Longtime Glom readers know that I've been interested in the new private secondary markets for quite some time. Indeed, my summer writing focused on these new markets, where accredited (i.e., wealthy) investors can buy shares of pre-public companies from current shareholders. Security Law's Dirty Little Secret, forthcoming in the Fordham Law Review, was the result.
In the piece one of the concerns I voice is that these new markets risk disrupting the "nurturing" model of venture capital. The dominant VC narrative is that part of what makes Silicon Valley et al. so successful is that venture capitalists bring not only dollars, but also expertise and support, to the entrepreneur. VCs take seats on a start-up's board and actively advise it on the myriad challenges a fledgling company confronts. My worry was that the secondary market, by providing an easier exit for venture capitalists and substituting faceless investors for engaged, experienced VCs, risked upsetting the successful Silicon Valley start-up model.
Enter AngelList, a website backed by SecondMarket, one of the two big players in the new secondary market. According to today's WSJ, AngelList allows angel investors to invest directly in start-ups via the web. Using this website, accredited investors can buy shares straight from the company. Investors may never meet or even speak with the entrepreneurs at all.
Off the cuff, here are some thoughts:
- Angels aren't VCs. The loss-of-expertise point may matter less here. Angels generally are less active investors than VCs and take fewer control rights, so substituting unknown web investors for angels may not make much of a difference. Where you come out on this depends upon what kind of intangibles you think angels bring to the table.
- Small dollar amounts from investors--as low as $1,000, according to the article--may lower the incentives of the angels to monitor any one investment. The WSJ quotes one investor: "You say how much, hit 'go,' and you're committed," he said. "It's almost as easy as the Amazon one-click checkout." This ain't you grandmother's--or Peter Thiel's-- angel investment, boys and girls.
- This money, unlike with the secondary markets, goes straight to the start-ups, and gets there closer to when they need it. That seems like a huge plus.
- It's more egalitarian. One attraction of Angelist is that it brings the Internet's "cut-the-middleman" angle to angel investing, and makes it less dependant on who you know in the Valley.
- But it's only available to accredited investors, and thus ripe for criticism from two fronts. First, from the "$1 million ain't what it used to be" crowd, investors with that net worth and/or $200,000 in annual income aren't necessarily sophisticated enough to handle these kinds of risky investments.
- On the flipside, if you're intrigued by AngelList, you're out of luck unless you have the money to get in the door. With more and more Americans qualifying as accredited investors, AngelList is just one more reminder that, when it comes to investing in the U.S., some investors are more equal than others.
So, just as I was getting a handle on moderation with the timesuck that is Facebook, a friend tells me about Pinterest. If Facebook is a timesuck, then Pinterest is a black hole: a very pretty, tasteful, affirming black hole.
So, what is Pinterest? I'm still not sure. It's official description is an "online bulletin board." In fact, each user (you have to be invited or get on the waiting list) may have numerous "boards," categorized by topic. Then, users "pin" images to their boards. These may be photos by the user, but almost all the time these are photos that are captured elsewhere on the web with the "pin it" app. The user may comment on the image or just pin it. When you log on to Pinterest, you are shown all the images that users have pinned on their boards -- the users you are "following" or the ones that Pinterest automatically had you follow when you joined based on your interests. If you like another user's image, you can repin it to your board. Generally, you will follow your friends, possibly other users you encounter, and then I sort of get confused.
What are people pinning? The folks I follow (and me) generally pin recipes, design ideas, fashion ideas, kids' ideas, and crafts. There are a lot of topics. I haven't pinned that much. I'm more of a browser than a pinner. I still am not quite sure what the point is except to have a pretty website to scroll through every day with photos of things most of my friends (and me) like -- a recipe to turn a watermelon into an open-mouth shark with fruit salad coming out, instructions on how to turn your builder-quality bathroom mirror into a framed thing of beauty, witty poster sayings, crock-pot recipes. what's not to like? And, unlike Facebook, there is no pressure to be witty, no requirement to read posts about other people's kids, no fear of running into extreme politics, and no fear of old sweethearts seeing your beach pictures. If we are putting our shiniest face forward on FB, then on Pinterest you are putting the shiniest face forward that you can conjure up from design/fashion/food images -- this is what my house would like like and the cooking smells it would be filled with if I had unlimited time and money.
