Dear Founders: Below are a few thoughts regarding Theranos/Elizabeth Holmes (in no particular order).

1)  Founders should be heartened that there is a lot of “dumb” money out there.  Obviously, the goal is to raise funds from “A” investors who can add value; however, if that’s not working, try plan B – i.e., family offices, etc.  Indeed, Theranos raised funds from the Walton family ($150MM), Rupert Murdoch ($125MM), Betsy DeVos and her family ($100MM), the Cox family ($100MM), and Carlos Slim ($30MM), among others. 

2)  Putting aside the potential legal liability (and ethical issues), lying to investors makes little sense from a business perspective because not only do you risk alienating investors, but also you risk destroying your reputation (which is likely your most valuable, long-term asset).

3)  Certain founders (like Elizabeth Holmes and Adam Neumann) are able to utilize an extraordinary level of charisma to mask deception and/or to trump the relevant data.  Most founders, however, do not possess that level of charisma.

4)  There is a big difference between selling your vision to investors and intentionally deceiving them.  For example, advising potential investors that “there’s lots of interest in the round“ is quite different than “I received a term sheet” (when you did not).

5)  In my experience, there are relatively few super-smart investors; most successful investors are just good at playing the game.

6)  One of the most overlooked traits in successful founders is integrity.

7)  Most experienced investors/dealmakers understand the importance of conducting adequate due diligence.  Founders must understand this as well in connection with hiring, fundraising and partnering.  Always ask: “who is that guy on the other side of the table?”

The post THOUGHTS ON THERANOS appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Dear Founders:  It’s hard to do deals when you have little or no experience.  Indeed, no matter how much you read online or how much advice you get from others, you cannot develop the skill set needed to be an effective dealmaker without actually doing deals; that’s the hard truth. 

Nevertheless, I thought it would be helpful to share ten “golden” rules of dealmaking based upon my nearly 25 years of doing deals as a corporate lawyer.  Accordingly, whether you’re doing a financing or selling your startup, you should consider the following (in no particular order):

Rules

1)  Create a competitive environment.  Remember — if you’re only negotiating with one party, your only leverage is to walk. 

2)  Whoever wants the deal less has the most negotiating leverage; or put another way, the more anxious a party is to do the deal, the weaker his negotiating position.

3)  Your strongest leverage in any financing/sale is prior to the execution of an exclusivity letter — i.e., an LOI/term sheet which includes a “no shop” provision.

4)  Create a sense of urgency.  The longer the process (e.g., fundraising) or deal drags on, the less likely you will close.

5)  At the end of the day, it’s all business.  The investor’s/acquiror’s smooth talk and smiles pre-closing mean nothing.

6)  Try to deeply understand the interests/motivations of each player, including advisors.  For example, investment bankers only get paid if the deal closes.

7)  Your word must be your bond.  If the party on the other side of the table can’t trust you, he will typically walk.

8)  If there will be an ongoing relationship with the other party post-closing (e.g., a financing), you better diligence that party and get strong references from appropriate sources.

9)  The highest offer may not be the best offer; terms and people matter.

10)  Don’t count your chickens before they hatch.  In other words, the deal isn’t closed until the wire hits (not before).

The post 10 GOLDEN RULES OF DEALMAKING appeared first on WALKER CORPORATE LAW GROUP, PLLC.

In a solid Clubhouse conversation from a couple of weeks ago (which was uploaded to the a16z Live podcast), Zach shares some words of wisdom for founders (@16:21):

“[My] only advice … is don’t die as a startup. I think that is the most important lesson that I learned, which is: Don’t give up – keep fighting. Somehow if you fight long enough, good things happen.”

Zach also shares a great story regarding Plaid’s seed round @14:22.  I hope you enjoy it.  Cheers, Scott

The post Words of Wisdom from Zach Perret appeared first on WALKER CORPORATE LAW GROUP, PLLC.

In this brief interview (from a few years back), Sam shares some solid advice for non-technical founders trying to launch a technical startup, including the following:

• In order to succeed as a non-technical founder, “you have to be able to convince really good technical people to follow you.” (at 0:38)
• If you’re not going to be technical, you have to be great at product and be a great leader.” (at 0:43)
• “I would not start a company with somebody I didn’t already know.” (at 1:18)
• “And I wouldn’t start a company with someone I hadn’t worked with on some project either.” (at 1:28).

