Clean technologies are receiving increased attention from a variety of stakeholders today. All levels of government, from local to federal, are providing tax abatements, grants and subsidies for the development of clean technologies involving solar, wind, carbon sequestration and nanotechnology. With global warming a household name and the “green” label in vogue, clean technology is enjoying a renaissance in the U.S.
Clean technology venture capital deals and financing have exponentially increased, from under $1 billion in 2002 to nearly $8.5 billion in 2008. Clean technology ventures currently leads the investment pack under the rubric of emerging industries, securing over $2billion in venture capital during the first quarter of 2010.
Challenges however remain. China has undercut U.S. solar panel developers with their rock-bottom prices while producing over four times as much megawatt power per panel in a quarter of the time. As a result, California companies now struggle to compete despite the favorable economic and regulatory environment afforded to them. Further, many of the latest iterations of clean technology such as ethanol-based fuel and wind power have yet to be fully scaled for mass production, or even proven as sustainable mechanisms for supplanting traditional fuel generation.
Despite the global volatility of the clean technology industry and the limited remedial effects of the domestic legal infrastructure, there are creative legal solutions that can be individually negotiated into any clean technology venture deal. These briefly addressed solutions, while not exhaustive, take into consideration both the capital-intensive nature of clean technology ventures and its lengthy beta-to-commercialization process.
1. Method of Financing. Does your CleanTech venture seek debt or equity financing or a hybrid of both? What are the “Market Terms” for such financing? For example, interest rates, warrant coverage and related issues such as registration rights, anti-dilution protection and the warrant strike price for shares of the venture are all terms that should be addressed in any financing deal structure.
2. Intellectual Property. Does your method, process or product have intellectual property protection? How is it distinct and unique from competing or similar technologies? Will it serve as collateral to any debt financing deal to the benefit of a lender in the event of default? Furthermore, IP litigation has become one of the most prolific and hotly contested areas of law, with grievances and lawsuits filed almost daily across the U.S. over who owns the rights to technical minutiae and against monopolistic behavior by competitors. For clean technology ventures operating on an international scale, additional IP issues arise in local or regional contexts, particularly under the European Union which tends vigorously enforce its anti-competitive regulations by mandating that technologies and know-how be open-source.
3. Licensing. In terms of technology, there is a distinction between integrated products, those products that combine technologies into systems, and component-based products, illustrated by example as renewable batteries, photovoltaic membranes, or nanochips. The degree of licensing to third parties will depend on how your product is characterized, the applied business model and the nature of the market in which it's being introduced. If your product is a component, licensing will be a primary way to engage customers and clients since it cannot be economically viable unless it’s utilized in other computing, industrial or communication hardware or software aggregated on a systemic level.
4. Material Adverse Conditions. MAC clauses have received their fair share of attention across industries. As a contractual provision, MAC clauses define changes in the business, operations and conditions of a company that are material and adverse to the contracting party. MAC clauses come up in both debt financing deals as a “catch-all” safety event for lenders in the event of default and also with clients and customers who seek to limit their obligations under an agreement should an adverse condition arise. Case law has generally imposed a high standard on contracting parties seeking relief under MAC clauses, often hinging on the precise language of the clause itself. A “material” change must be substantial, taking into account the long-term perspective rather than, for example, a drop in quarterly earnings due to market conditions or strategic business decisions.
As a CleanTech venture, a narrowly defined MAC clause, coupled with more carve-outs, will impose a higher threshold on the contracting party should it want to void the agreement based on perceived adverse conditions.
The clean technology industry is growing and evolving at a frenetic pace. The legal framework is nascent at best. Emerging legal issues however, are becoming more nuanced as novel business cycles and disruptive technologies are upending traditional industries. As legal issues sharpen, CleanTech ventures should understand from the outset that their financial success and competitive advantage is based not only on sky high visionary thinking, but the transactional details paving the road underneath.
Sheheryar Sardar, Esq. & Benish Shah, Esq., Sardar Law Firm LLC
www.sardarlawfirm.com
@sardarlawfirm
@shezisardar
@benishshah