Dave Young of Cooley

Welcome to the Puck, Venture Capital and Beyond, a show that explores the evolving landscape of the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Beer, managing partner of Beren Troff and president of CMBG Advisors. This podcast brings change makers to the table to discover the inner workings behind decision making strategies and ultimately how they got to where they are today. The combination of the local c capital coupled with access to Silicon Valley's immense amount of venture capital funding that other markets don't really have is just this combination of factors that no one can take away.

And so I think that we're really bullish on where LA goes. Today, our guest is Dave Young, partner and the cofounder of the Santa Monica office of the Cooley Law Firm. Dave, as a top VC lawyer, gives us a unique and valuable perspective on the Southern California VC community. So I wanna welcome you. But just for people listening in terms of an overview of who Dave Young is, where did you come from?

What brought you to LA? Where are you from originally? Tell us just a little bit about your background. Yeah. So I'm originally from the Bay Area.

I've been in the same practice for twenty four years now, which is really representing venture backed companies and their investors. And, you know, I first came down to LA in 2000. I founded the office for another Silicon Valley firm called Venture Law Group and then eventually came over and founded Cooley's office in 2012. And my background prior to that gave me a little bit of unique perspective just on LA and markets in general. Because prior to founding Cooley's office, I'd actually been one of the first six lawyers in offices of three different Silicon Valley firms in different locations and in different markets.

So I started out in San Diego, where I was the sixth lawyer at what was called Grey Carey, which is now DLA Piper in the North County office that just merged with the Silicon Valley firm, saw that grow to 35 or 40 lawyers, then spend some time in Silicon Valley, then went to Venture Law Group in Seattle, again, as lawyer number six, kinda right at the peak of the Internet bubble '90 eight to 2,000 that grew to 35 lawyers probably within two years. And then that's when I came down to LA to found Venture Law Group's office. And so seeing those different ecosystems and those different markets and then also seeing different kind of founding different offices or being an early member different offices gave me unique perspective to come in and kind of help found Cooley's office. So I've had the same practice my whole career, been in a bunch of different markets, and I think really given me some perspective on helping to build here in LA. So talking about that different perspective, when you look at where LA is today and the companies you were working on twenty years ago versus today, what industries or what things do you see developing, it's AI or otherwise, that are new right now in LA?

Anything coming across your desk, so to speak? Yeah. I mean, certainly things have changed a ton. And some of it's just the breadth of companies, like, in LA in particular, like, when I first came down and you remember this too. And back in 2000, LA was the fastest growing venture market on a percentage basis even though it was probably a third tier market overall.

You sorta had people were looking at convergence of entertainment and tech is what they called it then. And then LA probably got hit harder than any market post internet bubble because it only had internet companies. And it's hard to remember that was actually a bad thing in 2003. And then you kinda had the web two point zero period in 2005, 2006, and LA's really taken off since then. And so it's interesting because LA people think from outside the market that it's all sort of things at kind of entertainment related or media related.

And the reality is if you define that really broadly, there is a lot of that. There's a lot of companies that are at that sort of intersection of media entertainment and tech. Again, it can be a lot for things whether that's online video, whether it's just other types of content, whether it's influencer marketing stuff, whatever. Right? If you define that broadly.

What we've seen a lot of lately, there's certain things where just LA is the natural market. VR and AR are certainly one. I mean, that's cooled off a little bit more, especially on the virtual reality side, where people probably see AR now as the more near term opportunity. We've continued to see a lot almost in the food tech areas. One that there's been a ton of activity lately, and that, again, can take a lot of different flavors.

There's been a lot of esports and gaming. I mean, gaming has always been another thing that's a natural fit for LA as it starts to become esports, and you have more people, you know, watching esports and watching the World Series and the NBA finals and things like that, and then dollars pouring in there. Again, that's been great for LA because it's just a natural epicenter of that. And, you know, addition to having both Activision and Riot Games kind of running the biggest leagues here, and then you've got a bunch of the teams. You got a bunch of just those elements.

And then I think LA will continue to be really strong in ecommerce. I mean, that continues to be the area where we just see continued leadership and activity. And so LA is a little bit of a different market, certainly than Silicon Valley that does tend to be a little bit less pure tech plays, but you have really what we see in LA is things where there's industries being disrupted. And that's probably been the theme of the last five or six years is just tech has sort of taken over everything. And, like, insurance is one example.

If you told me seven years ago that I would have, like, six or seven insurance company clients, I would have thought that my life took this weird turn, and I was no longer a tech venture lawyer. I was now an insurance lawyer. And yet there's one doing health insurance, one doing car insurance, one doing life insurance, one doing homeowners insurance, one doing shipping insurance, and a couple when doing weather related insurance, you know, it's just crazy how that's disrupted everything. A millennial is never gonna walk into an insurance agent's office literally never, and that's just not how they're gonna do it. It's gonna be something on an app or something that's easier, and that's just one other example.

So that's interesting. So the notion of life insurance agents or these agents that are out there selling you insurance, you're seeing the trend being that it'll all be done through our phones, essentially. Yeah. I think that it's kind of a generational thing. But, yeah, it's just another area that's being disruptive and, you know, they'd sit in board meetings, talk about the behavior of millennials, but it's true.

