Partners, Balgarnie van Rooyen and ATEED meet the VC’s event on Wednesday, 22 May at 5.30pm.

We have Blackbird Ventures, Shearwater Growth Equity and Partners for Growth joining us from Australia, Qualgro from Singapore, and Quidnet Ventures rounding out the investor contingent from San Francisco. All have NZ investment mandates and are on the hunt for interesting companies with international growth potential.

Each of the investors will make a quick pitch to our audience of NZ tech company founders, explaining their investment mandate and the value add they bring to the investment equation. We’ll then let the investors loose to network with founders over drinks and food.

NZ tech companies interested in the event can apply here to attend.

More about the great VCs who’ll be pitching:

Blackbird Ventures: Sam Wong

Blackbird is an Australian venture capital firm that exists to supercharge our most ambitious founders. Investing in big ideas from a wide scope of companies, they offer equity capital to Seed, Series A and later stage startups.

Qualgro: Peter Huynh

Qualgro invests across Southeast Asia, Australia and New Zealand, at Series A & Series B. Their goal is to support high-quality teams building high-growth businesses and help them become regional or global leaders in their space

Shearwater Growth Equity: Zac Zavos

Shearwater is a new fund established by three successful tech founders. They are investing their own capital into entrepreneurs who are trustworthy and passionate about driving great companies.

Partners for Growth: Karthi Sepulohniam

PFG is an investment firm that provides capital funding debt solutions to private and public technology and life science companies. It finances those generating revenues above $5 million (aud), who seek $1 – $20 million (aud).

Quidnet Ventures: Mark Bregman

Quidnet is an early-stage investor. It realises that whilst New Zealand’s innovators have no shortage of ideas, they are often starved of funding. With 30 years of experience in the US tech space and the aim to invest $40 million, Mark is well-placed to help propel local startups to the global stage.

reflections on 2018 from our commercial team

As will be clear from our recent blog on financing deals completed in 2018, we like to collect data on the work we do for our tech company clients to help us monitor trends and fine tune our services.

We’ve analysed the data on our commercial work in 2018. In total, the stats show we completed over 600 jobs for our New Zealand and international clients in that calendar year. This represents a 20% increase on 2017 and a 50% increase on 2016.

Most of this work was for NZ clients, but Southeast Asia was a meaningful contributor, making up 15% of the total. And based on the first few months of 2019, we expect the percentage of commercial work coming from Southeast Asian clients to increase a lot in 2019.

The data highlights several clear trends for NZ tech businesses:

the biggest mover in terms of work type was data protection and privacy. GDPR compliance is now a big issue for NZ tech companies, particularly SaaS businesses, and we helped many clients with their compliance programmes. In fact, it kept us so busy that we decided to launch an online tool to produce customised privacy policies tuned to comply with the GDPR
there was a big increase in NZ tech companies doing business outside the more traditional offshore markets (e.g. Australia, USA and Western Europe). We helped many Kiwi clients with commercial deals in China, which in past years was more of an outlier (despite China’s market size), and with deals in countries as diverse as Vietnam, Taiwan, South Korea, Japan, India, Uganda and Ukraine
multinationals remain very willing to do business with innovative kiwi tech companies, including startups. We’ve seen some big names doing exciting deals with Kiwi companies, and we love being part of the team getting these deals over the line
among our clients, SaaS is the fastest growing category of tech exports. Of course, the SaaS business model avoids many of the obstacles faced by traditional NZ businesses as the product is infinitely scalable, weightless to deliver, and requires relatively little capital to get to market and prove customer demand. Also, NZ is increasingly recognised as a centre for excellence for SaaS – and this is reflected in the increase in international VC funds interested in opportunities to invest in NZ SaaS companies.

We expect the amount of commercial legal work we do to continue its trend upwards and look forward to sharing with our clients the lessons we learn in 2019.

companies participating in techlaw intern programme 2019

In January we asked tech companies interested in participating in our 2019 techlaw intern programme to contact us. There was lots of interest, and we’re happy to announce this year’s final line-up of participating companies as:

Stretchsense
Crimson Education
PredictHQ
9Spokes
Pacific Channel
AmbitAI
UniServices.

It’s great to have StretchSense, Crimson Education, PredictHQ and AmbitAI join the programme, and we are delighted to have Pacific Channel, 9Spokes and UniServices back for a second year. We’re sure they will provide a fantastic and varied experience for the interns.

A quick recap on how the scheme works:

we work with the University of Auckland in Term 1 to select law students who are keen to gain some real world legal experience working in a tech company
we then match those students with participating tech companies
the students provide up to 100 hours of work to their matched company
Kindrik Partners and our sponsors pay the students rather than the participating companies (i.e. this is a free service for tech companies)
we provide upfront training to the students, and technical support while they are on the job.

The aim is to give law students an understanding of the business world, which is lacking in the law school study experience.

If you would like any information on the programme, please contact Julie Fowler, or, if you know of any students who may be interested, direct them to the applications page on our website. Applications close on 25 March 2019.

meet the offshore VC’s with kindrik partners and balgarnie van rooyen at tech week 2019

Last year, New Zealand saw a big increase in direct foreign investment into our early-stage companies. Some exciting international funding rounds were completed by the likes of Rocket Lab, Soul Machines, Nyriad and Vend. So why are global venture investors looking at New Zealand and more specifically, what are they looking for in Kiwi tech companies?

Kindrik Partners has partnered with Balgarnie van Rooyen to bring four international venture investors to Auckland during Tech Week 2019, helping high-growth Kiwi tech companies to understand the NZ investment mandates of these US, Australian and Singaporean funds. Companies will also get the chance to network with the investors after the panel session, so a well-polished elevator pitch is a must have for attendees!

Co-hosted with Auckland Tourism, Events and Economic Development (ATEED), the event is scheduled for the evening of Wednesday, May 22nd in Britomart. The investors will consist of 3 early-mid stage venture capital funds and one venture debt fund.

This will be a great event for NZ tech companies who may be interested in raising capital from offshore investors at some future point, who also have:

expansion plans in any of Australia, Southeast Asia or the US; and
proven some level of product/market fit in NZ or internationally.

To apply to attend or to find out more, apply here.

research and development tax credit bill

The R&D tax credit bill (introduced to Parliament in October of 2018) will replace the existing system of Callaghan Innovation R&D grants with a tax credit system.

Under the Callaghan grant system, tech companies obtained taxable grants equal to 20% of the cost of eligible R&D activity.

Under the new system, tech companies undertaking eligible R&D activity will receive a tax credit equal to 15% of their eligible R&D expenditure, which can be applied to reduce tax due in the current year, or carried forward to subsequent years if there is no tax to offset. Initially, loss making companies will only have a limited ability to cash out these tax credits.

The headline value of the two schemes is broadly similar, since a 15% tax credit is more or less equivalent to the after-tax value of a 20% grant.

However, the R&D costs that are eligible to be deducted under the two schemes are quite different.

This difference is going to be felt by NZ tech companies developing software products, including SaaS products. Many NZ software companies are currently recipients of substantial Callaghan R&D grants. However, as the NZ Angel Association, the NZVCA and others highlighted in a joint submission, these software companies are going to find it hard to meet the new eligibility criteria.

Software product companies dominate NZ’s venture-funded tech ecosystem. We therefore expect this eligibility gap to cause some interesting discussion at the Select Committee hearings on the Bill later this year.

*Andrew was recently invited to join the IRD’s advisory group on the R&D tax credit regime, and attended the first meeting of the group in January.

2018 capital raising numbers

We’ve crunched the numbers and confirmed that 2018 was by far our busiest year for capital raising activity.

In total we helped clients close 92 deals. This is a big uptick in activity from 2017, with 67 completed deals. For the first time, Southeast Asia accounted for more than half of our capital raising activity, with 47 closed deals.

The total amount raised came in at $337m (c.f. $220m in 2017), $116m going to NZ companies (c.f. $67m in 2017) and $220m to Southeast Asian companies (c.f. $151m in 2017).

Average deal size was $2.6m for NZ investments and $4.7m for Southeast Asia, with median deal sizes of $1m and $1.5m respectively. These figures are almost identical to our 2017 numbers.

The average pre-money valuation for NZ deals was $10m with a median of $4.5m, compared to $29m and $6.3m for Southeast Asian deals. These numbers are also very close to our 2017 numbers.

Comparing lead investors on our NZ deals to our Southeast Asia deals is an interesting exercise. As the table below shows, the majority of our NZ deals were led by existing shareholders, angels and friends and family, whereas the majority of our Southeast Asian deals were led by VC’s.

Particularly telling is the fact that only 5 of our NZ deals were led by VC’s, whereas 28 of our Southeast Asian deals were led by VC’s, 19 of whom were local investors (compared to only 1 NZ deal led by a local VC). We think this is a fair, though unfortunate, reflection of the comparative maturity of the NZ and Southeast Asian investment markets.

	NZ	SEA
friends and family	3	5
existing shareholders	11	0
angels	9	4
family office / HNWs	7	1
onshore VC	1	19
offshore VC	4	9
NZ corporate investor	2	0
offshore corporate investor	4	9
accelerator / incubator	4	0
	45	47

So what does 2019 hold in store for our venture capital lawyers?

The outlook is for a similar or higher level of deals. We started the year with 35 active deals on the books, and as our clients get back to work after the holiday break new deals are coming in the door.

We expect the spread of lead investors to be fairly similar to 2018, with perhaps a higher number of NZ deals led by offshore VC’s as Australian funds in particular get more comfortable investing in New Zealand companies. Even more capital will flow into Southeast Asia from China and the US with large VC’s likely to set up shop in Singapore.

*all $ amounts are NZ$

seeking companies to host techlaw interns

Our 2019 techlaw intern programme is getting underway, and we’re looking for Auckland based tech companies who would like to participate.

A quick recap on how the scheme works:

we work with Auckland University in Term 1 to select law students in the later stages of their degrees who are keen to gain some real world legal experience working in a tech company
we then match those students with participating tech companies
the students provide up to 100 hours of work to their matched company
Kindrik Partners and our sponsors pay the students rather than participating companies (i.e. this is a free service for tech companies)
we provide upfront training to the students, and technical support while they are on the job.

Participating companies need to have some legal related tasks that can be worked on effectively by a student with appropriate supervision and support. Our preference is to select companies who can provide that supervision and support themselves, with some remote support and mentoring from our team.

Feedback from both companies and students who participated in last year’s scheme was extremely positive. The companies particularly enjoyed helping young students gain an understanding of the business world, which is quite lacking in the study experience of most law students.

If you are interested in hearing more about the programme, or would like to take an intern this year, please contact Julie Fowler by the end of February.

launching our free GDPR privacy policy tool

Earlier this year, our intrepid commercial lawyers were inundated with increasingly panicked enquiries from Kiwi tech companies about GDPR compliance.

This got us thinking that there had to be a more efficient way to help companies to review how they capture, use and protect personal information, and to then enshrine this in a GDPR compliant privacy policy.

We started experimenting, and soon came up with a concept for an online interview process to do all the heavy lifting, including at the end of the interview, serving up a customised, compliant privacy policy (all in the plain English style of our lovely Kindrik Partners templates).

The demand for GDPR compliance advice didn’t slow, so we decided to put the concept into reality.

Fast forward a few months and hundreds of hours of development effort, and we are proud to announce the launch of our free, NZ and GDPR compliant privacy policy doc maker.

GDPR compliance has been a massive cash cow for lawyers internationally, so we’re not surprised to find that we are the first law firm in the world to provide a free tool to address GDPR compliance issues. We think this tool will provide great value to Kiwi tech companies. We’re thrilled to offer the tech industry this sort of world beating assistance.

Give the tool a try and let us know what you think. If you’d like to talk about privacy law in more depth, or about legal tech like this doc maker, just drop us a line.

sale of swipedon to smartspace software

Our Auckland team, led by Julie Fowler, has advised the shareholders of SwipedOn Limited on the sale of their shares to Smartspace Software Limited, a wholly owned subsidiary of Smartspace Software Plc, for $11m in cash and shares.

Launched by founder Hadleigh Ford in 2013, Tauranga-based SwipedOn has developed an innovative SaaS based visitor management platform, which is now used in more than 2,000 cities worldwide. Kindrik Partners assisted SwipedOn with its $1m capital raise in late 2017, when Tauranga’s Enterprise Angels, Quayside Holdings, NZVIF and K1W1 all invested.

Smartspace is listed on the Alternative Investment Market of the London Stock Exchange and provides smart workplace software and technology. Smartspace is in expansion mode, and sees the SwipedOn acquisition as a good opportunity to expand its customer base. Hadleigh and the rest of the management team will continue to work in the business.

The sale has resulted in a positive outcome for all of the shareholders of SwipedOn. The founders have achieved a successful exit and will continue to be involved in the success of the business, and the investors have realised a positive return on their investment, less than 12 months after investing.

We have been thrilled to share this journey with SwipedOn, through its capital raise and culminating in this successful exit transaction.

capital raising numbers – the year so far

2018 has been a bumper year so far for our capital raising lawyers.

As at 30 September, our team has worked on a total of 117 financing deals that have either closed, or are still live and aiming to close prior to Christmas. This compares to a total of 67 transactions closed in 2017, and 83 closed in 2018.

Our Southeast Asia team has been a big contributor to the growth in deal numbers. In 49 of these deals we are representing Southeast Asian tech companies or VCs. This compares to the 24 Southeast Asian deals we helped close in 2018.

New Zealand numbers are also up on 2017. Deals involving Kiwi tech companies for the year to date (closed and live) are at 72, compared to a total of 43 closed last year.

Of course, not all of the live deals will end up closing. However, this will be partly balanced by an inevitable rush of bridge funding deals in November and December.

Our best guess is that our total number of deals closed will top 100 for the first time.

Looking forward, the conditions for capital raising are still very favourable for both Kiwi and Southeast Asian tech companies.

For Kiwi companies, we expect this to continue well into 2019 as some of the liquidity created by this year’s great exits is recycled into new investments.

In Southeast Asia, our VC contacts tell us they are allocating large sums of investment to tech companies servicing the burgeoning Indonesian economy. Singapore domiciled companies continue to be the preferred investment vehicle, however.

the techlaw intern programme in review

We launched the techlaw intern programme this year, which paired law students from the University of Auckland with NZ tech companies for some hands-on work experience. Jude, UniServices, Endace, and 9 Spokes were our hosts.

The programme has been a resounding success.

The students loved getting a taste of working in the tech sector and learning new skills on tech projects. Matt Bastion (Jude’s intern) says:

it has been awesome learning about what Jude is doing and being thrown in the deep end.

