Silicon Valley attorney Roger Royse will address not only the legal aspects of preparing for an M&A but also the practical business and planning issues involved in a successful sale. The most important event of a startup company’s life is the exit, meaning the sale or initial public offering. At exit, the founders and team may cash out and realize the benefits of many years of hard work. The M&A market is strong now, and many startup companies are actively seeking a buyer. Other startup companies should be preparing for an eventual sale by taking steps to increase their marketability and limit the risk of a failed acquisition. This presentation will cover: 1) When to start thinking about an exit 2) How to ensure the maximum after-tax returns to the sellers 3) Transitioning from being a founder to becoming an employee of an acquirer 4) Using earnouts to maximize sales proceeds 5) How to retain your most valuable asset – people – until a sale occurs 6) Using intellectual property to make your company an attractive target and more!

1. © 2020 Haynes and Boone, LLP
© 2020 Haynes and Boone, LLP
How to Plan and Implement
a Successful Exit Strategy
IdeaToIPO
December 15, 2020
Roger Royse

2. © 2020 Haynes and Boone, LLP
M&A Activity
2
PitchBook North American M&A Report

3. © 2020 Haynes and Boone, LLP
Choice of Entity
1. C Corporation
2. S corporation
3. LLC taxed as a partnership
3

4. © 2020 Haynes and Boone, LLP
C Corporation - QSBS
 0% rate for gain on QSB stock sold up to $10 million or 10X
 20% capital gain rate
 37% individual rate
4

5. © 2020 Haynes and Boone, LLP
QSBS Requirements
 Original issue
 Five-year holding period
 100% post-Sept. 27, 2010
 $50 million Gross Assets Test
 Active Business Test
 No significant redemptions
5

6. © 2020 Haynes and Boone, LLP
Passthroughs
 S corporations
 LLCs
 Section 199A deduction
6

7. © 2020 Haynes and Boone, LLP
Structural Matters
1. Capital Structure
Preferences
Earn-Outs
2. Equity Compensation
Options and 409A
3. Parachutes and Change of Control Provisions
7

8. © 2020 Haynes and Boone, LLP
Form of Deal
1. Taxable Reorganizations
Mergers,
Stock / Interest Purchases,
Asset Purchases
2. Tax-Free Reorganizations
Mergers
Stock Swaps
Stock for assets
3. Acqui-hire Transactions
8

9. © 2020 Haynes and Boone, LLP
Shareholder Tax Planning
1. Pre-Transaction Gifting
2. Tax Elections
3. Income Tax Planning
4. Residency Planning
9

10. © 2020 Haynes and Boone, LLP
Process
1. Team
2. Initial Meeting
3. LOI
4. NDA
5. Due Diligence
6. Definitive Agreement
7. Closing
10

11. © 2020 Haynes and Boone, LLP
Who Needs Lawyers Anyway?
The lawyer-less deal
or
“Think of all the money we’ll save”
11

12. © 2020 Haynes and Boone, LLP
Not My Problem
Who is the client? (the answer may surprise you)
Employment
Shareholders
12

13. © 2020 Haynes and Boone, LLP
NDA, SHMEND D A
Residual knowledge
13

14. © 2020 Haynes and Boone, LLP
GAAP (How tough could it be?)
 Price was multiple of EBITDA
 Working capital adjustment clause
 Inventory understated = COGS overstated = EBITDA understated = lower price
 Working capital adjusted price lower
14

15. © 2020 Haynes and Boone, LLP
Due Diligence
1. Intellectual Property
2. Corporate
3. Equity
4. Tax
5. Misclassification
6. 409A & employee benefits
7. Claims and Litigation
8. Other (privacy, data, AML)
15

16. © 2020 Haynes and Boone, LLP
Super NDAs
Target prohibited from disclosing anything to Buyer
16

17. © 2020 Haynes and Boone, LLP
ROFR
 Right of First Refusal
 Right of First Offer
 Right of First Look
17

18. © 2020 Haynes and Boone, LLP
Reverse Due Diligence
1. Beware the professional buyer
2. SEC filings
3. Court filings
4. Financing
5. Strategic vs Financial
18

19. © 2020 Haynes and Boone, LLP
Deal Terms
1. Deal currency
2. Deferred and earnouts
3. Vesting
4. Employment and transition
5. Non-competes
6. Carveouts
19

20. © 2020 Haynes and Boone, LLP
The Transition
Square pegs, round holes
20

21. © 2020 Haynes and Boone, LLP
Definitive Agreement
1. Reps and Warranties
2. Indemnification
3. R&W Insurance
4. Dispute resolution
5. Covenants
6. Conditions
7. Escrows and holdbacks
8. Purchase price adjustments and GAAP
9. MAC and Covid
21

22. © 2020 Haynes and Boone, LLP
Indemnity
 Capped
 Limited by time
 Baskets and Deductibles
22

23. © 2020 Haynes and Boone, LLP
Trust Us
Never indemnify an 800 pound Gorilla
23

24. © 2020 Haynes and Boone, LLP
Can We Talk? (No, Not Really)
Who owns the attorney client privilege?
24

25. © 2020 Haynes and Boone, LLP
Liability Issues
1. Board Fiduciary Liability
2. Minority Shareholder Unfairness
3. Creditor Duties
25

26. © 2020 Haynes and Boone, LLP
Unsuccessful Exits
 Bankruptcy or Insolvency Reorganizations
 Fire Sales
 Management carveouts
 Fiduciary duties: shareholders, optionees, preferred and creditors?
26

27. © 2020 Haynes and Boone, LLP
Can’t We All Just Get Along?
VCs vs. Management
27

28. © 2020 Haynes and Boone, LLP
Troubled Company Terms – Carveout Plans, Capped
Participation
 Startup sale to Bigco opposed by common stockholders
 Target turned down better offers, including one for $825 million, nearly double
Bigco’s offer.
 Investors claimed that instead of pushing a deal that maximized value for
common stockholders, mgmt pushed for a deal with a sweet “retention plan”
28

29. © 2020 Haynes and Boone, LLP
Litigation
29

30. © 2020 Haynes and Boone, LLP
In re Trados Inc. Shareholder Litigation
 Board adopted a management incentive plan (MIP) that was
structured so that once an offered sale price for Trados exceeded the
venture capitalists’ liquidation preference, compensation to the
preferred stockholders would increase substantially at the expense of
common stockholders.
 Preferred received most of their preferences, MIP got $7.8 million,
common got nothing
 Interested director transaction
 Entire fairness standard
 Fair process
 Fair price
30

31. © 2020 Haynes and Boone, LLP
Best Practices
 Duties to common and preferred
 Independent boards
 Entire fairness standard
 Good process and minutes
 Bankers
 Separate votes
31

32. © 2020 Haynes and Boone, LLP
Other Unsuccessful Exit Issues
 Tax Liability
 Personal Liability
 Tax
 Employment
 Fiduciary Claims
 Securities Law Claims
 Contractual
 Pierce the veil and creditor claims
 Serial Entrepreneurs and failed companies
32

33. © 2020 Haynes and Boone, LLP
Winding Up
 WARN Act
 Payments to creditors
 Distributions to stockholders
 After found assets
 Post dissolution claims
 Zombie companies and the California Franchise Tax Board
33

34. © 2020 Haynes and Boone, LLP
Advanced Materials
34

35. © 2020 Haynes and Boone, LLP
35