February 22, 2013 - The Recorder by Joshua Sisco
Sofinnova Ventures Inc. is a marquee Sand Hill Road firm. Founded in 1974 and on its eighth fund, it manages approximately $1.4 billion in active client assets. In 2011 the company raised about $440 million for Fund VIII, its first focused exclusively on life science companies.
One of the oldest venture capital firms in Silicon Valley, Sofinnova originally sprang out of French investment firm Sofinnova SA and has a sister firm, Sofinnova Partners based in Paris. The two firms have been independent since the late 1990s.
The Menlo Park-based Sofinnova currently has four active investment funds, with about two dozen portfolio companies in each. Over the years the firm has backed some high-profile companies, including drug makers Genentech Inc., Biogen Idec Inc. and Seattle Genetics Inc. It's latest portfolio company to go public, antibody maker KaloBios Pharmaceuticals Inc., was the first initial public offering from a Bay Area company in 2013 and raised $20 million more than it had originally planned. The firm has sold companies to pharmaceutical giants including Pfizer Inc., Takeda Pharmaceutical Co. and MedImmune Inc., among others.
Hooman Shahlavi came to Sofinnova as its director of legal affairs in 2007 and was named general counsel in 2011. He is Sofinnova's first and only lawyer. With a couple of exceptions, including New Enterprise Associates and Bessemer Venture Partners, venture capital firms have historically relied on outside counsel for all of their legal work. In addition to Sofinnova, a number of other firms — including DCM, Venrock, 5AM Ventures, Founders Fund, Kleiner Perkins Caufield & Byers and Andreessen Horowitz — have brought lawyers in house in recent years.
Shahlavi first thought that he would join the corporate world and studied business and political science at San Jose State University. It was a business law class in his undergraduate studies that persuaded him otherwise.
After graduating from UC-Hastings law school in 1997, Shahlavi joined the business and technology practice at the now-defunct Brobeck, Phleger & Harrison.
After Brobeck he joined the corporate transactions group at O'Melveny & Myers as counsel. Shahlavi was well-acquainted with the general partners at Sofinnova prior to coming aboard, having represented them as outside counsel on a number of transactions. "I've always been a general corporate lawyer focused on early-stage companies and venture firms and had been working with Sofinnova for years," he said. Nevertheless, Shahlavi originally was hesitant about going to Sofinnova. "One concern coming here was that the work would be limited, all Series A [financings] one right after the other," he said. Prior to taking the job, he consulted with his friend and former colleague at Brobeck, Rodi Guidero, who has been GC at ComVentures and VantagePoint Venture Partners, among others.
After talking to Guidero, he realized that the role would entail a traditional generalist approach, dealing with everything from employment and labor to intellectual property to debt and credit lines, IPOs, M&A and SEC reporting.
Shahlavi was initially brought in by Sofinnova general partner Mike Powell, who campaigned for three years for the firm to get its own lawyer. Still, not all of his partners were convinced. "What I first heard was that they didn't think they needed me. Now it's we don't know how we did it without you," he said. Before he was hired, Shahlavi said he wrote a memo detailing all of the work he would be able to help with, including follow-on financings and acquisitions and initial public offerings of portfolio companies. "He knows exactly what we want in every document. It literally saves me one day a week," Powell told The Recorder in 2008.INSIDE AND OUTSIDE COUNSEL
Sofinnova's roughly 100 active portfolio companies "generate an unbelievable amount of paperwork," and at its most simplified, Shahlavi's primary responsibility is to shield the general partners from that and allow them to focus on business decisions.
For their initial investment in a company, venture firms traditionally bring in an outside firm, which is typically chosen by the investor leading the financing round. For this, Shahlavi turns to Warren Lazarow at O'Melveny; Barbara Kosacz, head of the life sciences group at Cooley; and attorneys from Gunderson Dettmer Stough Villeneuve Franklin & Hachigian. For fund formation, the one area in which he relies almost entirely on outside counsel, Shahlavi uses Steven Franklin and Sean Caplice at Gunderson. For IP and licensing work he looks to Nan Wu at Cooley.
While he does not typically dole out too much advice to Sofinnova's portfolio companies in order to avoid potential conflicts of interest, Shahlavi will occasionally make use of his generalist background. If one of the companies is negotiating an equipment purchase or sales contract, the Sofinnova partner on the company's board may seek his advice, Shahlavi said. He sits in on all of the partner meetings and is well-versed in all aspects of the firm's investments. It is Shahlavi's job to look out for Sofinnova in areas where it and other venture firms have historically not been well-represented. Somewhat surprisingly, venture firms generally do not use outside counsel in a number of key areas, including follow-on financings and acquisitions and IPOs of their portfolio companies, he said. And since many venture firms didn't have an in-house lawyer either, there was often little or no advice on the most important part of the process: how they get paid.
In follow-on investments venture firms have typically relied on the company's counsel or the firms advising a new investor. When new investors are brought in, they often want terms that conflict with a company's previous backers. "These guys get a ton of documents and will often sign away rights without realizing it," said Shahlavi, referring to the general partners of a venture firm. Shahlavi also spends a lot of time ensuring that Sofinnova's interests are aligned with acquiring companies. When a portfolio company is acquired it does not take much to hamper the firm's ability to pay out its own investors, in an exit. For example, in a $100 million sale of a pharmaceutical company, much of the purchase price is often tied to revenue and regulatory approval milestones. For a large drugmaker, with ever-shifting priorities, the acquired company's drug program could easily be pushed aside, hampering the ability to meet goals. "We don't want the company to ignore our [drug] program, because our milestones are tied to that," Shahlavi said. "The last thing we ever want to tell our limited partners is that they are not getting all of their money."