For Nadya Fauzia (9 Spokes’ intern), its confirmed for her that she wants to be in tech.

A key reason for our host companies volunteering was simply to support students getting some real-life experience. But all of them have received value from the programme and the work of the students. Sandra King, General Counsel at UniServices, says:

the students have been a great help to us and the programme has allowed us to give them a taster of legal life in the tech sector. We are looking forward to next year!

And there have been lots of learnings for us too, e.g. ensuring the programme is flexible so that students can work around their University and other commitments.

Having had a successful pilot – we’re committed to running the programme next year too. If you are an Auckland-based NZ tech company who would like to participate in our 2019 techlaw programme, get in touch with Julie Fowler.

antworks completes US$15m series A round with softbank

Our Southeast Asian team is pumped after helping Singapore-based artificial intelligence company Antworks complete its series A round in late July.

Antworks raised US$15m from the investment arm of Softbank, the Tokyo listed telecommunications, technology, and investment giant. The Japanese multinational has invested into several major players in the region, including Grab.

This deal follows close on the heels of the Bambu series A round, led by US investment firm Franklin Templeton. It is great to see Southeast Asia attracting more and more attention from large overseas investors.

Antworks intends to use the series A funds for R&D, marketing, and sales, as it expands into new markets and builds up its technology product portfolio. The company and Softbank have also announced a commercial partnership and will work together to maximise the enterprise AI opportunities across Southeast Asia.

We were delighted to hear that co-founder, Asheesh Mehra, originally contacted us after a Google search for information on term sheets and series A deals that led to the Kindrik Partners website, which was full of relevant material.

employee share schemes for nz tech companies [webinar]

We recently held our very first webinar on employee share schemes for nz tech companies. Our superstar presenters explained the new tax rules that came into force on 1 April 2018, including why these rules mean that for most startups an ESOP (employee share option scheme) will be the best choice. Once the basics were covered, they also walked through the creation of a simple ESOP using our nifty ESOP doc maker!

For those who missed the webinar, we’ve included a recording below for you to watch.

experian leads $28million series C investment in c88

Our Kindrik Partners Southeast Asia team is thrilled to have advised fintech leader, C88 Financial Technologies, on its $28 million series C investment round led by Experian. The deal represents one of the largest fintech investments ever in the region.

C88 operates the largest financial marketplaces in Indonesia (CekAja.com) and the Philippines (eCompareMo.com), and is expanding to Thailand with this fundraise. The group’s marketplace brands combine comparison of eligibility and scoring, with brokerage application capabilities across a range of consumer lending, insurance and wealth management products. To date, C88 brands has served over 50 million customers in Indonesia and the Philippines, and over 90 licensed financial institutions are distribution partners.

The investment, together with a commercial partnership with London-listed Experian, will hopefully be transformative for C88 with financial institutions that sell products on C88’s platform receiving access to Experian’s credit-scoring solutions.

The round was supported by new investors responsAbility Investments AG, DEG, InterVest, Pelago Capital, FengHe Fund Management and Fuchsia Venture Capital, together with existing investors, Monk’s Hill Ventures, Telstra Ventures, Kickstart Ventures and Kejora Ventures.

bambu deal

Our lawyers Chris Wilson and Sarah Yen recently advised Singapore-based fintech Bambu on its S$3 million series A round, which closed earlier this month. The round was led by Franklin Templeton Investments, a US global financial services businesses.

Bambu supplies its robo-advisory platform to financial services providers in Singapore, Hong Kong, Malaysia and the United Kingdom. The platform enables financial services providers to offer automated and/or robo-augmented investment services tailored to the needs of retail, private and high net worth customers.

The company plans to use the investment to expand into new markets and to fund further R&D. Founders Ned Phillips and Aki Ranin aim to guide Bambu to a million end users by the end of 2019.

It is always exciting to help startups secure funding from major international investors, and we are proud to have helped Bambu to close it’s series A round. We look forward to helping the company grow its business internationally in the coming months.

new southeast asia startup templates

We’re excited to release eight new, free legal templates for Southeast Asian startups:

a startup shareholders’ agreement
a SAFE
a KISS term sheet
an advisor share agreement
an m&a term sheet
an intercompany loan agreement
a deed of variation
a deed of termination

We’ve also updated some of our existing templates including the ESOP rules, KISS convertible note and our series A term sheet.

The expanded suite of templates cover the basics for tech startups as they build a company in the region, including flipping to Singapore, governance, incentivising founders and employees, raising capital and m&a.

You can find all of these templates, along with loads of great blogs, case studies, guides and doc makers, in a new Southeast Asia section of our site.

These resources, along with our recently announced map of the funding terms online tool, make the Kindrik Partners website a must visit resource for all aspiring Southeast Asia tech startups.

australian venture debt investor hunting NZ deals

We’ve often heard NZ tech companies bemoan the lack of active venture debt investors in the NZ market.

In North America, venture debt from financiers like Silicon Valley Bank helps companies with strong cash flows to raise finance for growth without the level of dilution, or loss of control, that comes with raising venture capital investment. This growth is often what is needed to bridge a company to a significant liquidity event (an exit or IPO) or to more traditional funding sources (bank finance).

In contrast, in NZ there is pretty much just private equity between venture capital investment and bank financing. And securing meaningful bank financing is extremely hard for most NZ tech companies.

This may be about to change, however, as Australian venture debt financier Partners for Growth (PFG) is on the hunt for Kiwi tech companies interested in raising venture debt.

PFG venture partner, Karthi Sepulohniam, reached out to us last week to tell us about PFG and their financing criteria:

We focus on revenue-stage companies – above $5 million in revenue – and with a growth story. We seek to fund good companies who generally can’t get finance from banks and are seeking to minimise dilution from raising equity capital. Originally founded in San Francisco in 2004, PFG has been financing companies in Australia since 2007 and we have now expanded to New Zealand.

We provide financing of between $1 million and $20 million and have a particular focus on financing technology and software companies. Investment is typically via a mixture of interest bearing secured debt and warrants, sometimes provided alongside equity investors.

Karthi wanted to know if this type of offering would be of interest to some of our clients. The answer of course is yes – we have an increasing number of NZ clients crossing the $5m revenue threshhold, and an additional type of local funding mechanism for these types of companies would be a great help.

If you are interested to find out more about PFG and venture debt, please drop Karthi an email or ask one of the Kindrik Partners team to connect you.

Kindrik Partners advise on the sale of grinding gear games to tencent

Julie Fowler, assisted by Sarah Yen and Sam Kaelin, has advised the shareholders of New Zealand’s largest game development studio, Grinding Gear Games, on the sale of a majority interest to Tencent, the world’s largest online games company.

Founded in 2006, Grinding Gear Games is known for the wildly successful competitive online role-playing video game, Path of Exile, which launched on Microsoft Windows in 2013 and on Xbox in 2017. The game is now published in eight languages.

Tencent is a tech powerhouse that provides numerous online products and services across social networking, e-commerce, entertainment and artificial intelligence. Tencent is based in China and is listed on the Hong Kong stock exchange.

Grinding Gear Games will continue to operate as an independent company and be led by its founders, who expect the company to benefit from access to Tencent’s vast global network. We are delighted to have been involved in a transaction that has had such a great outcome for Grinding Gear Games, its Kiwi founders and the continued growth of the NZ gaming sector.

new tax rules from 1 april 2018 for employee share schemes

After a long consultation period, and a delay caused by 2017 election, the IRD’s new rules on the taxation of employee share schemes came into effect on 1 April 2018.

(Access our free ESOP template here.)

Companies will no longer be able to structure share purchase schemes to have the economic effect of options, while treating increases in the value of shares issued under those schemes as tax free capital gains. Instead, share purchase schemes involving limited recourse loans, partly paid shares and other risk free devices will have gains taxed on the same basis as options.

In practice, this means that:

most NZ startups will be best-off using simple option schemes. Options are easy to implement and there is no upfront risk for the employee or cash cost to the startup. No tax is payable unless and until employees exercise their options, at which point tax is due at each employee’s marginal tax rate on the difference between the exercise price and the market value of the underlying shares at that time
more established companies may also use simple share purchase schemes under which shares are purchased outright by employees at market value. As long as there are no vesting or buy-back arrangements in place, increases in the value of the shares above the initial purchase price should be tax free capital gains. However, employees bear the risk of loss of their investment in the company.

We will discuss some of the technical detail in later blogs. A few points to be aware of in the meantime:

companies are now entitled to deductions on taxable gains made by employees via employee share schemes. The deduction will generally arise when the employee becomes liable to pay tax – so in the case of share options, this will be at the time of option exercise
founder vesting arrangements will not be caught by the new rules (reflecting our submissions on this topic)
the tax free status of existing share purchase schemes is largely grandfathered, as long as the vesting/buyback arrangements underpining those schemes expire prior to 1 April 2022.

cap tables

We had a great response to the SaaS cap table survey in our April newsletter. ConnectWorks are analysing the results, and will let us know whether there was enough interest for them to add a cap table module to their company secretarial platform.

In the meantime, we’ve created version 2 of our own template cap tables. There are two templates:

cap table with discounted debt conversion – for use where the company has KISS notes or similar that convert debt to equity at a discount to a subsequent equity financing
cap table with no discounted debt conversion – for use when the company has no convertible debt, or only debt that converts at the same price as the subsequent financing.

The main change between version 1 and and version 2 of these tables is the treatment of employee share schemes (ESOPs).

Most tech company financings provide for the establishment of new, or enlarged, ESOPs. Version 1 of the cap tables took a founder friendly approach to the treatment of these plans, by spreading the dilution caused by the ESOP equally across all shareholders.

However, NZ market practice has now largely settled on the use of fully diluted pre-money valuations. This means that the dilutive impact of a new or enlarged ESOP is applied to existing shareholders only, not to the new investors (or converting note holders). Version 2.0 of the template cap tables reflects this approach.

Here is a quick example of the difference, assuming an investment of $1m, a pre-money valuation of $4m, and the creation of a 10% ESOP as part of the round:

Shareholders	Before Investment	Version 1.0 (everyone dilutes)	Version 2.0 (fully diluted basis)
Founders	1,000,000 (100%)	1,000,000 (72%)	1,000,000 (70%)
Investor	0 (0%)	250,000 (18%)	285,714 (20%)
ESOP	0 (0%)	138,889 (10%)	142,857 (10%)
Total	1,000,000	1,388,889	1,428,571

GDPR is coming

The European Union’s General Data Protection Regulation (GDPR) comes into effect on 25 May 2018 and represents a big change to current EU data protection laws.

The GDPR expands the territorial reach of EU data protection laws and New Zealand businesses that process personal data of individuals in the EU will have to comply with the new laws. For the purposes of the GDPR, processing means any operation which is performed on personal data such as collection, recording, organisation, storage, use, disclosure or erasure.

The GDPR will apply to your business if:

you have a business located in the EU and process personal data of individuals in the EU (regardless of where this personal data is processed), or
you do not have a business located in the EU, but offer goods or services to individuals located in the EU (even if those individuals are not paying customers) or monitor the behaviour of individuals located in the EU (including through the use of cookies).

The GDPR applies to the processing of personal data by both data controllers (organisations who exercise overall control of personal data and determine why and how that personal data is processed – if your business collects personal data about EU individuals for its business use, you’re likely to be a data controller) and data processors (organisations which process personal data on behalf of a data controller e.g. an outsourced cloud service provider such as Azure or Amazon Web Services).

The GDPR comes with large fines for non-compliance. Businesses can be fined up to 20 million euros, or 4% of global revenue, for serious contraventions of the GDRP (which is 30 times more than the current maximum fine for an offence under NZ privacy law).

If the GDPR applies to your business, it is likely that you will need to update your privacy processes and policies to comply with the new law. Some of the requirements of the GDPR that are more onerous than those under New Zealand privacy law include:

increased data rights for individuals – individuals have a number of data rights under the GDPR, designed to empower individuals’ control of their personal data. New rights include the right to erasure (often referred to as the right to be forgotten), to data portability (e.g. to transfer personal data from you to another service provider), and to object to the processing of personal data. Individuals also have rights in respect of automated processing (decision making) or profiling e.g. an algorithm used to make a decision on an individual’s online loan application or analysis of data to gain insights into behaviours and characteristics of different groups of individuals who are subsequently targeted with certain types of advertising. You must tell individuals if you undertake these activities and allow individuals to request a review of any automated decision
lawfulness of data processing – businesses can process personal data only when one of 6 lawful purposes applies: consent is given by the individual or data processing is necessary for: the performance of a contract with the individual; to comply with legal obligations; to protect the vital interests of the individual or other person (i.e. protecting someone’s life); to perform a task in the public interest; or where the data controller has legitimate interests (i.e. where the controller uses personal data in ways individuals would reasonably expect and which have minimal impact on their data rights)
a higher standard for consent – the GDPR is more prescriptive on how consent must be given for data collection (particularly for sensitive data e.g. racial or ethnic origin, religious belief, genetic data, biometric identification data and health data) and on parental consent for children (anyone under 16). Consent must be freely given, clear and concise, specific, informed and an unambiguous indication, either by statement or by a clear affirmative action (offering the option to tick an opt-out box will not qualify as freely given consent)
privacy by design – the GDPR requires privacy by design. This means that privacy law obligations are embedded in a business’s personal data handling processes from start to finish. Data controllers must implement appropriate technical and organisational measures considering the nature, scope, context and purposes of processing, as well as the data rights of individuals
transfers of personal data outside the EU – while personal data may be transferred outside the EU, businesses are only allowed to transfer personal data to countries that provide an adequate level of data protection (the European Commission has determined that New Zealand meets this standard) or where appropriate safeguards are in place, e.g. standard contractual clauses in place between the data controller and data processor, or the transfer complies with an approved code of conduct or certification mechanism

The full text of the GDPR is available here.

We will dive into the detail of the GDPR over the next few weeks, including providing some tips to help with your journey to GDPR compliance, so stay tuned for our next blogs.

collaboration with company works on a SaaS capitalisation table solution

Capital raising can be stressful enough without spending hours weeping in front of an excel spreadsheet, desperately trying to reverse engineer your cap table. So ideally the cap table is something you have under control before you start a capital raising process.

Our template cap tables are relatively easy to use, but they still require you to do the heavy lifting, and they do assume some knowledge of the mathematical relationships between pre-money valuation, ESOP allocation, conversion of notes and post money valuation.

Your accountant or lawyer may be able to help you get, and keep, your cap table in order. But we all know professional services don’t come cheap. And not every professional is going to be familiar with cap table number-crunching.

