Haim Zaltzman & Ben Potter on Startup Growth Equity & Debt

Haim Zaltzman & Ben Potter of Latham & Watkins - Podcast Transcript

Scott Orn:	Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. My very special guests, two guests today, Haim Zaltzman at Latham and Ben Potter at Latham. Welcome, guys.
Haim Zaltzman:	Hey, thanks for having us, Scott.
Ben Potter:	Yeah, thanks for having us, Scott. Great to be here.
Scott:	We just ironed out … Before turning on the mics, we figured out the solving the legal billing solution.
Ben:	I’ve got number two, yes.
Scott:	These guys are going to be millionaires pretty soon, or already are millionaires, probably. Thanks for coming by. Haim and I have been friends for, god, eight years?
Haim:	It’s probably been even longer if you really want to [crosstalk]
Scott:	You look a lot better than me. He’s also given me a lot of advice as we went through the child process, so thank you very much for that.
Haim:	Yeah. I don’t know if other people would think of it as good advice, but it was advice.
Scott:	It’s advice. Some of it, I’ve enjoyed, and some of it, my wife’s looked at me and questioned the validity of that advice.
Haim:	Very practical. Very practical.
Scott:	These two guys are lawyers at Latham, one of the biggest, best startup law firms in the Valley, in the United States, really. Haim is the guy in venture debt. I’m going to brag about you. I’m not going to be shy. You are-
Haim:	You’re going to make me blush.
Scott:	… Number one, number two in all of the country on venture debt, so there’s a ton to talk about there. Then, Ben, maybe you can give your background in your practice and the stuff you focus on.
Ben:	Yeah. I am a guy who walks in Haim’s shadow. I’m a startup lawyer within Latham-Watkins. I represent companies and venture firms to finance them, whether growth equity or not. I have a company-based practice principally, working with them as they get funded, advising through general company representation matters, and ultimately through a liquidity event. So, focused principally in tech and life sciences. I’m the co-chair of our tech industry, but I have a pretty sizeable life sciences practice as well-
Scott:	Wow.
Ben:	… Being located in the Bay Area. It’s a great place to be right now.
Scott:	That’s awesome.
Haim:	Most importantly, he works a lot with me.
Scott:	You guys are [crosstalk]
Ben:	In his shadow.
Haim:	Yeah, yeah. When he does the growth equity, I do the growth ed part, and so we work a lot together.
Scott:	That’s awesome.
Haim:	Yeah.
Ben:	Yeah.
Scott:	It’s fun, though, when you have that continuity, right? You guys know each other. The clients benefit from that.
Haim:	I mean, it’s fun for me. Ben’s struggles a little bit with it, but …
Ben:	No, it’s a point of pride. I get to bring Haim into every single company I work with because every single company needs debt financing [crosstalk]
Scott:	Does he take you out to dinner like once a month, or how does that work?
Ben:	No, vice versa.
Scott:	Oh, oh, oh, oh. Now, Haim, give me your quick background.
Haim:	Sure. Haim, a partner of Ben’s at Latham & Watkins. Sit in San Francisco in our Silicon Valley office in Menlo Park. I have a fairly national practice handling all of the, quote, growth debt at Latham & Watkins. What that means, we can talk about a little bit more deeply in a second. It’s anything from the fairly small venture debt that you see for very early startups, to what we call structure debt, debt that has to do with startups that aren’t yet cash flow positive. I can’t service a debt, but I already have revenues and other assets that could be used as sources of payment for debt. These deals tend to be a little bit larger, more mature, but we’re seeing more and more of that in the early stage moving to late stage. Then more esoteric stuff in growth, so stuff like IP back debt, royalty financings on the health care side. That’s generally what we call growth. It’s anywhere from very little to no revenue to all the way up to probably like $15 million of EBITDA of cash flow. Health care, life sciences, and tech … I’m usually a pretty even split, and I’m pretty even split between my lender investor practice and the company side practice. And it’s all over the U.S., probably 40% here in the San Francisco Bay Area, another 30% in the Boston, New York area, and then a lot in Southern California. We have pockets everywhere.
Ben:	Yeah. Mirrors, like, the venture capital distribution.
Haim:	It definitely mirrors a venture capital, although we’ve been seeing a lot of action also overseas-
Scott:	Interesting.
