Insight: Considerations for Operating or Working With Tech Startups in Automotive and Mobility

August 14, 2020

The automotive and mobility technology space continues to grow in line with the speed of automotive innovations. Startups are playing a key role in developing these cutting-edge technologies, including in autonomous driving, electric vehicles, and connected cars.

In this Insight, we review some of these innovations, how to protect the interests of investors in these technologies, and issues that startup companies working in these sectors may face.

Major recent global innovations in the automotive and mobility sectors include:

  • Connected, Autonomous, Shared, and Electric (CASE) vehicles. They are the future of the automotive industry.
  • Greater connectivity, autonomy, sharing, and electrification of automobiles, which are driving investment in technology startups in the automotive space.
  • Autonomous-vehicle sensors and advanced driver assistance systems (ADAS), batteries, electric vehicles and charging, semiconductors, and urban air mobility.

When investing in automotive startups or technology, it is important to consider the following key terms for protecting investor interests:

  • Trade-Secret Misappropriation – there has been an increase in trade-secret litigation, especially in relation to departing employees. It is critical to put into place a trade-secret policy and protocols such as immediate IT access restrictions before employees exit your organization.
  • Liquidation Preference – this includes not only dissolution and liquidation of the target company, but also an M&A exit. Investors will want to receive a return on their investment before the holders of common stock through the use of Preferred Stock. Please note: The webinar presentation linked below provides an explanation of nonparticipating liquidation preference vs. participating liquidation preference.
  • Negative Covenants (also called Protective Provisions) – usually, founders and management strongly resist these provisions, but investors will demand them as a condition to their investment. These provisions require investor approval for certain material transactions or even employee-related matters.

Notable supply chain, regulatory, and legal issues for automotive and mobility startups working with new technologies like those mentioned above include:

  • Supply Chain: The coronavirus (COVID-19) pandemic is creating supply chain disruptions all over the word that are calling into question force majeure provisions in commercial agreements*.
  • Supply Chain: There is enormous demand for silicon carbide semiconductors for automotive applications, and as a result, companies are investing in rapidly expanding supply capacity.
  • Regulatory: Automotive qualification (ISO 26262, ISO/TS 16949) is key for any automotive startup and boosts the value and credibility of the company.
  • Regulatory: Product Warranties – there are lengthy product warranty periods required by applicable statute. Not only are they negotiated between parties, but longer warranty periods are statutorily required and can last 10 years, 15 years or even longer in certain jurisdictions.
  • Regulatory: Foreign Investment Approvals – major jurisdictions have preapproval and/or prefiling requirements for foreign investments. ( e.g., the Committee on Foreign Investment in the United States).
  • Legal: Data privacy and cybersecurity is a significant legal issue in the automotive sector for automotive startups and investors because of the ability of connected cars to gather information like geolocation data and the potential for this data to be hacked.

* Read more in our report, “Cross-Border Transactions Caught at the Crossroads: Navigating the Global COVID-19 Crisis through Force Majeure Provisions.”

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