I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements. What is going on and why is this important? Mike Sullivan at Howard Rice has the best plain English explanation that I’ve seen: Let’s say you’re a VC and you sit on the board of […]
I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements. What is going on and why is this important?
Mike Sullivan at Howard Rice has the best plain English explanation that I’ve seen:
Let’s say you’re a VC and you sit on the board of a portfolio company. Something goes wrong at the company; and the plaintiffs sue everyone in sight, including you. You don’t welcome the idea of paying litigation costs out of pocket, but luckily you have an indemnity agreement from the portfolio company – saying that the company will cover litigation costs and liabilities. You also are indemnified by your VC fund, but until recently most people thought that was just a “backup” – in case the portfolio company was insolvent.
But that was before the recent Levy v. HLI Operating Company case. There, a Delaware court surprised most experts by holding that where the individual board member had indemnity rights both from the portfolio company and his fund, the fund and the portfolio company had to share claims for any indemnity claims required to be paid. [This clearly will lead to a financial and process nightmare dealing with different insurance carries and attorneys. – Ed.]
The result? VCs are changing their indemnity agreement forms. The NVCA form of indemnity agreement has been changed to make it clear that the portfolio company indemnification is the board member’s primary source of protection, and the VC fund will have to pay only if the portfolio company is unable to do so. Since most people assumed that was true prior to the Levy case, our experience is that most companies aren’t fighting this change.
Jason has over twenty years of experience in the venture capital and technology industries in a multitude of investing, legal, and operational roles. Prior to co-founding Foundry Group, Jason was a Managing Director and General Counsel for Mobius Venture Capital. He is also a co-founder of SRS/Acquiom.
Q: What’s going on with the changing tax situation on the “carry” relating to VC funds? Is it finalized? And how will this affect the VC market, if at all? A: (Jason). Sandy Levin (from the great state of Michigan) introduced a bill recently to tax carried interests (“carry” or profit) as ordinary income, versus […]
For those of you VCs following along at home, Paul Kedrosky has just published his Top 10 Limited Partner Lies. It nicely complements Paul’s Top 10 VC Lies. I see a future for Paul on The Letterman Show.
February 12, 2009
If you are in Seattle and interested in startups, entrepreneurship, venture capital, or TechStars, Brad will be in Seattle having a party to talk about these topics. All the details can be found here. The date is February 25th.
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