Haim:	… With a lot of our lenders and investors going for … I mean, as you know, it’s become a global world. Everybody talks about the Chinese VC world, so that’s obviously part of it. But there’s a huge community in Europe, and capital knows no boundaries, usually. I won’t make any political statements. We’ll leave that to a different …
Scott:	Leave that to Ben.
Haim:	Yeah, a different session, hopefully with some whiskey involved. But we’ve been seeing a lot of deals. Randomly, I’ve done five Australian deals this last year.
Scott:	Really? We actually get a lot of Australian startups, too. [inaudible] really going.
Haim:	Yeah, Australia’s been, oddly enough, out of nowhere, really popped up into my radar, but Northern Europe, Southeast Asia. I mean, we see them all. Some Latin America. Yeah.
Scott:	That’s awesome.
Haim:	It’s been super interesting.
Scott:	You guys talked about how you kind of bring each other new deals. One of the questions that we kind of talked about was outlining growth equity, what that is, the definition of that, how companies use that. Then, also outlining growth debt and how that complements growth equity. You want to start with growth equity, Ben?
Ben:	Yeah, sure. As I mentioned, I have principally a company-based practice, so I work in a lot of VC as well. A traditional venture investment is investment into an unproven business with an unproven business model. Those companies get some product market fit, so to speak. You see an opportunity where a company has an opportunity to grow and scale, whether it’s scaling within their existing market, attacking new markets. It’s an opportunity for a venture firm or perhaps a crossover PE firm, we’ll talk about that a little bit, to invest into a company with an opportunity not to invest into sort of an unproven business model on a revenue play, but perhaps to invest into a profitability model with a proven unit economics model and really drive that forward. So, it attracts a new type of investor [crosstalk]
Scott:	But the unit economics might be, like, customer acquisition cost divided by … Or, LTV divided by customer [crosstalk]
Ben:	Yeah, I mean-
Scott:	Every dollar they invest, they five dollars of revenue or something like that.
Ben:	Yeah, I think that’s right. You get a lot of investors who are accustomed to more of a control investment as opposed to a venture investment, and they’re-
Haim:	Those are the private equity shops, right, the one in control.
Scott:	Yeah, yeah.
Ben:	And they’re accustomed to investing into a business with real free cashflow and real opportunity to hone the profitability model as opposed to the revenue model. You see these investors, when you talk about who they are, we represent a number of them, writing checks that are anywhere between 50 million to $100 million to $500 million with some of those Chinese investors Haim was talking about. It’s an opportunity that’s completely different than some of the artisanal VC firms that are investing really just with a 20% equity stake into a set of founders and trying to give them some running room to prove out the business.
Scott:	Yeah, but those later stage, the more structured investors, are coming in three or four or fix or six years after the VCs, right?
Ben:	That’s right, and-
Scott:	Once it’s proven?
Ben:	One point we want to discuss a little bit is it’s a little bit different by industry. Right? So, in life sciences, you’ve seen this phenomenon since around 2012, ‘13, ‘14, so-called crossover round, where … It very much looks like a growth equity play, but it’s a part of a play that’s a predecessor to an IPO. So, you’ve got the so-called crossover investor, the Fidelities, the T. Rowes of the world, folks who are active in the public markets but also sometimes take a position in a privately held company. In that case, and in that world, they’re not funding a profitability model, but they’re funding lots of scale into an opportunity where there’s a really defined road to an IPO. So, it’s that last mezzanine around into going into the public markets.
Scott:	Don’t they usually tell the company they’re going to buy in the IPO, too? It’s a little bit of like-
Ben:	That’s exactly right. That’s exactly right, Scott. Something that has happened in the last few years is you’ll see … We were just combing through some data over the weekend. These life science IPOS are oftentimes up to 30% or more participation by existing investors. So, it’s critical you’ve got a real anchor tenant heading that IPO from your existing cap table, and that’s oftentimes what the crossover round is geared to do. But it’s very much a growth equity play because those rounds are minimum 50, $55 million.
Scott:	Yeah.
