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Not long ago, venture capitalist masters of the universe would routinely sit on the boards of companies they funded, even after going public. After all, the benefits in keeping tabs on their investments, networking with other technology executives and r�sum�-polishing seemed invaluable. But in an industry sea change, venture capitalists in recent months have begun to question whether the growing liability risk that comes with board membership is worth the benefits, and some have already left boards. The Sarbanes-Oxley Act, passed July 30 amid public outrage of corporate malfeasance beginning with Enron Corp. and including several others, is further reinforcing the trend. The law imposes new obligations on directors and officers of corporations and provides stiffer penalties. “The Sarbanes-Oxley Act definitely upped the ante of the risks associated with serving on the board of public companies,” said Carl Metzger, an attorney with Testa, Hurwitz & Thibeault in Boston and a specialist in liability risk issues that pertain to the venture capital business. “While I’m not predicting that the sky is falling, I do think that the new law will lead to a continued decrease in VC representation on the boards of public companies.” In one clear sign of the increased risk, insurers are charging higher premiums for corporate coverage and in some cases are refusing to insure VCs with a penchant for remaining on boards of public companies. John Burkhart, worldwide product manager for venture capital and private equity at the Chubb Group of Insurance Cos. of Warren, N.J., said that in the past six months he has noted a growing number of venture clients relinquishing their board seats on public companies. He declined to provide specific numbers or names, but said, “With the the new act in effect, there is 10 times more exposure to insure a public board seat than a private seat, and so many VCs are weighing the strategic value of remaining on those boards.” John Ianotti, senior vice president in the financial institutions group of American International Group Inc., said that VCs at technology and IT-focused funds have seen a 100 percent increase in premiums in the past year because they have the most exposure. Not coincidentally, he added, they are the most concerned. The rising amount of litigation also underscores the increased risk for VCs. Quoting statistics from Stanford Law School Securities Class Action Clearinghouse, Metzger said that 485 federal securities fraud class action suits have been filed so far this year, more than double the tally of any prior year. “I think that VCs absolutely will be thinking twice about sitting on these boards moving forward,” said Greg Smitherman, a partner with Advent International in Boston, a venture capital fund that has seen 125 portfolio companies go public over the years, some with Advent partners on the board. Sitting on portfolio companies’ board seats is a long tradition in Silicon Valley. Venture capitalists say they benefit from being on the cutting edge of technology trends, the contacts developed and the burnished image created for other portfolio companies and investment targets. “It certainly doesn’t hurt your prospects when you talk to new companies and can say I am on the board of some high-profile company,” Smitherman said. “In that respect, it can be a real advantage.” Moreover, the hot public market in the 1990s led VCs to hang on to their investments longer into the public markets for the potential upside. Sanjay Subhedar, a general partner with Storm Ventures of Palo Alto, Calif., predicts that VCs are going to be less willing to sit on boards to avoid the risks of litigation and potential lower returns resulting from settlements. He sees that as a black market on the industry. “Ultimately, I think this will severely reduce the incentives for VCs to be on the board and will hurt a lot of public companies,” he said. New Enterprise Associates, which is on the board of fewer than 10 companies and generally keeps partners on boards for about a year after an IPO, said it will shorten that time frame. “In general, I think that we will try to have our partners move off of boards sooner and will have to be more diligent about this because of the liability issues,” said Forest Baskett, an NEA partner in Menlo Park, Calif. But many VCs are expected to continue their corporate board representation. Flip Gianos, a managing director with InterWest Partners of Menlo Park, Calif., said he has no plans to step down from the two board seats he occupies, arguing that the benefits still outweigh the risks. “It allows me to be more knowledgeable and stay plugged in the industry and it also makes me more far more valuable to my other portfolio companies,” Gianos said. Yet he added that it is still too early to gauge the true impact of the new law. “We haven’t spent a lot of cycles on this subject, and we might change our mind moving forward.” Testa, Hurwitz’s Metzger said the new law ups the ante for corporate behavior. It requires CEOs to certify earnings reports and increases the risk of personal liability for board members, he said. It also authorizes stiffer monetary penalties, longer jail sentences and lengthens the statute of limitations for certain violations. Metzger also said the act also provides “additional quivers” for plaintiff attorneys looking to bring claims against public company directors and officers, and said VCs are often viewed as prime targets because of the perception they have deep pockets. “While sitting on the board is not in itself an unreasonable thing to do, VC managers do need to be aware of what the new risks are, and it would be wise for any VC who does currently sit on a board to reevaluate if such as service is truly in the best interests of their fund,” Metzger said. �Copyright 2002, The Deal, LLC. All rights reserved.

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