I hope it’s helpful.  Cheers, Scott

//www.youtube.com/watch?v=FpHWQ9uFHuk

The post Words of Wisdom for Non-Technical Co-Founders (via Sam Altman) appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Welcome to our series “Motivational Clips for Entrepreneurs.”  Every few weeks, we share a favorite video clip to inspire and motivate founders.  Why?  Because we know how tough it is being a founder (particularly during this pandemic).  Indeed, whether you’re launching your venture, trying to iterate on your business model or raising funds, you need a little juice to help you push the ball forward.  I hope these videos are a little juice. 

Today’s video provides a little motivation from an award-winning filmmaker and storyteller, which every founder must learn to be.  As Elisa Schreiber (the marketing partner at Greylock) wrote a few years back in her article, “How founders can tell a great startup story”:

No matter the sector, I have found that the organizations who effectively tell their stories are the ones who can recruit the top talent, acquire long-term customers, and build brands that endure.

What is your story?

Your story is way more than a chronological history of your company. The biggest mistake most companies make is they start with the love story of the founders. (i.e. “My co-founder and I met when we worked together at Company X. We built these 3 successful products together and had had fun doing it, so we decided to build this new thing because we think there is a market for it.”) This is the absolute wrong foot to start on.

A great story about your company will succintly capture 1.) what you offer, 2.) to whom, and 3.) why you are different. Nailing this will set the path for every other decision you make going forward.

I hope you enjoy the video. Cheers, Scott

//www.youtube.com/watch?v=iiG3XIyfiZE

The post Motivational Clips for Entrepreneurs: “I Told A Good Story” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

In this brief clip, Jeff shares some solid advice for entrepreneurs and founders: “You need a combination of stubborn relentlessness and flexibility – and you have to know when to be which.” I hope you enjoy it.  Cheers, Scott

//www.youtube.com/watch?v=L6Vi_hf0Dt8

The post More Words of Wisdom from Jeff Bezos appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=gnJv0UdOC-Q

The post Motivational Clips for Entrepreneurs: “We Slept on the Couch” (via Elon Musk) appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Happy New Year!  Below is a list of my top three posts in 2020.  Cheers, Scott

• Selling Your Company? Here’s A Legal Checklist

• Dear Founders: Here Are Three IP Mistakes To Watch-Out For

• SEC Expands “Accredited Investor” Definition

The post Top 3 Posts in 2020 appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=kib6uXQsxBA

The post More Words of Wisdom from Steve Jobs appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=tQg1V1Kv9-s

The post Motivational Clips for Entrepreneurs: “Life Is a Game of Inches” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Introduction

Over the past six months, my firm has been engaged by a number of startups with significant intellectual property (“IP”) problems.  In a couple of cases, the founders played lawyer on their own; in the other cases, the founders either used (i) a Web service that did not address IP issues or (ii) an inexperienced law firm.  The purpose of this blog post is to briefly discuss the three most common IP mistakes that founders make.

Mistake #1 –Your Prior Employer Actually Owns the IP

If any founders were employed prior to launching their startup, they must ensure that none of the prior employers have any rights to the startup’s IP.  This would arise as a result of a founder improperly “moonlighting” (i.e., working on the startup) while employed.  Even a founder’s use of a prior employer’s laptop and/or cell phone in connection with the new venture could be a problem.

Who owns the IP — the old employer or the founder/startup — is governed by state law and the terms of any agreements that the founder executed.  Accordingly, legal counsel must review all of the written agreements between the founder and his prior employer (as well as the employee handbook/manual) to determine if there are any provisions that may give the prior employer rights to the startup’s IP. 

Under California law (regardless of what the agreements or other documents say), an employee owns any “inventions” that that he developed entirely on his own time without using the employer’s equipment, supplies, facilities or trade secret information, except for those inventions that either: (i) relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (ii) result from any work performed by the employee for the employer.

