On June 3, 2020, the United States House and Senate passed The Paycheck Protection Program Flexibility Act of 2020, or PPPFA, and on June 5, 2020, culminating a strong bipartisan effort, the President of the United States signed it into law.
Broc Romanek sat down with Louis Lehot, the Founder of L2 Counsel and the video blog series — #askasiliconvalleylawyer — to discuss negotiating mergers and acquisition transactions during this pandemic.
In today’s interconnected world, where opinions are formed in nano-seconds, companies vastly underestimate the damage that social media and other applications can have on their daily business. To protect and manage their brand and online reputation, it is essential that companies implement effective and comprehensive social media and data collection policies. This article outlines nine steps startups should take to institute effective policies for social media and other online activities.
1. Train employees to never mention prospective or ongoing funding needs or rounds in social media posts.
Due to the sensitive nature of the fundraising process, compliance with securities laws and confidentiality agreements, your employees should be trained not to comment or engage in any sort of discussion regarding funding requirements or pending rounds of financing on social media or any other platform. Such comments could precipitate a negative effect on the company’s ability to raise funds and to the loss of trust with regulators and current and future investors.
4. Secure the company’s ownership of its website and other online assets.
To secure the company’s rights in its website and other assets, the company must effectively implement various IP protection strategies. You should engage with specialized IP counsel to determine what the best plan or approach would be for your particular company’s needs.
5. Survey and solve for the legal issues surrounding early-stage e-commerce.
If a startup is an e-commerce company, then there will also likely be a multitude of legal matters that the company needs to address before moving forward. As with most legal questions that arise during the operation of a company, it is best to consult a lawyer when these legal issues arise.
6. Become familiar with laws regarding endorsements, contests, and promotions.
To promote their websites and products, many companies will offer different contests, sales, or other endorsements. Various laws govern these types of promotions, and legal questions will undoubtedly arise during the website’s life cycle. As with most legal questions that arise during the operation of a company, it is best to consult a lawyer when these legal issues arise.
7. Ensure that employees understand that they must consult legal counsel before posting about material aspects of the business (for example, pending litigation or new product development) on social media.
Companies often have their employees make postings to their various social media accounts to bring attention to the company’s products or upcoming promotions. All employees must understand the consequences of posting any company-related materials to their social media accounts. Therefore, a company must use its best efforts to ensure that all of its employees consult with legal counsel before making any postings. This is easily performed if the company has in-house legal counsel.
8. Pay close attention to privacy and data security laws governing the collection, use, security, transfer, and disposal of the personal information of employees and customers that is collected and maintained by or for the company.
Many companies face issues when it comes to their data collection policies. Often, companies mistakenly neglect to remain abreast of privacy laws, which results in their policies becoming outdated. Even the most carefully crafted policies will fail if not updated. Companies need to make sure that they’re always current on the ever-shifting landscape of privacy and data security laws wherever their company is located or does business.
9. Do not assume that the casual nature of social media and other online and mobile applications means that these activities cannot cause significant harm.
Above all else, it’s best to use common sense! Make sure that you use good business judgment when engaging with social media platforms. If there are any doubts as to whether or not a post could cause harm to your business, it’s best to err on the side of caution. If there are any questions that you have about a post or a potential social media strategy, it would be best to consult a lawyer before doing so.
There are two desired exits for a company: to go public or be acquired. While companies often hope for a public exit, it is much more likely that, when the time comes, they will go through a merger or acquisition transaction, or “M&A” transaction. This article will provide an overview of eight key stages that typically occur as a company goes through a M&A transaction.
1. Preliminary conversations with potential buyers
Typically, transactions kick off as informal discussions between the company and one or more potential buyers. It may be helpful to enlist a banker to run an organized process for price discovery based on a well-drafted information memorandum, and to organize outreach to potential buyers that may be interested in your company, as well as to help guide these preliminary conversations to a letter of intent. The primary focus of these preliminary conversations is price and value exploration, along with fit and feasibility. Conversations regarding deal structure are to be had at a later stage of the transaction.
