Venture Boards and the Corona Virus – 5 Things to Do Now
COVID-19 Legal Updates Dror Futter · March 6, 2020
The Corona Virus is serving up a pretty toxic mix of public safety and economic risk with a heavy side order of uncertainty and anxiety. Company directors have a “duty of care” that requires them to “exercise care in making decisions as a director, based on adequate information and a good faith belief that their decisions are in the best interest of the company and its stockholders.” Based on recent events, a Board that simply adopts a “wait and see” attitude is at risk for a future accusation of failing to meet the duty of care.
Despite the uncertainty, there are steps venture Boards should be taking now to help their companies weather the crisis and guard against future claims.
- Call a Special Meeting. This is exactly the type of event for which Special Meetings were invented. Before the meeting, task management with reporting on potential Corona-related risks and the company’s plans for meeting them. At the conclusion of the meeting, management should be tasked with specific action items to address vulnerabilities. Depending on how the external situation evolves, follow-up meetings should be set up to track progress against the plan and the identification of new/changed risks.
- Keep Employees, Customers and Suppliers Safe. Priority number one has to be safety. This is especially challenging given the changing medical situation. Easy steps include directing ill employees to stay home and liberalizing sick day policies. Revisiting remote work and travel policies also makes sense. The most important thing is to take this relative calm before the anticipated storm to plan these things out. You don’t want to respond in an ad hoc fashion once an employee has contracted the virus.
- Identify Supply Chain Issues. Management should be tasked to report on supply chain vulnerabilities. They should start regular communications with critical suppliers and seek to identify alternative suppliers and develop contingency plans.
- Develop a Communications Plan to Customers. If the virus and its impact begin to affect your company’s ability to deliver in a timely fashion to your customers, management should be tasked with developing a communications plan to keep customers informed. In most instances, customers will be understanding given the circumstances. However, in any event, the only thing worse than a disappointed customer is a disappointed and surprised customer. Again, remember these are relationships you want to preserve when the crises ends, give your customers the notice they need to develop their contingency plans.
- Consult with Your Legal Counsel and Your Insurance Broker. OK, as a lawyer this is a bit self-serving, but no less true. This is the time that management should be consulting with company counsel to identify potential legal risks and steps that can be taken to mitigate those risks. For example, a review of critical contracts should be undertaken to understand the company’s position if it does not perform or the other side does not perform and identify mitigation strategies. Similarly, the Board should understand its insurance coverage and if possible, try to add coverage in gap areas where the virus has increased the risk. Finally, it is always a good idea to make sure that D&O insurance coverage is appropriate for the company.
The best contingency plans are those that are never taken out of the drawer and hopefully that will be the case here too. The good news is that this type of analysis and planning is likely to deliver value to the company even if the virus’ impact is minimal. What this article does not address is a downturn in the venture finance market, as was strongly suggested in a recent letter by Sequoia Capital to its portfolio companies. Dealing with the possibility of a funding downturn should be on the radar of every non-profitable venture, but that is the subject of another article ….
Dror Futter focuses his practice on startup companies and their investors and has worked with a wide range of technology companies. His fifteen years’ experience as in-house counsel includes positions with Vidyo, Inc., a venture-backed videoconferencing company, and New Venture Partners, a venture fund focused on corporate spinouts. Prior to that, Mr. Futter was Counsel to the CIO of Lucent Technologies, as well as supporting parts of its sourcing organization. Read more.
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