The nightmare scenario for founders is that they are heads-down and working on their startup for a number of years and finally get some headlines on a successful financing or exit.  Then the prior employer rears its ugly head and claims that it actually owns the startup’s IP.  Unfortunately, I was involved in such a scenario a few years back, and it cost the founders a lot of money to get the prior employer to agree to execute a waiver.

Mistake #2 – You Did Not Assign to the Company All IP Created Pre-Incorporation

Any IP created by a founder (e.g., code, designs, logo, etc.) prior to incorporation must be assigned to the company.  Usually this is done as part of the founder’s Restricted Stock Purchase Agreement pursuant to which the IP is contributed to the startup as full or partial consideration for the shares of common stock issued to him in a tax-free transaction under Section 351 of the Internal Revenue Code.

A huge problem arises if one of the founders leaves prior to incorporation and takes his rights to the IP along with him; or if the assignment of IP is not properly made and the founder leaves post-incorporation, but prior to this issue being cleaned-up.  In both cases, the company is in the difficult position of trying to negotiate with a departed founder.  (This issue is akin to trying to negotiate with a departed founder who is not subject to a vesting schedule – see post here.)

Another problem often arises with respect to IP created pre-incorporation by outside developers or contractors (i.e., non-founders), particularly if they are located outside of the United States.  The IP created often never gets assigned to the company at all either because there was no written agreement or because the company was not a party to the agreement (because it did not exist at the time).

Mistake #3 – You Did Not Assign to the Company All IP Created Post-Incorporation

Once the corporation has been formed, the ownership of the IP should be protected by requiring all of the company’s founders, employees and contractors to execute a Confidential Information and Invention Assignment Agreement (“CIIAA”).  This is a standard agreement and automatically assigns to the company any IP created by founders, employees and contractors post-incorporation.  (Note that there are three different forms depending upon who the counterparty is.)

As discussed above, any IP created pre-incorporation will typically be assigned to the company in exchange for equity.  In other words, the startup actually purchases the pre-incorporation IP.  With respect to IP created post-incorporation, the CIIAA is typically referenced in the offer letter that employees must sign or the contractor agreement that contractors must sign, and thus no separate legal consideration is necessary.  Moreover, the IP creation and assignment is forward-looking.   

Again, IP-ownership problems often arise in the context of a financing or an M&A transaction when the investors or acquiror is unable to establish a clear chain of title to the startup’s IP as part of their legal due-diligence investigation.  This is why it is critical that IP issues be addressed early on.  Indeed, the last thing a founder wants is to be chasing down (and negotiating with) old developers and/or departed founders in the mist of a transaction.

Conclusion

If a startup’s most valuable asset is its IP/technology, it is self-evident that reasonable steps must be taken to protect that asset and to ensure it is legally owned by the startup.  While the above mistakes should be a helpful introduction, founders must understand that IP protection comes in different forms, and one size does not fit all.  For example, for certain startups the filing for a patent may be appropriate; for other startups, a patent may be a waste of time and money.  Accordingly, the first step for founders is to sit down with experienced startup counsel and identify all of their startup’s IP.  They then need to come-up with an effective, reasonably-priced strategy to protect such IP.

The post Dear Founders: Here Are Three IP Mistakes to Watch-Out For appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=biIRlcQqmOc

The post RIP Ruth Bader Ginsburg: “All I Ask of Our Brethren Is That They Take Their Feet Off Our Necks” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

To Our Clients & Friends: Welcome to our series “Helping Entrepreneurs Succeed.”  Every few weeks we share a favorite video of a successful entrepreneur, investor or business leader on a variety of topics.  This week, we present Geoff Ralston, the President of Y Combinator and a very solid former entrepreneur.  

In this brief speech to the 2019 Startup School, Geoff shares some words of wisdom to founders, including the following:

• “There is no one path.” (at 0:42)
• “Make something people want.” (at 3:54)
• “Startups are hard.” (at 4:25)
• “The most important quality in a startup founder is determination.” (at 8:23 via Paul Graham)
• “Default to action – [e.g.,] Write code. Talk to users.” (at 10:44)
• “One of the main reasons that [startups] fail is because co-founder relationships breakdown…” (at 12:41)
• “Create the kind of company that you would like to work at.” (at 14:45)

I hope you enjoy it.  Cheers, Scott

//www.youtube.com/watch?v=s8ER6DIlAvY

The post Words of Wisdom from Geoff Ralston appeared first on WALKER CORPORATE LAW GROUP, PLLC.

