Presentation Transcript

1. EVERYTHING MATTERS

   The Investment Process After Seed Forum – Investor Terms And Conditions

   Seed Forum Pitch Training Camp 9 April 2012
2. Understanding The Process Now you have made the initial contact with the investor What is next? I will guide you through some basic information that should be useful in your discussions with the investor
3. Understanding The Process The investment process might be somewhat different depending on which phase your company is in Seed phase – can be a less formal process Early venture phase – often more formal Why? Companies in the seed phase have a shorter history and are normally worth less, whereas early venture phase companies have existed for some time, have more documentation, have made more mistakes, and are (hopefully) worth more money
4. The Golden Rules – Advice To Investors If the product or idea is good and the founder is not, then go home, have a good bottle of wine, and enjoy the fact that you have saved a great deal of money and avoided many sleepless nights! If the product or idea is mediocre, but the founder is great, think seriously about investing a good portion of your money into the project. If the product or idea is great and the founder also is great, then run to the bank, mortgage your home, and invest it all!
5. What Can We Learn From My Golden Rules? You are selling yourself and your staff just as much as you are selling a product or an idea No company is better than its weakest link You must have a fire in your belly and believe in your company, your product, and your vision of the future If you don’t – no one else will! You need staying power Show that you will do what it takes to succeed Show that you will not give up when the hurdles appear (and they will, believe me!)
6. Understanding The Process Know your limitations – none of us are world champions in all fields of life – know when to ask for help or when to leave the steering wheel to more competent people Show that your main goal is to make money, not to own the whole company One of my most difficult tasks as an adviser to founders is to take the % sign out of their eyes and replace it with a $ sign
7. Asses Your Financial Needs Prior to discussing term sheet details with your investor you should have a clear idea about: How much money do you need? Do you want to have enough money to be able to concentrate on developing the business or do you want to spend time looking for new money on a regular basis? How long should the money last (6/12/18 months)? How much are you willing to pay for the investment? That is: How much equity dilution will you accept? What sort of investor do you need? Just money, or money combined with industrial knowledge? Willingness and ability to participate in the operations of your business?
8. Asses Your Risk Exposure Are the investor requirements balanced? Can you comply with the warranties in the investment agreement? Don’t promise more than you can deliver. What are the risks if you cannot deliver? Who will be liable for these risks? Are the risks commensurable with the benefits you gain from investors?
9. The Initial Discussions Are Over – You Must Now Draft A Term Sheet The Term Sheet will include the vital legal and commercial elements of the investment transaction Main elements Shares Possible Loan Financing Pricing Other Terms And Conditions
10. Term Sheet – Vital Elements Shares Equity investment One or more tranches Should you cover all your financial need right away? It is tempting to take it step-by-step as the value of the company increases and the price for new capital decreases RISK: The market may change and you might run out of money and face cash flow problems resulting in a very high EQUITY DILUTION OR INSOLVENCY if you need to find additional money while you are in a difficult situation Sale of shares Normally not an issue at this point in time since the company will not benefit financially from such a transaction
11. Term Sheet – Vital Elements Loan Financing What are your needs? Convertible loans – Often used On demand or call loans – Can be very practical Mortgage loans -Does your company own real estate? Bridge loans Do you need help to short-term finance the purchase of raw materials in order to produce your product for which you have a sale contract in place? Other types of loans…
12. Term Sheet – Vital Elements Pricing How do you evaluate your company? Professional help – pre-defined principles The market decides If you have investors standing in line – you decide the terms If you need the money and the investors aren’t standing in line outside your door you might have to swallow a camel and accept hard terms from the investor Decide on a pre-defined calculation method for subsequent investment tranches Decide on the consequences of negative findings in the Due Diligence process - Opt out clauses
13. Term Sheet – Vital Elements Other Terms and Conditions Do you want different classes of shares? Different rights for different shareholders? Do you have to pay a finders fee to an agent?