Overseas, SaaS cap table solutions have become a popular remedy for this pain point, particularly in the US and Canada. Those SaaS solutions have increasingly become the norm for cap table management and modelling because they offer ease of use and sharing – allowing companies to create their cap tables, keep them up to date, and share them with stakeholders, prospective investors, and professional advisers.

However, the solutions available in the US or Canada don’t easily translate to New Zealand. What works in the US or Canada doesn’t work in New Zealand because, fundamentally, the background legal and tax regimes are different. NZ has no concept of authorized but unissued capital for example, which tends to form the basis of overseas cap table solutions. In New Zealand, your capital (equity) is either issued or it’s not. There is no in-between.

So when it comes to existing SaaS cap table solutions, a New Zealand company can make them work, but it’s time-consuming and the end result is a bit ugly.

Which is where Company Works comes in. Company Works is a New Zealand company secretarial SaaS solution, and they are thinking about expanding their platform to include a cap table module tailored to the needs of local tech startups. We think this is an awesome idea, and we’ve offered to help with some market validation of the concept.

If a SaaS cap table solution sounds like something you’d be interested in, please take some time to complete the survey linked below. Everyone completing the survey goes into the draw to win one of four 6 packs of quality New Zealand wine (two from Company Works and two from Kindrik Partners). Which is why we’ve had to stop Fiona from filling it out seven times already.

complete survey

caltex startup accelerator open for entries

Slingshot, an Australian accelerator program that connects large corporates with startups via tailored accelerator programmes, recently announced the Caltex Spark 12 week accelerator. The accelerator will run from May 7 to August 1 in Sydney.

Slingshot are seeking applications from Australian and New Zealand tech startups and scale-ups in the mobility, retail, convenience or efficiency space. There’s up to $150,000 of funding up for grabs for each successful entrant, as well as the potential for additional investment from Caltex and the Slingshot Venture Fund. Plus a highly structured lean orientated training and mentorship programme provided by Slingshot.

The Caltex Spark Accelerator will be visiting The Icehouse for a Roadshow on 8 March. Applications close March on 16. If you would like to find out more, visit: https://spark.caltex.com.au/.

AoG – back in the saddle

We’re delighted to have been appointed to the Gen 2 All of Government external legal providers panel to advise public sector agencies on their IT projects and related issues. In the past, Kindrik Partners has enjoyed a great relationship with many agencies and we’re looking forward to reconnecting with our colleagues in the public sector.

While Kindrik Partners acts for many customers on IT projects, we have developed a reputation as a go to firm for suppliers on ICT transactions. Whether you’re a supplier or a customer of ICT services, it’s vital that your lawyer understands the risks and issues from the other side’s perspective so that solutions can be quickly found that meet both parties’ interests.

Given we act on both sides of the fence, we think our inclusion in the panel will offer great benefits across our client base. And, if you’re a public sector agency, keep an eye out for our focussed newsletters and webinars that we’ll soon be launching.

ICO update

We are receiving a lot of enquiries from NZ startups, and more established tech companies, about the legalities of NZ companies raising investment via an ICO.

The likely legal treatment of an ICO offered to the general public in NZ (as opposed to wholesale or other excluded investors) is still a work in progress. The Financial Markets Authority’s guidance on this topic, which the Authority updated late last year, is helpful but far from definitive (see our December blog for more on this topic).

However, a NZ company wishing to raise funds via an ICO is unlikely to be targeting the NZ public. The big money invested into ICO’s is coming from international investors already participating in ICO, token and cryptocurrency markets.

The disclosure (prospectus) requirements of NZ’s securities laws do not apply to offers of securities outside NZ. So NZ companies seeking funding only from international investors will not need to wrangle with the NZ law or the FMA’s guidance. (Unfortunately this doesn’t mean NZ companies escape the need for legal advice altogether – specialist crypto-centric advice will still be needed on compliance with international securities laws.)

Although the bulk of NZ’s securities laws will not apply, there are still a couple of things to be aware of:

if the ICO is an offer of a financial product, then the fair dealing rules of the Financial Markets Conduct Act will apply. These rules prohibit the making of false, misleading or unsubstantiated statements in the marketing of financial products. ICO White Papers will be caught by these rules if the token on offer constitutes a financial product, which means the FMA would have the power to ban a White Paper by a NZ company (and take other punitive action) if it contained false, misleading or unsubstantiated statements
NZ companies that deal in cryptocurrency have difficulty opening or maintaining NZ bank accounts, as local banks are very concerned about money laundering risks. Companies thinking of raising money via an ICO will need to talk to their bank to see if raising money via an ICO will create issues with the banking relationship. You are likely to need to carry out know your customer procedures in respect of all participants in your token offer.

We expect to be talking with the FMA about ICO’s and NZ legal requirements as the year progresses. We will continue to blog on this topic as new information becomes available.

2017 capital raising numbers

We’re happy to report that 2017, while not quite reaching the heights of the previous year, was still a great year for our corporate lawyers advising on capital raising deals.

In total, we helped our clients complete 67 capital raising transactions in 2017, compared to 83 in 2016 and 43 in 2015. The total amount of capital raised in those transactions was $220m, compared to an identical $220m in 2016 and $180m in 2015.

NZ companies accounted for close to $70m of this capital raising, compared to $150m in 2016 and $53m in 2015. Our average raise for Kiwi companies in 2017 was $1,550,000, with a median of $700,000. This compares with $2,450,000 and $950,000 in 2016, and $1,950,000 and $500,000 in 2015. Although the total capital raised in our 2017 NZ deals was a lot lower than the previous year, we are not reading too much into this as the 2016 number included a couple of IPO’s.

The average raise for our Southeast Asian deals was $6,300,000, with a median of $1,400,000. This compared with $3,950,000 and $2,050,000 in 2016, and $9,200,000 and $2,500,000 in 2015.

The lead investors on our 43 NZ deals were:

friends and family – 4
existing shareholders – 3
private angels – 6
angel clubs – 7
family office/HNWs – 5
onshore VC – 6
offshore VC – 4
NZ corporate – 4
offshore corporate – 4

These numbers reflect our feeling, at the start of 2016, that corporates and VC’s were going to play a bigger role in the NZ funding ecosystem than had been the case in prior years.

The lead investors on our 24 Southeast Asian deals were:

private angels – 3
angel clubs – 4
family office/HNWs – 1
VC – 14
corporate investor – 2

The weighting of venture capital in these deals reflect the funding market in Southeast Asia – there are scores more VCs operating in Southeast Asia than in New Zealand.

So what does 2018 have in store for our venture capital lawyers? The significant theme so far is interest in ICOs. We have a couple of NZ clients working hard on utility token ICOs that they expect to launch in the first half of the year, and we are receiving frequent enquiries from NZ companies wanting to understand the legalities of undertaking internationally focussed ICO’s. This trend is about six months behind our Southeast Asian experience, where we have had several clients complete ICOs, including exciting blockchain company bluzelle. The recent volatility in bitcoin prices certainly hasn’t affected the interest we are seeing amongst tech companies in ICOs.

Although there is a lot of interest in ICOs, we expect that the numbers of NZ companies raising capital via token issues will still be relatively small this year. Meanwhile, we expect traditional capital raising activity to continue to be busy as it has been over the last 3 years.

NZ regulator updates its guidance on ICO’s and cryptocurrencies

Late in October New Zealand’s Financial Markets Authority (FMA) released guidance on the regulation of initial coin offerings (ICOs) under NZ securities law.

In our November blog, we commented that the FMA’s guidance was pretty conservative, as they said that all tokens and cryptocurrencies are securities under the [Financial Markets Conduct] Act – even those that are not financial products.

We felt that this stance would be unhelpful to NZ’s fledgling blockchain industry because it would result in NZ being perceived, internationally, as an unfriendly regulatory environment for blockchain ventures.

It appears that others have expressed a similar view to the FMA, as the Authority has recently updated its guidance to remove the blanket characterisation of ICO’s as securities. The guidance now says that offers of tokens will only be regulated under the Financial Markets Conduct Act if:

the token falls within one of the four categories of financial product regulated under the Act (debt securities, equity securities, managed investment products and derivatives); or
the token falls within the residual definition of a security under the Act AND the FMA decides to declare the token to be a financial product under the FMA’s regulation making powers.

From a NZ law point of view, this isn’t a significant change, and in legal terms, the FMA is more or less saying the same thing using different words.

However, from an industry point of view, the change is a biggie. Internationally, the bright line for regulation of ICO offers (or, at least, retail offers) is whether or not the ICO constitutes an offer of securities. Regulation as a security has many implications for an offer, not just by requiring prospectus registration and disclosure, but it also brings potential requirements for the regulation of intermediaries and platforms involved in the offer process. The FMA’s original blanket statement that all ICO’s/tokens are securities was likely to be off-putting to international participants in the burgeoning ICO industry, and had the potential to undermine efforts to attract some of that activity to New Zealand.

The FMA also made a few other subtle changes to the guide, which present NZ’s regulatory framework as being more open to ICO’s and cryptocurrencies.

Although the FMA’s guidance now has a friendlier vibe towards ICO’s and cryptocurrencies, it is still difficult to pick where the FMA will draw the line between a token or financial service that is regulated, and one which is not. We understand that the FMA is thinking about publishing a second guide with specific examples of tokens and services which will be regulated, and examples which fall on the other side of the regulatory line. We expect that this will follow the form of examples published by the Singapore regulator.

If so, as well as helping NZ blockchain entrepreneurs (and their lawyers!) to understand the thinking of the NZ regulators, it will be very helpful to international entrepreneurs thinking about NZ as a possible home for blockchain activity.

doc makers upgrade

We’ve been super busy upgrading the Kindrik Partners website to make our doc makers more awesome.

There are two main changes:

users can now access the doc makers (and Word templates) by setting up an account on our site. All you need is an original user name (warning – Evil Lawyer is taken) and a valid email address. Of course, users can still login via LinkedIn if they prefer.
once set up with an email or LinkedIn account, users will have a login/my documents tab at the top right of the site. This links to each user’s document vault, in which completed forms and documents are stored. Partially completed forms are stored here too.

The my documents vault is an killer feature, as it enables users to reuse their forms and accompanying data as much as they like. It’s already a big hit with the Kindrik Partners lawyers.

We currently have 12 document makers up and running. These cover many of the tech startup essentials, including:

Now that we’ve optimised our site, we will be focussing on turning the rest of our Word templates into doc makers. We’d like to get this completed early next year.

conservative guidance on ICOs from NZ regulator

NZ’s Financial Market’s Authority recently released guidance on the regulation of ICOs under NZ securities laws – in particular under the Financial Markets Conduct Act 2013 (FMCA). This follows a spate of similar guidance releases by securities regulators around the world.

The FMA’s guidance is pretty conservative. They advise that:

all tokens and cryptocurrencies are securities under the FMCA (a blanket categorisation that is unlikely to help NZ’s fledgling blockchain services industry to promote NZ as a destination for blockchain entrepreneurs)
tokens and cryptocurrencies that fall within one of the four categories of financial product defined in FMCA (equity securities, debt securities, managed investment products and derivatives) may only be offered to retail investors if a product disclosure statement (a prospectus) is registered and other regulatory requirements are met. In the case of debt securities and managed investment products, which are the categories most likely to catch ICO’s, the regulatory requirements include registration of a trust deed and appointment of a statutory supervisor
tokens and cryptocurrencies that don’t fall into one of the four financial product categories are still liable to be regulated by the FMA, based on the economic substance of the token or coin. The FMA would do this by designating the instrument as a financial product under its broad regulatory powers.

Compliance with the product disclosure statement regime and other regulatory requirements is unlikely to be attractive to NZ entrepreneurs interested in raising funds via an ICO. The costs of compliance are significant, whereas the NZ retail market for this type of investment is diminishingly small in comparison to international markets.

NZ entrepreneurs will be able to offer tokens in an ICO to wholesale investors, using the same criteria that apply to any tech company private capital raising. However, this may not be worthwhile, again due to the small size of NZ’s wholesale capital pool for high risk investments.

How will this affect the participation of NZ investors in offshore ICOs? Our guess is that the blanket designation of tokens and cryptocurrencies as securities will see NZ investors excluded from ICO’s run by reputable players in ICO markets, who will generally wish to avoid regulatory complexity in minor markets.

launch of techlaw intern programme

As we see it, there are a couple of issues for law grads and the tech sector that need to be fixed fast. The first is that most law graduates don’t realise that working in the tech sector is an option for them – crazy, we know. The second issue is that, while law school teaches students the theory, they graduate knowing very little about how to actually be a lawyer. We’ve decided to solve both issues in one swoop.

We’re launching a pilot programme in 2018 (current working title is the techlaw programme) where participating law students in their final years will get the chance to intern with NZ tech companies doing real legal work.

Our plan is for the students to be paid to complete up to 100 hours of basic legal work for tech companies – at no cost to the companies as Kindrik Partners and our sponsors will foot the bill. The work will be supervised by a buddy at Kindrik Partners. We’ll also provide up-front training for the students, with help from sponsors and friends in our network.

This will be a fantastic real-life experience for the students but will also enable tech companies to showcase careers in tech. We think this programme will be win-win for everyone.

It’s early days and we’re still working on the finer details. But, if you’d like to participate, either as one of the tech companies using a student or in another way (e.g. as a sponsor, supporter, or educator), we’d love to hear from you.

More details to follow in early 2018 . . .

let’s be clear – negotiating contracts

Howls of outrage in the @techlawnz office generally mean one thing – the other side to a negotiation has not properly marked up the contract.

Of course, we follow the well-worn protocol of, with each turn of the contract, accepting all of the other side’s mark-ups, and marking up all of our edits from there. US firms usually provide a clean version of the contract along with a compare in pdf.

Why take this approach? Because it ensures that the other side can clearly identify and consider all of your changes.

Should you care if the other side is too lazy to double check that it has picked up all of your changes?

Well, making changes to a document without bringing them to the other side’s attention can tend to sour a newly formed relationship. But, worse still, you run the risk of breaching the Fair Trading Act. That Act prohibits misleading or deceptive conduct in trade. And if you fall foul of that Act, the remedies against you are wide-ranging, including a declaration that the relevant contract is void and/or an order varying the contract, requiring the refund of money, or requiring the payment of damages.

What’s brought this to mind for us? We’ve just reviewed a US contract that requires each party to confirm that it has made no change that hasn’t been redlined or expressly brought to the other party’s attention. And, if a party has, the other party can terminate the contract.

We like it so much, we’re thinking about including it in our templates.

