Presented by the New York Technology Council on June 26, 2012 at the New York Institute of Technology. Panelists included Paul Ellis (Paul Ellis Law Group), Corey Massella (Citrin Cooperman), Jack Early (Cherrystone Angels), and Don More (Signal Hill).

1. Long-Range Planning for the Successful
Sale of a Company
New York Technology Council (NYTECH)
New York, New York
June 26, 2012
Legal Track Leader/Panelist:
Paul S. Ellis, Principal, Paul Ellis Law Group LLC
Panelists:
Jack Early, Angel Investor, Cherrystone Angels
Corey L. Massella, Partner, Citrin Cooperman
Don More, Managing Director, Signal Hill
PAUL ELLIS LAW GROUP LLC
© Paul S. Ellis

2. Contact Information and Disclaimer
• Paul S. Ellis
– Principal, Paul Ellis Law Group LLC
– pellis@pelglaw.com 212-949-5900
• Jack Early
– Angel Investor, Cherrystone Angels
– jpe365999@cox.net  401-965-6529
• Corey L. Massella
– Partner, Citrin Cooperman
– cmassella@citrincooperman.com 212-697-1000
• Don More
– Managing Director, Signal Hill
– dmore@shcg.com  917-621-3664
These materials and the information contained in this presentation are provided for informational purposes only and
they do not constitute advertising, a solicitation or legal advice. The materials are not represented to be correct,
complete or up-to-date. Accordingly, you should not act or rely on any information in this presentation without seeking
the advice of an attorney licensed to practice law in your jurisdiction. The materials contained in this presentation do not
create and are not intended to create an attorney-client relationship between you and Paul Ellis Law Group LLC.
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3. Speaker Bios
Paul S. Ellis, Principal, Paul Ellis Law Group LLC
Paul Ellis is the principal of a six-lawyer firm, Paul Ellis Law Group LLC, and is a
founding board member of the New York Technology Council (NYTECH) and leads
NYTECH’s bi-monthly series of legal events. He has represented companies
ranging from start-ups to multinationals, as well as funds and individual and
institutional investors. Mr. Ellis counsels on issues including formation, early-stage
financing, joint venture and strategic partnering relationships, employment, equity
plans, mergers and acquisitions, and, together with his colleagues, protection and
licensing of intellectual property. Beyond the software/internet/IT industries, he has
practiced in industries including telecommunications, healthcare, manufacturing,
banking, real estate, consumer products and entertainment. Previously, Mr. Ellis
practiced with two major New York firms. He has extensive public speaking
experience, having spoken on panels presented by organizations including the
New York Academy of Sciences, Columbia University, the MIT Enterprise Forum
and the National Science Foundation on the legal issues facing early-stage and
technology companies. He holds degrees from Harvard University and Georgetown
Law School.
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4. Speaker Bios
Jack Early, Angel Investor, Cherrystone Angels
Jack Early, who is currently affiliated with Vantage Point Venture Partners, was the
co-founder of Early Cloud & Co (ECC) and is considered an expert in the areas of
multi channel sales & marketing and the technologies that support Customer
Relationship Management. ECC clients included Sears, Citibank, Bank of America,
Lend Lease (Austrailia) Bank of Scotland, Allstate, Pac Bell, First Chicago National
Bank, and others. The company was sold to IBM in 1995. Upon leaving the
company, he consulted with various Fortune 500 companies, including IBM,
regarding their IT infrastructure to support alternative channels. Jack is a founding
member of the Cherrystone Angles of RI, and in 2005, raised funds for the rebirth
of the Narragansett Brewing Company and currently serves as Secretary and a
board observer. was an investor in Context Media, which was eventually sold to
Oracle in 2005. He was also instrumental in the sale of Clientsoft to Neon Systems
in 2004 and the sale of Horizontal to Autodesk in 2011. In 2006, Jack joined the
Board of Vistula Communications and subsequently performed as Interim COO. He
later served as COO of GeoSentric from 2007 to 2010 and was a board
representative of their China subsidiary Gypsii Shanghai. In recognition of his
pioneering contributions to the contact center industry, Jack received a Lifetime
Achievement Award in spring of 2006.
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5. Speaker Bios
Corey L. Massella, Partner, Citrin Cooperman
Corey Massella is a partner of the firm and CEO of Citrin Cooperman’s SEC
Solutions Group. With more than 20 years experience, Corey provides business
consulting, audit and tax services for clients in a wide range of industries. Corey
has deep experience with technology company’s financial service firms, including
hedge and private equity funds, banks, broker-dealers and investor relations firms.
As a business consultant, he has advised the CEO’s and CFO’s as well as the
Boards of both public and non-public clients in various industries. Corey has
negotiated mergers and acquisitions, performed due diligence for potential target
acquisitions; assisted clients in the analysis of cash flows, productivity, personnel,
financing, the preparation and development of business plans, the preparation of
public offerings; and represented clients before governmental agencies such as the
IRS and SEC. Additionally, Corey is one of the founding members of the firm’s
Technology Industry Committee.
