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Technology incubators, accelerators and hubs: The good, the bad and the ugly.

Byline: Nancy Yamaguchi, Mitchell Kops, Jill Kelley

In the past, technology companies were founded in garages, college dormitories and basements, and the famous garage where Bill Hewlett and Dave Packard began and what became today's global technology giant, Hewlett-Packard, has become a tourist hotspot in California. Today, the garage has been replaced by incubators, accelerators and hubs, which offer technology startups with extensive benefits and resources, including, but not limited to low cost office space, early stage funding, training programs, co-working environment, mentorship and access to investors and corporate partners.

In Silicon Valley, the top incubators and accelerators include Y Combinator in Mountain View, founded by Paul Graham, a renowned entrepreneur who made his fortune selling his startup to Yahoo! and Plug and Play in Sunnyvale, where successful companies like Google, PayPal and Dropbox originated. There are others such as RocketSpace in San Francisco, which is referred as a "technology campus" where hundreds of startups can rent space and benefit from its various resources, including connections to corporate partners and venture capitalists, and where Uber and Spotify started. Then, there is GSVlabs in Redwood City, which provides accelerator programs, robust IT infrastructure and business education through its networking events and summits. At our law firm, we are involved with an incubator in London called Innovate Finance, which promotes technology startups in the U.K. financial services industry.

While touted as the perfect breeding ground for successful technology companies, what are some of the key legal issues that arise when becoming part of these technology incubators, accelerators and hubs, whether as tenants, investment targets, mentors or investors? As lawyers advising technology companies and investors, are incubators, accelerators and hubs a good thing or a bad thing? Since there are so many incubators, accelerators and hubs these days, and with each one of them having different approaches and programs, it is almost impossible to generalize, but we have attempted to summarize here the top three legal issues and challenges to keep in mind when technology companies decide to join an incubator, accelerator or hub.

Confidentiality and IP Protection: Most incubators have open space where different technology companies and entrepreneurs work. Some of this space have no doors or private areas, and everyone can hear each other. Even without verbal communication, confidential information, schematics and designs can be disclosed through visual access. Some incubators have conference rooms where confidential discussions can be had, but in our experience, these conference rooms are in great demand and must be reserved well in advance. In such an open and public space, it is nearly impossible to satisfy the basic legal requirements necessary for trade secret and other IP protection.

What we often recommend to our clients is to have them come into our office, and away from the incubator, to hold confidential discussions regarding technology development or to meet with their investors. We believe that it is essential for technology companies operating in incubators that they exploit all of the benefits of a communal setting in the incubator while at the same time vigilantly guarding their trade secrets and intellectual property by physically segregating as much as possible their proprietary materials and other IP, as well as conversations surrounding such IP, from the incubator.

2. Competition and Keeping Up with the Joneses: With so many early stage companies taking up space in incubators and making presentations and pitches to potential investors and strategic partners at the incubators, there is undoubtedly competition that develops between and among these companies and entrepreneurs. Sometimes there is also competition among investors who become members of these incubators as they clamor to find their next "home run" investment. While competition could have salutary effects in that top performers can push each other towards excellence, the problem at these incubators is that many of the technology entrepreneurs tend to oversell themselves and at times make misrepresentations regarding their progress. For example, one portfolio company may brag to others in the same incubator about a new customer or investor, which may be mere showmanship or premature. Other companies at the incubator, relying on this false information, may change their product development roadmap, and the investors participating in the incubator may make investment decisions based on inaccurate information.

3. Ownership and Corporate Governance: Because of the proximity with which the technology companies work in an incubator and because many of the same characters sit on Boards of Directors or Advisory Boards of these technology companies, there will always be some level of conflicts of interest that lurks behind the corporate management and governance of any company operating in an incubator.

If, for example, an investor holds equity or Board positions in two or more companies in the same incubator, the investor may need to abstain from voting, whether as a shareholder or as a Board member. Corporate law would require that the investor both disclose any conflicts and refrain from voting. Complying with these legal requirements, by definition, will require disclosure of confidential information about one company to another company. There may be other regulatory hurdles, especially if the disclosure is made to other members of the Board or shareholders who may be prohibited from receiving the confidential information.

Navigating through these legal complexities and balancing the various legal requirements can be daunting for entrepreneurs and investors alike. Regardless, we still believe that incubators offer many benefits to entrepreneurs and investors alike, and as long as they are well-advised and think through some of these key issues, the benefits will outweigh the risks.
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Publication:Inside Counsel Breaking News
Article Type:Company overview
Geographic Code:1U9CA
Date:Dec 17, 2015
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