Drawn to the Boardroom, Not the Courtroom

Ed Zimmerman planned to be a litigator, but the courtroom turned out to be far less appealing than boardrooms and backrooms. The frenetic pace of startups proved irresistible for the Lowenstein Sandler attorney, as did the opportunities to create life-altering wealth for founders.

Zimmerman chairs the firm’s Tech Group, which launched in 1998 with him and two other attorneys. Today it has more than 60 lawyers and this year will close 200 venture deals.

Zimmerman spends about 60% of his time working with entrepreneurs and the balance with investors, including such firms as Bessemer Venture Partners, First Round Capital, New Enterprise Associates, Accel Partners and Sequoia Capital.

“To have a robust venture capital practice you have to understand both sides of the deal, and you have to stand in both sets of shoes,” he says. “If you’re doing a really good job as company counsel, funds will ultimately want to work with you.”

In addition to advising entrepreneurs and investors, Zimmerman is an angel investor himself through Grape Arbor VC, which he founded in 2006 with friends. Grape Arbor invests in early stage companies with a focus on digital media, ecommerce and cloud computing.

Here’s what he had to say to VCJ about various legal issues and VC trends.

Patents, Portfolios and Protection

He notes that buyers are increasingly concerned about potential and pending litigation involving patent portfolios.

“We’ve seen some very big names start aggressively patenting and buying portfolios of patents, and we’ve seen it in the cloud computing space and in other aspects of digital media in the last 18 to 24 months,” says Zimmerman, who adds that patent concerns have moved to the forefront recently thanks to “a wave of innovation” involving cloud computing and virtualization software.

This summer, Google paid $12.5 billion for Motorola Mobility Holdings Inc.’s 17,000 patents, and Nortel Networks sold a cache of wireless patents for $4.5 billion to buyers including Apple Inc. and Microsoft Corp. Meanwhile, Struggling Eastman Kodak Co. this fall began selling its digital patents, which could be worth several billion dollars.

Investors’ wariness about patent matters has manifested itself in more rigorous terms and conditions.

“The impact on price is not necessarily an actual mathematical impact,” he says. “It’s more of an impact where you say, ‘Hey, we shook hands on a 10% escrow, but these patent claims worry us, and so we want a 20% escrow’” for a certain number of years.

Investors don’t want the expense and hassle of litigation, so they’re buying companies with patent portfolios that are “clean and buttoned-down”—and thoroughly researched to avoid any unanticipated liability.

“We are seeing a lot more effort extended on patents and patent litigation and letters putting people on notice or threatening them, and I’ve also seen transactions close with pending patent litigation,” Zimmerman says. “Those sorts of things are a shifting dynamic.”

Strategic investors have begun scrutinizing intellectual property portfolios before committing funding. Venture investors aren’t doing that yet, Zimmerman says, but he’s not ruling it out.

Advice for Entrepreneurs

Think ahead, Zimmerman urges. Founders should understand what their investors wants to see a year or two down the road and map a strategy to get there. Companies often focus their efforts on growth, but that emphasis may not help them achieve an acquisition.

Smart entrepreneurs will take an exit if an attractive one comes along, even the timetable is different than anticipated or the buyer isn’t a typical suitor. As an example, Zimmerman cites retailer Nordstrom’s acquisition last February of luxury online shopping site HauteLook for $180 million in stock.

Though companies have been hit hard by the ongoing economic downturn, they’re also holding onto more cash, which means they’re able to shell out large prices when a promising acquisition comes along, Zimmerman notes.

It’s All About the Relationship

Getting in on the ground floor of a hot investment isn’t going to happen without connections. Zimmerman advises funders: “The investors who are successful are getting to know companies in their early stages and are tracking them as they grow. So when a company’s looking for a growth round, they’ve already had coffee three or four times.”

Empire State of Mind

Boston and Silicon Valley used to be the obvious magnets for European and Israeli startups relocating to the United States, but in the past six years, New York—Manhattan and Brooklyn, particularly—has become an increasingly popular choice for ecommerce and digital media businesses. Boston remains a draw for life sciences businesses and big networking companies, Zimmerman says, but appeal of New York City is growing.

Having an office in New York instead of California lops six hours of travel time off a flight to Europe or Israel and shaves off three time zones.

BillGuard, a 16-person company that provides free personal finance security, this fall resettled in New York City from Israel. Zimmerman represented BillGuard in a $10 million round of funding announced in October from Khosla Ventures, Founders Fund and Bessemer Venture Partners.

Lowenstein Sandler recently represented several New York companies as they scooped up millions in funding, including:• BirchBox, a monthly beauty and makeup subscription service, in a $10.5 million Series A round of funding in August, led by Accel Partners with First Round Capital, Stanford University endowment and others;

• BuddyMedia, a social enterprise software company, in a $54 million series D round of funding in August led by Insight Venture Partners, with participation from Institutional Venture Partners, GGV Capital and others; and

• Knewton, an online education provider, in a $33 million Series D round of funding co-led by Founders Fund and Person, with participation from Bessemer Venture Partners, First Mark Capital and others.

Colleagues

Zimmerman works with Kathi Rawnsley, managing partner of the firm’s Palo Alto, Calif.-based office, and Mark Kesslen, who chairs the IP section of the firm’s tech group. Raymond Thek and Anthony Pergola are also key players in Lowenstein Sandler’s practice. Pergola is also a member of Grape Arbor VC.

June D. Bell is a San Francisco Bay Area-based legal affairs reporter. She can be reached at junebell@aol.com.

Attorney at a Glance

Ed Zimmerman

Age:

43

Education: Zimmerman graduated from Haverford College in 1989 and received his law degree from the University of Pennsylvania in 1992.

Experience: A summer intern at Lowenstein Sandler while a law student, Zimmerman was hired after graduation and never left. “I’m one of the few people I know who’s been at the same place for 20 years,” he says.

Other interests: Zimmerman teaches venture capital and angel investing to second-year MBA students at Columbia University’s business school. An oenophile, he at one time hosted a radio show about wine.

Family: Zimmerman and his wife, Betsy, are the parents of Becca, 12, and Ben, 11. Betsy is COO and a board member of The HAPI Foundation, which the Zimmermans and friends created in 2002 to aid children’s charities in New York and New Jersey. Zimmerman, who chairs the board of trustees, says the foundation has raised and donated several million dollars.

Get the corkscrew: If you’re closing a deal but there’s still work to be done, Zimmerman suggests savoring a Riesling from Selbach-Oster. If the papers have all been signed and everyone’s ready to relax, uncork Realm Cellars’ Beckstoffer To Kalon Cabernet Sauvignon.

CORRECTION

Note from the Editor: We want to clarify and correct several points found in this Legal Notes story about Ed Zimmerman.

The price that Google paid for Motorola Mobility Holdings Inc. was $12.5 billion. Zimmerman’s wife Betsy is COO and a board member of the HAPI Foundation. Their son Ben is 11 years old. Zimmerman’s colleagues Mark Kesslen, Anthony Pergola and Raymond Thek are all members of Grape Arbor VC.

Nordstrom paid $180 million in stock for HauteLook, but there’s an additional earnout that could bring the price to $270 million.

The fundings of Knewton and BuddyMedia were rephrased to note what firms led or co-led the deals.

These clarifications, and the misspelling of Khosla Ventures, were corrected above.