Wilson, Sonsini, Goodrich & Rosati is the largest law firm in the Bay Area. Andrew Ellis, who is definitely one of their best and brightest, is a true gem on the inside and out.
More than just being the largest, according to Capital IQ, WSGR is the leading legal advisor to issuers of IPOs for technology companies and also represent major tech companies like Google, LinkedIn Corporation and Salesforce.com, among others. So needless to say, I was excited to have the opportunity to chat with Andrew Ellis, an associate at WSGR who focuses on corporate M&A and IPOs in the healthcare industry. I met Andrew about 3 years ago while I was working for All Stars Helping Kids. WSGR graciously serves as our legal support whenever we have contracts or any other agreements coming through our office.
I wanted to learn more about M&A and IPO processes and how attorneys were involved in pushing them through. Check out my interview with Andrew below!
But first, what did I learn?
Key Learnings from Andrew Ellis from Wilson, Sonsini, Goodrich & Rosati:
1. A lot of young founders consider the IPO the barometer for success, but there's still so much work to be done at that point and you can still end up in a bad position after an IPO.
2. IPOs are one of the few times when everybody is working on the same team for the same goal. So while there may be a few hiccups, they are far less contentious than other financing events.
3. And so that was interesting to see how a medical company can be so much like a consumer company if you just take the insurers out of the equation. This is super interesting because we always draw a hard line in the sand when it comes to medical devices, etc. but really they key differentiator is the medical device, it's whose paying for it.
4. Law malpractice insurance is totally a real thing...who knew!
5. Venture capital cultural differences between the West Coast & East Coast are very real.
Megan: I'm here with Andrew in the cafeteria at Wilson, Sonsini, Goodrich & Rosati. Thanks so much for having me, Andrew! So let’s get started by having you tell me little about you as a lawyer that you think people might want to know.
Andrew: So I came into law, I think, from a non-traditional background.
Megan: Yes, you did, Dr. Ellis!
Andrew: So in entering into this eight-year program that combined undergraduate and medical school, I had applied for it when I was 17 years old. And at that time I thought I really wanted to be a doctor. The purpose of this program was to allow people to sort of broaden their horizons because typically you get a student who goes straight through college to medical school, focuses only on the sciences and biology and comes out kind of one dimensional. And they wanted to create well-rounded physicians. So they encouraged you to do a lot of extracurricular activities and take classes. And I did that. I took all kinds of classes, including some entrepreneurship classes. And I ended up starting and running a business in college to pay my way through.
Megan: Oh my gosh. What kind of business?
Andrew: It was a specialty catering business. It did weddings and corporate events and things like that.
Megan: Oh. Do you cook?
Andrew: No. It was desserts and chocolate fountains.
Megan: Love it! I would’ve never have thought that about you!
Andrew: So that kind of created a bug for business that I took with me into medical school, and when I got to medical school, I liked what I did, but I was more much more interested in the business of how all these things came to market. So the business of how devices developed and sold, and how the drugs come to market, how care is delivered. And at that time, health IT was becoming a much bigger thing. So how that is working. We were sort of piloting electronic medical records at the time, and that was an interesting business for me. So then it was a question of how best to use that interest. Well, the decision first was, do I want to pursue the science side and be a doctor or go at it from a different angle? So I decided I wanted to follow my passions and do the business side.
Then the most interesting way, I felt, to exercise that, was to combine business, law, and medicine in this career. And now I do corporate law for health care clients, so I get to use all three.
Megan: Can you tell me what exactly is your role here at Wilson Sonsini? And kind of what are your main tasks or focuses?
Andrew: Yeah. So I'm a corporate associate, and I focus on the health care industry. But I do pretty much everything the full life cycle within that industry. The firm's known for being good at everything from the corporations to the IPOs and public companies. And so Google, for example, we started when it was just a couple of guys, they were Stanford students, and we took it to a multi-billion dollar company. So that's the model. That's what we want all of our clients to end up doing, but of course it doesn't always work out that way.