Corey is a member of the American Institute of Certified Public Accountants and
New York State Society of Certified Public Accountants. He presently serves on
the NYSSCPA Securities and Exchange Commission Committee and is a board
member and sponsor for the Financial Executives Institute (FEI), Keiretsu Forum
and the Long Island Capital Alliance.
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6. Speaker Bios
Don More, Managing Director, Signal Hill
Don More is a Managing Director at Signal Hill and was a Partner at Updata
Advisors (which merged with Signal Hill) after joining in 1998. Mr. More focuses on
representing companies in emerging sectors. Mr. More has completed more than
70 transactions with portfolio companies of leading financial investors and with
public companies including CA, IBM, Oracle, Quest Software, Symantec, and
Websense. Mr. More began his investment banking career as an M&A banker at
Merrill Lynch. Prior to that, he was a corporate attorney with Davis, Polk &
Wardwell and Shearman & Sterling. Mr. More received a J.D. with distinction from
Columbia Law School, and a B.A. magna cum laude from Yale University.
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7. Goals of Today’s Session
• Long-range planning
• Not focused on the run-up to a specific exit event, but
on the issues that are important long before there is a
particular opportunity
• Focused on the issues that will build value, make the
company attractive and make the process as smooth
and efficient as possible (thereby preserving value)
• For the early-stage or established company
• Cannot provide you with all the answers – We’re here
for “Issue-Spotting”
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8. Topics To Be Covered Today
• Entity and Jurisdiction
• Founder Relations
• Industry Intelligence
• Building Value in the Enterprise
• Outside Advisors
• Attention to Accounting/Tax Matters
• Attention to “Corporate Housekeeping”
• Shareholders and Their Rights
• Contracts and Particular Provisions
• Personnel Issues
• Protecting Intellectual Property
• Compliance with Securities Laws
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9. Starting With the Ending
• The End-Game:
– Identifying a potential purchaser
– Negotiating a Term Sheet
– Diligence
– Documenting and closing the transaction
• Factors that will influence the outcome:
– Knowing when the time is right
– Knowing who potential buyers are
– Knowing and being able to deliver what they are looking for
– A smooth process – everybody hates surprises
• You need to focus on these factors long before the exit
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10. Entity and Jurisdiction
• Depending on the anticipated financing and exit strategies,
the best structure may be a C Corp., an S Corp or an LLC
• Certain tax benefits of LLCs:
– Flow-through taxation of LLC reduces tax burden to the individual and
eliminates double-taxation in an asset sale
– Enhanced ability to deduct losses
• But, do not ignore difficulties in LLC form:
– VC and foreign investment, employee equity plans and other issues
• Jurisdiction should generally be Delaware
• Consider early segregation of different lines of business in
subsidiaries
• Bottomline? – Consult with legal/accounting professionals
when appropriate
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11. Founder Relations
• Too many promising young companies fail or face significant
problems over issues among founders
• Issues that need to be addressed:
– Equity percentages
– Reverse-vesting
– Titles and roles
– Succession/Buy-out rights
• Keys to avoiding problems:
– Address these issues early – delay only adds complications
– Commit informal understandings to signed agreements
– A proper Shareholder’s Agreement or LLC Agreement is critical
– Advice of counsel is important at this stage
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12. Industry Intelligence
• Knowledge is a critical component to a successful exit; developing and
maintaining that knowledge base has to be a regular, ongoing activity
• Types of information that are important:
– Who are your competitors, both existing and potential new competitors
– How do you define your market and what is its size
– What types of offerings are your competitors introducing
– Who are the potential buyers – both strategic and financial
– What acquisition activity is occurring and on what terms
– What are the general trends in your industry
– What factors are influencing the degree of acquisition activity among
buyers
– What is occurring in the economy that influences the exit climate
• By keeping abreast of this and similar information, you will be in the best
possible position to know when the time is right to pursue an exit and to
negotiate the best possible deal terms
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13. Building Value in the Enterprise
• In maintaining your industry intelligence on potential
buyers of your company and similar deals, be aware of
the acquisition metrics that drive purchase price, such as:
– Revenue, EBITA
– Intellectual property
– Userbase
– Particular customers/significant accounts
– Employees with industry-recognized expertise
• Orient the development of your business to emphasize
growth in the areas that will drive value in an exit
• But don’t fixate on the exit – if you focus on building a
successful company, the buyers will find you
PAUL ELLIS LAW GROUP LLC
© Paul S. Ellis

14. Outside Advisors
• Getting the right team in place is critical – accountants,
lawyers, financial advisors
• Considerations:
– Industry-specific expertise
– “Right-size” – Neither too large nor too small
– Willingness to offer meaningful time and assistance at the
critical moments
• But beware the false mentors
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15. Accounting/Tax Matters
• Value of company can be diminished by inadequate
attention to accounting or unknowledgeable accountants
• By way of example:
– Incorrect or incomplete financials can slow down a deal or result
in renegotiation of the purchase price
– Opportunities for tax incentives can be lost
– Errors with respect to state nexus can result in liability for state
income and sales tax
– Failure to get clean audit opinion
• As with legal matters, sloppiness in financial practices
raises red flags for buyers, resulting in a diminished
purchase price or no deal at all
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16. Accounting/Tax Matters (Cont.)