2. Execution of non-disclosure and non-solicit agreements with potential buyers
Before a potential buyer will agree to move forward with a transaction, you will be required to provide sensitive or confidential information. To protect this information, it is best to execute a non-disclosure agreement with any potential buyers. This will ensure that a buyer cannot walk away from the deal and then use confidential information provided during the discussions for their benefit. A non-solicit agreement should also be executed if you want to prevent buyers from recruiting members of your business team.
3. Receipt of a letter of intent from the buyer
When a potential buyer has decided that they want to continue with the transaction, they will provide the target with a letter of intent or term sheet to outline their proposed terms for the transaction. This acts as a framework for terms regarding the structure of the transaction, the purchase price, the structure of the earnout, indemnification, and any other terms associated with the closing of the deal. The buyer may choose to include an exclusivity provision in their letter of intent to prevent the target from engaging with other potential buyers. It is critical that a thorough legal review is performed by the target company’s legal team at this stage of the transaction, as once the term sheet is signed by the seller, the leverage can quickly shift to the buyer, and it will be more difficult to extract concessions.
4. Pre-signing period
- Negotiate the definitive document
The definitive document is the formal document outlining all terms and conditions of the deal. Any terms proposed in the letter of intent may be renegotiated at this time if required. The final document will be negotiated and agreed upon by the buyer, target, and their respective legal teams. Negotiating the terms of the definitive document often takes several weeks.
- Complete due diligence
The target will be required to provide any documents outlined by the buyer in a due diligence request list. These documents will cover matters such as corporate formation, financing, intellectual property, debt, commercial contracts, regulatory matters, licenses, and employees and consultants. At this stage, the buyer is concerned with circumstances that may impact the purchase price and result in additional terms and negotiations being required.
- Populate disclosure schedules
Representations and warranties about the operation of the target will be outlined in the definitive document; this includes disclosure of matters pertaining to lawsuits or breaches of contract, if any. Disclosure schedules will qualify these representations and warranties and ensure that there is no misrepresentation and that the buyer does not have right to pursue an indemnification claim.
5. Signing of documents
Once the definitive document has been negotiated, finalized, and agreed upon, and any additional documents have been provided and considered, signing of the documents will occur. At this point, the deal may close if there are no additional closing terms to be satisfied.
6. Pre-closing period
If there are additional closing terms that need to be satisfied following the signing of the definitive document, the target and buyer will prepare and present all outstanding deliverables. Terms that may be satisfied during this pre-closing period include government approvals, and third-party or employee agreements. The number of terms that remain to be satisfied following the definitive document signing will determine the length of this stage.
7. Closing the deal
When both parties have met all terms outlined in the definitive document and funds are exchanged, the deal is closed.
8. Post-closing period
Once the deal is closed, you can focus your attention on your future endeavors, paying taxes, creating an estate plan, and thanking all that were key to the success of the M&A transaction. At this point, the buyer will be responsible for full integration of your business.
One of the first formal corporate actions to be taken following the formation of a corporation is issuing stock to the founders. Stock issuance to founders typically occurs during the formation process, though a company will continue to issue various securities through its growth and development. This article will outline five considerations to keep in mind as your company issues securities.
1. Board Approval
Any security to be issued requires approval from the board of directors. Regardless of the type of security, whether common stock, preferred stock, stock options, warrants, or convertibles notes, it is necessary for the board of directors to provide either written consent or approval at a board meeting. Ensuring securities have board approval validates the issuance of the security and is a simple administrative task that prevents complications in the future.
2. Payment for the Security
In return for the security, the company must receive payment. This payment can be monetary, property, or a service. Monetary payment can be made by cash or check, or an agreement to forgo a debt payment owed by the company issuing the security. Property of value that can be used as payment includes equipment, technology, or intellectual property rights. If a service is being used as payment, it must have already been provided and not be a promise to provide a service in the future.
When deciding on a payment option for a security, it is important to consider any tax issues that may arise. It is best to consult with a tax attorney or accountant as they will be able to advise the best payment option for each security holder.
3. Required Documents
The documents required when issuing securities will be dependent on the type of security that’s being issued. Below are the documents required for commonly issued securities.
