0 Presentation to the Colorado Bar Association Securities Subsection Hot Topics in Private Company Securities and Corporations Law* January 21, 2010 Jason Mendelson, Co-Founder and Managing Director Foundry Group *a view from a recovering lawyer and current venture capitalist ©2009, Foundry Group LLC, Proprietary and Confidential

Expectation Setting I’m not a securities lawyer anymore. If you are looking for chapter and verse, either leave or throw your forks at me I am a venture capitalist who has been involved with over 400 private companies in the past 10 years Our current fund, Foundry Group has completed 20 investments since November 2007 (when we raised $230m) We invest all over the United States with 33% of our companies in Colorado, 33% in California and 33% elsewhere (currently Seattle, New York and Boston) I blog at and Some of you may know that I spend too much time worrying about your business (Law Firm 2.0) PLEASE INTERRUPT ME DURING MY PRESENTATION OR I WILL GET BORED 1 ©2009, Foundry Group LLC, Proprietary and Confidential

Pre Formation / Formation Issues Companies are having harder time raising money. They are forming “later” and engaging counsel later This is bad. Despite better public information re: how to run your company more mistakes than ever are being made. None of them will surprise you, but I’m always surprised how most lawyers don’t have “plans of actions” ready for the following issues:  Missed 83(b) elections  Departed founder without proprietary rights agreement / clean IP  Running into liabilities pre formation  Transferring assets / improper chain of command of IP  Open Source licensing issues This all leads to folks like us needing to educate the public well before either of us see these companies. 2 ©2009, Foundry Group LLC, Proprietary and Confidential

Financing Issues Angel investors are more important than ever, especially in CO with many venture firms disappearing. (Yes, you can ask me about this, if you want) Too many of these Angels aren’t properly vetted for securities compliance. Recession offers are happening more and more often  You can’t count any money in as “in”  Plaintiff’s lawyers  Spinway suit There is a rise of the unscrupulous angel (for example, Illinois Ventures) 3 ©2009, Foundry Group LLC, Proprietary and Confidential

Financing Issues At best, there is the rise of the unsophisticated angel (usually named “Dad” or “Mom”) Valuation / control issues. Entrepreneurs are getting too good of a deal 409A – more and more issues surrounding Angels and convertible debt with warrant coverage Senator Dodd bill could wreak havoc on financings. Although lame ducks don’t normally get legislation passed 4 ©2009, Foundry Group LLC, Proprietary and Confidential

Ongoing Operating Issues Sloppy employment compliance  Too many contractors and not enough employees  Poor paperwork in trying to cut costs There is no such thing as “at will” employee these days Plaintiff lawyers / class actions Are CEOs illegally selling securities? Every meeting is a sales meeting given the difficulty in raising funds. I’m seeing more and more “impossible” executive summaries Option pricing, 409A ranges Employee pushback on length to exercise options. 5 ©2009, Foundry Group LLC, Proprietary and Confidential

Exit M&A and Sarbox Shareholder rep issues Sarbox: No one really understands it You see a massive amount of legal / CFO turnover and consequently law firm change right prior to the IPO How does this change your business model? 6 ©2009, Foundry Group LLC, Proprietary and Confidential

Other Stuff Divorce. Way up in the bad times. What does this mean to your CEO’s / exec’s motivation?  Not just because he / she is depressed  But now have 50% of their stake that they previously held How do you deal with disclosure? Legal controls over bank accounts. Embezzlement / False statements. Should securities lawyers help their clients with this? VC FAS 157 / Topic 820 issues Law Firm 2.0 – Clients killing you on fees 7 ©2009, Foundry Group LLC, Proprietary and Confidential

I’m Done – Questions? Q&A 8 ©2009, Foundry Group LLC, Proprietary and Confidential