This past Wednesday, the Securities and Exchange Commission (SEC) adopted amendments expanding the definition of “accredited investor” to include individuals who hold certain professional certifications/licenses or have certain “credentials,” as determined by the SEC.  As the SEC press release provides: “For the first time, individuals will be permitted to participate in our private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.”  The amendments also broaden the types of entities that qualify as accredited investors and add a new “spousal equivalent” concept, as discussed below.  The amendments will take effect 60 days after publication in the Federal Register.

Background

Pursuant to applicable securities laws, a startup may not offer or sell its securities unless (i) the securities have been registered with the SEC and registered/qualified with applicable State securities commissions; or (ii) there is an exemption from registration.  The most common exemption used by startups is the so-called “private placement” exemption under Section 4(2) of the Securities Act of 1933, as amended.  As the term implies, a private placement is typically a private offering to a small number of investors; however, there are different rules depending upon whether the investors are accredited or non-accredited.

If a startup issues securities only to accredited investors, compliance is much simpler and cheaper because it can rely on SEC Rule 506 of Regulation D, which has two important advantages: first, Rule 506 preempts state-law registration requirements – which means, in general, that the startup merely must file a Form D notice with the applicable state commissioners (together with the SEC) and pay a filing fee; and second, there is no prescribed written disclosure requirements.

On the other hand, if one or more of the investors is not accredited, it opens a Pandora’s box of compliance and disclosure issues under both federal and state law.  Yes, there are ways for a startup to offer and sell securities to non-accredited investors in compliance with applicable securities laws (e.g., via crowdfunding or SEC Rule 504); however, the cost, onerous requirements and negative signaling generally outweigh the benefit.

Current Definition of “Accredited Investor”

The current definition of an accredited investor under SEC Rule 501 includes eight different categories of investors, the most significant of which is an individual who has (i) a net worth (or joint net worth with his/her spouse) that exceeds $1 million at the time of the purchase, not including the value of his primary residence; or (ii) income exceeding $200,000 in each of the two most recent years (or joint income with a spouse exceeding $300,000 for those years) and a reasonable expectation of such income level in the current year.  Here is the exact statutory language from the Federal Register:

230.501   Definitions and terms used in Regulation D.

As used in Regulation D (§230.500 et seq. of this chapter), the following terms shall have the meaning indicated:

(a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

(1) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

(2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

(3) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

(4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.

(i) Except as provided in paragraph (a)(5)(ii) of this section, for purposes of calculating net worth under this paragraph (a)(5):

(A) The person’s primary residence shall not be included as an asset;

(B) Indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and

(C) Indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability;

(ii) Paragraph (a)(5)(i) of this section will not apply to any calculation of a person’s net worth made in connection with a purchase of securities in accordance with a right to purchase such securities, provided that:

(A) Such right was held by the person on July 20, 2010;

(B) The person qualified as an accredited investor on the basis of net worth at the time the person acquired such right; and

(C) The person held securities of the same issuer, other than such right, on July 20, 2010.

(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

(7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii); and

(8) Any entity in which all of the equity owners are accredited investors.

Amendments to Definition of “Accredited Investor”

As noted above, the first significant amendment is to allow individuals to qualify as an accredited investor on the basis of holding certain professional certifications/licenses or having certain credentials, rather than meeting the net worth and/or income tests.  The Final Rule expressly provides that: “In connection with the adoption of this amendment, in a separate order, we are designating the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65) as the initial certifications, designations, or credentials designated by the Commission under Rule 501(a)(10).”

Moreover, it is important to note that the SEC did not increase the net worth or income levels, which had been rumored for years; however, the net worth and income criteria was amended to include a “spousal equivalent” (not just a “spouse”), which means a cohabitant occupying a relationship generally equivalent to that of a spouse.  The amendments also clarified that that the securities being purchased by an investor relying on the joint net-worth test of Rule 501(a)(5) need not be purchased jointly.