Megan: Yeah. Most of the time it doesn't but I’d assume that's just the nature of starting a business.
Andrew: Of course. But I do enjoy the variety of dealing with companies that are at these different stages because it gives you variety in your own practice. If you do enough IPOs, then you understand why certain terms were entered into early on in the company. When they're doing financings or setting up the organizational documents, certain provisions affect how things play out in the IPO process. If you come full circle, you understand all that. So talking about my practice, I spend at least half my time doing IPOs and public companies.
Megan: And particularly health care companies?
Andrew: All healthcare. And then the other half, or a little bit less than half, is spent doing sort of everything else. So some M&A, some private venture financings, corporations, and then just general everyday stuff.
Megan: Okay. And when we think about IPOs, as someone that's completely new to the industry, can you tell me what exactly is the lawyer's role in the IPO process? You've got your founder, you've got your VCs, and then here comes the attorney. What do you do?
Andrew: Right. So IPOs are unique because the teams are really big. If you're doing a financing, you have the investors in the company who are on different sides of the table, and they each have their lawyers. And it's sort of adversarial the whole time. The IPO process is different because you have the company, the lawyers for the company, the bankers, the lawyers for the bankers, the auditors, and then sometimes some consultants that the company hired to help them think like a public company. And except for the underwriting agreement, which governs the relationship between the bankers and the company, and then the lockups, which are associated with that ...
Megan: And that's how long they'll have to wait? (asking about lockups!)
Andrew: Yes. And the legal opinions, those three things. Everything else is you're all in the same team, moving towards the same goal, which is a lot of fun. And the company's lawyer's job is really to be the quarterback of all the moving pieces that are part of the process. The main piece is that you write a giant document, usually it's like 250 pages long, that talks about the business, how it compares to its competitors, what its plans are, what makes it unique, what the risks are, and then a bunch of financial and employment disclosures, and various requirements that the SEC puts on you in order to sell shares.
Megan: You mentioned you put risks in. What types of risks raise the biggest red flags for you in an IPO, as an attorney?
Andrew: Yeah. Well it really depends on the company, but I think that usually the companies who are backing an IPO process are ones that are venture-backed, whether it's tech or healthcare, they're venture-backed. They either, for a healthcare company, haven't finished their trials yet, or maybe they just finished and just started selling their product. For a tech company, they've launched their product and have some revenue, but they're usually not profitable yet. You've got to ramp up significantly to get to profitability most of the time. So the main risk is “we haven't been doing this for very long, we have some data that our product works, but we're not totally sure it'll be a success”.
Another one is if they think they’ll become profitable, but don't know when. We don't know if that will happen. They also may need additional funds, and those may come at terms that aren't good for them.
Another one is that in a fast-moving field, which means a competitor could rise up, or an existing competitor from a large company who has much larger resources than you, could develop a new, competing product faster.
Megan: So being a new company is a risky business.
Andrew: Yeah. It is. And even at the IPO stage, which a lot of people consider to be the barometer of success for everyone. Everyone's going toward that, either that or being bought. There's still so much work to do after that point. It is scary.
Megan: So tell me about one of the most interesting deals that you've done. Has there been anything that you were just like, "I really loved working on that?" Or it had some cool factors to it that made it more interesting to you?
Megan: And if you don't want to say a name, you don't have to.
Andrew: When I first started, I sold a company that was making a cellulite treatment. It’s funny to me that the first company that popped into my mind was the cellulite removal device. That was my first merger, and your first one of something is often your favorite! What I find more interesting as a general rule are the personalities I encounter, which I mentioned, and the various technologies. I’ve dealt with college entrepreneurs and entrepreneurs in their 70s, first-timers and well-known serial entrepreneurs, and everything in between. I’ve been able to work with all kinds of companies, including a developer of tiny drug delivery devices that attach to your eye to treat glaucoma, a breast implant manufacturer, gene therapy companies, etc. I’ve negotiated across an old friend from law school and, at another time, the exact opposite – a livid partner at a NY firm I had never spoken who resorted to screaming multiple times without provocation. I’ve had devices demo’ed on me and have even had my blood drawn by a client to test a device. Now I can claim that I truly have bled for my clients.