Yeah. I mean, I think that that's the big driver of it. And using that as an example, because young people are a great indicator of where the puck is going, so to speak. You talk about buying insurance, which again oh, you know, health insurance. And we've obviously you and I are past crossed in terms of companies doing brokering with insurance.

There's all sorts of creative things going on in that regard. In terms of young people and trends and these disruptive things and how millennials are acting differently than our generation, so to speak, what other companies are disruptive things? Well, and there's some you know, I think and I think another one that I think is is really interesting in the in the longer term is a company here in town called Kitchen United that basically has virtual kitchens for restaurants and brands for delivery. So, you know, the typical delivery radius is two to three miles, I think, to go on to Postmates or whatever. Uber Eats choose your delivery app.

But, you know, kitchen united basically just takes a warehouse or a location and has segregated in shipping containers or otherwise, and just will have five or six different restaurants. Here's Chili's, here's sweet green, here's whatever. I'm choosing bad examples. Applebee's, you know, whatever restaurants are there, and it's their food. It's their employees.

It's truly their menu. But there's not really a physical location. But when you're ordering on Postmates, you don't really know that, and you don't really care. Right? If you're trying to order something from Chili's, you're gonna order it.

And so rather than going through the expense of having to create an actual physical restaurant location, even if it had a slightly different footprint in order to get delivery to the to have a standard delivery footprint unbelievably. And that's just another thing I'd say that's example. Another one I think is a little bit driven by that changing behavior just because the food delivery is just become ubiquitous as far as how people are doing this is gonna continue. So, again, looking into the future and kind of economic indicators in terms of people are now talking about negative interest rates. They're talking about is there gonna be a recession.

When's there gonna be a recession? We never typically see recessions when there's an election coming up. But in terms of investor attitudes, in terms of money right now, are you seeing any sea change out there in terms of are people being more cautious? Are they seeing this at the end of the cycle? I mean, what's your thought about that?

Yeah. I think there's a couple different answers to that. I think that, like, if I look at just what we're seeing in the market, it varies by the stage. At sort of the later growth stage, 50,000,000, $100,000,000 financings, the market is, like, significantly better than it's ever been at that. You know, people who it's true of me and it's true of pretty much everyone that, like, people have done more deals in that range of true sort of venture backed companies in that $50,100,000,000 dollar plus financing range in the last two or two and a half years than the twenty five years combined before.

It's just there's so many more of those deals. And there's a bunch of reasons for that companies don't go public anymore. And so those used to be IPOs for the first half of that twenty five years, always. And then if you go to kinda series b, series c, it's probably the market's better than it's ever been, but not by a huge amount. Series a, it's probably as good as it's ever been, and then seed was probably better two or three years ago.

And so it's sort of just almost a straight line curve where the market starts out great but not amazing. And then at the later stages, it's absolutely unbelievably amazing. And so there's just a ton of dollars going to work, and there's a bunch of reasons and going to a little more maybe on that. But I do think that there's generally a sentiment that a recession is coming, and it's just because there has to be. I mean, it's been ten years of an economic upcycle, which is literally the longest period ever, and nothing has fundamentally changed in the way economies work that would be able to believe that those cycles don't exist anymore.

They almost have to. And so I've sort of stopped predicting that it's about to happen, and we're seeing all these signs of it even though we are because I said that in 2015. I said in 2017, and I was wrong both times. And I was telling everyone we're gonna have a recession in the next six to nine months. We're seeing all the signs.

And I think there's some reasons for that. I think that the corporate tax rate, that's one real impact it had is it really did that being cut, you know, in the tax cuts a few years ago, had a real effect on public companies and m and a, and just the ability to continue to put cash to work. And so that, I think has helped extend it but I do think that sometime there will be recession and then I think for entrepreneurs and people with companies I think you have to always factor that but I think when it's ten years into an upcycle you have to factor it even more. You know, one is just taking the money that's there. And people start to sort of realize that.

And when you look back, that's something that we saw both in 2000 and in 2008 was almost this surge in financings because companies every company that, like, might need to raise in the next nine to twelve months was suddenly being told do it now, and that's almost a self fulfilling prophecy. Right? But there are differences. I mean, I think, you know, one of the dramatic ones that we saw in particular in the last recession, less so in 2000 only because seed funding wasn't really part of the funding cycle then, is one of the changes that has happened. But when a recession hits, there's a difference in the company that's raised $2,000,000 and has an institutional VC fund and the company that raised $2,000,000 with 20 dentists writing a $100,000 check or even 20 high net worth experienced tech entrepreneurs writing $100,000 checks.

Because when the Nasdaq goes down by 25%, the amount that people's spouses permit them to invest in start ups instantly goes to zero. Whereas the $100,000,000 venture fund or the $75,000,000 venture fund is still a 75 or a $100,000,000 venture fund. That hasn't changed at all. And if anything, they just slow down on doing new deals and triage their existing companies. But that usually means in past recessions that existing portfolio companies usually get some kind of bridge or flat round or something.