Finally, the other significant amendment for startups is the expansion of the list of entities that may qualify as accredited investors to include (i) limited liability companies with at least $5 million in assets; (ii) family offices with at least $5 million in assets under management; and (ii) any entities with at least $5 million in investments.    

Practical Tips for Startups

From a practical perspective, the foregoing amendments should not change the fundraising strategy for startups because, as I have previously discussed: “The goal for every startup seeking funding is to find superstar investors (“A” investors – as opposed to “B” or “C”) who can add substantial value via their domain expertise, their contacts and/or their experience.”  Needless to say, an “A” investor will not have an issue with respect to qualifying as an accredited investor — whether the investor is an individual angel or a partner in a fund.  Indeed, it’s the “C” investor that’s the potential problem — i.e., the friend, the uncle, the dentist, the neighbor — and ideally you do not want him or her as your investor in any event.  That being said, sometimes startups have no choice, and that’s where these amendments could be helpful.

Noncompliance Issues

In conclusion (and just a friendly reminder to founders), you need to take compliance with applicable securities laws very seriously.  As a corporate/securities lawyer for 20+ years, I have a completely different perspective than founders, and I have seen the “dark side” of non-compliance, including a right of rescission for the investors (i.e., the right to get their money back, plus interest), injunctive relief, fines and penalties, and possible criminal prosecution.

The post SEC Expands “Accredited Investor” Definition appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=7cbCmM3RSuI

The post Motivational Clips for Entrepreneurs: “I’m Not Okay Waiting” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

To Our Clients & Friends: Welcome to our series “Helping Entrepreneurs Succeed.”  Every few weeks, we share a favorite video of a successful entrepreneur, investor or business leader on a variety of topics.  This week, we present Jack Ma, the co-founder and former executive chairman of Alibaba Group.  As of July 24, 2020, Jack is the second-wealthiest person in China, with a net worth of $48.1 billion

In this brief interview from a few years ago, Jack shares five solid tips for founders.  My favorite quote: “When everybody says ‘yes,’ there’s no chance for you.  So, be unique.”  

I hope you enjoy it.  Cheers, Scott

//www.youtube.com/watch?v=ol_VZfjgkME

The post Words of Wisdom from Jack Ma appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=WAqcob899hE

The post Motivational Clips for Entrepreneurs: “Right Now, The New Is You” (via Steve Jobs) appeared first on WALKER CORPORATE LAW GROUP, PLLC.

In this very interesting interview by Tina Seelig (via Stanford’s eCorner ), Kevin shares some solid tips for founders, including the following:

• “While business may be cyclical, innovation is not…. [In other words,] good ideas don’t just come when the market is up.” (at 7:38)
• “I was spot-on with the idea that ‘it’s all about the people’ because that was my experience throughout building all parts of my team — whether it was the group of venture capitalists we went with, whether it was our first employees, whether it was scaling-out our team….” (at 10:38)
• “It turns out that people are the reason that you either succeed or fail.” (at 10:58)
• “You always want to feel like you would work for the people that you hire because you are learning so much from them.” (at 17:13)
• “You have to get used to feeling really uncomfortable because if you didn’t feel uncomfortable it would have been solved by someone else by now.” (at 18:14)
• “You always want to solve a problem…. If I were to write a book on entrepreneurship it would be called: ‘solve a problem’.” (at 22:09)
• “It turns out if you don’t solve a problem for a lot of people, you won’t have a lot of customers.” (at 22:55)
• “Plans are useless, but planning is everything.” (at 27:58)
• “You can either be a rocket yourself or you can decide to strap-on rocket boosters on the side of your rocket and fly even faster.” (at 32:52)
• “If I were to teach one class,… I would just spend an hour on the fundamentals of making decisions based on expected value – and that has changed my life….” (at 42:21)
• “Remember that you are here to enjoy the journey.” (at 43:46)
• “As much as you want to be a hard-charger and work 24 hours a day, give yourself a little room to enjoy life.”   (46:22)

I hope you enjoy it.  Cheers, Scott

//www.youtube.com/watch?v=xAF9h1VNY8A

The post Words of Wisdom from Kevin Systrom appeared first on WALKER CORPORATE LAW GROUP, PLLC.