14. Term Sheet The Term Sheet will be the basis for the final agreement(s) It will normally be difficult to change the main terms decided in the Term Sheet Spend time with your legal and financial advisors prior to finalizing the Term Sheet Make sure you understand the consequences of each item in the Term Sheet NEGOTIATE each term Don’t rush – take your time Remember: the Term Sheet normally only reflects the preliminary outcome of the negotiations
15. Next Step – Due Diligence Why Due Diligence? Identifying risk Verifying facts
16. The Final Agreements After the Due Diligence process has been completed and the findings have been dealt with between the parties it is time to complete the contract structure Agreement on private placement based on the Term Sheet Shareholders agreement Loan agreement Employment agreements Please note that these processes vary for each company and that I will only touch on a few aspects
17. The Transaction Agreement/Agreement On Private Placement Who are the parties to this contract? Investor Shareholders (major shareholders or all shareholders) Company Regulates the investment Equity contribution Loans/guarantees – if applicable Warranties Condition precedent clauses/representations
18. Shareholders Agreement Parties The large shareholders or all shareholders The investor The company (sometimes) Regulates the rights and obligations of the parties as shareholders of the company Preemptive rights Voting rights Board representation Investment control
19. Loan Agreement Parties Investor and the company Possibly major shareholders Banks (if applicable) Types of loans Security (if any) Convertibility Reporting requirements
20. Employment Agreements Normally only for officers and management Remuneration systems Options Share purchase deals Fringe benefits New management? Competition clauses
21. Due Diligence What is due diligence? Who performs a due diligence and when? Why do a due diligence? How is due diligence performed? The mechanics
22. What Is Due Diligence? “Due diligence (also known as due care) is the effort made by an ordinarily prudent or reasonable party to avoid harm to another party. Failure to make this effort is considered negligence.” (source: www.wikipedia.org) Due diligence in transactions:“Examination of factual circumstances surrounding a business, in order to verify that the conditions on which the transaction rests are present and that the transaction may be implemented.” A systematic scrutiny of a business in order to: Control facts and conditions Identify risks Identify and quantify value drivers
23. Various Types Of Due Diligence Due diligence types: Commercial; business-wise/strategic/market Financial; balance/results/cash flow/financing Environmental Human Resource/Management Technological Legal The various types of due diligences most often have the same purpose and frequently overlap
24. Who Performs A Due Diligence? Due diligence is performed in various situations Sale/purchase of shares Sale/purchase of business/assets Issuance of new shares Merger/de-merger Initial Public Offering (IPO) Loans Internal business review (not transaction related) Buyer/seller/lender
25. When Is Due Diligence Performed? Prior to agreement on sale/purchase, merger/de-merger, IPO or loan Unveil and/or verify facts, i.e. the basis for the contemplated transaction Form the basis for the agreement, the price, guarantees, etc… Confidentiality Post agreement ”Confirmatory” due diligence; verification of the basis for the agreement Can form the basis for price adjustments, breach of warranties, claim for damages, etc… Multi-step due diligence Limited due diligence pre-agreement coupled with confirmatory due diligence post transaction or a more thorough due diligence post transaction In loan arrangements it is not uncommon to perform repeated verifications that the borrower is compliant with agreed covenants
26. Who Performs The Due Diligence ? Sale/purchase of shares or business: Buyer (normal in all major transactions) Seller (more and more frequent) Often extensive and with a broad scope Share issuance/IPO Prospectus requirements; The company must perform a legal due diligence covering certain aspects of the business, i.e. tax, etc… Not uncommon that the financial advisors also requests a due diligence to be performed in order to verify important information in the prospectus Merger/de-merger Both/all parties involved in transactions Not very common, but increasing focus Loans Banks Internal due diligence Companies desiring to know the ”health status” of the business, part of risk management program or companies contemplating a restructuring of it’s business Post-closing after a transaction - confirmatory due diligence to be used to as a check to unveil breach of guarantees