- Board approval
- Complete stock purchase agreement
- If insufficient number of shares authorized, charter amendment, stockholder approval and other approvals
- Board approval
- Independent third-party valuation
- Stock plan
- Option grant and complete option grant notice
- Board approval
- Complete stock purchase agreement
- Stockholder consent (watch for any class votes required)
- Ancillary agreements
Ensure that all required documents are prepared, signed, secured, and easily accessible. This will allow diligence by future investors to proceed without issue during financing or sale of the company.
4. Securities Filings
When issuing securities, a securities filing is often required to comply with state and federal securities laws. These laws require companies to fully disclose information regarding the company and associated investment risks. It is typical for companies to seek exemptions to these securities laws so that they do not have to provide full disclosure. Exemptions can be applied to the following situations:
- The number of securities being issued is small, and they are offered to a discrete number of potential investors
- Potential investors are already involved with the company to some degree so they are aware of the risks that may be associated with the investment
- Potential investors that have previous experience with similar investments, a high net worth, or a high income will be seen as able to bear the risk of the investment
Even if an exemption is employed, a securities filing may still be required to comply with the law. It is important to consult with your legal team when submitting any securities filings to ensure that all necessary laws are being complied with. Maintaining accurate records of all filings will also permit diligence by investors during any future transactions.
5. Stock Certificates
The final thing to consider when issuing stock is whether to issue a paper or electronic stock certificate. Public companies only issue electronic certificates, however private companies may choose whether a paper or electronic certificate would be more suitable. Increasingly, private companies are working with cloud-enabled vendors to issue electronic certificates.
As someone with extensive experience advising public and emerging growth companies and their investors, along with parties in M&A transactions, I am often asked to advise companies on how they can prevent interruptions to their business priorities, particularly interruptions to customer and supplier relationships. With the advent of COVID-19 and the declaration of a “global pandemic” by the World Health Organization, companies are more concerned than ever about protecting the business contracts they have in place. I am now being asked if companies are able to trigger a “material adverse change” clause that would allow them to terminate a contract they are bound to and how companies can ensure the contracts they have in place are protected.
What constitutes a “material adverse change”?
A “material adverse change” clause, or MAC clause in short, is a clause outlined in a business agreement that allows a counterparty to exit the agreement if there is a major degradation affecting the fundamentals of the deal between when it is signed and closed. MAC clauses have been prevalent in commercial and investment contracts and are often interpreted in the context of merger agreements with the buyer being able to walk away from the deal.
When determining if a MAC clause has been breached, there are several things a court needs to assess. The adverse change must be “material” to the deal in whole and occur over a significant period of time. A circumstance that is only temporary and occurs over a short period of time is not enough to necessitate a MAC. Additionally, the MAC must have actually taken place; the threat of a forthcoming MAC will not trigger a MAC. For a MAC to be triggered, the party wanting to trigger the MAC needs to demonstrate the adverse change in terms of time and quantity while being specific to how and why the MAC occurred. If the consequence was foreseeable when the contract was established, but was not spelled out, the courts would be less likely to see the event as a MAC. A MAC clause will be carrying more weight when leveled against an unknown or unforeseeable event.
Triggering a MAC should not be taken lightly, as the party seeking to trigger the MAC must provide evidentiary support to prove that a MAC has actually occurred. A famous example of a MAC was between a buyer and seller of a sugar refinery in Cuba in which the subject refinery became nationalized under Fidel Castro following the Cuban revolution. Legal standards for a MAC do not differ across the states, though Delaware and New York are most persuasive (as to variations across national boundaries, that is another question entirely). Furthermore, there are no specific guidelines that must be followed, so courts interpreting a potential MAC must look at each circumstance individually with all facts presented.
COVID-19 and your contracts: Can this global pandemic trigger a MAC?
As stated above, the party wishing to trigger a MAC clause must provide immense evidentiary support for the clause to be granted. Terminating a contract poses consequences to the viability of commerce and the financial economy as a whole, and the courts will seek to preserve the economic basis of contracts in light of the consequences that may arise.