So, now to the point. How does this make money? So far, Cold Brew Labs, headquartered in Silicon Valley, has raised $27 million in funding based on a $200 million valuation. Hmmm. If you look on Pinterest, there is no advertising. And ads would completely ruin the visuals. There is some sense out there that Pinterest may be making money based on links back to merchants. So, if I decide I like a dress I see on a website, and pin that to my board, then someone clicks back to that website, there is some opportunity for revenue there. There also seem to be commercial folks joining Pinterest. A radio station we listen to here in Champaign has been mentioning (all the time) that it has joined Pinterest. The radio station is nonprofit, but surely there are forprofit firms joining Pinterest. There are a lot of Etsy folks on there. There's also the possibility that some users who create boards like "New Dresses From X That I Love" are really X employees. Then the "ads" would be hard to distinguish from "user pins," wouldn't distract from the visual flow and would generate revenue. But this is guessing.
I have two problems with Pinterest. First, I can't really figure out how to use the site. I can't find my own friends that I know are on it. (Unlike FB, the "find friends" search engine can't find squat.) More importantly, I'm worried it has copyright problems. People are pinning anything they want from anywhere they want. If the pin comes directly from the original image on the web, then under the image, the link appears, but that's it. But who knows what images are going up without any sort of attribution. Here are the Terms and here is the Copyright Policy. Basically, users promise not to violate copyright when they pin stuff up there, and Cold Brew Labs promises to consider, in its discretion, any complaints that users have violated copyright.
Besides that, I did make the slow-cooker basalmic pork tenderloin, and it was good.
Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.
Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.
To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.
How can law schools help?
First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.
Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?
Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.
When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.
Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.
This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.
Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?
Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.
If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.
When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.
The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.
The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.
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When Adam Liptak wrote about the willingness of judges to play the role of charitable donors with left over class action settlement proceeds, it was news to me. The schmancy new poli sci blog The Monkey Cage recommended that charities ramp up their "take a judge to lunch" program. Heh. But the whole "judges doing something different" concept is not an outlier, it's a meme. Judges are by no means inevitably activist, but they're not just neutral arbiters either - sometimes, they revel in the opportunity to run an agency. Other times, they prefer comedy. And now they're doing charity. Breaks up the workday at least.
Bonus: I like the Monkey Cage's quick hit take on favorite Serbian political aphorisms too.
Sox has turned out to be a continuing cost item (bonanza), and not the one-off expense that listed companies (accounting firms) had hoped (feared). Year on year audit fees for US-listed companies continue to rise, according to a report by Foley & Lardner, as described by the Financial Times. The finding gives lie to the conventional expectation that SOX costs would largely be borne in the early years following enactment, as companies scrambled for 404 compliance. As a result of rising audit fees, SOX restrictions on non-audit services have not harmed accounting firms as was feared. Instead, total fees have risen since 2001, the year before SOX was enacted.
The report also confirms the disproportionate impact of SOX on small firms that many, including my colleague Bill Carney, have previously detailed. Fees paid to auditors nearly doubled on average between 2001 and 2005, and last year audit fees paid by small companies rose 22 percent. For the biggest companies, by contrast, total fees climbed by only a percentage point.
Heather MacDonald wrote a scathing indictment of law school clinics, which appears in today's W$J. Using the Alito hearings as a springboard to discuss "mainstream" views of law, MacDonald offers clinics as Exhibit A for the notion that law schools are incubators of left-wing political activism:
Today's clinical landscape is a perfect place to evaluate what happens when lawyers decide that they are chosen to save society. The law school clinics don't just take clients with obvious legal issues, such as criminal defendants or tenants facing eviction. They take social problems--unruly students in school, for example--and turn them into legal ones. Florence Roisman, a housing rights activist at the Indiana University School of Law, has inspired clinicians nationwide with her supremely self-confident call to arms: "If it offends your sense of justice, there's a cause of action."
