Tech Capital Partners Blog

In my last post I discussed exits and ended by stating we tell our companies: “build the company on the assumption it will go public but recognize that a strategic sale is more likely so don’t do anything that will make a sale difficult”. So what are those things that make a sale easier in the future? While not exhaustive here is a short list:

Own all intellectual property
Any acquirer is going to want to know they are acquiring all IP rights. This means from early on you need to ensure the company owns all of its intellectual property. You need to ensure that everyone who has played a role in development has assigned their rights to the company. Specifically:

• All individuals who “touched” the IP prior to a company being formed need to have explicitly assigned the IP to the company. Even if you had friends help you brainstorm early on it is important that they sign IP transfer agreements.
• If developed in a university setting, all students will need to sign IP transfer agreements.
• Once incorporated, all employment contracts should explicitly state that the company owns all IP developed by the employees.

Standardize employment agreements
It will drive potential acquirers crazy if every employee has their own form of employment agreement. Best practice is to use one standard form of agreement for all  employees. Obviously items such as salary will change from employee to employee but the basic form of agreement should be consistent. This also makes negotiations with potential employees easier as you can simply say the form is non-negotiable.

Make option agreements comply with regulatory requirements
There is no significant cost to ensure your private company stock option plan is consistent with that of a public company so why not make it compliant from day one. This makes it easier for an acquirer as they will not likely have to take any accounting hits (stock based compensation charges) that could impact their willingness to complete a transaction.

Don’t have change of control provisions in option agreements
During the “bubble” there was a tendency for stock option plans to have a provision that provided for full vesting of options on a change in control (i.e. an acquisition). Today that is not the norm. Full vesting will scare an acquirer who will be concerned about the ability to keep the company intact after acquisition. If they do agree to proceed notwithstanding the acceleration, it will usually mean a reduced price because they will need to allocate some portion of what would have been included in the purchase price towards retention bonuses and/or new stock options to provide an incentive for employees to remain. Today’s market is such that only a handful of employees will usually have accelerated vesting – usually only the CEO and CFO as often both are not retained post acquisition.

Be consistent with customer terms and conditions
Do you have a standard set of terms and conditions that govern sales? If not, you should put a set in place immediately. While I realize early on you need to be flexible and work with customers, you want to try to be as consistent as possible. Ideally you want things like warranty periods and support hours to be consistent from customer to customer. You want to make it easy for an acquirer to get through diligence and standardized terms make it simpler.

Avoid complicated tax/business structures
At the risk of offending well meaning lawyers and other advisors, stay away from complicated corporate structures. Yes, in theory moving your IP to an offshore entity and then licensing back to Canadian and US operating entities may save you some taxes down the road but the reality is you are spending time and money up front for a benefit you will not realize until you are profitable. More importantly, you are unlikely to realize the benefit at all because you will likely be acquired before the benefits kick in. A foreign structure will make it more complicated for an acquirer who may even want the structure unwound before completing the purchase.

· trackback ·