Megan: Cellulite?! That’s really different and interesting.
Andrew: It was interesting for a couple of reasons. One, it was sort of the same thing, where it was really entertaining subject matter. But the other one was that it was the first health care company that I encountered that wasn't sort of hostage to all the health care regulatory concerns.
Megan: In what way?
Andrew: Reimbursement. So it's still a regulated device. The difference is that in most cases in health care, the patients are the end user. They get that treatment through the doctor. But the insurance company is paying for it, and it just adds a ton of complexity to what you're doing. That one was, because it's an aesthetic device, you don't have to deal with the insurance side of things. It's all cash. And so that was interesting to see how a medical company can be so much like a consumer company if you just take the insurers out of the equation. We still had the FDA, but it the device is already approved, then it's basically just like selling any other product. But that one was interesting.
Megan: Cool. You’ve definitely had some cool projects.
Andrew: The ones that are also most interesting are the ones that have interesting personalities.
Megan: As in the people or the products?
Andrew: The people. I think this is true in tech and in health care, but you tend to encounter really smart people who often have PhDs, or MDs, or they're genius programmers or something. And they typically haven't really been trained, so they're interesting to deal with in that respect, but they also rely really heavily on you. And it lets you take a larger role in the process than you would as an attorney in a more traditional sense, maybe like with a bigger company with very sophisticated employees.
Megan: I think that puts a lot responsibility on you as an attorney to treat that person right. If they can't really grasp everything that's going on, they're kind of depending on you a lot. So that's a lot of responsibility.
Last few questions! Can you tell me what’s tough about this role? What is something that either keeps you up at night? Or you come into work and say, "Dang. I wish this could be better for everybody involved"?
Andrew: One of the things that's hard is that I tend to approach this job in a very entrepreneurial way, and I think that’s the way the firm's philosophy goes, as well. And so your job as a lawyer, you're constantly playing a balancing act between saying no to be conservative, and giving options and laying it all out on the table for the client what the risks are and letting them choose. A lot of the times they kind of want you to choose or tell them which one's the way to go. And so finding the balance between being conservative enough to keep them safe, so to speak, and saying yes often enough that they can actually run their business is a hard one.
Megan: So kind of figuring out how to get to yes in the most responsible way possible?
Andrew: Definitely. And the other one, too, is with IPOs, for example, you dig into that company over about six months or eight months or however long it takes to go through the process in that case, and you think you know everything about them and you've spent hours writing the risk factors and get everything on paper that you can anticipate would be a problem or a differentiating factor. And occasionally sometimes something happens after the IPO, and you think, "Oh. Gosh. Do I have this covered?" Or you hear about something at a competitor happening, and you think if that affects me or if the same thing happens to us, do we have the disclosure we need to protect the company? That's another one, just making sure you've got your bases covered.
Megan: And then if things don't go correctly, is all the blow back on you?
Andrew: Well, it hasn't happened to me yet, thankfully.
Megan: Because you're so dang smart. (I’ve known Andrew for a few years now, he’s incredibly smart. So this isn’t me saying something to someone I never met to boost them up during the interview. Haha!)
Andrew: Well, we've been doing it for a long time. There are a lot of checks and balances. And you have a lot of good precedent because we've done so many similar transactions in that past. You can draw on a lot of the work people have done and make sure you have your bases covered that way. But, no, if something went wrong and it wasn't adequately disclosed and the company got sued and they lost, then it would definitely be on us, or at least we'd have a high portion of it.
Megan: Is there insurance for that?
Andrew: There is.
Megan: There's IPO insurance?
Andrew: Kind of.
Megan: Malpractice for lawyers?
Andrew: Yeah. Absolutely. The company pays insurers lots of money to insure us against claims like that. And from the company side, they have D&O insurance, which protects the directors and officers from personal liability.
Megan: Oh yes! We have that in non-profit.