The original rationale for many clinics disappears under their political agenda, even though schools still invoke it. Harvard, for instance, explains why law students should enroll in a clinic by emphasizing craft training: "Practical learning . . . should not be deferred until after law school graduation," the faculty declare. But what "skills of legal representation," in the faculty's words, will students in the Gender Violence, Law and Social Justice clinic pick up in researching "gay, lesbian, bisexual and transgendered awareness" for the Massachusetts trial courts, or in helping with the "development of a new self-defense program" to prevent acquaintance rape?
New York University's Brennan Center Public Advocacy Clinic explicitly disavows advancing a student's lawyering knowledge: It is simply a vehicle for every type of left-wing political advocacy. The center spearheaded one of New York's most powerful welfare-rights groups, and, to make sure that the supply of left-wing agitators remains high, it also developed a "community advocacy" curriculum for high schools. Nor does another NYU clinic, this one on immigrant rights, limit itself to law matters. Students help lead protests and then rustle up media coverage for those protests--part of what the clinic calls "explor[ing] . . . ways of being a social justice lawyer." Students in Georgetown's State Policy Clinic work on "building a new economy that is inclusive, participatory and environmentally sustainable." Yale's Legislative Advocacy Clinic aims to move Connecticut toward "a more progressive agenda in taxing and spending revenue."
MacDonald also touches briefly on the subject of business clinics:
Ask why more clinics don't represent small-business men and you'll hear: We are "people's lawyers," representing clients who cannot afford attorneys. Oh, really? Georgetown University's Institute for Public Representation represents the American Cancer Society, the American Heart Association and the American Lung Association in tobacco litigation. The idea that these charitable behemoths could not pay for lawyers is silly.
If law schools were really serious about preparing students for their legal careers, every one would have a transactional clinic for small businesses. The vast majority of lawyers advise clients on business deals -- negotiating contracts, setting up corporations and partnerships, trying to avoid legal and tax liabilities, and arranging securities offerings and registrations. Struggling businesses, including those run by minority entrepreneurs, are hurting for lack of such counsel.
When I was working at Skadden in Wilmington, Delaware, I was encouraged to participate in the firm's pro bono efforts. Being a corporate transactional lawyer, I felt more than a bit shy about taking on a death-row inmate as a client, so I suggested to the firm's pro bono coordinator that I might spend my time working with various economic development groups in Wilmington. These groups provide services and financing to low income entrepreneurs, often focusing on women and minorities. The pro bono coordinator (in the New York office) scoffed at my proposal: "There is no such thing as an indigent entrepreneur!"
Despite his unwillingness to back my efforts, I received local support from the partners in Wilmington and eventually assisted the First State Community Loan Fund in making some of its first micro-loans. These loans paid for a sewing machine, a computer and tax-preparation software, and inventory for a small hardware store. The repayment rate was outstanding, and I daresay that a few lives were changed, including mine.
Since entering academe in 1994, I have been a cheerleader for business law clinics. Although I cannot take credit for its realization, I participated in the early discussions that lead to the creation of the Business Law Practicum: Community Development Law Project at Lewis & Clark Law School. We have had similar discussions at Wisconsin, though we are a long ways from launching a business law clinic. Nevertheless, business law clinics already are fairly common and they are proliferating. (Just Google "business law clinic" and you will find plenty of examples.) In my travels, I have not sensed any of the hostility that I experienced in my foray into pro bono work at Skadden, and my sense is that the attitude referred to by MacDonald is receding.
Thanks to Danny Sokol for the tip.
UPDATE: I just caught up with Larry Ribstein's post on this from earlier today. Larry contends that few law schools have business law clinics, and though I think there are more than he knows (I am on a listserv for business law clinicians, and they seem pretty numerous to me!), his core point is sound:
This is important training for the real world of law practice that is not being done either at law firms (now focused on squeezing as much profit-per-associate as possible) or in law school classrooms.
In his kind introduction, Vic described my summer employers, The Institute For Justice, as "protect(ing) widows and orphans from large corporations. Or maybe it's the other way around." The discussion in the comments of my last post counsel me to point out that IJ does indeed protect widows and orphans, quite literally.