They get kind of a year of cash to kinda push them through the recession, and then the triage happens on the back end of that. Not everyone raises coming out of that, but people usually get the one inside round. And so the companies that have a bunch of angel investors, their sort of mortality rate in a recession is way higher, at least at the beginning of it, than it is where the ones that are venture funded usually have one chance to get another year of cash and then see if they can raise coming out the other side. And so that's one thing that people sometimes need to factor on, just how are they structuring their financing. It's not something you always have the choice to do.

Right? You're not always faced with, like, these two deals ready to close, and one is with a VC, and one is with a bunch of angels, but it's still something that people generally can factor in as they think about whether we are gonna have recession was gonna look like. And I and I think there's differences of opinion on how dramatic it will be intact. Right? Every recession, at least the ones I've been through have been different.

Whether they go back to, like, 9293, which was a couple years before I started practicing, that was exceptionally hard on LA in particular. That was, like, the aerospace industry and defense industries. LA was actually was the hardest hit market in that recession, not in tech and venture, but just economy wise. And then in 2000, that was obviously driven by tech. And then 2008, 2009 was so dramatic just with the economy overall that it was brutal.

But it was interesting in tech and venture in that period. Even though financial services was struggling and things were slipping, it was, like, what, I guess, the October 2008, it was like flipping a switch in tech. Everything went to, like, being fine to, like, suddenly Bear Stearns and the IG or whoever it was, like, we're just gone. And then tech, it was, like, a week later, everyone thought we're gonna be standing in bread lines and, like, not be able to raise money. So it was really dramatic there even though people didn't necessarily expect it.

It was so sudden. And this one, I think there's some sentiment that it won't be as bad in tech as it maybe it won't be as bad overall as as that last recession and won't be driven by tech as the one before. And that part of the recent activity isn't necessarily driven by just everyone being overexcited and overexuberant, but there's a lot of companies. Again, everything is disruptive, and there's a lot of innovative companies really doing well. And that's largely what's driving a lot of it.

And so I think that's gonna help. The companies raising money at those really high valuations have real businesses and real fundamentals, and some of them might have evaluation reset or something. But it's not gonna be, like, 2001 where their public companies suddenly don't have a business model or just folding the tent. If you had, in terms of giving advice to people, when you look at the calls you get and the challenges in the land mines that you've had clients hit over the years, in this environment that we're going through right now, any particular advice or traps for the unwary that people should be thinking about? I mean, I think there's probably a couple of things.

I mean and and there there's actually two things that are polar opposite depending where the company's at in their stage. I mean, one is I do think that companies are well advised to sort of take the money that's there for the most part. I mean, obviously, it has to be partners you wanna work with and terms that work, but we've seen way more people regret not taking the money and trying to gain me too much. You know, I don't want too much dilution and I don't wanna have this high valuation. And I read these horror stories about that and being overfunded.

And certainly, companies shouldn't be too overfunded. But people definitely regret gaming that more than just taking what's there, having a strong balance sheet, which is always a good thing as a business, even get a little bit of illusion, and then just figuring it out. But then you sort of balance that with what is sort of the polar opposite, which is company's desire to preserve optionality or the importance of preserving optionality. And that's what those things, you know, it matters a little bit less as you get to the you know, in the early stages, series seed, series a, where most of the exits are okay. Those are very you know, we're gonna be okay results for those early investors, and the investors are very founder friendly company builders.

Not all the companies make it. When you get more into the growth stage, you're raising money to $2,300,000,000 valuation. That's great. But those investors having the ability to block a sale, which is a key common term is something companies really have to grapple with and negotiate and think about because getting that $350,000,000 offer is gonna be life changing because our founders great result for the early stage guys. Yet if you just took money at a $300,000,000 valuation, that new investor is not happy with that.

And so you often can negotiate where they only have walking rights at two x or three x. In an effort to preserve optionality, sometimes you can trade economics for that and give a participating preferred or in rare cases even multiple liquidation preference so that you're sort of that new investor does okay in virtually every exit scenario because they got a juiced return on the downside, and in exchange for that is okay with giving the company optionality to sell for whatever they wanna sell for. And there are some companies where that may be the right answer even though it's an awkward conversation because you're sort of messaging to your new investor, yes, we need your $15,000,000, but we're not totally convinced that we're gonna go for the billion dollar exit even though we might. So, Dave, that's interesting to me because in an earlier life, I spent more time being a VC lawyer as well and did a lot of work with the Ideal Labs and the Clearstones of the world. And my recollection was that, like, in a typical Series a round, you had protected provisions that said you can't change the rights, preferences, and privileges without the consent of the preferred.

You can't issue more preferred. And I believe, typically, you can't do a sale or merger without the quote, consent of the preferred. And in fact, one of my clients in New York, I met originally because he had investors from New York that had blocking rights on his ability to do another round. He wound up doing a series b round. And they were like, nope.

