Archive for the ‘Mergers and Acquisitions’ Category

AlphaTakes – Determining the Size of the Stock Option Pool

In this AlphaTakes video, Meechie Pietruczak discusses calculating the number of shares in an emerging technology company’s option pool.

Here are the key takeaways from this video:

  1. Emerging technology companies usually create stock option pools to compensate and incentivize employees, directors, consultants and other independent contractors.
  2. The size of the option pool is typically calculated as a percentage of all capital stock, which is often in the range of 10 to 20%.
  3. The size of the option pool may have a significant impact on the price per share paid by an investor.

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AlphaTakes – Convertible Debt Financing Term Sheets

Convertible debt financings are a common type of bridge financing for emerging technology companies.  In this AlphaTakes video, Matt Storms discusses term sheets for convertible debt financings for an emerging technology company.  He provides a summary of the common key financial and procedural terms that are typically negotiated.

Here are the key takeaways from this video:

    (1)  The convertible debt term sheet for an emerging technology company should be relatively simple and short

    (2)  The key financial term in a convertible debt transaction is typically the size of the discount off the next round’s price or the warrant coverage amount

    (3)  The key procedural terms in a convertible debt transaction typically include the definition of a “Qualified Financing” and the ability to change the transaction documents with less than unanimous approval of the noteholders



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AlphaTakes – Liquidation Preferences

In this AlphaTakes video, Matt Storms discusses the basics concerning liquidation preferences. He provides a summary of the different types of liquidation preferences that are typically negotiated in emerging technology company transactions. He also provides a spreadsheet illustration of the effects of the different types of liquidation preferences.

Here are the key takeaways from this video:

    (1) A liquidation preference is a right to all or a portion of the assets of a company upon its sale over the rights of others

    (2) The three most common types of liquidation preferences for an emerging technology company are

    (a) non-participating preferred (most common in early stage deals)

    (b) participating preferred

    (c) participating preferred with a cap

    (3) Liquidation preferences are important


by AlphaTech | Permalink | 1 Comment


Announcing AlphaTakes—Videos for Emerging Technology Companies

We are excited to announce that in coming weeks, we are starting a new video series called AlphaTakes. The goal of the initiative is to provide clients and others with background on the variety of recurring issues that emerging companies face through their development, from startup to sale.  Our hope is that the videos will supplement the existing articles for emerging technology companies that is already contained on our website.

Technology Company Startups

For startups, we plan to cover topics such as the incorporation process, allocating founder shares, common mistakes of startups, and calculating the stock option pool.  We have a number of other ideas as well, based on the questions we receive from entrepreneurs.

Scaling Technology Companies

For operating companies that are scaling, we plan to have videos that go over the different types of financing structures, common mistakes of software companies, the Series A Financing term sheet, liquidation preferences, and anti-dilution provisions.  As bringing on employee talent and contracting are important for scaling companies, we also plan to touch on issues related to employees and contracts.

Emerging Companies Considering Sale

For companies considering a potential sale, we plan to cover common sale transaction structures, how to prepare for a potential company sale, letters of intent, and use of investment bankers.  We also will look at some of the commonly negotiated terms in sale transactions as well as recurring issues that arise during the sale process.

If you have any suggestions on potential topics for us to cover in AlphaTakes, let us know!

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Preparing for Due Diligence for the Sale of a Company

Executives who have not led a sale or merger of a company before are often caught off-guard by how much work goes into due diligence. For many who are successful, the building of the business crescendos and culminates in a sale. The term sheet is signed, you smell the money, and perhaps even book your post-closing vacation, but you may not realize that you’ve just signed up to run a muddy obstacle course race while also running your business. Your next several weeks, maybe months, will be consumed by responding to page after page of information and document requests from your potential acquirer. You will be questioned about all aspects of the business. Because you want to keep the pending transaction under the radar and limit the impact on your business if the deal does not go through, you assemble the smallest employee team possible to help you with the transaction. You may find yourself requesting files and summaries from various employees in the guise of another business need, copying after hours, and arranging off-site meetings with the acquiror.

To preserve some of your sanity during an M&A transaction, there are steps that you can take in advance to prepare for due diligence.   Read the rest of this entry »

by Macy Stoneback | Permalink | No Comments


Finders under Fire

Small businesses often have challenges with raising capital from investors.  Gaining access to equity capital can be difficult and complying with a myriad of rules and regulations when seeking help in raising funds can be very confusing.  When raising equity capital, many entrepreneurs seek assistance from unlicensed “finders” for introductions to potential investors. Recent government enforcement actions and commentary from regulatory agencies, however, emphasize some of the risks associated with working with unlicensed finders.

So . . . What do Finders Find?

Generally, finders make introductions between investors and companies, but do not actually sell securities or close transactions on behalf of the companies selling the securities.  If a finder is providing anything more than a simple introduction or access to contact information, or is receiving a fee based on the completion of a transaction, then the finder needs to be licensed as a broker-dealer. Read the rest of this entry »

by Matt Storms and Paul Page | Permalink | No Comments


Changing Your Choice of Entity: Cross-Species Mergers and Conversions

With increasing frequency, companies are considering a change in their form of entity.  The reasons for the change vary considerably: sometimes companies are underwhelmed by the tax benefits of being a limited liability company and are overwhelmed by its complexities (international tax withholding issues, multi-state K-1’s, profits interests management, phantom income, and employee education regarding equity-based incentives), while other times companies are frustrated by the restrictions on S corporations and desire the flexibility that limited liability companies afford.  In other cases still, institutional investors may require a certain form of entity (e.g., a C corporation), while other investors (e.g., active angel investors) are looking to take advantage of pass through losses. 