I’ve been handling M&A transactions for 20+ years, including nearly eight years at two major New York City law firms.  During that period, I have seen numerous significant mistakes made by founders and entrepreneurs in the context of selling their company.  Accordingly, I thought it would be helpful to provide a checklist of key issues, which includes links to prior posts for a more detailed discussion.  If you have any questions, please ping me at scott@walkercorporatelaw.com.   

1. Execute a confidentiality agreement with each potential buyer (see mistake #1 here and this post here).

2. Create a competitive environment or the perception of one (see tip #1 here and mistake #1 here).

3. Discuss the necessity of an investment banker with legal counsel (see this post here and tip #7 here).

4. Diligence the potential buyers (see tip #1 here and tip #1 here).

5. Watch-out for financial, as opposed to strategic, buyers (see this post here).

6. Negotiate a letter of intent which addresses all material issues (see mistake #2 here and post here).

7. Cap your liability at 10-20% of the purchase price (see tip #2 here).

8. Push for a large, broad “basket” (see tip #7 here).

9. Require the buyer to pay a reverse termination fee (see mistake #3 here and tip #10 here).

10. Include a non-reliance provision in the acquisition agreement (see tip #3 here).

The post Selling Your Company? Here’s a Legal Checklist appeared first on WALKER CORPORATE LAW GROUP, PLLC.

//www.youtube.com/watch?v=wnHW6o8WMas

The post Motivational Clips for Entrepreneurs: “If You Want It, Go Get It.” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Pass by, oh night!

Fade away, stars!

Fade away, stars!

At dawn I will prevail!

I will prevail, I will prevail!

Note: this post is part of our series “Motivational Clips for Entrepreneurs.”

Stay well.

Scott

//www.youtube.com/watch?v=T1n1N4eS7Uw

The post Motivational Clips for Entrepreneurs: “At Dawn I Will Prevail” appeared first on WALKER CORPORATE LAW GROUP, PLLC.

In this interesting blog post, Sam shares some solid nuggets for founders, including the following: 

• “The most counterintuitive secret about startups is that it’s often easier to succeed with a hard startup than an easy one.”
• “The most precious commodity in the startup ecosystem right now is talented people, and for the most part talented people want to work on something they find meaningful.”
• “If people care about your success because you seem committed to doing something significant, it’s a background force helping you with hiring, advice, partnerships, fundraising, etc.”

And below is an old clip for non-technical founders, with the following advice: “It’s very hard…to have a company [succeed] with no technical founders; it’s not impossible, but it’s a significant headwind.”  I would also add that it’s very difficult to raise seed funds from sophisticated investors if your company is a tech startup and you have no technical founders (i.e., all the development is being outsourced).

//www.youtube.com/watch?v=FpHWQ9uFHuk

The post Words of Wisdom from Sam Altman appeared first on WALKER CORPORATE LAW GROUP, PLLC.

I’ve been doing M&A transactions for 25+ years (including nearly eight years at two major New York City law firms), and I’m going to discuss an important issue for founders interested in selling their company: the distinction between strategic and financial buyers.  Most founders are familiar with strategic buyers, such as Google, Facebook and other big companies; they are not, however, familiar with financial buyers.  This post briefly discusses the differences between such buyers and expressly warns founders to watch-out for financial buyers.

What Are Financial Buyers?

Financial buyers are investors that are interested in a return on their investment business – which is the business of buying and selling companies.  Instead of investing in the stock market or in startups (i.e., venture capital), they buy and sell companies and seek a return that way.  The most common financial buyer is a private equity firm.  Indeed, big private equity firms (such as Blackstone, TPG, Apollo, etc.) are often on the front pages of the Wall Street Journal.  There are also, however, lots of small private equity firms that you never read about and which are on the hunt for small, private companies.  (Hedge funds and family offices are also financial buyers.)

Why Are Financial Buyers Different Than Strategic Buyers?