They literally were gonna essentially buy him on the cheap because he was completely locked in. So long winded question is, from your perspective in terms of these companies, is it's not automatic that they're gonna give up those protections with a typical VC? Well, so it is automatic that they're gonna be there in some level virtually automatic. Especially, as you get sort of the later stage you go, we do a lot of times in particular these days where, again, companies really don't go public and say it was a private company a lot longer, which is a lot to do with it, where you can negotiate to where that block is only two x or three x. And really where it comes in is is that block just that's two x or three x the most recent money.

Right? Ideally, for the company's perspective, you have all preferred voting together, and that's what sort of solves it. The earlier c and a guys are at five x or 10 x or 20 x, so they're fine. So that's always gonna be there an overall preferred boat. It's really, like, what separate blocking right did you have to give to that most recent series?

Because the more there's an uptick in valuation, the more you see that new lead investor wanting their own blocks on Got it. Sale and on financing, like, version of common things because they argue that their economic correctly argue that their economics are so different. And that's where I'm saying, sometimes, you can negotiate that away. It'd still be an overall block, but just not one you'd need to worry about Gotcha. In the same way.

Okay. That makes sense. So when you look at your cooling now and the and the role you're playing in in terms of personalities of the firm, how would you differentiate what you're doing now in your practice from your competition? And I don't mean you have to talk about what's bad about your competition, what's better about you. But, like, what's unique about your Yeah.

I mean, I think when you take Cooley in particular, I think there's really probably two things that that are really different. And there are really two things that attracted me to come over to cooling twenty twelve and help start the Santa Monica office. And one is just the other competitors to a large extent tend to be the other Silicon Valley firms. And they're strong in Silicon Valley, for sure. But if you really peel it back, maybe have one other market each where there's truly a really strong presence where for Cooley, the geographic footprint is by far unparalleled.

Well, if you take the eight biggest tech and venture markets, in terms of companies, the market share is leading in six of those markets. And it's no worse than third in other two. And it's also really strong in China and The UK, our international offices. And so people in Silicon Valley, I think, don't really care about that it tends to be more Silicon Valley centric. But when you're practicing in LA, and I also mentioned I was in San Diego and Seattle in prior lives, it actually matters a lot having that just focus outside Silicon Valley and having that presence.

And so having that connectivity into other markets is really helpful. And then the other thing that I think makes Cooley different is just having the fund formation practice where it's probably 30% of all venture funds and seed fund formation is done by Cooley. And then one of the competitors, Gunnerson, is probably similar, and then sort of rest of the world is the other 40%. Like, it's that concentrated. And that just gives us really deep relationships.

So it's interesting that the focus is on the founders and on the entrepreneurs, and that we share that with a bunch of other firms and people doing that same work. But the sort of gatekeepers for the entrepreneurs are the venture investors and the ecosystems. And so by focusing on building all the different ecosystems and focusing on the investors, it actually gives you the tools to really help those entrepreneurs more than if you're just showing up by yourself. And so I think having that sort of broader approach to the whole environment and not just companies in Silicon Valley or companies in LA, I think is what has really helped us a lot. So when an entrepreneur is thinking of raising money, we've talked to the VCs a lot about what you need to do to get their attention because they're inundated with so many things.

How much do you and how much does Cooley help the young entrepreneur if they come to you first, find the right home for VC money? Yeah. We actually do it a lot. We see a ton of really early stage two founders in a business plan kind of company. Like, if you're sort of branded for early stage and in particular in LA, where there's a lot of sort of Internet software mobile companies, there's a lot of them out there.

Where in San Diego, you know, where it's mostly life sciences, the companies probably have a higher hit rate of being real, like, we need a lot of them, but we also pass a lot of pretty high percentage of the time. And that is interesting because it's almost amateur venture capitalists that it's not very different. And, you know, you've seen this too. Like, it's not is this one of the five companies I'm gonna invest in this year or two companies I'm gonna invest in this year, like, stake my career? It's not is it gonna be a billion dollar company?

It's will anyone invest $2,000,000 in this company? So I'm gonna say it's not that we have to pick the winners. We just have to pick the losers and pick them, which may be a little harsh for you to figure out, like, just which ones we really think you raise money. And we actually try and set up our high. And we actually are perfectly happy letting companies slip through and seeing them get funded because of our time as our only resource.

We want to reserve it for companies that we really believe in. And then we do spend all time interviewing investors, we actually have a full time business development professional in every office and two of them in Silicon Valley. And they probably spend half their time just just helping our companies with fundraising with introductions to investors. So that's a fantastic resource. And we don't charge for it.

It's obviously not our core business is just trying to be helpful. But having that it goes back to having geographic footprint that in LA, we probably wouldn't really need the business development people, we know the local investors really well. But if we're tapping into New York or Silicon Valley or Boston, those business development folks know which partners are cool, you know, which partners at all the different funds. And so if someone wants to get to a certain partner at Andreessen Horowitz or whatever fun, like they know which partner can make a warm intro. And so we're able to leverage the whole network of relationships of the firm by having dedicated non billable people helping connect the dots and helping with that.