Andrew: Oh, yeah. I'm sure. And also general liability coverage. Companies like to be covered, and insurers like to sell things. At the end of the day, everybody's happy.
Megan: One thingI'm hoping to do in this process is figure out, between the entrepreneurs, the VCs, the attorneys and the bankers, are there any hang-ups in the overall process? Like is it pretty frictionless between everybody? And I guess my question would be something like: What is something, in their interactions with you, that you think venture capitalists miss? Is there anything that you constantly have to tell them, "No. This isn't gonna go this way"? Any kind of spaces of butting heads that they consistently miss?
Andrew: Yes. A couple of things.
Megan: You're like, "I have a ton."
Andrew: I would say that one of them is there's a difference in the culture of the terms of these deals and how these deals are done between different geographic areas. So if I'm dealing with a VC from Silicon Valley, or a VC's attorney from Silicon Valley, I know that we have, depending on the firm, I know that we have a common way of thinking about how the term sheet should look, and what's market, and what's expected. If you're dealing with someone from the East Coast, like Boston or New York, a lot of time they have their own culture, which has been influenced by the larger transactions, private equity, and very large corporations. It's just not the same as the Silicon Valley culture, in many ways, but particularly in term sheet terms for financing. So when you deal with VCs from another area, that's one of your challenges, just trying to get on the same page with what's an acceptable term.
The other one is that these terms change over time. So if you were to look at basic financing terms, like a chart of basic financing terms, and what percentage of the time they went one way or the other, seven years ago it would be different than now. Even two years ago, different than now. And so sometimes it can be difficult to kind of convince the VC or their counsel that, "Hey. Yes. A few years ago this would have been an acceptable term. But now this is not really the case." That tends to fluctuate with the economy. If the economy is good, then it becomes more founder friendly. And if the economy's bad, it becomes more venture friendly because everybody's desperate for money.
Megan: That makes sense. Well do you think there's anything else that I should know? Or any things I can start learning and reading? Any ideas?
Andrew: Yeah. I have a couple. One of them would be ... you mentioned that you had read a VC book. There are a couple of VC books that, unfortunately, I can't remember the title of. I'll have to send them to you. But they cover term sheets and terms. If you're going to be on the VC side, it's always good to know what the different terms mean. And like I said, what's market at a particular time will change, they will have some variations. But the principles will remain the same. And if you're not already familiar with those, that would be a good thing to do. You may already be.
Megan: It's funny that you said that because once I turned off the recorder, I was gonna ask you, "Hey. Are term sheets secrets?" And then is there any way that somebody would be able to be like, "Hey, Megan. Let's talk about term sheets"? And I don't know. "Walk me through a couple of fake ones." Or something like that? But anyway, I'll ask you afterward.
Andrew: Yeah. Yeah. Happy to do that. I'd be happy to walk you through one some time.
Megan: That'd be great.
Andrew: Another piece of advice I’ll share is from when I was a summer associate, I worked out a time to go talk to Larry Sonsini, who's one of the main partners in the firm. And I asked him, "If you were me, sitting across from you, what would you want yourself to know? Or what would you have wanted someone to have told you early in your career"? And he said, "Never forget the human element." He's like, "There's often an economic explanation for why someone wants things, or a business explanation for why someone wants things, but sometimes there is a human element to it.” Maybe they're attached to a particular business for some personal reason. Or maybe there's a political reason within their organization why they do or don't want something to happen. And sometimes you can get to yes not by convincing them that a term is market or that it's gonna benefit them economically, or whatever angle you want to take. Sometimes if you just figure out what the human element is and attack the problem from that perspective, then you can get to a mutual agreement on a term, or a deal, in a more efficient way."
Megan: Yeah. I would agree. Like I was telling you about going into business school, that's definitely one of the perspectives that I've gotten from my past experience in philanthropy & nonprofit. And so I totally agree with that. Everybody's still a person, and there's other things involved.
*During the interview Andrew also suggested the book Venture Deals by Brad Feld. Purchased it the same day and have started the read. Of course, a post on it coming later!