Haim:	We’ve actually seen, Scott, the worlds converge just one way, but collide is another way. There’s just so much capital out there, and I know everybody’s sick of hearing. Capital, capital, there’s lots of capital. But there really is lots of capital, and we’ve been seeing the folks who are traditionally much larger private equity, big-fund players, looking for yield on one end, moving lower in the market, and also more importantly, strategically looking to get their foot in the door with seed or other rounds to try to make sure that they’re better positioned later on. We’ve seen a lot of the really big players, both from Chinese and the U.S. Private equity world, have both on the equity set of growth equity shops and set up growth debt shops in order to move to the late-stage technology market and/or the late-stage life science market, what we call the structured area, where there’s some revenues, companies or commercial, et cetera, in order to get a piece of that puzzle partly through yield, but also partly to make sure that their foot is in the door so that they get better opportunities later on.
Scott:	Yeah. What do you think it is, like, what changed? Because I remember those investors that weren’t super active back in the day. Was it that they used to be they were afraid they were getting only the dregs and that adverse selection was at work? Or is it like capital’s so abundant now that people just are not afraid of that, and they’re just going to … Or, they can do better diligence because of the internet? What are the factors that have facilitated that?
Ben:	I think part of it is an environment with low interest rates and seek for return, quite candidly.
Haim:	Yeah, that’s part, but I do think that there was a moment … I definitely think that’s what opened up the gates. When I think that the levy really broke is when folks realized that cashflow on the tech side isn’t a end-all in itself and that you can actually slice it with revenue. If the company has X revenue, but it’s not, recurring revenue is a really huge theme on the tech side. On the life science side, there’s always been a group of investors and including IPOS for companies that are extremely early or clinical, et cetera. I think the tech’s been actually trying to catch up with, oh my god, how can the life sciences guys-
Scott:	[crosstalk]
Haim:	… Do IPO in capital markets for companies that have zero in revenue, right, and only just an idea [crosstalk]
Scott:	And a phase two drug.
Haim:	Or phase two, right? But the milestone’s … It’s a little bit clearer, so I think folks have tried to incorporate that paradigm over to the tech. The first step they did after there were cracks, and it just went into yield is through recurring revenue SaaS models, but now they’re looking at, “Oh, this is sticky. This is still a pretty good credit.” A company that has $500 million in revenue and is in a growth space but is not cashflow positive, is that a worse credit than this little dinky company that has five million of cash but is not in a growth area? The answer is clearly no, but before that, they weren’t really looking at those models. Now we’re seeing a lot of the big credit shops and the investors really looking at it and moving more down [crosstalk]
Scott:	You said it started with SaaS. Just kind of for the audience, we talk about getting revenue support, like, the lender gets support. What do you mean by that?
Haim:	Just when a lender looks at a company … Obviously, I’m just the lawyer, not the credit guy. They’re looking to make sure that the company has quote, unquote, what it takes to pay back the debt. In traditional deals, you look at cashflow, which is you want profits to be able to pay back the debt. But what they’ve been able to find is, look, if a company is growing so significantly, even if it’s not cashflow positive, the reason it’s not cashflow positive, it’s not profitable, is because it’s spending a lot for growth, but you-
Scott:	Reinvesting.
Haim:	Reinvesting, but you still have all of this revenue. So, they could always stop the reinvesting and then generate the profits if they had to, or at least if they have enough revenue to be able to pay us back even though they’re not technically profitable. You can get companies with significantly more revenues who are pushing for growth than smaller companies that happen to be profitable but aren’t growing. You want the company that’s actually growing because we’re eating more market share. It’s more sticky. So, they started looking at part of the equity model and also that recurring revenue, the stickiness of the revenue to basically be a replacement in many ways, not permanently, obviously. Sooner or later, you want to make money, but a replacement short-term at least for growing companies for the profitability that’s usually the core of what the big banks lend on.
Scott:	Yeah, and then they can get … Then, eventually, they do the IPO because still a lot of companies … On the tech side, a lot of companies are losing money when they do the IPO. They’re still losing money, but their losses are not as much.
Haim:	Losses are less, but they’re showing trajectory. They’re showing growth, and the stickier the revenue, the recurring revenue, just a way to call it … In finance, we say the stickier it is, the harder it is to move off of it, the more … The contracts are longer term. Looking at one-year contracts is better than looking at one-month contracts, for example. There’s also to this analysis the investors, the big players, have always kind of looked at it on the equity side. Now that that’s kind of catching up and working together …
Ben:	Yeah, but again, the growth equity round has a different place for tech and life sciences, right?