And it just helps anyway that, you know, I make a lot of the intros, but they're coordinating it and teeing it up because I'm doing it. After doing all the client work late at night where like they're coming in in the morning and like, here's my sets of calls with companies, I'm gonna really help them. Yeah, I think that's an important aspect because their networks vary widely, right? Some come in very well connected and not knowing where they're gonna get their money. But a lot of them are very strong entrepreneurs, but maybe don't have that same network.

And that's one area we can actually be helpful. So having lived through the evolution of the LAVC community and when I started doing this a long time ago, when there was Palomar and there was Redpoint, and then Bill Aucas did Idealap Capital, and all of a sudden, you saw these funds start up. There really have been changes. And as as I'm listing you and I'm thinking about the legal market and for instance, the fact that a lot of firms like Cooley are deferring fees for these entrepreneurs that come in. Is it too strong to say that firms like Cooley almost have become a farm team for some of the local VCs or otherwise?

Because when you bet on a client, when you take that client in and you defer fees, in a sense, what you're doing is they passed your screen. You're not gonna do that to anybody. Right? Presumably. You're making that initial determination whether or not to invest in this company, which in a sense then when they go out to the VCs, they've already passed that first level of quality in terms of does that Yeah.

And I true to that. Yeah. And I think there is some truth in that. Right? I mean, it's certainly not that no one's gonna invest in a company in that.

But the hardest thing at the seed stage is just getting the meetings, right? Because when a company has $1,520,000,000 of revenue, literally, you can get a meeting probably with anyone that's a fit. And the reality is probably anyone would do the deal at some valuation because it's a real company, right? Whereas at the earlier stages, those VCs are similarly so inundated with early stage opportunities, and there's so many more than you could possibly imagine that find their way to them as well for sure because they're obviously brand on that way. But I do think intros coming from a known source, it's just the same as having advisers that they know listen to the deck.

Just all of those just you know, this is an indication that this company is for real and is starting to get networking with some of the right people and has passed a few gates. I think you're right. I think it does help. And when you just kind of think back over how the venture landscape's changed, I mean, that's one way sort of related point where it really has changed is when you go back to, like, before 2006, maybe, the seed rounds that are so prevalent now, like, literally didn't even exist. It wasn't my thing.

Like, if you had a mobile company, it's hard to remember this, but there were no iPhones. There were no apps. That meant you were doing carrier deals that took two years to do. And so you were raising $6,000,000 in a series a when it was two founders and business plan. And that was true of all kinds of companies.

And it still is of, like, semiconductors and some life sciences companies, things where you have, like, certain milestones you have to hit, and you need a certain amount of money to build something or get some proof of concept or get some trial done. If you only had half that much money, then you couldn't do anything. But that seed round of funding, I think, has really changed the landscape because suddenly the million dollar, $2,000,000 seed round, the cost of starting a company came down so dramatically with every being in the cloud and all this open source and ecosystem of developers, moonlighting all these different reasons why cost came down for companies legal came down less so separate issue. But it's another challenge people have grappled with. And that's actually, I think, part of the underlying almost unheralded reason why LA and New York have risen up to being basically number two in the case of New York and tied with Boston for third, because venture market in the case of LA is just having that really active seed community where a lot of other markets that had been very strong venture markets just haven't developed 40 seed funds in town.

Even though when you go back like Austin and Seattle and San Diego and Boulder, all fantastic markets, we have great offices in most of them, but they had the same size or more venture funding in LA. But when that shift happened, they didn't have the ability to create all of those seed funds, because there's just so much wealth in New York and LA, that they were able to because those don't really have institutional LPs. When you're starting off at $15,000,000 $20,000,000 seed fund, it's usually just high net worth folks. And so LA in particular has really been able to adapt to that change in just the way the funding cycles work. Again, so has New York.

And I think that's really driven this, like, almost meteoric rise of those two markets into being the markets that are the most active and most interesting after Silicon Valley. It's funny. There's certain things that you say for the first time. Like, I started out and, again, saw a lot of these series a rounds. And then all of a sudden, you know, you you see these companies as you're saying with incubators and accelerators and all this other stuff.

But I didn't put two and two together and think that it was because, oh, the cost to get in has gone down because as you say, mobile apps and all these other things in the cloud. I was just thinking about, well, you know, at the end of the day, they put a lot of money out. People got big offices. They geared up and hired all these employees, and they got smart, and they just decided to cut the size of the round down. That may be part of it, but it's also because it's just gotten just like you can do almost anything on a computer or a phone now, It's gotten a lot easier for these people to start these companies.

Well, Nick, can they can they raise a million or 2 and depending on the business, they come out the other side to raise their series a with real metrics. You know, the VC has got a good at knowing, like, if it's content, do they have 50,000 daily active users, whatever looking for? And if it's e commerce or SAS is just what's your cost of acquisition? And what's your lifetime value of your customer? And just like if you can prove those unit economics, if you can show indications unit economics make sense and can work, you don't have to have that many sales to be able to extrapolate that it's going to work for the long term.

And so the ability to sort of get metrics off a million or two that demonstrate a lot of visibility into where the company might go for the long term has really been huge. So years ago or when you were doing these seed rounds, a lot of times you'd see these convert deals. Now a lot of people are doing these safe agreements. Is that become commonplace? Is that something you see across the board?

