VCDR: Venture Capital Dispute Resolution

VCDR: Venture Capital Dispute Resolution
July 1, 2014 Gary

An investment sector that thrives on entrepreneurship, prides itself on deal making and finances emerging growth companies through private investment operates in a very different sphere than the court system.

Venture capital investors want to focus on raising capital, growing their portfolio companies and providing returns for their partners, matters on which judges and juries have no experience and little comprehension. A courtroom is just about the last place a venture investor wants to spend his or her time.

It’s almost always better to negotiate a new deal than spending months responding to requests from litigation lawyers, sitting for weeks in a courtroom and having your business dealings scrutinized by a jury. Usually the disputes that stay in the courtroom, be it the claims of investment fraud or sexual harassment, don’t end with a pretty picture.

There’s another way to resolve disputes, one that is built around the same principles as the venture model: entrepreneurship, deal-making, private investment and win-win returns, which I call Venture Capital Dispute Resolution, or VCDR for short.

VCDR brings an experienced dispute resolver in to help both sides reach a new deal. So think about where this might come to play: a limited partner has a complaint about fund management or misgivings about commitments, a seed or earlier round investor takes a difficult position on new financing approvals or liquidation preference priorities, a portfolio company management team makes demands that seem excessive, a portfolio company has a problem with a vendor or distributor, an acquisition doesn’t close over a valuation and everyone is pointing fingers, maybe you just need some resolution on a corporate governance issue or you’re fortunate enough to have an IPO on the horizon but are having trouble getting all the investors to get around the same table.

These are all events that could escalate and end up in court but a judge and jury would have little idea what to do with them, at least not in a constructive way. The better road to follow is a discussion and resolution long before that.

VCDR involves bringing in an experienced dispute resolver, usually a specially trained and seasoned tech sector lawyer, to help both parties frame a deal when the deal isn’t happening on its own. On disputes like those mentioned above, a VC dispute resolver will speak to all involved one on one, address business-practical solutions, and efficiently help get a resolution. VCDR takes some of the history and personality issues out of disputes; it’s particularly useful where direct negotiations aren’t productive and a deal is threatened or, worse, are leading to calling in the litigators and ending up in court.

Where the issues are particularly complex, an accountant, a banker or even a non-partisan VC, may be added to the resolution team to help get a sound deal on the table and agreed upon.

The process typically starts out as non-binding to allow for negotiations and deal-making. Like traditional mediation, the success rate should be expected to exceed an average of 80%.

In those rare instances where all possibilities of negotiation have been exhausted, if the parties request, the dispute resolver can provide a non-binding or binding determination. If needed, VCDR can even transition into a private arbitration, with each side’s lawyers involved, to produce a binding decision. In all cases, court proceedings can be avoided if the parties agree to resolve the dispute through VCDR.

With VCDR, issues are resolved smartly, privately and efficiently. Everyone agrees on the process, and no one goes to court. (Although, if needed, VCDR settlements and binding determinations can be enforced in court.) There’s a lot of flexibility to VCDR because it is customized and evolves to meet the needs of those involved and the situation at hand.

The fee for a VC dispute resolver to help resolve a dispute, usually a daily rate which is picked up by one party or shared, is bound to be multiples less than hiring a team of lawyers and experts to fight a litigation. The problem is outsourced and shuttle negotiations allow the parties to remain focused on other ongoing business. Most matters can be resolved within a period of days or less.

VCDR can be used at any time with any dispute. It can even be used to help resolve issues with offshore partners, where it would be particularly complicated to get local or foreign courts involved.

Apart from putting out brush fires, VCDR can also be used where the flames are already out of control. The VCDR process can be implemented at any time alongside a court case, so that the parties can work out a business resolution, and ideally avoid a trial or appeal.

VCDR requires a special skill set: sector experience, substantive knowledge, business and diplomacy skills, and perhaps international or other qualifications depending on the situation. It’s not being a judge, nor is it quite mediation or arbitration. It’s a dispute resolution process that responds to the uniqueness and specialized requirements of the venture capital industry.

If you have a tech/venture-related dispute and think VCDR might right for you, get in touch.

Gary