Scott:	Maybe explain that, Ben.
Ben:	Well, so increasingly you’re seeing the growth equity round be the IPO, right? As the SoftBanks of the world are coming in, we have clients that are raising capital in huge growth equity round, so to speak, and they don’t expect to go public. That is their IPO, and that’s going to get them to the place where they get liquidity for their investors for alternate routes. Whereas in life sciences, it really … You look at the market right now, we’re 2X where we were last year in IPOs.
Scott:	Wow.
Ben:	It’s red hot IPO market in life sciences, and it’s very much a stepping stone and very much, as you were saying earlier, part of the play book to filling out the book for an IPO.
Scott:	Maybe for the audience, when a life sciences company does an IPO, usually that’s all new shares the company’s issuing that kind of builds their war chest. Right?
Ben:	Correct.
Scott:	With the tech companies, I think what I hear you saying is they’ve already done that big, late-stage round from a SoftBank or maybe a Sequoia Fund or another foreign investor. Maybe when they do an IPO, they’re only selling a few primary shares, and some of it’s investors getting out of the company. It’s like a liquidation event for some of the investors.
Ben:	It can be. Yeah, I didn’t mean … Don’t take what I said earlier as an overstatement. The IPO market is certainly open for terrific tech companies, but there’s so much opportunity for capital raised in the private markets to date still. Although, we’re looking at SoftBank. I think a lot of people are asking what happens in a world after SoftBank?
Scott:	Yeah.
Haim:	He’s talking about $100 billion Vision Fund from SoftBank that are raised with Saudi Aramco and others. $100 billion is large for any fund, but it is … Just for the audience, it was like the Titanic of … We’ve never seen a ship like this ever in the VC world. $100 billion. I mean, the average fund is 500 to a billion, if that. There’s a few outliers that were like two, three, four, five billion max. Then, to jump in there with 100, I repeat, $100 billion-
Scott:	It’s like Dr. Evil, Austin Powers.
Haim:	It was literally like you’re just tossing an ice berg in the middle and seeing how the water swishes around it [crosstalk]
Scott:	My friend was a executive at a late-stage company that took money from them, and I think they took like 500 million. He’s like, “Off the record, they were demanding we give you a billion for a long time.” Management was like, “That’s nice. We just don’t need it. Not enough people want to sell,” and da da da da da. It warps people’s behavior a little bit.
Ben:	Correct. But it’s not just SoftBank, too. It is the phenomenon of capital coming in from overseas. We represent a company named Impossible Foods who’ve raised … They’ve had success in raising a really large convertible note financing, for instance, and it’s largely been funded through funds out of that region of the world, the Temaseks of the world. Those checks are bigger than they were in Silicon Valley a few years ago, and it’s just because the capital’s there.
Scott:	This is crazy, but I did there series A venture capital-
Haim:	Yeah, I actually remember that.
Scott:	You remember that?
Haim:	I do remember that.
Scott:	We worked together.
Haim:	Yeah.
Scott:	Oh, we did.
Haim:	Yeah, we did.
Scott:	Yeah, yeah, yeah, yeah, yeah. That makes sense, actually. Yeah, yeah.
Haim:	Yeah. No, you guys definitely were, yeah. We’ve done their debt since like the $3 million equipment line with you guys [crosstalk]
Scott:	Oh, I didn’t even think that much. It was-
Ben:	That was when they were Meat 2.0.
Scott:	They had like five different names, and they had crazy … Anyways, the company’s kicking ass. That’s awesome that they can go out there and raise-
Ben:	But it’s another example, that one, food tech, where there’s a lot of opportunity in the private markets to fund a company with real … That’s going to commercial scale. It’s in restaurants now. That’s what they’re fundraising for. They don’t need to go the public market [crosstalk]
Scott:	That’s amazing.
Ben:	They can just [crosstalk]
Haim:	Yeah, and there are obviously advantages to staying private, right? I mean, everybody weighs them. There’s the cost of-
Scott:	I mean, we talked about them real fast, so people know.