But as a general rule, contract negotiations always go more smoothly if everyone is transparent about the changes they are making. And, you still end up friends after the contract is signed.

new templates for NZ angel deals

Kindrik Partners has inspired an Angel Association working group that is aiming to produce a new set of template investment documents for use in NZ angel deals.

The new documents will replace, as industry standards, the New Zealand Venture Investment Fund (NZVIF) templates which have been in use (with periodic amendments) for about 10 years.

The NZVIF templates have been a great help to the industry. They have helped to improve investment practices, which were pretty rough and ready in the early days of NZ’s startup scene. They have also helped to lower legal costs for both companies and investors due to standardisation of documentation.

However, they have also caused some issues. The templates:

started life with a strong investor friendly bias. This has softened over time (in part due to our public advocacy), but in some areas they are still more investor friendly than we would expect to find in a typical startup investment deal in Silicon Valley or Southeast Asia, particularly around control terms (e.g. investor approval rights). At times, this has made it harder for founders to run their companies, and in some instances has lead to governance problems; and
are more complicated than they need to be in some areas, increasing the administrative burden on founders and their companies.

Another issue that has caused some difficulty over time is the combination of investment terms and governance terms into a single document – the SaSA (Subscription and Shareholders’ Agreement). This reduces the number of documents in play when a company takes its first round of angel investment, but many companies raise further rounds of investment from angels and new investors under the same governance documenatation. The SaSA becomes unwieldy in that situation. The working group is therefore contemplating breaking the SaSA out into two documents – an Investment Agreement relevant to the initial investment round only, and a Shareholders’ Agreement that continues to apply to subsequent rounds (unless new investors require otherwise).

The group is also going to look at alternatives to the current NZVIF convertible loan agreement template. This is a terrible document from a founders’ perspective, as it combines the worst features of both debt and equity details and creates immediate solvency issues (at least from an accounting point of view). Kindrik Partners is obviously advocating for the use of our KIWI KISS note, at least for small seed investment deals (up to around $300,00) but there is some work to do to get everyone on board with this approach.

The Angel Association’s end goal is to publish the new templates on its website in an unbranded format, with angels, companies and their respective lawyers being able to use and adapt the documents free of charge.

We are hopeful that once published, the documents will perform a similar role to the template investment documents published by the American Venture Capital Association. Those documents are widely used in Silicon Valley and internationally as base templates, but individual investor groups adapt the document to suit their own investment practices including to differentiate themselves in the marketplace (for example by offering investment terms that are more founder friendly than the AVCA templates). This contrasts with the current position, where NZ angel investors tend to treat the NZVIF templates as industry standard and don’t tend to deviate from them very much between investment groups.

We’ll post more on this project as it progresses.

SEC initial coin offering (ICO) report

The US Securities and Exchange Commission (SEC) has just issued a report warning that Initial Coin Offerings (ICOs) may be deemed to be securities, making them subject to United States’ securities laws. This will depend on the economic realities of the transaction (is it an investment transaction for capital raising purposes), regardless of the terminology or technology used in implementing the transaction.

The report comes off the back of an investigation into the legality of tokens issued by virtual organisation The DAO. DAO is an acronym for digital autonomous organisation. The DAO itself was a decentralised venture capital type fund that raised crypto currency (Ether) to invest in blockchain and other projects. Unfortunately, vulnerabilities in The DAO’s code were attacked, putting The DAO’s funds at risk. This ultimately led to unwinding of The DAO (at least as it was originally conceived).

The SEC was tasked with considering whether The DAO had violated United States securities laws, which hinged on the question of whether The DAO tokens were securities under US law. The SEC found that The DAO tokens were securities. They decided not to pursue enforcement action, but considered it to be in the public interest to warn those who use ICOs or other blockchain technologies to raise capital in the United States to ensure compliance with US securities laws. Interestingly, as well as firing a warning shot across the bows of issuers and promoters of ICOs, the SEC also said that investors have a greater responsibility to look out for ICO red flags.

What does this mean for the current wave of ICO activity?

In the short term, probably a migration of companies planning ICOs to countries with favourable regulatory regimes. We hear blockchain/crypto startups mention Singapore often for this reason.
In the medium term, if ICOs are going to crack the mainstream, they will need to square up to regulatory compliance in the United States as this is by far the world’s biggest capital market (and we can’t see crypto or blockchain changing that). At the same time, we expect that the SEC will need to move to accommodate the industry to some degree, as the American startup ecosystem, not to mention financial markets, will not wish to miss this movement in its entirety.

As far as we are aware, New Zealand’s equivalent of the SEC, the Financial Market’s Authority (FMA), has not given any detailed consideration to the regulation of crypto currencies/ICO’s in this country. Since New Zealand’s securities laws have their original genesis in the United States Securities Exchange Act 1933, and the regulators at the FMA have a pretty similar consumer protection focus to the SEC, we’d expect them to reach similar conclusions to those in the SEC’s The Dao report. Meaning that New Zealand’s fledgling blockchain and crypto sector will need to work with regulators and officials to achieve a workable regulatory position, if it is to grow into a major industry in this country.

LION startup accelerator open for entries

I recently caught up with Karen Lawson, the CEO of Slingshot – an Australian accelerator program that connects large corporates with startups via tailored accelerator programmes.

Slingshot are running the recently announced LION Unleased 12 week accelerator, and are seeking applications from Australian and New Zealand tech startups and scale-ups. There’s up to $150,000 of funding up for grabs for each successful entrant, as well as the potential for additional investment from LION and the Slingshot Venture Fund. Plus a highly structured lean orientated training and mentorship programme provided by Slingshot.

The programme is aimed at tech startups, rather than food and beverage product plays. Karen said that they are particularly interested in SaaS companies that have the potential to disrupt parts of the food and beverages industry including the supply and distribution chain.

To find out more, visit: http://unleashed.lionco.com/.

employee share schemes – new IRD reporting requirements

As part of this year’s changes to the tax treatment of employee share purchase schemes, the IRD has introduced new obligations on employers to report benefits received by employees under share schemes.

Employers are now required (since 1 April 2017) to report when an employee acquires shares under a share purchase agreement, as part of their employer monthly schedule (EMS) filing. To do this, employers must identify the benefit the employee receives when acquiring the shares (which is the basis for their tax liability), which is determined by calculating the difference between:

for shares, the price paid for the shares vs the market value of those shares at that time; or
for options, the exercise price of the option vs the market value of the underlying shares at the time the option is exercised.

These reporting obligations will also apply to conditional share purchase schemes that will be taxed on a similar basis to options once the IRD’s Bill on the taxation of employee share schemes comes into force.

You can find a description of the new reporting scheme on the IRD’s website. If you have an employee share purchase or share option scheme in place, we suggest you check out the information provided by the IRD then schedule a chat with your regular tax adviser to work out the most efficient way to comply with these new obligations.

2017 capital raising numbers so far

After our bumper year of capital raising in 2016, we’ve been keeping an eye on the level of capital raising activity amongst our clients as 2017 progresses.

So far this year we’ve completed 15 transactions with another 27 on the books, raising (if all complete) about NZ$180m. This compares 87 completed transactions in 2016 with a total raised of $220m.

Trends so far, amongst our clients at least, have been a greater number of investments from corporate venture funds (e.g. Spark Ventures) and local and offshore VC’s.

As far as the second half of the year goes, capital raising activity usual gets serious towards the end of Q3 through to the end of the year, so current expectations are we will close a similar number of deals to last year with most likely a higher total amount of capital raised.

constitution document generator

We are stoked to have completed the automation of our template tech company constitution, using the SaaS platform of Aussie doc automation company ZumeForms.

Chris Wilson held the Kindrik Partners record for completing a constitution from our online template of 10.5 minutes. Using our constitution generator for the first time, Chris was able to produce a completed constitution in 77 seconds using his iPhone one-handed in a restaurant. That’s quite an improvement.

The document generator gives the user the choice of downloading either a PDF or a word document to allow further customisation of the document. Users can return to and reuse completed forms, selecting different options if they wish.

[Edit November 2019: We’re giving our document generators a new lick of paint. They’ll be available again soon. In the meantime, you might also like our free constitution template as a .docx file.]

taxation of employee share schemes for startups

The IRD has released its much-anticipated issues paper on taxation of employee share schemes for startups.

This is the third part of a substantial review undertaken by the IRD of the rules governing the taxation of employee share schemes. The first two parts involved:

introduction of reporting rules, requiring employers to advise the IRD when shares and options are issued to employees, and when options are exercised; and
a Bill, currently before Parliament, that treats conditional employee share purchase schemes as if they were options for tax purposes. This means that employees will pay tax on the gains made through share purchase schemes in the same way that gains are taxed with option schemes.

The IRD’s paper addresses a problem that employees of startups encounter when they come to exercise their share options. This problem will also arise with share purchase schemes once the new Bill comes into force.

Currently, an employee becomes liable to pay tax at the time a share option is exercised, with tax being payable on the amount of any gain made.

With listed companies, it is easy for the employee to work out the amount of any gain made because the shares are publicly traded, and it is also easy for the employee to sell the shares in order to crystallise their gain and to pay the tax that becomes due.

However, with startups, it is usually much harder for employees exercising options to determine the value of the shares purchased and thus the amount of any gain made. It is also difficult, if not impossible, to sell those shares in order to crystallise the gain and pay the tax that may be due. This leaves employees in an invidious position – paying tax on a notional gain, that may or not materialise many months or years down the track if/when the company is ultimately sold or listed.

To help alleviate these problems, the IRD is proposing that startups be given the option, when an employee scheme is set up, to elect to defer the tax date to the earlier of:

a liquidity event occurring (e.g. the sale of the company, sale of the company’s business, or an IPO);
7 years from the date of exercise of the option (or in the case of a share purchase scheme, the shares ceasing to be held subject to conditions); or
the employee ceasing to be a New Zealand resident.

We think this deferral option will provide a material benefit to employees of New Zealand startups.

The event that most commonly triggers a decision to exercise options is an employee leaving the startup. Usually, the employee will have a short period in which they can exercise their options (commonly 3 months) otherwise the options are extinguished. However, the requirement to pay tax on the notional gain made at that point is often very unattractive to the employee, as there is no guarantee that the gain will actually materialise or if it does, it could be many years down the track.

It is not unheard of for the amount of tax payable to be equal to or greater than the exercise price of the options. While an employee may be willing to take a punt on buying the shares and sitting on them in the hope that a liquidity event will arise, this is a much riskier decision when that tax burden is taken into account. This deters employees from exercising their options in some cases, particularly more junior, less well paid, employees.

The IRD’s proposal will make it more attractive for all employees to exercise their options, not just senior, well off, employees. We think this will particularly benefit younger employees and those with lower net wealth behind them, as people in this category find it harder to get the money together to pay tax lump sums under the current regime.

*Andrew was engaged by the IRD to undertake a review of an earlier draft of the IRD’s paper to provide input from a startup sector perspective.

reflections on 2016 from the commercial team

Each year, while our corporate team releases its stats on capital raising deals and sums involved, the wallflowers of Kindrik Partners (aka the commercial team) simply do what they always have done – getting on with the job.

But sometimes, enough is enough – because we don’t think the commercial team’s 2016 was too shabby either.

In 2016, the Kindrik Partners commercial team helped our clients finalise around 400 commercial transactions in more than 24 countries around the globe. Here’s a few titbits as they reflect on the year.

we put in place close to 50 in-market distribution arrangements (including resale, agency, and OEM) for clients in 6 different continents – we haven’t swung a deal in Antarctica yet but still dream of a grand slam (and we confirm that we are available to act for either the Emperor Penguins or Bluebird as required)
the growth of the cloud and as a service market continues – while we’ve worked on more traditional licenses than SaaS offerings in 2016 (with a ratio of 3:2), we think this gap will close in 2017, with SaaS possibly outstripping more traditional offerings
we’ve advised on over 80 major project deals that have resulted in our clients introducing their offerings to a range of institutional and government customers internationally.

We think these figures reflect the success that the NZ tech sector is having, particularly in the export of their products and services offshore. These businesses understand the tensions and issues they face breaking into new markets and are looking to partner with local businesses who are better equipped to help them succeed in that market.

Not only that – securing a contract with a large customer used to be a major hurdle for any NZ tech company. The number of deals we’ve worked on shows these customers understand the quality and maturity of NZ tech businesses and want to do business with them. It’s great to see.

This is the first year we’ve looked at our commercial transaction stats. We’re looking forward to next year when we can provide a better comparison of what is happening in the market based on the trends we’re seeing.

tax overhaul for employee share purchase schemes

Last week saw the introduction to Parliament of an IRD Bill that will overhaul the tax treatment of employee share purchase schemes.

The aim of the IRD’s new rules is to put employee share purchase schemes on a similar tax footing to share option schemes. Put simply, if a share purchase scheme has similar economic features to an option scheme, it will be taxed in more or less the same manner as an option scheme.

what does this mean in practice?

For share purchase schemes caught by the new rules, employees will be required to pay tax on gains made between the date of purchase and the share scheme taxing date. This is the date at which the shares cease to be subject to contingencies such as vesting or put/call arrangements (excluding vesting/put/call arrangements at fair market value).

The IRD provides a bunch of examples of how this will work in practice at http://taxpolicy.ird.govt.nz/publications/2017-commentary-areiirm-bill/employee-share-schemes.

how will this affect Kiwi tech companies?

We think the Bill will increase the popularity of share option schemes and reduce the use of share purchase schemes.

Share option schemes are simple to implement and carry no risk of capital loss for employees. They also the norm internationally, whereas share purchase schemes require some explanation when dealing with international VC’s and acquirers.

For companies that wish to offer the opportunity for tax free capital gains to employees, purchase arrangements will need to ensure that employees bear the full risk of loss of value in the shares up to the point that the shares cease to be subject to any vesting/put call arrangement and beyond. This is likely to be most suitable for senior hires, or where the shares have a very low initial market value so the amount of capital at risk is low.

Because the new rules apply to any purchase of shares by an employee, not just to formal schemes, tech companies (and companies generally) are going to have to take considerable care when documenting share purchase arrangements when bringing new partners or senior-hires into the business.

This will be particularly so for services companies, who in the past haven’t had to worry about the tax treatment of share buy back arrangements that apply when/if that partner or senior hire leaves the business. Unfortunately, these new tax rules may force companies into market value buy out arrangements when buy-out at entry price or on some other formula would make more commercial sense.

The IRD’s initial consultation paper on these rules suggested that founder vesting arrangements would result in the taxation of gains made by founders up to the point of vesting. However, the IRD appears to have has listened to our submissions on this issue and founder vesting will now fall outside of the definition of employee share schemes whether or not the founders are employed by the company.

what happens to existing share purchase schemes?

