Blending Analysis with Advice

If you like vanilla, Donna Petkanics can take your order. A longtime attorney with Wilson Sonsini Goodrich & Rosati and specializing in venture capital transactions, Petkanics has been seeing a lot more plain-vanilla term sheets lately at early stages, smoothing the way for deals to get done.

“There’s a lot of money available for good ideas,” says Petkanics, of Wilson Sonsini’s corporate practice division. LinkedIn’s eye-popping $4 billion IPO in May is likely just the beginning of a wave of blockbuster public offerings that will eclipse the meager showings of the past few years, she says.

Petkanics joined the firm’s Palo Alto, Calif.-based office in 1985 after earning her law degree from UC Berkeley. Her first IPO she worked on was no run-of-the-mill tech company. It was the public debut of Sun Microsystems in 1986 at $16 a share.

Petkanics managed the business side of the law firm’s operations from 2000 to 2006. That experience of running a business, she says, has helped giver her insight into the challenges her entrepreneur clients face. Here’s what she had to say about the latest trends involving entrepreneurs, who make up about 90% of her client base.

Entrepreneurs Seek Board Control

Part of Petkanics’ value to startup founders is educating them about balancing their desire to maintain control of their business with the need for more experienced leadership. She coaches first-time entrepreneurs to ultimately cede the CEO role to a seasoned leader.

Founders are usually amenable, but in exchange for relinquishing the CEO title, they may insist on controlling another board seat.

“I’m seeing that more and more,” says Petkanics, who adds that entrepreneurs have been more successful in negotiating favorable terms because they’re savvier about protecting their interests.

She says that many entrepreneurs are inspired today by Google Inc. co-founders Larry Page and Sergei Brin, who in 2001 named Eric Schmidt CEO.

Although he has since relinquished that role, Petkanics says that at the time, that move was seen as a successful model for a startup looking to grow big.

“Two young, smart founders who willingly welcomed in a very experienced professional,” Petkanics says. “I’ve had many founders tell me, ‘I want the Google model, where we bring in a CEO to work with us and we’ll work together.’ Is it always successful? Not necessarily, but it’s something more prevalent on the minds of founders.”

Dilution and Valuation

But as her startup clients take on new financing, founders are remaining wary of dilution of their valuation, she says.

Petkanics—who teaches UC Berkeley’s Boalt Law School students in her course on VC and IPO law—reminds entrepreneurs that having enough capital on hand must be the priority, not the valuation.

“It’s better to own less of a company that’s ultimately successful and can get to a liquidity event than to own a large amount of a company that can never fulfill its business mission because it was under-capitalized,” she says.

Petkanics points out that the essentials for going public in the late ‘80s included four consecutive quarters of profitability and achieving certain revenue marks.

Those requisites vanished during the heady tech boom of the ‘90s , often with disastrous results. The pendulum has largely swung back, Petkanics says, although some industries—such as cleantech and biofuels, for example—can still play by different rules.

For instance, when Petkanics worked on the Pacific Biosciences IPO in October 2010, the genetic sequencing company had no revenue, but investors understood its potential and snapped up its stock.

Convertible Notes and Preferred Stock

Never mind harps and halos. Some angels want preferred stock. Petkanics is seeing VCs willing to do $1 million seed financings, or what were formerly called Series A deals, with a locked-in valuation.

VCs prefer to see a valuation set and do a relatively simple set of preferred stock documents for a company’s first financing. They’d rather lock in their ownership percentage and valuation, knowing the valuation can spike if the business thrives.

“They want to be rewarded in a bigger way than they might otherwise be in a convertible note financing,” Petkanics says.

In convertible note financings, she is seeing investors agree to discounts of 20% to 25% on the next preferred stock financing.

“The VCs would like to see a bigger jump than that sometimes for taking that early risk,” she says. “They’d like to see a 50% step up in valuation. They want to lock that in.”

Governance is another reason VCs favor doing early financing as preferred stock: VCs want the ability to hold board seats and provide mentoring, coaching and controls, which are not guaranteed with a convertible note structure.

When to Sell

Despite the growth of the IPO market, a sale is the reigning liquidity event for many startups. Petkanics is seeing more deals with “drag-along” provisions, requiring the founders or key holder of common stock to agree to vote their shares with the board or preferred stockholders.

If clients are considering balking at the terms of a possible sale or acquisition, Petkanics taps her economics background. She’ll work through a model of a realistic return and help them come up with a “backstop policy.”

Should they reject a transaction, they’ll be prepared to accept an attractive buyout offer.

Her Team at WSGR

Petkanics often works with colleague Allison Spinner and about 10 associates at the firm, usually on the corporate side. She’ll pull in other specialists as needed.

Wilson Sonsini aims to snag startups in their earliest stages by offering a free term sheet generator for VC financing and Series A documents on its website. The firm hopes an initial helpful connection will translate into a long-term relationship.

Israel Bound

Israel—specifically the city of Herzliya, near Tel Aviv—is the Middle East’s entrepreneurial hotspot. Thanks to compulsory military service and an emphasis on innovation, Israelis develop excellent skills in security, Internet infrastructure and other marketable areas.

Petkanics, who plans to travel there in the fall, says many Israeli companies incorporate in Delaware and move developed businesses to Silicon Valley or New York.

Her Israeli startup clients include Jajah, a VoIP provider, purchased in late 2009 for $207 million by Telfonica Europe; Internet display advertising business Dapper, acquired last fall by Yahoo; and Unisfair, a virtual events provider acquired this spring by InterCall, a subsidiary of West Corp.On Tap

Petkanics is preparing three companies for IPOs—one in biofuels, one in LEDs and one in Internet advertising. Prepping begins nine months to a year in advance due to “all the regulatory changes and governance issues and processes,” including the addition of independent directors and a securities-law compliance team.

Bridging the Gap

Petkanics advises entrepreneurs to be candid about their weaknesses and seek the help of VCs to bridge those gaps.

Startup founders tend to be “very optimistic people, glass-half-full, rose-colored glasses people,” she says. “There’s always a tendency to think that things are going to work out if you just work harder at it. That can be true, but sometimes you have to look at the reality.”

Attorney at a Glance

• Age: 53

• Hometown: New York City; raised in New Jersey

• Education: Undergraduate degree in economics, Northwestern University, 1980; law degree, University of California at Berkeley, 1985

• Previous jobs: Staff economist for the Carter Administration

• On her night table: I love to read and am usually reading a variety of books, both fiction and non-fiction. Current books include “The Start-Up Game” by Bill Draper, “Queen Mother” (about Queen Elizabeth’s mother, who was featured in the “Kings Speech”), “Cutting for Stone” and “Born to Run.”

• Hobbies: In my spare time, I love to garden, hike, run with our dog, ski, make wine and travel. My son is interning in Ireland this summer and my husband and I plan to travel there. My daughter will study in Florence, Italy, this fall, so we are planning a bike trip there, as well. Our family also loves board games, especially word games like Scrabble and Catch Phrase.