Is it replace convertible notes initially? Or they pass it already and there's something new? Like, what Yeah. I don't think safes have replaced convertible notes, although they have over the last five years have gone to it being ninety ten notes to safes to eighty twenty to seventy thirty. Now it's probably $50.50 between notes and saves.

K. And I will admit that I was gonna be able when saves first started being popular, we would do them. But was it of in the camp that it was kind of a solution chasing a problem that it's, like, virtually the same thing, but, like, and no interest rate I get. That's a real economic term. But also for notes, it served a purpose.

It basically increases the discount a little bit for time. If you raise the money a year and a half later, the discount in effect, you had a 5% interest rate had gone up by seven and a half percent versus if you raised it right away, then what didn't change at all. Right? So that was actually to me, my mind was for a purpose. And then the fact you don't have to pay it back.

I could be doing this for, you know, my whole career. And I've I've never once seen that happen in a negative way with notes where it actually caused a problem. You know, maybe there'd be one random, like, individual investor that probably shouldn't have been investing in with it made only had one tech investment that wanted their money back. But if the notes can only be called my majority interest is how they should be drafted and usually are drafted, that person couldn't do anything anyway. So it usually never mattered.

But I think that safes have definitely hit that tipping point where they're just as common, they work really well. They do have the advantage in that because they're open source, you can send it to anyone and hopefully not get a lot of comments, right. And I get that advantage. And so same with the seriesc.com forums sort of really help with seed financing is not that they're better than anyone else is really really formed to just having a standard open source set of forms that you can redline against is, look, we didn't change anything. So therefore, don't make any comments has really added efficiency that you didn't have from notes because everyone used their own forms of notes.

And that's one reason why with Cooley, we've just put all of our forms on a document generator on our Cooley Go site available because we just decided that if people use our convertible note forms, or they use the series seed forms that we have on there, or they we even have the safes on there too, and even our forms of NDA and consulting agreement offer, like, if there's a lawyer in Iowa with a startup and they use our forms, that's just only a good thing. It's just standardizing sort of similar. It's not quite the same as a safe, but it's the same general concept. It might as well people have good forms and standardize it. And I think that's partly what's driven to safes.

But I think it's fundamentally the same thing. I think what's been interesting with the development of notes and safes is that those really and started with notes were really structured to be an instrument for bridges where it was like, we're gonna be raising the next six months or soon. And we're putting in money early, either it's an early investor or its existing investors just kind of doing a down payment on like, pro rata, they would have done anyway. But then now people use them as entire rounds of financing where it's two years of cash. And so you've had a little bit of an adjustment in the terms, these are being used for a purpose that they weren't originally intended.

So And so And so we're gonna set this cap, but now people really just look at the cap as the valuation. You think, well, that's true, then why don't you just do a price trend? It's another tactical discussion, but it's, you know, it's sort of being used in a way that wasn't intended. So you've had to, we've had to kind of adjust the terms, then you have what at the early stages, when you have notes, What's most common from sophisticated investors in particular is that if the company gets sold, the notes just get to x or some amount off the top just back but then you know, I won't name the company, but I had one company a few years ago, where they had raised 3 or 4,000,000 in convertible notes from a bunch of institutional investors, and then got acquired on the backs of just that financing for $300,000,000 and had these notes that just paid the seed investors to x. Right.

And there was a negotiation that took place. But, you know, just another example of just it's the instrument wasn't being used in a way that it wasn't really set up for. And you sometimes have these unintended consequences where if that had been just done as a price round or with some other way of converting it or having the ability to convert it, it would have they would have been protected. Yeah. They would have made 15 x.

So there's been a lot of talk recently about going after some of the tech companies because of privacy issues or monopoly issues or all all sorts of other stuff. In terms of your personal interest or kind of where tech can have a positive impact in society or otherwise, are there any things that you think about or thoughts in terms of where, as a tech lawyer, as somebody involved in the ecosystem, where with a lot of the daunting challenges today, you're seeing companies think about trying to fix some of these things? Yeah. I mean, I think that sort of interesting to see where it goes. I mean, the privacy issues and some of those issues that the biggest companies are facing the Googles are facing certainly do have an effect.

And you do see some things coming down on some of the ad tech companies that are sort of dictated by those companies. And there are reactions that people have to those. And there's been a big flurry of activity in the privacy space to with all companies having to comply with GDPR. And then the California equivalent, which is coming out, I guess, at the end of this year goes into effect. And so I guess where I've seen it more with the companies I work with is just having to struggle for their own compliance.

And and maybe it's a benefit to the lawyers because they'll have to come and do this project. Right? So more people being sort of either having to go scramble to comply or feel some of the impacts, whether it's Google controlling advertising in certain ways, or just like Facebook's, there's nothing wrong with it. But Facebook's like continuing just they change their algorithm every year, and all the content companies have their nice upticks in users and views go down and because they constantly keep changing the way their algorithm works. And so these it's more of seeing the companies just trying to react and keep up with that.