The Bill does not apply to shares issued to employees prior to 12 May 2016. Also exempt from the new rules are shares issued after that date but not later than 6 months after the new Bill comes into force, as long as the share scheme taxing date is no later than 1 April 2022 (as long as the shares weren’t issued with the purpose of avoiding the new rules – although it is hard to know how this would be proved or disproved).

2016 capital raising numbers

Our 2016 capital raising numbers are in and we’re pleased to report a big increase in activity over 2015. In total, we helped our clients complete 83 capital raising transactions, up from 43 in 2015.

The total amount of capital being raised in these 83 transactions was just over $220m. This compares to $180m in 2015.

NZ companies accounted for $150m of this capital raising, with Southeast Asian companies making up the balance of $70m.

Our average raise for Kiwi companies in 2016 was $2,450,000, with a median raise size of $950,000, compared with $1,950,000 and $500,000 in 2015.

For Southeast Asian companies the average raise was $3,950,000 with a median of $2,050,000 compared with $9,200,000 and $2,521,727 in 2015.

Indications are that 2017 will be at least as busy for our capital raising lawyers. It’s hard to pick trends this early in the year, but we are expecting an increase in the number of deals involving offshore VC’s, with larger amounts of capital being raised. On the seed investment front, we are picking a similar level of activity and deal size to 2015. As was the case in 2016, we think that young Kiwi tech companies looking to raise capital via an IPO will be listing on the ASX rather than the NZX, since our market lacks the appetite for these riskier investment propositions.

kindrik partners legal templates now available free of charge to NZ lawyers

Three years ago, we released a suite of 20 free legal templates for download by NZ tech companies. This was a first for a NZ law firm.

Since the launch of this free service we have been overwhelmed by the positive response from the tech and wider business community. We’ve had more than 125,000 downloads so far, and our library has grown to nearly 50 free NZ templates plus 12 free templates for Southeast Asian tech companies.

Many of our documents are now in wide circulation and some are becoming de-facto industry standards, including our convertible note agreement, shareholders’ agreement, services agreement, and confidentiality agreement. Our clients tell us they are delighted when a counterparty presents them with what is obviously a Kindrik Partners template for review.

Open sourcing creates efficiencies and helps with the development of best practice. For this reason, we’ve decided to take the “next step” by fully open sourcing our templates – NZ lawyers will no longer need to pay to use our templates and instead may use them free of charge.

Lawyers can now access our and use our templates from our regular templates page. We update the templates regularly and welcome feedback.

kindrik partners advises kfit on M&A deals

We’re pleased to have advised KFit, one of Southeast Asia’s exciting tech startups on its acquisition of Groupon’s Malaysian business. This follows the acquisition of the Indonesian part of the Groupon group which was announced in June. KFit CEO Joel Neoh previously headed up Groupon Asia-Pacific before founding the Sequoia Capital backed startup in 2015. The acquisitions are part of KFit’s strategy to become a leading online-to-offline (O2O) player in Southeast Asia. Both Groupon businesses will be incorporated into Fave – KFit’s deals app.

Kindrik Partners is already well regarded in Southeast Asia for its VC financing practice – we are advising on around 15-20 series A and B deals per year. Helping our tech clients grow through M&A transactions is also in our sweet spot. Particularly working across the different jurisdictions in the region.

The Southeast Asia tech ecosystem may face a shake-out in 2017 following a lot of VC investment in the last 5 years. We therefore expect to see more M&A deals. This may include more exits, business consolidations and buy-and-build transactions. With our Singapore branch launching in early 2017, we look forward to supporting more Southeast Asian tech businesses on these kind of deals.

The deal was led by Lee Bagshaw and Chris Wilson.

2016 capital raising numbers so far

We’ve been crunching the numbers on our capital raising activity this year.

So far, we’ve completed 50 transactions with another 25 in train, the majority of which will be done and dusted by Christmas.

The total amount of capital being raised in these 75 transactions is just over $220m, with a cumulative pre-money valuation well north of $700m (this number counts only the priced rounds, and leaves out convertible note raises).

NZ companies account for $150m of this capital raising with a pre-money value of over $450m, Southeast Asian companies another $70m with a pre-money value of more than $250m.

The average and median raise size and pre-money values are interesting, particularly when comparing NZ and Southeast Asia.

Region

Average raise

Median raise

Average pre-money

Median pre-money

$2,850,000

$900,000

$10,550,000

$3,750,000

Southeast Asia

$4,150,000

$2,100,000

$15,800,000

$9,250,000

Overall, we’ve found raises in SE Asia to be a bit bigger at a higher pre-money valuation, but the difference is not logarithmic. The NZ average was boosted by a few large financing deals, including two IPOs. The NZ median raise number is perhaps more indicative of the current state of the capital raising market in which the majority of deals are seed investments (albeit often closed on series A terms).

The biggest difference we have found in SE Asia is the depth of money available for subsequent rounds – once founders have raised an initial seed round from professional investors they can move on to plan Series A and later rounds with some confidence because there are many VC’s and family offices active in the market. There is nothing like this level of Series A and later round financing available in NZ, and this is one of the main holes in our ecosystem.

Having said that, it is not all doom and gloom for Kiwi tech companies seeking Series A funding. GD1’s new fund and Movac’s recently closed fund 4 are both targeting this segment, and hopefully more players will emerge in 2017.

kiwibank fintech accelerator partners with kindrik partners

Kindrik Partners is delighted to be appointed as the legal partner to the newly launched Kiwibank FinTech Accelerator, powered by Lightning Lab and run through Creative HQ.

“Lightning Lab wanted to ensure that participants in the newly launched Kiwibank FinTech Accelerator are able to access specialist lawyers who can provide mentorship and advice to the participants as they develop through the programme. Kindrik Partners is a massive supporter of the startup and tech community and it’s great to have them on board as the Accelerator’s partner,” said Brett Holland, Lightning Lab’s Head of Acceleration.

Lee Bagshaw, one of the Kindrik Partners partners leading the initiative, said:

“Given our deep involvement in the tech sector, we’re excited to help develop New Zealand’s first FinTech accelerator. We already advise a number of successful venture-backed FinTech companies both here in NZ and in SouthEast Asia, and will look to share our experience with the teams during the programme. There’s a lot of competition internationally, but we think the New Zealand tech ecosystem has the skills and entrepreneurs to develop New Zealand into a successful FinTech hub.”

The accelerator programme starts in February next year.

capital raising and NZ securities law – an interactive tool

Check out our new interactive tool to help companies better understand the Financial Markets Conduct Act 2013 (FMCA), and demystify one of the more technical aspects of cap raising in New Zealand.

Before a company can issue (or offer to issue) shares, options or convertible notes to anyone based in New Zealand, it must either:

follow the full disclosure requirements under the FMCA (which can be a long and expensive process), or
ensure that one or more of the exclusions in Schedule 1 of the FMCA apply.

The Schedule 1 exclusions are tricky to follow, and we spend a lot of time helping companies navigate them.

But, we’re always looking for ways to make our clients’ lives a little easier.

We’ve used Twine – an amazing open source tool originally designed for creating interactive fiction – to create the tool, which guides you through the process of identifying whether one of the more common Schedule 1 exclusions applies to your investor(s).

We hope you find the tool helpful. If you have problems accessing or using it (or if you’d just like to give us some feedback on it), contact us at support@kindrik.co.nz

morgo 2016

I was lucky enough to attend the Morgo conference in Queenstown last week.

The speakers were great – mostly Kiwi entrepreneurs talking about the tribulations and trials of building high growth companies with international impact. I particularly enjoyed talks by Timely founder and CEO Ryan Baker, and Loomio co-founder and chair Vivien Maidaborn. Both companies have some unconventional features (Timely staff all work from home and Loomio is a co-operative making decisions by staff consensus) but are nevertheless making their mark in NZ and overseas,

Just as interesting this year was the number of tech investors in room. These included most of the Movac partners, Lance Wiggs from Punakaiki and Robbie Paul from Tuhua Ventures who between them have raised close on $100m that will be invested in NZ tech and growth companies over the next year or so. Add GD1’s Fund 2 to the mix (which made its first investment recently, leading a Series A round in Spotlight Reporting), and this is starting to look like a meaningful amount of new capital flowing into the tech sector in the near term.

I left the conference excited about the new money entering the system. NZ’s tech investment scene has been buoyant so far this year, and new funds can only add to the momentum created by formal and informal angel groups, high-net-worths, corporate investors and crowd funding platforms who have been getting deals away at (in our experience at least) a record pace. This is before considering outlier deals like ASX IPO’s and investments by international VC’s.

While the number of investment deals underway, and the amounts being raised, are greater than I can recall in any prior year, there are still some gaps in the funding landscape. The most obvious issue is that there are no NZ venture capital firms backing startups wanting to pursue aggressive customer acquisition strategies ahead of the revenue curve. Entrepreneurs with these sort of strategies have to get creative with their fund raising or adopt a different growth strategy. The recent 9 Spokes ASX IPO is a great example of the former, a story which was recounted at Morgo by 9 Spokes COO Brendan Roberts.

Of course, finding funding for startups with aggressive growth strategies is not an issue just in New Zealand. Silicon Valley VC’s are reportedly much less willing to invest in these types of company. However, in some ways, this is a plus for NZ startups since it means less competition for customers from cash rich US startups willing to buy market share.

Overall, Morgo confirmed my feeling that the NZ tech scene is in great shape, and is going to continue its strong growth in coming years.

foundercon is go!

We’ve enjoyed the great discussion over the last few days about the proposals arising from the Simon Moutter led tour of the Israeli startup ecosystem.

One of the issues that I’ve been discussing offline with tech company founders Rod Drury and Marie-Claire Andrews is that there is no organisation or forum to represent their views in these sorts of discussions.

After kicking the issue around, Rod suggested a great first step would be to hold a conference for NZ tech company founders – like the Angel Association conference, but for founders. Rod’s a man of action, and wearing his Xero hat, he offered to host the conference if Marie-Claire and I organised it.

We didn’t need to be asked twice. We are aiming for an event late in November, in Wellington.

It’s still early days, but we have a working title – FounderCon. Watch this space for the other things like format, agenda and speakers etc.. One thing is certain though – it will be an opportunity for NZ founders to network the heck out of each other, a luxury they generally don’t have time for as they travel the world searching for new customers, channels and capital.

If you’d like to get involved, or have some ideas for the event, drop us or M-C marie-claire@showgizmo.com a line. Otherwise, expect some more concrete news in a couple weeks’ time.

angel at my table

Every year the New Zealand Software Association holds its annual Angel At My Table event – one of the most popular nights on the NZSA calendar. The event sees four early-stage entrepreneurs pitch their business ideas to a panel of three angel investors with total cash prizes of $5,000 being awarded to the winners. I was delighted to be the chief organiser and MC for this year’s event.

This year we attracted a record number of entries, with a particularly strong number of them coming from female-founded and led businesses. In an effort to prevent any bias during the selection process, I decided not to supply the other members of the selection panel with any founder/CEO details, meaning they would only be considered on the merits of their business proposition. This resulted in all four finalists chosen being female entrepreneurs – Amanda Judd (Kai), Lauren McKay (Insiteful), Lisarna Wynyard (MicroManager) and Marta Sudomirska (Tap).

Judge, Rudi Bublitz, commented:

Could this mean that at this moment in time there are simply no male founders across the whole length and breadth of Aotearoa that are on a par with these women? Or did those that are, just not bother to apply?

Not the case! In fact entries were evenly split between male and female-led companies – the women were just better this time around.

After our initial selection process was complete, we received a late entry from Melanie Langlotz (Geo AR Games), who has developed a geospatial augmented reality app platform designed to get kids off the couch and into parks, and had been run off her feet with press queries following the Pokemon Go launch. With the fear of winter lurgies taking down one of our finalists, Mel kindly agreed to be a backup presenter.

With a full-to-overflowing room at Glengarry’s Victoria Park, the evening kicked off with a short wine tasting, before our 4 finalists gave their pitches and took on our judges aka dragons. Each of our 3 judges had a “notional” investment fund of $150k, and after some challenging questioning all 4 finalists secured “investment” (ranging from $10k to $170k). We’d also managed to squeeze in a 90 second pitch from Geo AR, and our judges liked the pitch so much they “invested” $130k in the business (despite Geo AR not officially being in the competition).

All of our presenters received $100 for every $10k of notional investment, plus there was a $500 audience prize, so all 5 walked away with real cash. All those who pitched have said they had an awesome night, a lot of fun, and made some great connections.

These events certainly highlight the incredible, and diverse, talent within New Zealand’s startup eco-system. We’ll definitely be following the progress of these startups with a keen eye and wish them all the best.

simon moutter’s venture capital fund – one VC to rule them all?

It’s great to see Simon Moutter (Spark NZ CEO) proposing a new kiwi VC fund – backed by large NZ corporates, investors and iwi – on his return from a big business fact finding tour of the Israeli tech ecosystem.

Moutter’s proposal certainly zeros in (or perhaps we should say Xeros in) on an obvious hole in NZ’s tech ecosystem. New Zealand has no active Silicon Valley style venture capital funds, so startups wanting to raise serious Series A money (think USD2m-7.5m) have to either change their growth model or look off-shore for money.

Having said that, we take issue with the implicit premise for the trip to Israel – that NZ’s tech ecosystem is under-performing and needs NZ’s corporate champions to fix it. From what we can see (working with many tech companies and entreprenuers), the ecosystem has never been healthier, from the number of boot strapping startups right through to the number of NZ technology companies listed on the NZX and ASX.

As far as investment is concerned, NZ tech companies are raising money from NZ and international investors in ever increasing volumes. This year, our firm alone has been involved in more than 50 tech company capital raising transactions, including some large investments led by NZ and international corporates. The only negative that we can see is that there has been less series A style deals (and these deals have all been led by offshore VCs).

Although we would love to see more VCs active in NZ, we’re uneasy about Moutter’s proposal to create a corporate investor co-operative for a couple of reasons:

NZ has already tried the One Investor to Lead Them All approach in the form of NZVIF, and that hasn’t worked very well. In particular, its standardisation of investment approach and terms has been bad for NZ tech companies; and
there are currently a bunch of NZ corporates, including Spark, who are investing directly into NZ tech companies. This has been great for the sector, and we’d hate to lose that investment diversity in favour of a centralised investment desk.