Haim:	Ben would probably do better, but obviously, everything you do with public, you have to disclose it if it’s material so you get the public reaction to it. People are much more focused on the stock. It’s much harder on the short term. People are really focused on quarterly. Again, this is not a negative.
Scott:	Yeah.
Haim:	The positives obviously is liquidity in the market. There are more financing choices generally available, but you weigh that as an institution on what you can still obtain in terms of credit on the private market and not having to deal with the outside eye. There’s also a more regulatory and other things that happen when you’re public than when you’re private. IDSCC and other organizations-
Scott:	Your competitors can see everything you’re going to do.
Haim:	The competitors can see a lot more of what you’re doing. It’s a lot harder to be stealthy and push towards the long-term type strategy. So, for tech companies who are not profitable yet, right? And that’s a key word. They’re not turning profit to be able to stay private, and not have to deal with that public disclosure can be an advantage that some of them prefer. I mean, it each depends on the view of the board and the management and the strategy, but we obviously are seeing it and market’s seeing many companies in the tech world. Oddly, not as much in the life science world, which is just much more familiar and used to very small companies who are at clinical stage even, going public.
Scott:	Yeah. I think another reason for staying private is you can really build your management team out of the spotlight and get your VPs, get your directors. Sometimes you make a bad hire, and a bad VP of sales can really torpedo a company’s sales for a couple … No one wants to see that happen, but-
Haim:	Or a bad lawyer. If you don’t have a great outside counsel, I’m just saying, that’s [crosstalk]
Scott:	Which brings me to Latham & Watkins, yes.
Haim:	Yeah, have we spoken about Latham [crosstalk]
Scott:	One of the questions we had was … This is the layout. How busy are you guys right now? Is it busy out there? I say that jokingly.
Ben:	I will say it’s busy. Yeah.
Scott:	You’re working on the weekend, obviously.
Ben:	As I indicated earlier, for life sciences, the IPO market’s at 2X. It’s an extremely active market place and remains that way across all sectors. That means, topic de jour, a lot of growth equity rounds are being raised in advance with those IPOs in the life sciences sector or just in tech. I can’t remember a time in my practice when it’s been busier.
Haim:	The reason I looked at my email is not just to be rude, which I can be at times. Since we started this meeting, this interview, what, like 15 minutes ago, I’ve received 58 emails.
Scott:	No way.
Haim:	Yeah.
Scott:	That’s amazing.
Haim:	So-
Scott:	I thought I get a lot of emails.
Haim:	Granted it’s lunch. I think a lot of my clients and other folks try to torture me by hitting me right when they know that I’m trying to eat.
Scott:	The [inaudible] of Haim service?
Haim:	It’s great. We’re not complaining. We obviously have the bandwidth. I mean, one of the benefits again, not to tout Latham too much, but-
Scott:	No, tell it. You guys are awesome.
Haim:	One of the benefits is we do … It’s a broad platform with a lot of people in offices around the U.S. Internationally so that we can spread the work when it hits when there is an issue. Because clearly, no single lawyer can handle everything, so we are really proud of that platform that we’ve built and continued to perpetuate. Back to your initial question, it’s as busy as we’ve ever seen it. Part of it I think is market dynamics. Part of it’s political uncertainty. We really do think that’s happening in that-
Scott:	Is it because it’s a take the money and run, kind of like ring the [crosstalk]
Haim:	We’re not sure what’s … The market’s really good, and we have in the back of our head … Even though we can’t really talk about it because it’s irrational to talk about it, but we have in the back of our head that something can change with the current administration and its reactions and posturing from day to day. Therefore, we don’t really care about the marginal cost of anything relative to not being able to have access, so let’s just close this deal and let’s push it. When everybody does that, you get a lot of market push.
Scott:	That’s the exact advice I give our startups, always raise more money, get it done quicker. Also, I mean, don’t you guys feel like you have the collective 2008 to 2010 or 2012 hangover still in the back of your mind? I still think about that all the time.
Haim:	Yeah.
Ben:	Yeah. In some ways, we’re depression babies now [crosstalk] started our careers.
Scott:	Yeah, I think so. Well, we’re probably old enough all to remember ‘01, too.
Haim:	Yeah. No [crosstalk]
Scott:	Maybe not you.