And, again, it's probably good that they keep changing otherwise. The people that were gaming had to get more hits and more views through Facebook and Google would be the you don't want that to be the sole path to succeeding with your company. Right? But it's also keeps everybody on their toes. Cool.

Are there things, Dave, that you wanna touch about that we haven't talked about? Yeah. I mean, I think when you look at LA in particular, I think that we're really bullish on it only because I think what's happened in LA is really sustainable, which I think is great. I don't think it's just a surge. I think that there's really the fundamentals and the ecosystem have changed so much.

Again, New York has risen ahead, but we have Snap and SpaceX and a couple of the bigger companies they don't have. And historically, I only mentioned that because historically, what had fueled the growth of the tech markets outside Silicon Valley had been having the presence of one or more $100,000,000,000 public companies, like Seattle had Amazon, Microsoft, San Diego, Qualcomm, Austin had Dell, the Mid Atlantic had AOL, Boston had four or five of them Silicon Valley had 30 of them. And that's what really fueled those markets. And LA and New York has succeeded in spite of that. And even, you know, SpaceX is a private company, and Snap has fueled some new companies, but not as many as those others.

And so to me, it bodes really well because inevitably that will happen when a couple of those really, really large companies come out of LA and again in New York. And I think that that's going to just add to it because I think that we've succeeded in LA in spite of never having the one thing that actually fueled the growth in all the quote, competitive markets outside Silicon Valley. And I think that LA too, I guess, the other thing I'd say about ecosystem here, and we touched a little bit with all the seed funds, but LA has sort of these twin advantages over other markets. Again, all markets other than Silicon Valley that we have this amazing seed ecosystem, and that's fundamentally what has to be local. Raising your million dollar round is very, very difficult to have a lead investor from another market.

Sometimes people will participate or whatever, but they still like to have someone else. So we have that. But then Southern California is the one other market that really has really, really easy proximity to Silicon Valley. Because in LA, when you get past seed to go to your real series a, there's really only a handful of funds here that do an 8 or $10,000,000 or more series a financing. And And so people look at it and say, well, god, that's this big negative on the market.

But the reality, it doesn't matter. It's because Silicon Valley, from all Southern California, San Diego to you, is a one hour flight away. The flights are, like, every hour, but that's on each airline. Like, they're actually more than that when you fold them all together. And the VCs like coming down here, it's just very easy.

Whereas even, again, Seattle, not to pick on them, but Seattle, Boulder, Austin, it's a two and a half hour flight. If you time it perfectly, you can go up and back for the board meeting if you're the VC from Silicon Valley, but you can't really stay for dinner and it's just not as easy. And so having that proximity and also just entrepreneurs that Oh, you want to take a fundraising meeting tomorrow, just get up there tomorrow, it's just so easy, that the combination of the local seed capital coupled with that access to Silicon Valley's immense amount of venture capital funding that other markets don't really have, I think, is just this combination of factors that I think no one can take away. And so I think that we're really bullish on where LA goes. That's interesting.

Do you think that for young graduates, like the Steve Jobs of the world that start their companies in their garage for sake of argument. So I'm a kid that starts a company in Austin or Atlanta or wherever. People talk. Right? And everybody knows things.

Do people actually think, hey, cost of living, weather, and the fact that there's so much seed money in LA, we should go start our company in LA. We see that a lot now. We never used to. Right. We used we used to see the opposite.

Right. Right? That you would see companies being funded and asked to move. Right. And then there was a period I mean, I haven't probably like before maybe 2000 making this up, but before 2007, you probably saw that a lot.

And then between 2007, 2013, when you would see it as if you had enterprise software company whose customers were other large tech companies, they'd be like, you need to be in Silicon Valley because all your customers are in the backyard of us. Those companies ask me. I haven't heard of any company being asked to move since probably 2013. And you're right. On the flip side, we see companies even from Silicon Valley, let alone elsewhere, like deciding when they look at where should we start our company.

If it's, again, anything sort of entertainment, anything ad tech or certain anything ecommerce, certain things are obvious, but even otherwise, access to capital. Just the whole combination of factors and seeing that there's a real startup ecosystem. We do see that, and it's really exciting and refreshing. Do you just because I'm curious. You you've mentioned a couple times that ecommerce is, quote, big in Southern California.

Are we bigger or is head to head with Silicon Valley when it comes to ecommerce? I think we're actually far ahead is my sense. I mean, why is that? And you're defining ecommerce in what way in terms of, like, what's unique about it? When you look at it, LA has always been stronger in companies that had revenue earlier.

I think it was just this goes back even twenty plus years where some of it's a reaction to not having those large amounts of capital in your backyard where you had a lot of lead gen companies, a lot of just companies doing again, ecommerce where you have, like, revenue from your first day, LA out indexes in particular compared to Silicon Valley big time on those kinds of companies. And under indexes on ones, they're gonna raise $30,000,000 before they see revenue. It's just the nature of the market. But you look at, you know, it's just a long list. I mean, Darcey a couple example when I started with when it was two founders raising a $100 and took them $3,000,000,000 exit.