What we would love to see happen is for Spark to set up its own independent VC fund, at arms length from Spark (we think their existing venture team is good to work with, but they are an internal team that is rightly focussed on Spark’s commercial priorities). Moutter could then encourage his peers to do the same and, if they take up the challenge, a competitive industry would be born. The great benefit of this is that each VC would develop its own investment expertise and terms, and this sort of diversity is critical to creating a vibrant market.

Even better for Spark, this wouldn’t require it to commit a lot of capital to get the fund started. Our client Rakuten Ventures, a venture capital fund set up by Japanese e-commerce giant Rakuten, is a great example of how this could be done. Rakuten started off life as a USD10million fund, but has grown substantially through its successful investment activity – Rakuten recently completed a USD35million Series B investment in Singapore e-commerce company Carousell, one of Southeast Asia’s largest VC transactions this year.

If Moutter would like more local input on his ideas, a great place to start would be joining the NZ Tech Startups Eco-System Facebook group. The group has over 5,000 members, and the discussions on the health of NZ’s tech sector and capital raising scene are always entertaining and robust. We’d love to see him there!

bizdojo partnership

As a tech focused law firm, we’re always looking for ways to engage with NZ’s awesome startup and entrepreneur community. As a result, we partnered with BizDojo Wellington earlier this month.

BizDojo is a co-working space and collaboration network which supports a diverse community of startups, freelancers and small business. It has bases in Wellington, Auckland and now Christchurch. Each week we provide a lawyer hot desk in the Wellington BizDojo to answer residents’ ad-hoc legal questions or to just chat about strategy. We will also be running regular round-table discussions and presentations for residents on items such as legal basics, capital raising and commercial contracts.

Having recently advised long time BizDojo resident 90 Seconds on their $11 million investment by global venture capital firm Sequoia Capital and NZ based SKY Ventures, we’re excited to share our experiences with other NZ companies to help them grow here and into international markets. Being present in the ‘Dojo will also help us receive feedback from the ecosystem which in turn assists us when considering what additional content and templates to prepare.

kiwi tech companies listing on ASX – kindrik partners advises volpara

We are pleased to have advised Wellington based Volpara on the NZ law aspects of its IPO on ASX. Volpara, which provides digital solutions to improve clinical decision making for detection of breast cancer, raised $10million.

Whilst equity markets continue to be volatile, some ASX listed small-cap tech companies have been outperforming other sectors. It would be great to support the NZX, but the ASX currently has a much deeper pool of wholesale investors willing to invest in software and tech businesses, and specifically in Volpara’s case, digital health.

In January of this year, it was reported that technology businesses made up 20% of new listings on the ASX during 2015, up from 16% the year before, raising over AUS$1.5 billion. Aside from New Zealand, the market has attracted technology companies from other jurisdictions which do not have a track record of listing tech startups, for example Singapore.

If you are interested in discussing the possibility of an ASX listing for your tech company, send Lee Bagshaw an email.

kiwi tech companies to head to singapore?

We are pleased to have advised New Zealand’s cloud video production company, 90 Seconds, on their $11 million series A round led by global venture capital firm, Sequoia Capital. The transaction involved 90 Seconds redomiciling its business as a Singapore company to receive the investment.

Advising on the transaction, Lee Bagshaw explains, “This comes as a result of an increasing amount of venture capital money flowing into the Southeast Asian technology space. Subsequently, Singapore is becoming one of the world’s fastest growing tech hubs and now represents a potential alternative to the typical US investment route for Kiwi startups.”

Whilst there are a lot of investable startups already in the region, the level of institutional “series A and B” money now coming into Singapore has been transformative. This kind of follow-on investment has typically been an issue for startups in New Zealand.

90 Seconds have successfully demonstrated that there is no reason why well led Kiwi companies cannot attract investment from Singapore based investors. Key to this is companies demonstrating that they are focussed on the region and have a strategy on how to tackle the diverse markets. Companies with products in consumer spaces such as eCommerce, marketplaces, fintech, such as payments, and logistics have been in demand. However B-2-B service companies, where New Zealand has a lot of talent, have also raised good follow-on money.

Successful companies in Southeast Asia will in likelihood become attractive to buyers. The region is becoming increasingly lucrative as a fast growing digital media and mobile centric market. Companies that can overcome language, culture and local laws and scale quickly will be hard to catch, and therefore obvious M&A targets for international companies looking to expand into the region by acquisition.

Advising on 11 investments in SE Asian tech companies in 2015, Kindrik Partners’ day job is helping NZ tech companies, like 90 Seconds, grow internationally. If you are interested in exploring Singapore or Southeast Asia as a market, send an email to Lee Bagshaw.

victoria stewart appointed as CEO

We are pleased to announce the appointment of Victoria Stewart as chief executive officer of the firm, effective from 1 April 2016. Victoria also re-joins the firm as a partner from that date, after working part-time in 2016.

Victoria is a senior commercial lawyer who is widely respected by both customers and suppliers in the tech community. Victoria founded Kindrik Partners in 2006, and she has been an integral part of the business since that time.

“Kindrik Partners is enjoying rapid growth in its New Zealand and international client base. I am excited to lead the firm’s talented team as we invest to support and accelerate growth” said Victoria.

2015 capital raising numbers

At the start of each year, we like to spend some time analysing data on the transactions which we worked on in the previous year.

The numbers are now in and we’re pleased to report that 2015 was an incredible year for our corporate lawyers advising on capital raising deals. Here are some of the highlights:

we helped close 43 capital raising transactions. Of those, 32 were for NZ companies
our expertise now extends to financing rounds outside of NZ, and in particular in SE Asia – 11 were investments in Singapore based companies on mostly US style investment terms
a total of NZD180 million was raised in the transactions we advised on
in most cases we acted for the companies raising capital, but in a couple of notable cases, we advised international venture capital firms on significant follow-on rounds

The number of NZ capital raising transactions that the firm is handling continues to grow year-on-year. Companies, whom we previously advised on small seed rounds, are now looking for significant follow-on capital in 2016. This funding will increasingly come from overseas investors. For some this will be via ASX listings, others may end up flipping to the US or other emerging tech hubs, such as Singapore – where there is more institutional and VC funding available.

Our international work has also given us a different perspective on our NZ capital raising deals. We have tried to bring some of these investment models and other insights to the local market where we can. For example, last year we introduced the KiwiKISS and KiwiSAFE. As ever, we welcome discussion with participants in the tech ecosystem on ways to improve capital raising for both companies and investors.

Finally we are pleased to report we advised on 18 M&A deals during 2015, a significant increase on 2014. This included helping NZ and Singapore tech companies to make bolt on acquisitions, as well as advising on exit transactions. We hope to be able to report on a greater number of tech M&A transactions this time next year, with some larger valuations expected.

‘clbuttic’ find/replace mistakes

In the midst of crawling through 50+ page contracts we do get odd moments of humour. Yesterday’s one was courtesy of Word’s find/replace feature.

Find/replace is a pretty useful tool for lawyers – e.g. if you’re doing a software licence agreement for Company X that is pretty similar to one you previously did for Company Y, you can just find/replace Company Y with Company X and hey presto – new contract!

However, if used incorrectly, you can get some pretty humorous results.

Yesterday’s example resulted from a contract that was originally prepared for a bank (referred to as the Bank throughout the agreement, which was then adapted use for an online insurance business (let’s call them Thingamajig). A clever person decided to find/replace Bank with Thingamajig. This resulted in gems such as:

a Business Day excludes days when Thingamajigs are not open for business in the relevant country (should be days when banks aren’t open for business)
Thingamajigruptcy (bankruptcy)
the Thingamajiging Act (the Banking Act) and the Investment Thingamajig Special Administration Regulations (the Investment Bank Special Administration Regulations)
carrying on Thingamajiging services
carrying on investment Thingamajiging
a double whammy – the commencement of the Thingamajig insolvency procedure under the Thingamajiging Act.

Clbuttic mistake! (http://www.telegraph.co.uk/news/newstopics/howaboutthat/2667634/The-Clbuttic-Mistake-When-obscenity-filters-go-wrong.html for those who are unfamiliar).

capital raising in the US: advice from paul cameron

The first time I heard Paul Cameron speak was at Lightning Lab Wellington for a fireside chat about his journey with Booktrack. We had many impressive speakers and experts talk to us at the Lab, but Paul’s talk was easily one of the best. To find out more about Booktrack’s capital raising experiences in the US, I drove out to their Auckland office in ‘Techapuna’ where most of the company’s R&D is carried out.

Booktrack was founded by brothers Paul and Mark Cameron, with a vision to amplify your story. Their technology adds music and ambient audio to e-books, synchronising with the story line and an individual’s reading pace.

Launched commercially in 2011, the company has completed two financing rounds so far and is backed by a group of notable investors such as Peter Thiel, Sir Stephen Tindall, and Derek Handley. Paul is a great supporter of the New Zealand tech community, and launched straight into sharing some advice he wishes that he had been given.

the US is a competitive place

Firstly, raising money in the US is difficult. As Paul says:

Every person in the world is trying to raise in San Francisco – why do you think you have a better chance? The quality of deal flow in Silicon Valley is super high, and so is the talent. If you look at Asia, its deal flow is nothing like Silicon Valley, and good places to raise money are Singapore and Japan.

Silicon Valley is able to source plenty of local deals. They’re American, sometimes repeat entrepreneurs, they know the landscape and it almost comes as second nature. Outsiders are at a great disadvantage, so think carefully about whether the US is the right route for you. If not, why not try somewhere else?

If you are thinking about raising international money outside of the US, Paul recommends that you find a partner that you trust in that local market. In Booktrack’s case, Paul knew people in Singapore and Hong Kong and has taken on some decent investment from there.

the founder of Russia’s Facebook

Paul makes the analogy that if the founder of Russia’s Facebook (who happens to be called Pavel) came to New Zealand to raise capital, no one would give him money. To the local investor community, he is an outsider who looks and sounds funny, regardless of how successful his business may have been in Russia. You, a Kiwi founder asking for money in the States, may find yourself in a similar position to Pavel – except unlike Pavel, your company isn’t quite a Facebook (yet).

Furthermore, as an outsider in the US, one of the first questions you should expect is why aren’t you raising locally in New Zealand? You’ll need a darn good reason for them (acceptable: our market is in the US).

be local

One way to minimise the Russian Facebook effect is to become a local. Think, act and consume like a local American. Go to the same events, become familiar with others in the market, and follow the same news (e.g. TechCrunch, Wall Street Journal).

Look at your browser: are you looking at mostly .co.nz sites? Immersing yourself in popular culture is helpful for localising yourself, and Paul goes as far as seeing what the Kardashians’ are up to.

be there all the time

Creating a local presence, with an office and people, shows a real commitment to the territory. This is important in creating trust amongst your customers and investors, and signals that you’re intending to be around for a while:

If your key market is not in New Zealand, then why are you still here? Go to wherever your market is, and set up shop. There are local investors who will give you money to take the step to elsewhere (e.g. Sparkbox Ventures).

Booktrack started their US operations by setting up in New York, as that’s where they had a community of friends and support. Now they also have a San Francisco office, where they are mainly focused, and Paul’s commitment to the territory has resulted in more friends in the US than in New Zealand.

reach out to the Kiwi Mafia

The Kiwi mafia is your unfair advantage, and the most important resource you can tap into. If you have cultivated relationships well, these are the people who will help you unconditionally:

Invite them into your circle of friends as well as your network – hang out with them in the weekends, take them out to events, and favours will be returned.

You can’t expect to just turn up and raise investment without that strong network around you.

your advocates

It is harder to raise money without an advocate. These are people who will vouch for you, and say that you’re solid. Get some advocates interested in your business, maybe offer them some equity, and they can open up their networks to you.

Your advocate could be a lead investor. Paul has always had leads in his rounds so far – locally it was Sparkbox, and then internationally there has been Peter Thiel, Derek Handley and a Hong Kong investment banker. If someone puts money in early, then the others will follow.

pitch perfect

It is not luck that has brought Paul an amazing group of local and international investors. He is a first rate pitcher. How does Paul do it? It’s simply a numbers game:

The more you do, the more it helps. Pitch a lot before you need it (you can do it in New Zealand to various groups).

what kind of investment are you after?

There are four main types of investors: angel, high net worth, VC and private equity. The exception to Paul’s belief that raising in the US is difficult, is getting money from local angels. If you get an intro and have a low valuation, you could probably walk away at a seed round with $25k cheques.

VCs will want to put in at least 5 to 10 million. To ask for VC money, you’ve got to be really sure of what you are doing, and what you intend to do with the money:

They are smart people, and not interested in bullshit, so make sure you’re super slick and ready for that kind of investment.

If investors are not interested, push them to tell you no. If you’re not getting anywhere after 10 meetings, then you probably won’t get anywhere after that either. It’s good to know earlier rather than later, and you can always ask them if there’s anyone else they think might be interested.

money from around the world

Booktrack’s capital raising experience is unusual in that they have taken money from New Zealand, Asia, and both sides of the US. They always get new investment terms for each new round – incoming investors may look at terms from previous rounds, but are generally not concerned about it. In Paul’s experience, they have only gotten pushback on proposed terms from New Zealand investors, and never overseas investors.

The board is currently filled by two investors (usually with value to add to the business), an independent, and two founders. Paul finds that investors might want to check up on how the company is doing at the earlier stages (easily done by giving them some board observer rights), but later on grow more confident in the team and become more hands off. Now Booktrack’s communications are sent to investors on a quarterly basis.

no substitute for preparation

Paul, like all others interviewed in our US capital raising series so far, sees many New Zealand companies arriving in the US woefully unprepared.

No one ever taught me how to raise money. I bumbled along and figured it out, but you don’t know what you don’t know, and I learnt from my mistakes. Now, with the proliferation of information available online, there is no excuse not to be prepared and have an understanding of the landscape.

Prepare yourself by reading, finding some good advisors, and feeding that value back into the company.

john holt on kiwi tech companies who land in the states

In our third blog on capital raising in the USA, I chat with John Holt, co-founder and Chairman of the Kiwi Landing Pad. A serial entrepreneur in his own right, John co-founded Sonar6 in 2006, which was later acquired by a NASDAQ-listed US company in 2013. Although Sonar6 only ever took money from NZ investors, they had reached the term sheet stage with some US VCs but did not go ahead with it due to the “predatory terms” they were offered.

Having gone through the full startup to exit experience, John’s LinkedIn occupation is currently listed as “Recovering Entrepreneur” (and Company Director). John loves helping Kiwi companies reach their global aspirations, and sits on the board of high-growth NZ tech companies such as Modlar, 90 Seconds TV, Cloud Cannon, and Putti Apps (formerly known as App La Carte and recently took on strategic investment from Spark Ventures).

