Planning for Exit Events Mick Bain
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What to do now? Isn’t it too early?
Focus on Certain Cost-Effective Things Too Often Not Done or Not Done Well – Select proper form of entity
– Select experienced advisors
– Equity allocation
– Tax, tax, tax
– Observe formalities
– Protect intellectual property
– Watch for problematic contract provisions
– Conduct employee checks
– Risk management
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Carefully Select Entity
Tax concerns
Limited liability
Keep things simple
Typically a “C” corporation
Take care with respect to board composition
Clarity as to equity ownership at all times
Example: closely-held company with no records
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Properly Maintain the Corporate Form
Observe corporate formalities – Have good records
– Hold regular board meetings; keep minutes
Properly authorize stock issuances and major contracts
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Properly Maintain the Corporate Form
Adopt policies in key areas such as – trade secrets
– non-discrimination
– corporate communications/confidentiality
– harassment
– securities compliance
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Provide for Proper Equity Allocation/ Incentives Capital constrained; need to use equity to attract and retain
Consider how to allocate property
Avoid the “woodwork”
Need compliant equity plans – tax reasons
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Provide for Proper Equity Allocation/ Incentives Watch out for “hidden” tax and accounting problems
– 409A
– 123R
– 83(b) elections
– Cheap stock
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Carefully Allocate Ownership
Non-accredited investors and the securities laws
Don’t use non-registered capital raisers
Proper records are a must
Offer letters/oral promises
A shareholders agreement can help
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Provide for Good Title to Intellectual Property Robust form of agreement for inventions and NDA
Make sure everyone signs it
Need advice from a labor/IP lawyer here
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Provide for Good Title to Intellectual Property Take reasonable steps to protect your trade secrets, such as
sensibly limiting access
Perform trademark search early
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Check Out Prospective Employees Carefully Background checks
Are they subject to a non-compete?
Are they subject to a non-disclosure?
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Review Tax Treatment for Employees and Plans Carefully Cultural inclinations vs. IRS positions
Use of independent contractors
Be sure all filings are being made, e.g., forms 5500
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Risk Management
Central person, often CFO
Any complaint, threat or demand should be centrally filed
Disaster recovery plan – off-site storage and back up; consider IT infrastructure
Insurance e.g., D&O, casualty, etc.
Privacy Laws
Document Retention
Policies – whistle blower, etc.
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Be Vigilant in the “Big” Contract Context
Unfavorable provisions can have significant impact
Exclusive distribution arrangements
Consents required in a change of control
Use of the term “affiliate” in non-compete or a license
Right of first offer in public offerings
CONFIDENTIAL TREATMENT
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Carefully Allocate Ownership
Watch out for conflicting promises, e.g., registration rights agreements, rofr’s, etc.
Make sure promises terminate at the right time, e.g., guarantees for founders, ability to nominate to board, etc.
Problems with big/controlling shareholders
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Select Advisors Carefully Lawyer, at a minimum, should provide good form files to save
you money and time – Need SEC and M&A experience
– Ask about experience dealing with liquidity events
– Can perform audits to minimize future problems
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Select Advisors Carefully Public accountants critical if IPO is an option
– Need SEC and M&A experience
– Can help avoid big problems in areas such as revenue recognition and earnings charges
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