Today, most states make it fairly easy to change the type of entity or even to change the state of organization of the entity.  It is important to keep in mind though that while the mechanics of converting to a new entity from a legal perspective are not typically too complex, the related tax issues can be incredibly intricate, especially for an organization with a long operating history and a complex capitalization structure.  While in many situations converting to a different type of entity will be tax-free, that will not always be the case.  Your tax advisor and accountants should be consulted early in the process when considering a change in entity form.  Assuming a change in structure is justified and the tax issues are manageable, this article focuses on the mechanics of converting from one type of entity to another.  

While there are variations among the states, there are generally two ways to change your type of entity from a legal perspective: merging with and into another entity of a different type and effectuating a conversion.  The method selected, as well as some of the finer details associated with the particular method selected, is often driven by tax considerations.

Change of Entity Form Through Merger

The more traditional way to change the form of an organization is through a merger.  Sometimes people refer to this as a cross-species merger.  A merger enables two or more entities to combine into a single entity.  The surviving entity can be recently created just to effectuate the change in entity form or it can have an operating history. The surviving entity typically files with the applicable state a plan of merger and a statement that the plan was approved in accordance with applicable law.  In most states, the plan of merger identifies the parties to the merger, the surviving entity, and the manner and basis of converting equity interests in each entity into interests in the surviving entity.  The plan of merger also includes any applicable amendments to governing documents (e.g., articles) for the surviving entity.  

After the merger, only the surviving entity continues to exist and it is responsible for all liabilities of each business entity that is a party to the merger.  Subject to certain exceptions and filing requirements, title to assets automatically vests with the surviving business entity.

Change of Entity Form Through Conversion

Within the last decade, most states have adopted statutes that allow organizations to convert their form of entity by just filing the applicable conversion documentation.  For example, in Wisconsin, a business that desires to convert to another type of legal entity must submit to the Department of Financial Institutions a certificate of conversion with a plan of conversion and a statement that the plan was approved in accordance with the laws applicable to the pre-converted entity. 

Similar to a plan of merger, most states require that a plan of conversion include the name, form of business entity and jurisdiction governing the entity both before and after the conversion.  In addition, the post-conversion articles of incorporation or other charter document is an attachment to the plan of conversion.  Some states however require a separate filing for the charter document.  Like with a plan of merger, the plan of conversion must also include the terms and conditions of the conversion and the manner and basis of converting the ownership interests in the old entity to the ownership interests in the new entity. 

Upon conversion, the new entity continues to be subject to the liabilities incurred prior to the conversion.  If a business owner had any personal liability by reason of the owner’s position in the entity (such as the general partner of a limited partnership), such liability will continue, but only to the extent accrued prior to the conversion.  The new entity continues to be vested with title to all its properties, subject to modest exceptions and certain filing requirements.  Any legal proceeding pending against the old entity will be continued against the new entity.  

Conducting Due Diligence When Changing Your Form of Entity

Despite the fact that the legal filing requirements for cross-species mergers and conversions are rather straight forward and mechanical, there are a number of due diligence issues that should be considered prior to making the change in entity form.  For example, in contracts, a merger is sometimes treated as an assignment of a contract from one entity to another and many contracts prohibit such assignments without prior consent.  Businesses should review all their material contracts and consider seeking consent for assignment where necessary.  Trademark and patent filings in the U.S. Patent and Trademark Office (USPTO) will need to be updated to reflect new company names in a conversion.  Mergers are treated as an assignment that also needs to be recorded with the USPTO.  Likewise, regulatory approvals, permits and licenses may need to be updated.  Because a conversion, rather than a merger, involves only a single entity, many consider that general contract anti-assignment provisions do not apply to conversions unless conversions are specifically addressed and prohibited.  In either case, however, there is frequently a company name change that may need to be reflected on a variety of documents. 

In addition to third party contracts and government filings and licenses, there are a number of organizational documents that may need to be created as a result of the merger or conversion.  For example, if an entity changes from a limited liability company to a corporation, many of the provisions from the organization’s operating agreement prior to the cross-species merger or conversion will be incorporated into a combination of the new corporation’s bylaws and perhaps a separate shareholders agreement, investor rights agreement or voting agreement.  Some of these organizational-related documents can be adopted wholesale with no or modest changes.  Others, however, will need considerable changes or even termination because of statutory requirements, efficiency, or custom.  


While it would be convenient to have all the facts up front prior to choosing an entity’s form when creating it, even the most diligent and seasoned entrepreneurs experience change in facts or laws that necessitate changing the organization’s form of entity.  With proper planning and involvement of your attorney and accountant, the process of converting your form of entity is usually manageable.  In the end, like with most things, the decision often becomes a cost-benefit analysis.

by Sara Jensen and Matt Storms | Permalink | 1 Comment