Questions to consider:
- Was the circumstance, in this case COVID-19, already a known factor or had it been contemplated when the contract was established?
- Has the declaration of COVID-19 as a global pandemic resulted in an adverse change so severe as to render the agreement economically unfeasible?
- How long is the circumstance occurring for in relation to the length of the contract? Will the COVID-19 outbreak occupy a significant time during the performance period of the contract?
- If a MAC clause is not granted, will economic consequences to the other party be so great that they must cease operations in their current capacity?
- Are pandemics specifically called out in the contract?
- If more time passes and the COVID-19 outbreak subsides, will both parties be able to fulfill the terms of the contract?
How can your company protect its contracts now?
As the current COVID-19 situation stands, business should review their most important contracts. To determine:
- whether the contract provides for suspension or termination of performance;
- whether any representations, warranties, covenants, delay rights, termination rights, conditions or force majeure provisions are triggered by COVID-19 and determine next steps;
- look for any notice requirements that have been or may be triggered;
- the extent to which COVID-19 prevented a party asserting an inability to perform;
- consider what, if any, other means exist to deliver or perform on contractual obligations
- are there proactive steps that can be taken now in case the crisis continues for longer than currently anticipated?
- is there any ability to mitigate effects to better perform?
- try and quantify the potential consequences of a breach and/or default;
- communicate, communicate and communicate, and consistently; and
- to check for any governmental or regulatory statements that could impact performance or non-performance.
Risks and opportunities should be assessed on an individual case-by-case basis.
With the COVID-19 outbreak being categorized as a global pandemic, businesses now have a standard for handling such a situation in the future. In the current state of affairs, businesses should take this as a chance to thoroughly review their standard terms and conditions regarding business activities, including any agreements in place between customers, suppliers, or vendors. These contracts can then be tailored going forward according to experiences and expectations during a global health crisis, including if situations degrade before they get better.
Entrepreneurs and those in management should take a long-term view of relationships and avoid over-reacting to the current COVID-19 pandemic, which could, and most likely will, have only a temporary, albeit large, impact on their business. It is advisable to uphold any commitments that have been made to the fullest extent feasible, while continuing to look for business opportunities that foster trust, confidence, and continued growth in the future.
As your company grows and has completed its first venture capital fundraising round, it is customary to include one or more outside investors on your board of directors. As your company enters this stage, board meetings will become formalized events engaged and effective dialogue between the company’s executives and its board of directors.
- Determine how often your board of directors should meet. You want to strike the fine balance between keeping the board engaged throughout the meeting without the time commitment for preparation and attendance becoming unreasonable or inconsiderate of board members’ busy schedules. Meeting quarterly, at the minimum, is advisable.
- Prepare your board deck to serve as a meeting outline.Your board deck should provide an overview of the areas of focus for your company and what will be covered in the board meeting. You want to include an financial report covering current capital, capital projections for the upcoming period, and a calculated future capital prediction. In addition to financials, the board deck may highlight concerns regarding operations, development, competition, legal matters, or additional matters of business that require the board’s approval or feedback.
- Provide sufficient time for the board to review the board deck. The board deck should be circulated a minimum of one full business day ahead of the scheduled meeting to ensure board members have time to look through the material that will be covered. Delivering the board deck immediately before the meeting not only prevents the meeting from running as efficiently, but also reflects poorly on the company for a lack of organization.
- Schedule regular updates with the board so there are no unexpected surprises. When unexpected developments occur, it is important to inform the board prior to these concerns being brought up in the board meeting. Being candid in regards to unforeseen challenges or concerns facing the company allows the board generate feedback and prepare strategies that can help the company overcome the challenges. The board is there to guide and assist when challenges arise, don’t be afraid to utilize this.
- Spend more time focused on one or two areas where the company excels or struggles. The board deck serves as a meeting outline, however, rather than skimming over every area of focus of the company during the meeting, it may be more effective to give the majority of the meeting’s time to acutely address one or two areas where the company has excelled or struggled since the previous board meeting.
- Don’t waste your board members’ time. Your board members have busy schedules. Board meetings should be no longer than 3 hours, to ensure the meeting stays focused, efficient, and respectful of everyone’s time.