Financial buyers are different from strategic buyers because, as noted above, they are merely looking for a return on their investment.  Moreover, because most financial buyers are set-up as funds (which have their own limited partner investors) that typically expire in 10 years, the return on their investment must happen relatively quickly.  In other words, the business model for financial buyers is to buy a business and then sell it (or take it public) within a relatively short period of time.  Every aspect of the M&A transaction flows from this.  Simply put, unlike strategic buyers, financial buyers are not typically purchasing your company for the long term or as a result of potential synergies.

Why Does the Type of Buyer Matter?

It matters because, unless you understand the motivation of a prospective buyer, it will be very difficult to make informed decisions with respect to critical deal issues.  For example, as discussed below, the deal structure with financial buyers is usually different than with strategic buyers; and, most importantly, financial buyers typically offer a lower purchase price (and less cash at closing).  Moreover, you will typically be dealing with very different types of individuals.  The principals at private equity firms are extremely sophisticated and savvy, and have often developed an extraordinary skill set in connection with buying and selling companies and wooing founders.  Again, this is what they do for a living.  Unless you are dealing with a large strategic buyer with a corporate development division, you will typically be negotiating with the CEO and/or CFO of a strategic buyer, who is just looking to get the deal done and not trying to nickel and dime you and extract every possible financial advantage (i.e., is not merely seeking a return on investment).

How Is the Deal Structure Different with a Financial Buyer?

If you have never done a deal with a financial buyer, you are in for a rude awakening. The deals are typically extremely complex because the name of the game is debt.  Financial buyers buy companies the same way most individuals buy homes: they pay a cash down payment and borrow the balance.  In order to juice their returns, financial buyers try to borrow as much as possible in connection with a particular deal, which usually means that 70-80% of the purchase price will be debt.  Now don’t misunderstand this — the financial buyer is not typically borrowing from the seller; they are borrowing from banks and subordinated lenders.  The issue for you is that the acquisition agreement may contain a financing condition, which means that if they do not get their financing they may walk away with no recourse.  This is one of the unusual structures with a financial buyer. Another unusual structure is that financial buyers will typically require you, as the founder/CEO, to rollover your equity (usually 20-30%) into a new acquiring entity.  This means that you will only get 70-80% at closing, and probably closer to 50-60% – because they will push hard for a huge escrow and often an earnout.  The bottom line is that debt creates complexity, which creates extraordinary documentation — which creates time, money and uncertainty for the founder.

Should I Avoid Financial Buyers?

Like with any transaction, you need to diligence the party on the other side of the table.  Simply put, you need to do your homework and talk to other parties that have dealt with them in order to make an informed judgment as to whether they are guys with whom you should be negotiating.  Obviously, sometimes you have no choice but to deal with the financial buyer.  But, ideally, you want to create a competitive environment where you’re playing different prospective buyers off of each other in order to negotiate the best possible deal terms. As I have previously discussed, this all should happen in connection with the negotiation of a term sheet or letter of intent, which is when you, as the seller, have the most leverage.  The best advice I can give founders in connection with any sale is that cash at closing is king.  Anything other than cash at closing creates uncertainty and possible litigation – whether it is money held in escrow, rollover equity in a new LLC, an earnout, a promissory note, etc.  In short, strategic buyers typically provide the most cash at closing.    

Conclusion

The foregoing is a brief overview of the differences between financial buyers and strategic buyers.  When I worked at two major law firms in New York City, I represented a number of private equity firms and hedge funds in connection with buying and selling companies.  Indeed, I saw all the games they play at a personal level and in connection with financial engineering.  Now I am on the other side of the table, and I have recently helped founders successfully negotiate with my old clients.

The post Are You Selling Your Company? Be Careful with Financial Buyers! appeared first on WALKER CORPORATE LAW GROUP, PLLC.

Below is a list of my top three posts in 2019.  Happy New Year!  Cheers, Scott

• Dealmaking 101: Three Tips for Founders

• Motivational Clips For Entrepreneurs: “I Expect Nothing Less” (Via Coach Bear Bryant)

• What Are Super Pro Rata Rights?

The post Top 3 Posts in 2019 appeared first on WALKER CORPORATE LAW GROUP, PLLC.

The post Motivational Clips for Entrepreneurs: “Work Like Hell” (via Elon Musk) appeared first on WALKER CORPORATE LAW GROUP, PLLC.