Archive for the ‘Reference’ Category

Keeping Company Sale Proceeds: Indemnification-Related Provisions

In the vast majority of sales of privately held emerging companies, the indemnification-related provisions are the most important outside of the purchase price itself—these provisions often determine whether the seller may hold on to the amount paid by the buyer.  I say “indemnification-related” as it is typically not the indemnification provisions themselves that are most important.  Rather, it is the provisions that define and limit the rights to indemnification, determine how damages are calculated, and state when the rights can be exercised.

For example, the upper limit of the amount of indemnification damages that a seller is responsible for in the event that there is an indemnification claim (commonly referred to as the “cap”), is often more important to the seller than the indemnification language itself, which can be written fairly broadly.

While the indemnification-related provisions are important, they are relatively complex and interrelated.  A negotiating “win” in one area for a seller, such as a low cap on the amount of indemnification damages available to a purchaser, can be negated by a negotiating “loss” in another area, such as broad exclusions from the cap.  Because of how these provisions are interrelated, we usually review and negotiate them in their entirety.

Here is an outline of indemnification-related issues that are often negotiated in a company-sale transaction:

  • Survival of representations and duration to make indemnification claims
    • Duration of survival of “fundamental” representations
    • Duration of survival of other representations
    • Time period to make indemnification claims
    • Exclusions from any of the above
  • Sandbagging
    • Anti-sandbagging provisions
    • Pro-sandbagging provisions
    • Silent
    • Nonreliance provisions
  • Indemnification as the exclusive remedy
    • Covering all transaction-related documents
    • Exceptions to the exclusive remedy
  • Cap
    • Amount
    • Exclusions
  • Basket
    • Amount
    • Exclusions
    • Deductible or first dollar
  • Materiality Scrape
    • None
    • Single
      • Breach
      • Damages
    • Double
  • Indemnification damage reduction
    • Tax benefits to buyer
    • Items covered by insurance
    • Buyer obligation to mitigate losses

As indemnification and related provisions are complex and sometimes difficult to understand, they are frequently glossed over by those who do not have the background (or patience) to take the time to understand them.  These provisions, however, can have a significant impact on the financial end result of the sale transaction.  Having a comprehensive negotiating strategy when negotiating indemnification-related provisions is often crucial to a successful sale transaction.

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Company Sale Structure Considerations

In this AlphaTakes video, Matt Storms discusses the common considerations that drive the decision on how to structure a company sale transaction.

Here are the key takeaways from this video:

  1. The most common considerations that affect the transaction structure for the sale of a privately held emerging company are taxes, assignment of contracts, seller shareholder approval, transfer of licenses and permits, ability to exclude certain assets or liabilities, and simplicity.
  2. Which factors are important are often deal specific.
  3. While no transaction structure is right for all deals, an asset sale transaction is used most frequently in privately held emerging company sales.

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AlphaTakes – Structures for a Company Sale Transaction

In this AlphaTakes video, Matt Storms discusses the most common types of deal structures for a company sale transaction.

Here are the key takeaways from this video:

  1. There are a variety of ways to structure a company sale transaction.
  2. The most common types of deal structures are an asset sale, stock sale, and merger.
  3. The most common types of merger structures are a direct merger, a forward triangular merger, and a reverse triangular merger.
  4. Making a sale transaction tax free is often complex.

 

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AlphaTakes – Anti-Dilution Provisions

In this AlphaTakes video, Matt Storms discusses anti-dilution provisions in investor transactions involving an emerging company.  He outlines the different types of anti-dilution protection provisions that are typically negotiated and how they commonly impact the company.

Here are the key takeaways from this video:

    (1) Anti-dilution provisions contain rights in which the company provides some level of downward price adjustment to the holders of the rights in the event that the company sells securities at a lower price

    (2) The two most common types of anti-dilution provisions are full ratchet and weighted average, with weighted average being used in the overwhelming majority of circumstances

    (3) The exceptions or carveouts to the anti-dilution adjustments can be important in negotiating anti-dilution provisions

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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 – Series A Preferred Stock Term Sheet (part two)

In this second of a two part AlphaTakes video series, Matt Storms discusses the second half of the Series A Preferred Stock term sheet for an emerging technology company, using the Series A term sheet published by the National Venture Capital Association.

Here are the key takeaways from this video:

  1. The three most common alternatives to anti-dilution provisions:
    • Weighted average
    • Full ratchet
    • No anti-dilution provisions
  2. Several provisions are not typically heavily negotiated in Series A financings:
    • Pay to play requirements
    • Attorneys’ Fees
    • Registration rights
    • Participation rights
    • Drag-along rights
    • No shop requirements
  3. Keep an eye on the big picture

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AlphaTakes – Series A Preferred Stock Term Sheet (part one)

In this first of a two part AlphaTakes video series, Matt Storms discusses the first half of the Series A Preferred Stock term sheet for an emerging technology company.  He provides a summary of some of the key terms of the Series A term sheet, using National Venture Capital Association (“NVCA”) model document.

Here are the key takeaways from this video:

  1. The NVCA documents are great resources for understanding the Series A financing, but are fairly investor friendly.
  2. Typical preferred stock dividend provisions alternatives include the following:
    • If and when paid to the common stock
    • Accruing and cumulative
    • If and when declared by the board
  3. Most common preferred stock liquidation preferences alternatives include the following:
    • Non-participating preferred
    • Participating preferred
    • Participating preferred with a cap
  4. Preferred stock typically includes special voting rights, such as designating one or more members to the company’s board of directors and veto rights over certain company actions.

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