The discussion in those comments has focused on the 6th Circuit case of Craigmiles v. Jiles, (UPDATE: A more readable HTML version is here) which some people suggest raises the specter or promise of Lochnerism. In Craigmiles, the 6th Circuit struck down part of the Tennessee casket monopoly, which forced people to undergo two years of special education before they could sell caskets. The ulterior motive, as with the bar exam, teaching certifications, and the Louisiana florists' license, is to raise a barrier to entry, keeping supply artificially low and therefore keeping prices artificially high. Further background, from IJ, is here [For what it is worth, this same challenge was laughed out of the 10th Circuit].
Christine's reaction is typical of what I tend to hear from those who ponder the economic merits. Who could be in favor of letting funeral directors use the power of the state to rook extra money out of widows and orphans? The skeptics tend to be those who still don't support this particular piece of protectionist legislation, but worry that some day, some future piece of protectionist legislation that they do like will fall to the same scythe.
Of course, I am being a bit unfair to Craigmiles's critics in the paragraph above-- there are also those who simply think that nothing in the text (or history?) of the 14th Amendment justifies even vaguely serious review of legislation that injures only widows, orphans, and entrepreneurs. This is fair enough, I suppose, but it is nice to be clear about who the victims are.
[This post is also the perfect occasion for a disclaimer-- nothing I post here should be attributed to anybody other than me, especially, for example, The Institute for Justice, The Yale Law School, or other bloggers back at Crescat.]
When I was searching for judicial opinions to include in my casebook, I was shocked to see how many cases involved family businesses. Children versus parents, brothers versus sisters, cousins, cousins, cousins. When conflicts erupt in a family business, the issues of a lifetime often are laid on the table. And the focus of these disputes is always the same: control. In many instances, this is the genesis of the problem:
The most significant problem which will prevent family businesses from successful transition into the next generation is not estate taxes, not competition from the Wal-Marts of the world, not the lack of reasonably sound financial planning, and not the lack of industriousness or work ethic of successor generations. It’s the epidemic behavior exhibited by senior generation or founding generation business family members who refuse to let go of their companies!
When students approach with concerns about working in a family business, I advise them to be extremely cautious. Being a cohesive family can be tough enough without adding the stress of a business. And do you really want to be under your parents' thumbs until they die?
Hat tip to Law & Entrepreneurship News.
Anita at Small Business Trends posted a link to a story from the Kiplinger Letter about college graduates moving to "small towns." Among the "small towns" on the list: Provo, Utah, home to my alma mater, Brigham Young University. Since I am not a Kiplinger subscriber, I am not sure how they define "small town," but let me provide some assistance to the DC-based company: this -- my home town, population 1,500 -- is a small town. Provo is a small city, which (along with its sister city, Orem, and other surrounding communities) has long been quite an attractive spot for technology companies. WordPerfect and Novell were anchors of the 1980s economy, and many new technology companies are still operating in the region.
The Soup Factory in Middleton, Wisconsin -- described by The Isthmus as a brothateria -- has consistently great soup. Perhaps the best I have ever eaten, though I have never eaten soup at the Soup Kitchen International (apparently the basis for the "Soup Nazi" on Seinfeld). Last time I was at the Soup Factory, I had curry beef, but everything they serve is great.
This small restaurant was established last year by a couple with an entrepreneurial dream. The wife makes the soup. The husband, whom I have seen only once, fills in when his wife is otherwise occupied. They have a few employees. In addition to soup, they serve simple sandwiches and salads, but the soup is clearly the star of this show.
Things are not going so well for the Soup Factory. Two days ago, I was eating some soup for dinner with my daughter, who shares my enthusiasm for the place. (Cheeseburger soup is her favorite.) It was 6:00 pm and we were the only people in the restaurant. One or two other people stopped for takeout, but it was grim. The owner once told me that business had not been as brisk as she had hoped, but she was optimistic. This last visit, I saw her sneak into the business office. She was working on a spreadsheet, and I suspect that I know what that was about.
I took the opportunity to explain to my daughter some of the fundamentals of small business. We looked at the equipment, the space, the products, etc. and discussed the costs of running the business. Then we talked about revenues: our soups and drinks were $11. The margins are probably pretty good, if you ignore the fixed costs. But how to pay those fixed costs? Only one way to do it. If you are in the Madison area, haul over to the Soup Factory and get some of the best soup you have ever tasted. It's just off University in Middleton, across the street from Griglia Tuscany (here's a map).