• Dichotomy between Tax strategies vs. GAAP Strategies
– Capitalization of software development cost
– Proper recognition of revenue
– Proper recording of Research and Development; correctly
handling for tax benefits and difference in accounting for GAAP
• Potential Buyer Issues
– Tracking and accounting for stock, option and warrant issuances
– Profit normalization calculation – meaning and importance
– Ability to segment report to present different profit centers
– Accounting for international operations
• Other
– Tax structuring for future investors vs. initial founders
– Planning for limitation on tax losses to buyers.
– Tax credits available - Federal vs. State
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17. Attention to “Corporate Housekeeping”
• Easy to get right the first time, a nuisance to clean up after
the fact
• Particular issues:
– Holding meetings required under corporate law and by-laws
– Proper documentation of board and shareholder action
– Proper documentation of equity issuances
• The penalty for getting it wrong?:
– Discrepancies can harm or, more likely, slow down a deal
– Sloppy records raises red flags among purchasers = a busted
deal or a lower purchase price
– Piercing the corporate veil
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18. Shareholders and Their Rights
• A Shareholders Agreement is critical
• Examples of rights company needs in
Shareholders/Investor Rights Agreement:
– Drag-along right
– Supermajority override over holdout
shareholders/investors
• Consider the impact of particular strategic investors on
an exit
– Strategic investors can offer financing on attractive terms,
as well as contacts, expertise, credibility, etc.
– But beware of the potential to reduce exit opportunities
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19. Contracts and Particular Provisions
• For starters, agreements should be properly-documented
• Types of provisions that prove problematic in acquisitions:
– Anti-assignment clauses
– Change in control provisions
– Rights of first refusal
– Long-term leases and contracts with “take or pay” provisions
– Unusual limitations on liability or warranty commitments
– Exclusivity provisions
• Such provisions can result in delay, fundamental structural
changes, a reduced purchase price or tanking of a deal
• If such provisions are material to the contract, then you do
what you have to do, but be aware of the potential impact
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20. Personnel Issues (Non-tax)
• Employees are rarely unimportant in a transaction
– In some deals they are critical to the value of the company
– In other deals, what matters most is a smooth transition
• If you’re only starting to think about employee issues when
you’re signing the Term Sheet, you’ve waited far too long
• Retention issues and tools:
– Vesting periods
– Acceleration on change in control – consider “double-trigger”
– Retention bonuses/Severance packages
• Other issues:
– Non-disclosure/invention assignment and non-competition
agreements
– Work-for-hire agreements
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21. Personnel Issues (Tax)
• Proper characterization of personnel
– Cash-poor early-stage companies will often incorrectly treat
employees as independent contractors
– Creates potentially significant penalties for non-compliance at the
Federal and state level
– In recent years, taxation authorities have become increasingly focused
on this issue
• Tax issues with incentive plans
– Stock incentive plans – options v. stock appreciation rights
– Types of plans – incentive stock options v. non-qualified options
– 83(b) elections – need to be made timely
– Rule 409 valuation studies when issuing equity
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22. Protecting Intellectual Property
• Failure to protect IP can bring a deal to a sudden stop
• Particular considerations:
– Founders should have signed over IP (and any other assets) upon
formation – especially an issue if any of them have left the
company prior to an exit
– Proper employee documents (as per previous slides)
– Patents, trademarks, copyrights registered as necessary
– Do not neglect appropriate policing activity to protect rights
– Policies/procedures with respect to open source software
– Procedures in place and adhered to for protection of trade secrets
– Proper attention to protection of IP rights in agreements
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23. Compliance with Securities Laws
• Potential results of failure to comply with securities laws:
– Enforcement actions, criminal/civil penalties and rescission actions
– Can derail or slow an acquisition (or IPO) or impact the purchase price
• A broad topic, but there are some general principles:
– All issuances of securities must be registered or subject to an exemption
that has been identified and complied with; any other issuance is illegal
– Applies to founders, friends, family, angel investors, employees,
consultants, vendors, customers, landlords, in other words, everybody
– Applies to many types of debt securities as well as equity securities
– Applies to LLCs as well as corporations
– Finders that are not registered broker-dealers are generally prohibited
• Compliance is generally not difficult, but cleaning up violations after the fact
can be difficult, costly and time-consuming, if possible at all
• The lesson? – consult with a lawyer from the beginning
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24. Questions?
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25. Panelists and Contact Information
• Paul S. Ellis
– Principal, Paul Ellis Law Group LLC
– pellis@pelglaw.com 212-949-5900
• Jack Early
– Angel Investor, Cherrystone Angels
– jpe365999@cox.net  401-965-6529
• Corey L. Massella
– Partner, Citrin Cooperman
– cmassella@citrincooperman.com 212-697-1000
• Don More
– Managing Director, Signal Hill
– dmore@shcg.com  917-621-3664
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