Haim:	No, I remember it, although … Yeah, I have a great [crosstalk]
Scott:	You were in high school.
Haim:	I was not in high school. I graduated from college, Scott. Scott’s just commenting on the fact that I have very big baby cheeks.
Scott:	Yes.
Ben:	Oh. Well, you know, there’s this autocatalytic effect, too, because we’re out of the home more doing our work, and so we give our email addresses to our wives. So, then Haim gets 30 emails from his wife. I was actually at the office. I actually got a handwritten letter from my daughters-
Scott:	Aw, that’s awesome.
Ben:	… Mailed to my office because I’ve been home so little.
Haim:	Oh. Oh.
Scott:	That’s the barometer of how hot the market is right now. It is a hot market.
Ben:	It is.
Scott:	People are ringing their cash register.
Ben:	Yeah, for sure. Even in the summer months.
Scott:	We see that, too. We’re seeing big-
Haim:	Yeah. I mean, you guys must be-
Scott:	… Big rounds getting done.
Haim:	You guys must be-
Scott:	It’s crazy.
Haim:	Flipping it back to you, I mean, how are you guys handling this flood?
Scott:	Almost everyone at Kruz Consulting worked over the weekend this weekend, and this is July. It’s busy as shit.
Haim:	Yeah, I thought it was going to end with the end of quarter. I thought we were going to get a reprieve, but it didn’t really last. It was not really …
Scott:	For our team, I mean, we have a lot of younger people. We’re still building the firm, so a lot of people we hire are younger are staff senior accountants who are learning their trade. Actually, our people are, and probably a lot of your younger people, too, are willing to make the trade-off because they’re getting this incredible experience, the fire hose experience. It does kind of stink that a lot of people were working over the weekend, including Vanessa and I, who have a five-month-old, but the trade-off is there, and everyone’s accelerating their careers and getting so much experience really quickly that it kind of makes sense.
Ben:	That’s good. That’s good.
Scott:	What are some of their ways of developing your legal team talent, the people that work with you, support those … You talk about having the deep bench. What techniques do you guys use?
Haim:	Are we allowed to talk about the crying?
Ben:	The performance reviews, right? No, that’s a great question. One of the things we’ve focused on in our startup practice in Silicon Valley is really developing out of Silicon Valley and sharing some of our mind share in developing a so-called national practice. We’ve got offices in Boston, L.A., that are specific to emerging companies.
Scott:	That’s really smart.
Ben:	Yeah, and so we really attack the recruiting but also development of our talent nationally and, knock on wood, even globally. We’ve got folks in the UK, a few names I can mention that we’re harvesting, growing. At Latham, we review our associates twice a year, so we have a formal process we look at.
Scott:	We do the same thing, yeah.
Ben:	But we try to do a lot more than that. We really try to staff people on transactions and look at it from a departmental standpoint, really make investments in people’s careers and watch how they’re coming up, and make sure they’re really getting more than just an apprenticeship but they’re getting access to a good variety of deals and supervisors, and they don’t all have to work for Haim.
Haim:	Yeah. Yeah, working for me’s the hard part, although it seems to be very popular lately. No, that’s exactly right. We try to develop the firm. The firm does a really good in terms of associate progression, associate development. One of the things that I personally try to do is just stay as involved and actually show the associates the larger business part of it. This is what we do for the clients. This is what it takes. This is why we’re really a part of the client teams, taking them out to meals, taking them out to events with clients so that they see we’re social and that we’re really part of the end product the client does. Then, just try to work on kick-ass transactions for high-profile clients that we love and get people to have a sense of ownership of that. Because the work hours can be intense. This is definitely not for everybody, which is … It is what it is. There’s obviously some things I wish I could change that are client-driven, and some things that are my personality-driven, the ones that Ben was referring to early that make it more difficult. And that’s even before alcohol. We try to be very hands-on and really tailor to people, but it’s tough at times because of workflows. But we really to try to build out those compartments.
Scott:	I’m sure the younger group are getting this. You guys are trusted advisors. I haven’t worked with Bed and directly as Haim, but what makes Haim awesome in a deal is that you can give the practical implications of any kind of decision that the management team is making. Like, this term will either come back and bite you this way, or we need to push really hard to not ever get in on this term, da, da, da, da, da. Which is one of the reasons I like working with you so much because you … It’s the business advice, actually. You’re not even really giving legal advice. You’re giving business advice.