And that's just one example. But then there's honest company and me undies and ritual doing vitamins and happiest baby doing smart bassinets, and Burst doing subscription toothbrushes, and Parachute doing sheets and bedding, and Figs doing apparel. Like, there's just this long, almost limitless of companies that are really, really doing well. And I think this is one of those things where there's just fundamentally, companies start with talent. And LA just has a lot of just like it does with mean entertainment stuff.

It has a ton of talent that is experienced around building those companies. And so you get a few of them that do really well, and it really matters. Because those companies, they're interesting because they're sort of I enjoy working with them because they're sort of math driven. Like, when you sit there in a board meeting, it's like, what's the acquisition cost? What's the value of customers?

How are we pricing? And SaaS companies have some similarities where it's very much, like math driven marketing, which is different than other kinds of companies. So people that have that experience and skill set, you know, obviously, the most important thing is building a brand. But then behind the scenes, it's all math. So it's interesting combination.

So when you're, as you said, building a brand, and these e commerce companies, how much when they start out are they saying, we're gonna do this, build a brand, and sell not using Amazon? Or or is Amazon taking over all the world? Where when in other words, when you're sitting in these meetings, are they thinking about how we're gonna market on Amazon? Or they Yeah. They actually very rarely go on Amazon.

There's a few that do. Right. But you're paying half or whatever. I mean, it really impacts your economics. So there definitely are some that do, but there's been a very strong trend where people are don't even really consider.

And some of them maybe should. Like, we actually had to go the other way, a couple, like, maybe we should be doing this and it's like why aren't you all which because we never have you know which is not always the right answer you want actually have thought it through. But yeah, it really has been for the kind of direct to consumer like digitally native brands like really have mostly stayed off of Amazon And using keywords in Google and Facebook for growth marketing. Mostly yeah. It's Facebook ads.

You know, interesting podcast ads are some of the most effective ones because it's so targeted, right, where they can really select their audience in a way beyond. And then a lot of them having surprising success with, like, TV and radio. And if there's these companies out there that do attribution to help them figure out what was the cost of acquisition for that. And it's algorithms that are probably half made up, but you need to have some number to put there. And so to track that compared to Facebook ads, so it's usually sometimes sometimes these keywords with some of these keywords are really expensive, and it tends to be more sort of Facebook ads and other things that are a little bit more targeted.

And then again, it's just if they can acquire users for $10, but they're worth 50 in margin to them, then over time, then that's completely worth it. And that's where the subscription models come in because they make it so much easier to peg a high lifetime value number where the ones that aren't subscription usually are sort of breaking even on the first sale and then really trying to prove that when people purchase again, they didn't pay for them again, that they actually came back organically. Right? So, again, thinking where the puck's going, I mean, maybe I'm late to the party here. But Amazon, clearly disruptive, the retailers of the world, the Toys R Us's of the world, the Walmart, the Staples.

Everybody's, you know, getting their butts handed to them by Amazon to a large extent Walmart's coming back and doing things. But on the POC, we've talked about retail, we've talked about experiential. But in terms of e commerce, I've always thought about it that the trend was really towards Amazon. But when I'm now thinking about the ads I'm inundated with on Facebook for whatever, even though I normally find it so much easier to just buy on Amazon, boom, it sounds like there's a lot of growth in this area of other platforms to sell your goods. And in a sense, it's almost like Facebook's another alternative to Amazon.

Right. And it's using kind of artificial intelligence to figure out what to target you with. I think I know what I want, so I go to Amazon. Facebook's doing the opposite. It's basically saying, I know what you want, Jim, and I'm gonna send it to you.

I mean, it's That's exactly right. And because that's I mean, because I think I never thought about this. The key the key to those digital brands and why they do well is because they have cut out all of the wholesale costs, whether it's Amazon, and some of them certainly do. Right? I mean, it's a big decision.

Like, you have ones like Honest Company that do sell a lot through traditional retail. And that's a big decision because even taken on Amazon, just do we sell our products in traditional retail? Most of them don't do that either. Because again, it's sort of the whole point was that we don't have any of those costs. And so it's just our retail price.

And then that marketing cost of acquiring us a customer, we can just compare to that. And we're not having Walmart or Target, whoever making us take this huge haircut on our selling price. And so if anything, the trend these days is they now open their own retail locations via their own branded ones we know with allbirds does this and parachute and it really works. And it actually ends up really driving better e commerce in those local markets where they do have a store. And so they're profitable on their own, but they also help the overall business because just that awareness of, oh, there's a store on Abbot Kinney.

I see it. It's awesome. I know it's there. Like, actually, it just increases awareness where it's almost like advertising. Instead of buying a billboard, they just have the store, but go and go touch and feel it.

And depending what it is, sometimes they'll go and look at it, but then go back and buy online. That's very helpful, Dave. Thank you. Thanks. Join us in the next episode of the Puck when we talk with Rob Freeland at Silicon Valley Bank.

Rob oversees SVB's technology practice and shares his approach with venture backed tech and life science entrepreneurs in helping them into market leading positions in the industry. Industry.