- Include your company’s leadership team, not just the top two executives. While the CEO and CFO should be present at all board meetings, the board meeting is an excellent platform to introduce the entire management team to your board. If a board meeting will be more focused on matters dealing with sales, for example, having the executive in this area present their concerns will allow the board to view the company from a more organizational standpoint and see what areas of the leadership team need to be developed.
- Make a note of questions, suggestions, and advice brought up by the board. When your board members are engaged in the meeting, they will be asking questions, giving task suggestions, and providing advice. It is important to show your board that you value their input by providing a follow-up on their recommendations at the next board meeting.
- Showcase your company culture to build and maintain your relationship with the board. Activities beyond the board meeting can help build a meaningful and lasting relationship with board members. The board of directors is a great asset to a company’s growth and ensuring this relationship is built on trust and transparency can help when the company faces greater challenges.
When it comes to financing a startup, many entrepreneurs think of venture capital. While a venture capital fundraising round is critical to securing funds for an emerging company, there are other options to consider when a company is still in the early stages of its life cycle. This article will cover the friends and family round and the angel investment round of early-stage financing.
The “friends and family” financing round
Your company’s first source of capital is likely your personal savings or an investment from those in your close network. A company can expect to receive an investment anywhere from $10 000 to $150 000 in this round, with investors providing their own money due to their personal connection with the founder of the startup. Because this round comprises investments from those primarily in your close personal network, it is commonly referred to as the friends and family financing round. To prevent future conflicts and to maintain a lasting investment relationship with the investors of this round, you should ensure to retain some level of formality to the documentation process, much like you would for a corporate investment.
The angel financing round
Angel investors are often wealthy individuals that have experience working with and investing in early-stage companies. Angel investors can also belong to angel investing groups, small firms created for investment purposes. Angel investors are interested in companies that are still considered early-stage, however they have a developed and deliverable product. An angel investment can range anywhere from $50 000 to $2 million, with angel investors focused on the return they will receive.
Key differences between these financing rounds
The investor in the friends and family round is just that, a close personal connection of the entrepreneur. Their choice to invest in the company is based on their loyalty to and relationship with the founder. An angel investor typically does not know the entrepreneur and sees the investment in terms of the return and the opportunity to share their industry knowledge.
The size of the investment:
The capital raised from an angel round will typically be larger than that from a friends and family round. This is because angel investors or angel investor groups typically have greater personal wealth to invest in a startup. The average capital raised from a friends and family round is just over $20 000, whereas the average angel investment is more than three times that.
The valuation of the startup:
As friends and family round is one of the first sources of financing for a startup, the company often has a valuation no greater than $1 million. Angel investors typically invest in startups with a valuation between $1 and $3 million.
The time taken to secure the investment:
A friends and family investment is a quick solution to the immediate financial needs of the startup, as it usually takes no longer than two months to close the deal. An angel investment will take between three and six months to close, though if an angel group has a structured pitch and review process, it may take longer than six months to close the deal.
The chance of a repeat investment:
Investors in a friends and family round have a close relationship with the founder so they are more likely to support the idea of continuous or long-term support. An angel investor is concerned with their investment returns so they prefer diverse portfolios, making it unlikely for a company to receive repeated funding.
The cost of the round:
Being that the friends and family round is informal, without strict procedures in place, a company will save on transaction, documentation, and legal fees. The costs associated with an angel round will be greater, but this round also provides industry knowledge and advice from the experienced investors to the entrepreneur, making the fees worthwhile.
Companies should pursue these early-stage financing rounds to secure capital before they are ready to enter a formal round of venture capital fundraising.
Choosing the right lawyer that fits your business is one of the most important steps you can take in today’s litigious world. Whether you are launching a new venture, pivoting to reposition your current business or have a “bet the company” challenge or opportunity, finding the lawyer that fits your unique situation is critical.
Silicon Valley lawyer Louis Lehot shares 10 tips on how to build healthy relationships at work. It’s no surprise that many of the strongest relationships I have built over the past 20 years have revolved around my work.