Haim:	I appreciate that, and I’ll pay you for that statement later. We try to be very practical. We know our clients don’t want to grind most of the time on everything. Cost is obviously an issue on some end, but mostly, it’s just the efficiency of getting deals done. We try to be very practical. The concept I always focus on is added value. A lot of folks can do just your legal docs. We think we do them better. We do them just as well. But a lot of folks can do them, and there’s great law firms out there and other great lawyers. No denying and no needing to sandbag anyone. But in terms of adding value and really pushing our client, both from our practical advice, doing stuff with them to help them connect, do whatever it is, we’re very prone and very focused in trying to do that.
Scott:	There’s a little bit of a network effect, right? Because you guys see so much of the activity in the Valley that you know effectively what the market is. I mean, do see that on the growth equity stuff, like you know what terms should be, liquidations, preferences should be, all that kind of stuff?
Haim:	He dreams about them.
Ben:	Well-
Scott:	In a good way.
Ben:	Without question. Not the dreaming part, but that’s where we’ve added a lot of value [inaudible] I said I’m a company lawyer. It’s true, but we also represent a lot of investors, and that’s where flip it around-
Scott:	That’s interesting.
Ben:	… And give a lot of value and say, “Look, you’re coming into this venture community and this potential club deal with a different perspective perhaps because you’re a private equity investor. I’m here to kind of tell you how your terms sheet is going to look different than the others and some places where you might want to hold firm and some places where you might want to try to accommodate and look more like the others. That’s a way of saying we’ve got a really strong sense of what market is. For example, whether folks are asking for preferences in their liquidation stack, or if they’re looking to go pari passu, if they’re seeing any structure around that or dividends, if they’re asking for redemption rights, if they’re getting a force on an IPO liquidity event after a certain period. Because those are some of the terms that some of these folks who are coming in later are looking at in a very different way than the early-stage investors do when they’re just looking for a home run.
Scott:	You’re kind of looking out for them in the sense that if they’re trying to break into a new market, correct me if I’m wrong, but they don’t want to look like the outsider. They want to kind of look like they’ve been doing this for a long time. Probably a lot of them in the management team comfortable taking their money is that no, we’re not going to screw you, and we know how to do this and da, da, da, da.
Ben:	Totally.
Scott:	So, if they put the wrong foot forward-
Ben:	Totally.
Scott:	… They violated that.
Ben:	They want to put a step forward that’s authentic to their own firm and their values but that is fine-grain with respect to the terms already existing and the personalities and the venture firms are already around the table.
Haim:	That’s important both for the lenders and the investors. I mean, the example I always have is there’s the customer-facing stuff, which is really important. We’re like, “No, don’t use this term. Don’t use this type of term sheet. They’re used to seeing this-
Scott:	Yeah, totally.
Haim:	… So try to redo it as this.”
Scott:	Totally.
Haim:	But again, these are large institutions, oftentimes, or institutions, right? Large or small, and they have their own animals internally, so you need to get credit or your investment committee comfortable with doing something different. We try to be helpful on that end as well. “No, no. This is just like this. This is how you slice it. I just translated you to this earlier-stage VC type format that these guys are going to understand, but you’re getting the same credit or similar credit, or it’s close enough to this.” We think we add a lot of value because we are … Again, since we are on the mic to plug ourself, we really are proud of the zero to 60. We really can take a company from zero to 60. At 55 miles an hour, you IPO’d, you’re cash flowing, you have certain IP needs, you’re working overseas. The set of legal issues are very different. A set of investors and lenders who are in that part of the world is night and day from where they were when you were five million in revenue earlier. But we see them all, and we can help translate those worlds without having to jump ship or to skip to another car, to use the metaphor, and to really … We find that to be the added value of the platform that we can really sell.
Scott:	That’s awesome. It’s ultimately, you have to get … If you make mistakes early, your lawyer isn’t good enough to warn you about these issues and things coming up, then you’re never going to make it to 55 miles an hour, right?
Haim:	Well, you-
Scott:	Or, it’s a lot harder to.