John advises many Kiwi tech companies with a focus on the USA. He acknowledges that it’s difficult to playbook the US capital raising process, but preparation can go a long way.

are you ready for the States?

In John’s experience, the majority of New Zealand startups who jump on a plane to Silicon Valley arrive under-prepared, expecting they’ll meet with some ‘important people’ and then raise at a higher valuation than back home.

John thinks that companies should only think about raising capital in the USA when they that feel the business has some guts. If you’re a fledgling in New Zealand, don’t head to San Fran in search of a magic cure and money.

Thinking about raising capital in the US while based in New Zealand? John thinks it’s doable:

I would clear the decks for myself to build the funnel for investors, and leave the rest of my team to manage the business. After an initial trip to the States to warm up the investors, I would take their feedback back to the team in New Zealand and think about how to feed that into our company roadmap to work towards the question ‘what is investable?’. After a month or so of incorporating that feedback, I would return to San Fran in a better position to shake down those investors.

networking

Once you’re in the mecca of technology startups, it is all about the hustle. Show up at relevant industry events, and follow the right media to keep up to date with the industry’s happenings. John and I met at an iconic Wellington café for this interview, and he had this to say:

Pitching a business in Astoria Café is similar to how you would pitch anywhere else in the world – the difference is that if you were in Coupa Café in Palo Alto, 95% of the rest of the people in the café are also in the game.

Thousands flock to San Francisco for the same reason (have you seen the TV show?), and serendipity occurs over beers, at bowling, anywhere. Anyone who has spent time in the Valley will have some great stories on this, so have your A-game and compelling pitch ready at any time, and position yourself for those ubiquitous ‘chance encounters’.

Speaking of “chance” encounters, some encounters in the Valley are premeditated and can be bought! John says that, incredibly, you can pay people to create hype for your company by sitting close to investors (or others you’re trying to impress) in cafes, and gushing about how wonderful your company is. Just coincidentally, y’know.

the investors

There are different types of investors: angels, high net worth individuals, private equity, VCs, and increasingly the micro VC. John suggests getting familiar on this:

Investor psyche differs between the types, and it is worth doing some research to understand their respective investment approaches.

It will save you time and wasted effort on pitching to the wrong kind of investor for your company and stage. For example, Sandhill Road firms (the strip where all the major VCs in Silicon Valley are situated) usually look to make investments of over $5 million – whereas angel investors generally put in smaller amounts and at earlier stages. Keep in mind that the Valley operates on a larger scale altogether: a seed round injection is equivalent to a Series A in New Zealand.

US investors are looking for the big opportunity, but they also have preference sectors or categories in which they habitually invest. Do your homework and check out investor profiles and experience. Try to find out what their firm has invested in previously.

Another possibility is to go for the stepping stone between here and the Valley – many VCs have regional representatives. Follow TechCrunch and VentureBeat to see which regional investors are syndicating with US VCs, as the right person could open follow-on doors to the States. For example, in the past two years 500 Startups has expanded beyond Mountain View and significantly ramped up their activity in Southeast Asia.

the courtship

At the end of the day, investors are putting money into people, so build your personal brand. John strongly suggests an up-to-date LinkedIn profile: VCs might spend about 10 minutes before the meeting looking into the company and its founders, and if you’re not present on LinkedIn (particularly as you’re also non-American), then you’re already starting at a disadvantage.

Investors are more likely to fund people they like, and fortunately the Kiwi reputation does well, so be that nice guy or gal from New Zealand. However, being likeable isn’t enough to get you the whole way. As John points out:

Put a value on how much they like it – don’t be afraid to ask the hard questions for the deal.

You will get lots of No’s from investors, and John thinks the trick is to reduce the gap between the No’s and a Yes. When meeting with investors, try to talk about people they know and like (this is where the prior hustling comes handy). While it might not get you across the line with them, it will improve the quality of their feedback on ‘why not?’.

If you find yourself leaving an investor meeting feeling upbeat and thinking, wow that went really well – remind yourself that a great meeting doesn’t count for much. What’s happening next? If investors are interested, the process moves along really fast, and they’ll give you a lot of feedback for what to work on in the meantime. Don’t get swept up in false positives.

behind the rose-tinted glasses

Unfortunately, there are many Kiwi startups who do not manage to raise in the USA and end up back in New Zealand. By virtue of being not American and therefore not sounding American, you may find that you are already on the backfoot. Unsuccessful overseas attempts can negatively affect a Kiwi startup’s ability to raise locally later, so think carefully before you are drawn to the States by sky-high valuations and ‘investors with good contacts’.

John thinks that while it is not impossible to raise in the US, more are looking at the vast amounts of capital flowing through Asia. In any case, he is happy to be contacted if companies are interested in connecting with Kiwi Landing Pad.

In the following months we will also be publishing guidance on tapping into the growing opportunities, and the pool of capital, in South East Asia. In the meantime, follow our US series as we publish more interviews with Kiwis who have raised in the USA.

welcome averill dickson to our auckland office

The Kindrik Partners team continues to grow this year, and we are delighted to welcome Averill Dickson to our Auckland office.

Averill joins us from Simpson Grierson, where she was a Senior Associate in their ICT team. With almost 20 years in the technology sector under her belt, Averill has a keen interest in this area, and regularly presents and publishes on IT contracts and internet law. She has extensive experience advising on the corporate and commercial aspects of technology businesses and transactions, from working inhouse and in private practice.

Prior to her time at Simpson Grierson, Averill has worked at senior positions in other law firms, mostly with a focus on tech, and also as the inhouse legal counsel that took Endace through to listing on the London Stock Exchange.

how carnival mobile raised $2.4m from a dream team of US investors

This is part of our blog series to help New Zealand tech companies who are thinking about raising capital in the USA.

In our first interview with Kiwi companies who have raised capital in the States, we profile a pioneer in mobile application development turned Mobile Marketing Automation Platform – Carnival Mobile.

The company was originally founded in Christchurch in 2008 by Guy Horrocks and Cody Bunea out of their previous company – Polar Bear Farm. They were the creators of some of the first apps to run on iPhones, before the iTunes App Store even existed. Since then, the company’s operations have shifted to Wellington and New York, and Carnival Mobile now offers a full suite of marketing tools for brands to boost engagement with their customers via mobile apps. For example, Carnival was behind the mobile tech that enabled One Direction to link up with their fans as the band toured the US – clearly a big deal!

We caught up with Cody, the Wellington-based CTO of Carnival Mobile, to hear about their capital raising experience so far.

From 2009 to 2013, Carnival was bootstrapping its way but had always ummed and ahhed about seeking investment to grow faster. At some point the team was introduced to Gary Vaynerchuk (the number one person to follow on Twitter, according to Buffer circa 2014) by their client at OREO, who thought the two may be able to work together, where “Gary was the social and Carnival was the mobile”. Gary V, being a bit of a legend in this space, thought that Carnival was in a good state to start seeking investment. With his backing, the duo finally decided to go ahead with it.

From kicking off the pitching to having all the money in the bank took about 2 to 3 months. It was “a very fast process”, according to Cody, who acknowledged they had never tried to raise money in New Zealand (“what’s it like there?”). Carnival’s experience of raising capital in the States is one of many other examples out there, and it’s good to hear the story of a company who’s done it so well.

1. getting started

As the founder based in New York, Guy spearheaded the investment efforts on behalf of the company and started by travelling around the States pitching. Cody says that having Guy in the States created a 24/7 seamless loop for contact with the investors and clients, instead of waiting for the NZ-US time zones to align:

It’s good to have a US team on the ground. Investors and clients expect to meet in person and expect you to be extremely responsive. You won’t be successful raising in the US if you’re trying to do it from New Zealand.

It helped that Carnival had already been operating in the States for a few years, and they were able to reach out to their network for warm intros to potential investors. Gary V ended up co-leading their seed raise along with Lerer Hippeau Ventures, and even rounded up a few other investors.

2. the pitch

The company was commended for their excellent pitch deck, which apparently was later used as a model example for NYU as “one of the best pitch decks they’ve ever seen”. Unfortunately Cody didn’t bring this to Memphis Café with him so I cannot share with you its awesomeness, but he does have some suggestions:

Start your pitch with the purpose and the why, and allow the investors to buy into the whole story. Be founder-focussed in your story, rather than sell features. Largely the investors put money in because they believed in us, the founders, and our ability to execute. Although it’s hard to replicate the Guy factor – it certainly helped that Guy is so likeable and believable… (etc)

Aside from having a strong founding team, the company was also in a good shape having already made lots of progress. Since Carnival had been in mobile since the very beginning and operating in the US for some time, it also had a deep understanding of its space.

3. due diligence

Once the investors were interested, the due diligence itself took about a month. One thing which worked well in their favour was that Guy had maintained all the accounts and compliance affairs in order right from Carnival’s inception. Cody jokes that it verged on over-compliance as they just had stacks and stacks of accounts (something about Guy’s parents being accountants). However, this documentation turned out to be extremely valuable for a quick and painless due diligence. The investors also did some calls with Cody, just to make sure he also checked out.

There were some questions on the exit strategy, and while founders can only speculate on how their company might exit, Cody suggests:

Don’t sell on the first opportunity, but be aware of those opportunities and the fact that you are willing to sell at some point.

4. term sheet

There was little back and forth between the various investors at the term sheet stage, and just some minor negotiation on the percentages.

Cody noted that the US investors cared a lot about which class of shares they were getting, and was surprised to hear that “re-earning” of founders’ shares was very common. This is where investors may insist that founders hold their shares subject to vesting, so that founders earn their shares over a period of time as they work on the company.

Carnival used Gunderson Dettmer lawyers from the West Coast for the deal, which came to about $80,000 of legal fees in total – including restructuring the New Zealand entity to a US corporation. This means that the New Zealand company is now a subsidiary of the US Carnival Mobile, a necessary move since the larger US VC funds, such as Google Ventures, don’t invest in foreign entities.

Guy adds that having a good law firm with experience in the space is very helpful. Not only do those lawyers know all the investors in the space, but they can also speed up the process a lot. The reason why there was almost no negotiation on Carnival’s proposed term sheet was that their lawyers had prepared one with terms that are widely accepted as standard in the industry – and then it just becomes a matter of talking about the numbers e.g. the valuation, amount of founder vesting etc.

5. the investors

Although Guy pitched to investors all over the US, they settled on mostly East Coast investors. The round ended up being over-subscribed, and the company took in $2.4 million in funding from 8 sophisticated and strategic investors. Some had deep experience in the areas of mobile, social, SaaS – beneficial not only for their capital but also for networks. Four funds invested, which Cody thinks could also be useful for follow-on rounds, with the rest being angel investors.

To cap it off, Google Ventures (backers of Slack and Uber) also put money in. It is a real credit and good validation for Carnival to have someone like Google Ventures on the cap table, and also bolsters brand awareness. Apparently Google Ventures have a lot of added services, but are generally more reactive than proactive (providing technical and design reviews, through to PR intros and goal-setting advice).

Cody is grateful that their investors have empowered the management team by giving them the cash to go and do what they do best. He’s heard of the some of the micro-managing investor types in New Zealand – tranching, business plan milestones, board seats etc. It’s so far behind the founder-friendly approach of his investors:

I’ve got enough to deal with all the time already – I wouldn’t want to have the added stress of constantly thinking about how I’m going to get the next tranche of money. We’re really lucky that there’s no red tape or managing from our investors.

Sounds like they’ve got quite the dream team of investors!

6. always be closing

Cody finished our chat by saying that Kiwis have a good reputation in the States, and introducing yourself as a New Zealander is a great icebreaker, often establishing an instant level of trust. But while we may be good at opening – the Americans are much better at closing. Cody acknowledges that compared to the Americans, New Zealanders are just not as seasoned in the hustle. More than once the duo have been told that they are “too nice, be more ruthless”.

That being said, word on the street is that the CEO is also, shall we say, a nice Guy, and it seems to be working out just fine for Carnival Mobile so far.

Thanks very much to Cody and Guy for sharing their story to help the next generation of Kiwi startups!

new compliance requirements for NZ registered companies

From 1 May 2015, new compliance requirements for all companies registered in New Zealand will come into effect. These new compliance requirements and associated key dates are set out below.

new zealand resident director

From 28 October 2015, every New Zealand registered company incorporated before 1 May 2015 must have at least one director who:

lives in New Zealand, or
lives in Australia and is a director of a company registered in Australia.

All New Zealand registered companies incorporated after 1 May 2015 must comply with the above from incorporation.

A New Zealand resident director does not need to be a New Zealand citizen. The key criteria is that he or she resides in New Zealand.

additional disclosures

Every New Zealand registered company incorporated before 1 May 2015 must include the additional information set out below, in each annual return filed after 1 July 2015.

For each director

date of birth (this information will not be made available to the public), and
place of birth (this information will not made available to the public).

For any ultimate holding company*

name of the ultimate holding company
country of registration
registration number or code (if any), and
registered office.

All New Zealand registered companies incorporated after 1 May 2015 must provide the above information on incorporation.

If you wish to discuss the implications of any of the compliance requirements, please contact us.

* Broadly speaking, an ultimate holding company is any company that is a majority shareholder or otherwise controls the company, and is not itself controlled by another company.

welcoming lee bagshaw to kindrik partners from singapore

We are very excited to welcome English qualified corporate technology lawyer Lee Bagshaw to the Kindrik Partners team. Lee will work as a consultant at the firm until he has completed the requirements to be admitted as a New Zealand lawyer. We expect him to become a partner at the firm once he has completed those requirements.

Lee joins us from Singapore firm RHTLaw Taylor Wessing, where he was a partner and head of the firm’s regional corporate technology practice. Prior to moving to Singapore, Lee worked in the London office of Taylor Wessing, which regularly tops the rankings of UK venture capital law firms.

Kindrik Partners has an increasing number of high-growth tech clients seeking capital, partnership and M&A opportunities internationally. Lee’s broad experience advising technology companies and investors on venture capital deals, M&A and IPOs in Europe, Singapore and across Asia is a great fit for us and our clients.

Lee is particularly keen to work with Kindrik Partners clients exploring opportunities in Asia. He has a wide network in the Singapore and South East Asian tech community, including close relationships with a number of leading tech investors in the region, which will be of interest to companies thinking about capital raising and exit options. Lee also has strong relationships with corporate and commercial lawyers at firms throughout Asia, which will be an asset for our clients who are looking to enter Asian markets.

submission to the takeovers panel on small takeovers code companies

The Takeovers Panel is consulting on the cost of legal compliance for small companies that are caught by the Takeovers Code (making them Code Companies).