27. Why Perform A Due Diligence In Transactions? The main purpose for a seller or borrower To facilitate a speedy and practical process in relation to the contemplated sale, loan, or IPO Avoid surprises during the negotiations Reduce the risk for post-transaction claims for damages due to not meeting the buyers/lenders expectations To the extent possible, avoid sellers guarantees Receive settlement upon delivery without partial payment, escrow arrangements, etc…
28. Why… Main purpose for the buyer/lender/share subscriber To verify the information provided by the seller/target To avoid negative surprises post-transaction To reduce price To achieve guarantees for any risks to the business which are identified in the due diligence process as well as for any non-identified risks – risk sharing To make the consideration conditional upon performance or provide the basis for a post-transaction price adjustment To retain the purchase price as security/in escrow To prepare for takeover and continuance of operations post-closing
29. Seller wishes to control No surprises Negotiate the best possible deal Prepare target for sale Balanced and credible information Reduce pressure on management Control information to buyer Reduce number of post transaction issues Deliver pursuant to a realistic time schedule = Increase value Buyer wishes to control Expose weaknesses Downgrade historic earnings Put emphasis on liabilities and risks Control the negotiations Challenge contracts, IPR, budgets, accounting procedures and other value drivers Challenge conditions for growth = Reduce price The Parties Wish To Leverage Their Bargaining Power As Much As Possible
30. A study performed by Ernst & Young in Denmark shows that as a result of due diligence: The buyer cancelled the contemplated transaction in 20% of the cases The buyer achieved a price reduction in 18% of the cases The buyer achieved a price reduction and achieved other advantages in 7% of the cases The buyer achieved other advantages in 4% of the cases But also the seller may benefit from disclosing uncertainty, risks, and liabilities in advance
31. Possible Outcome Of Due Diligence No deal Price reduction Guarantees Adapted/changed structure of the deal Special Conditions Precedent – circumstances which must be fulfilled or rectified before the transaction can be completed Contributes to the agreement being more precise and addressing issues of importance Contributes to a clean and tidy implementation of the transaction
32. Corporate law and corporate documents Equity Finance Real estate, office lease Insurance, product liability Employment IPR Disputes and claims Contracts – (change of control) Regulatory issues (licenses, permissions, etc…) Competition law Tax Other Legal Areas That May Be Covered
33. How Does It Work ? You will normally be asked to provide information in a certain format pursuant to a request list provided by buyer Example: Please provide the Company’s Shareholder Register, the Certificate of Incorporation and the Company’s by-laws Example: Please provide details on the Company’s trademarks, tradenames, domain names, patents and designs Example: Do you use any third party software in your products ? If yes, please provide the terms and conditions under which these products are licensed The information (the ”Data Room”) is collated in binders and is either (i) reviewed on site, (ii) shipped to the interested party for review, or (iii) scanned and reviewed online in a virtual Data Room The management will normally be asked to explain or elaborate on certain information, or produce signed copies or other supporting documents
34. One Thing To Remember The due diligence results will have an impact on the investor’s view of the contemplated transaction. It is therefore important for start-ups to continuously collate and maintain relevant and sufficient documentation that supports the business proposal to the potential investors.
35. DLA Piper Vision To be the leading global business law firm Delivering quality and value-added services to our clients, globally and locally
36. DLA Piper Norway – Facts & Figures 90 lawyers Offices in Oslo and Bergen Merged financially with DLA Piper
37. Global Coverage
38. Worldwide Presence – Local Expertise DLA Piper Group Locations DLA Piper Focus Firms
39. Awards
40. Oslo Olav Vs gate 4 P.O. Box 1364 Vika NO-0114 Oslo, Norway T +47 24 13 15 00 F +47 24 13 15 01 E-mail info@dlapiper.com Bergen Torgallmenningen 3B P.O. Box 1150 Sentrum NO-5811 Bergen, Norway T +47 55 30 10 00 F +47 55 30 10 01 E-mail info@dlapiper.com DLA Piper – Contact Info