Haim:	It’s a lot harder. Look, we don’t want to give ourselves too much credit, but … Look, if you have an amazing product, you’ll work it through likely if you have the right capital and amazing product and you’re really smart. A lot of startups we will be able to push through, but the mistakes cost people time. They cost people personnel. They cause people heartache. Oftentimes putting the wrong foot forward, that can be more’ costly later on. So, making sure the next step and thinking of it is very important. Bringing myself and Ben into the picture, when a seed company just starts up [inaudible] them in, they’re probably not that much looking for debt. But if they’re not thinking of debt, which 95% of our startups are, and they don’t have a strategy for it, they haven’t spoken to it, they haven’t, they’re missing something like 30 to 40% of the capital that’s available for startups, and even more so after you IPO, right? Who thinks of their business strategy and leaves out a third?
Scott:	Yeah.
Haim:	It just doesn’t make any sense, so that-
Scott:	It could be life-changing for entrepreneurs.
Haim:	Yeah, it could be huge, so we try to get at a conversation. If they want to ignore us earlier on, I get it. I mean, I have lots of people-
Scott:	I get ignored.
Haim:	I get ignored. It’s a natural thing. But we try to bring that added value in to help strategically in how they think of the options.
Ben:	It’s not a transaction-based relationship with our companies. It’s a relationship. We really try to get a real sense for the culture and the personality of the client. Because we pride ourselves on being the best in the world in providing advice and getting transactions done, but that’s in many ways for what we do is startups table stakes. We really want to be able to translate that and the terms they’re getting into ways that the companies can understand. The founders who may be doing this the first time, the second time, can really appreciate and understand what layering a participating preferred stock security term will do to their cap table when they try to raise capital or try to exit and in terms of thinking about and speaking about things that can really make a massive and material misstep or just a step that the founder doesn’t fully appreciate because they don’t … They’re running around financing with a bunch of safes or notes, and they haven’t modeled out the dilution in a way to really understand when they raise their first round, how that actually plays out in a cap table and what that looks like. There are a variety of things that … We’re outside counsel, but we try to view ourselves as inside counsel, as kind of really being a trusted advisor and a teammate to the founders and what they’re trying to accomplish in building their product and their business.
Scott:	I love that about you guys. You guys are in it for the long haul. The fact that you even brought up Impossible Foods, which I think that was a company that started eight or nine years ago, right, or forever ago, that you’re still working with them is amazing.
Ben:	Well, yeah, and it’s an added perk if you’re involved with a mission-driven business that you’re aligned with, right?
Scott:	Yeah.
Ben:	I am vegan, and it’s been a privilege to work with Pat Brown and the founders and watch the team grow up. That’s just an added benefit of the job that I can at least explain to my wife why I’m slaving away [inaudible] why she’s having our children send us cards in the mailbox.
Haim:	My wife wishes I ate more vegetarian.
Scott:	You look good. You look healthy.
Haim:	Oh, just the stress. But it’s all good, yeah.
Scott:	All right. We got to wrap it up. You guys are amazing. Maybe you can tell everyone where they can find you?
Haim:	Sure. Probably the easiest is just email haim.zaltzman@lw.com. By far, the easiest. Ben?
Ben:	Yeah, same here. Ben, ben.potter@lw.com. Feel free to reach out. Would love to hear from you.
Scott:	We’ll link to this onto your website and all that kind of stuff. Ben-
Ben:	Hey.
Haim:	No, Scott thank you.
Ben:	Yeah, thank you, Scott.
Haim:	By the way, we didn’t spend a lot … But what you guys have been able to do here and grow Kruz has just been sensational.
Scott:	I appreciate it [crosstalk]
Ben:	There’s huge need for what you’re doing.
Scott:	I know, I know.
Ben:	We’re looking forward to sending as many clients to you as we can.
Scott:	Thank you. Thank you. It’s a little scary sometimes because sometimes we can’t take them all, but we’re doing our best. Ben, Haim, you guys are awesome. Highly recommend. They’re amazing. Call them. Make them your lawyers. Thank you, guys. Appreciate it.
Haim:	Thanks, Scott.
Scott:	Awesome.
Haim:	Really appreciate it. Thank you.

Haim Zaltzman & Ben Potter of Latham & Watkins on Startup Growth Equity & Debt

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