The Panel is interested in submissions from the public on whether the cost of complying with the Takeovers Code is too expensive for small Code Companies.

In our experience, Code Company status is toxic for unlisted technology and other high growth companies seeking to raise capital from sophisticated investors. It is not simply a matter of cost of compliance with the Code (although this is certainly a factor). The Code creates structural impediments to raising capital, making investment in these types of Code Companies riskier than investment in non-Code companies. Sophisticated investors have a wide array of investment choices, and can and do avoid investment in Code Companies for these reasons.

We think it is really important for New Zealand’s high growth companies to be able to access capital efficiently. We have therefore proposed to the Takeovers Panel that it reintroduce a turnover and/or net asset threshold in addition to the current 50 shareholder threshold, both of which a company would have to exceed before becoming a Code Company. This change would be a relief to many high growth companies, including those seeking to raise company via crowdfunding platforms.

Please get in touch if you would like to share your comments or experiences with us.

Submissions close this Friday 12 December.

my fair liability

On Tuesday 17 June a number of important changes to NZ’s consumer law regime will come into effect. This blog discusses a change to the Fair Trading Act 1986(the FTA) that clarifies the extent to which B2B transactions can carve out liability under the FTA.

From Tuesday, when dealing with other businesses, you will be able to contract out of the FTA prohibitions on:

general misleading and deceptive conduct (section 9)
unsubstantiated representations (section 12A)
false or misleading representations (section 13)
false or misleading representations in connection with the sale or grant of land (section 14(1)).

To take advantage of this carve out, the following requirements must be met:

all parties must be in trade
all parties must agree to contract out of the relevant provisions of the FTA
the agreement must be in writing
it must be fair and reasonable for the contracting out to occur.

Until some court decisions are made, it’s difficult to say what is required to satisfy these requirements. However, to give yourself the best possible protection until that time, we suggest you take a good look at the entire agreement clause of your agreements to ensure it is broad enough to obtain the benefit of the change (this is the clause that states that earlier agreements, discussions, etc. are superseded by the agreement). As a minimum, we suggest this clause is expanded to include an express:

agreement to contract out of sections 9, 12A, 13 and 14(1) of the FTA
acknowledgement that each party has not relied upon (amongst other things) conduct and representations of the other party that are not expressly set out in the agreement.

We have thought about whether it would be useful to include an acknowledgement that the parties consider the contracting out to be fair and reasonable. We’re still on the fence on this one but we think that the courts are unlikely to be swayed by a statement of this nature. We’ll keep in touch if there is any development on this.

In the next week, we will update the relevant entire agreement clauses of our free legal templates to ensure clients and friends can obtain the benefit of the change.

Keep an eye on our blog for the next in our series on these consumer law regime changes.

new employee share schemes exemption starts on 1 April

The Financial Markets Conduct Act exemption for employee share schemes comes into force on 1 April 2014. This is a watershed event for the New Zealand tech sector – finally tech companies can offer shares and options to New Zealand employees on a similar basis to those offered to Silicon Valley employees.

We expect there will be a rush of tech companies setting up new schemes from 1 April. We’ve been advising clients to hold off setting up schemes until the new exemption is available, and are aware of a lot of pent up demand for cost effective schemes in the sector.

To qualify for the new exemption, companies will need to meet the following requirements:

the offer must be made as part of the employee’s remuneration, or in connection with their employment or engagement
raising funds must not be the primary purpose of the offer
the company must limit the number of shares and/or options issued under the scheme in any 12 month period to 10% of the total number of shares on issue.

Companies also must provide a limited disclosure package to each employee containing:

a description of the scheme and its terms and conditions
the company’s latest annual financial statements and latest annual report, with a statement that (if applicable) the financial statements are not audited. Alternatively, the company may state that participating employees have a right to receive those documents free of charge from the company
a warning statement, to the effect that the normal disclosure obligations do not apply to the employee share scheme, and participating employees will have fewer legal protections for their investment.

These disclosure obligations, including the specific form of the warning that must be provided, are contained in the Financial Markets Conduct (Phase 1) Regulations 2014.

We expect that most companies will include these disclosures in the offer document for the scheme, i.e. the disclosures will be part of the terms of the offer. This seems the most straight-forward way of meeting the disclosure requirements.

Although the above requirements should be easy to comply with, companies will need to think about a number of other issues before setting up a scheme, including:

the terms of each scheme need to be tailored to the circumstances of the company and the incentives that the scheme is intended to create for the company. E.g., over what time period will shares/options vest with the employee so that they can retain the benefit of the shares/options after they leave the company? Will there be a distinction between good leavers and bad leavers?
companies need to review their governance documentation (shareholders’ agreements and constitutions) to make sure they are appropriate for the inclusion of small shareholders on the share register. This is as important for share option schemes as it is for share purchase schemes, because the peculiar tax treatment of capital gains in New Zealand means employees often exercise share options in advance of a liquidity event (which is uncommon in Silicon Valley)
it is important to obtain expert tax advice to ensure the tax consequences of the scheme are understood. However, the tax treatment of different types of scheme needs to be balanced against the complexity involved.

Keep an eye on our website as we will shortly be publishing for New Zealand tech companies a template set of documentation for the issue of share options to employees under the exemption. We’ll post this ahead of 1 April.

employee share schemes – let’s get cracking ministers!

For years, NZ tech companies and their employees have been held back by NZ’s securities laws governing private company employee share schemes.

Overseas high growth technology hubs are fueled by a high level of employee equity participation, usually in the form of generous option schemes. Yet in New Zealand, it’s illegal to offer these schemes to employees unless a company is willing and able to comply with the FMA’s burdensome and, frankly, paternalistic exemption notice (which few are).

Adopting the recommendation of the Capital Markets Taskforce, the Financial Markets Conduct Bill contains an exemption for employee share schemes that will bring our securities laws into line with US share scheme rules. We think the new exemption will do more to accelerate the development of the NZ tech sector than any other Government initiative under contemplation.

Unfortunately, the start date of the Bill has been pushed back to at least April 2014 due to the complexity of re-writing the rules governing retail financial markets.

Whilst it is critically important to get the rules for retail financial markets right, this doesn’t need to hold up the introduction of the new employee share scheme exemption (because the whole point of this exemption is to take share schemes outside retail investor disclosure rules).

We have therefore proposed to Minister Foss that the employee share scheme exemption be fast tracked.

This is a great opportunity for the Government to provide a major benefit to the tech sector with minimal effort and cost. The sooner the exemption is introduced, the sooner the benefits will flow to NZ tech companies, their employees and to the economy as a whole. Let’s get cracking!

Europe gives thumbs up to second hand software sales

A recent European Court of Justice ruling allowing the re-sale of perpetual software licences has been widely reported, and a number of our clients have asked questions about its impact on NZ software suppliers.

In this case, German company, UsedSoft, resold perpetual licences to Oracle’s database software. If a client bought a licence for 100 users but now only had 50 staff, UsedSoft would resell that unused allocation. Oracle sought to stop this practice on a number of grounds, including that the licence was non-transferable under the licence agreement.

Based on the wording of the relevant EU directives (which overrule the express terms of a licence agreement), the Court held:

the copyright holder can only restrict the first sale of a copy of a computer program into the EU, not downstream sales. As a result, the licence in its entirety could be re-sold by UsedSoft because Oracle had exhausted its exclusive right as copyright holder to distribute the software within the EU. However, part of a licence could not be resold, i.e. UsedSoft could not sell excess user allocations in the way described above
the purchaser of the second hand (resold) copy of the software could download the software from Oracle in the same way as the original purchaser and use it, but the original user would need to make its copy unusable.

If you supply or intend to sell software to customers in the EU, you may want to give some thought to your supply model. If your current model is based on up-front license payments, and you are concerned about subsequent second hand sales of your software, you may want to restructure your model to better protect your interests. E.g.:

fixing the term of the licence, with renewal at an additional fee. While it is unclear whether this will remove you from the scope of the UsedSoft decision, it will enable to you obtain ongoing revenue from the licence holder on renewal (whether or not the licence has been resold)
reducing upfront licence fees whilst increasing on-going fees (e.g. support and maintenance)
in the long run, moving to a SaaS/cloud model, which has the double benefit of recurring revenues and controlling access to your software.

Since increasing recurring revenues is often an important business objective for software companies, these approaches may make good commercial sense.

always have a deck handy

We work with a lot of early stage and high growth tech companies that have a capital raise in their short to medium term business plans, and we are often asked to connect these companies with potential angel and VC investors.

Most of the investors we know like to see some written material on an investment proposition before agreeing to meet with a company seeking investment. This could be as simple as a one or two page “drop sheet” summarising the company and proposition, although some investors also like to see a more detailed “deck” (an information memorandum or similar document) before going further.

It’s more efficient for the investor this way – they often don’t have time to meet everyone looking for money and, frankly, it is easier to say a polite “thanks but no thanks” to someone you haven’t met. Essentially, you want to make the consideration of the investment as easy as possible for the investor.

Unfortunately, many NZ tech companies are tragically poor at producing succinct and up to date drop sheets and decks when asked for them by potential investors. Perversely, it is often even harder getting tech companies to update their drop sheets and decks as the capital raising process drags on, even though the hard work of writing something from scratch has been done.

The upshot of this is that good investment leads are lost because companies fail to stump up with a drop sheet or deck while the prospect is “hot”. This is particularly the case where investment leads have arisen through more casual conversations with investors, whether at conferences or when investors are passing through NZ. These sorts of leads are often perishable and you need to strike while the lead is hot.

So – if you might want to raise capital in the foreseeable future, wrap a wet towel around your head, write up, and keep up to date a drop sheet and deck for use at short notice. Your cap table will thank you for it!

the dual negotiation approach to ICT procurement

2010 has seen a big uplift in ICT procurement activity in and around Wellington, particularly from the Government sector. A feature of many of the larger procurements has been the conduct of dual negotiations with two or more suppliers (before down selecting to a single preferred supplier).

We think this approach is often a good option for high value procurement – NZ’s ICT market is competitive and the additional tension generated by a dual negotiation usually leads to a better deal for the customer, both on price and commercial/contractual terms.

Best practice with these processes involves:

attaching a draft contract to the tender documentation and requiring each supplier to agree to the terms of the draft contract except as marked by that supplier
making the supplier’s degree of acceptance of the draft contract an evaluation criteria
conducting negotiations in parallel with the same negotiation team (making it easier to compare each supplier’s offering and ensuring the competitive threat remains as real as possible for as long as possible).

However, customers need to be careful to not shoot themselves in the foot. While the competitive tension could be used to require extreme customer friendly or even punitive contractual terms, this puts suppliers in an untenable position. Do they (i) spend lots of $$ on lawyers to negotiate a fairer deal with the risk of losing the tender; or (ii) suck it and ignore the risk the contract poses (particularly if the supplier feels contractual provisions are untenable in the context of a long term commercial relationship)? We’ve seen customers take it too far and the end result is usually bitterness and/or disengagement on the part of the supplier – not the best way to start your relationship . . .

We think the best approach is for customers to put forward a realistic and reasonable draft contract from the outset. Being pragmatic, as a customer, is likely to substantially reduce the time spent in, and costs of, negotiations (as suppliers are more likely to agree to the terms) and sets the tone for a good working relationship going forward.

the source of the problem . . .

The dramas keep coming for Telecom with the collapse of a small software provider who owns the source code on which the XT network is built. The public details are thin on the ground but there are allegations that the provider failed to comply with an escrow arrangement by not depositing the most current version of the code and, in any event, the receiver is refusing to release it.

Telecom’s case is not a one-off. The GFC has resulted in the collapse of a lot of small software and tech companies. This in turn has created a heightened customer awareness of insolvency risks, and the need for protection over critical third party software and solutions (including those provided via the web and cloud).

Generally, NZ software companies have preferred the ignore/avoid technique when dealing with source code issues. However, in the current financial environment this attitude is likely to result in a loss of business, particularly when doing dealing with large companies in the States. We have found it increasingly common for US corporates to make aggressive demands of NZ companies for access to source code, and this is not limited to escrow. For example, we have seen US corporates demand source code “ownership” in their industry vertical or IP buyout rights as a starting point. These demands are not just from customers – US partners or distributors are increasingly concerned about access to source code following the GFC.

Unfortunately for NZ’s software companies, the issue of access to source code is not going to disappear any time soon. If you are planning to break into the US market, you may miss out on business opportunities unless you are ready to offer a credible solution that provides sufficient comfort to your customers or partners while protecting your IP.

our blog

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deal activity so far

themes emerging in 2021

amount raised

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looking ahead in 2021

key change 1 – notifications of privacy breaches

key change 2 – disclosures overseas

updated templates

stay in touch

what is information privacy principle 12 (IPP12) and when does it not apply?

what if IPP12 applies?

comparable safeguards

authorisation

why keep a share register?

legal requirement

evidence of share ownership

classes of shares

next steps

tell us a little about Startmate

you’re related to Blackbird Ventures – how closely are you linked to the VC?

Startmate was originally an Australian accelerator, but you’re in the middle of your first NZ cohort. Can you tell us about them?

what’s the timeline like for the next intake?

anything else you want founders to know?

A reminder of what the safe harbour is

what does the safe harbour expiring mean?

what next?

you must notify certain breaches

what counts as ‘serious harm’?

are there any exceptions?

what should you do?

quick reminder – what’s a SAFE?

so, what changed with the ‘post-money’ SAFE?

what else did YC change?

other key points to remember about a SAFE

round up

the take-aways

background

governance arrangements

next steps

new structure: easier to implement for larger teams

new claw-back provisions if an employee leaves

when to use the individual ESOP option deed and offer letter

new notification requirements

how to notify

national interest assessment

analysis

how do pre-revenue startups qualify?

notes for high growth businesses

what comes next

who responded

impact on revenue

industry observations

unexpected observations

dollars lost in anticipated revenue

impact on fundraising activities

impact on other growth activities

hiring plans

market and product launches

how long do we expect this to last?

what comes next

signing documents

passing resolutions

in person via Zoom

pass a resolution in writing

how to pass a resolution in writing

tips for passing shareholder resolutions

need help?

what’s the risk being addressed here?

what do we mean by “safe harbour”?

why is the safe harbour important?

am I ok to start taking this approach before the amendments have been formally adopted by Parliament?

I’m a director of a company and this sounds great – what do I need to remain wary of?

directors’ duties

reckless trading and incurring obligations

practical tips for an investor director

managing investor director conflicts

if you think you can’t perform your contract because of covid-19, be proactive

read your contract – most contracts include a clause relating to force majeure