Making it Rain:How to be Prepared, Not Scared, for Your Acquisition, IPO & More
1. Making it Rain:
How to be Prepared, Not Scared,
for your Acquisition, IPO & More
Stacy Marcus, Partner
Barbara Bispham, Associate
July 2015
NEW YORK LONDON HONG KONG CHICAGO WASHINGTON, D.C. BEIJING PARIS LOS ANGELES SAN FRANCISCO PHILADELPHIA SHANGHAI PITTSBURGH
HOUSTON SINGAPORE MUNICH ABU DHABI PRINCETON N. VIRGINIA WILMINGTON SILICON VALLEY DUBAI CENTURY CITY RICHMOND GREECE KAZAKHSTAN
3. …but first, what’s on the Agenda?
1. What’s Market in the Market?
2. Current Market Trends
3. Understanding the Digital Landscape
4. Trends in Digital
5. Financing Options
6. How can I prepare?
7. Takeaways
11. Financings (Some Rumored) in 2013/2014
Airbnb
Airwatch
AppNexus
Automattic
Box
Coupons.com
Deem
Dropbox
Evernote
Fanatics
Gilt
Good Technology
GoPro
Jawbone
Lending Club
MongoDB
Palantir Technologies
Pinterest
Pivotal
Pure Storage
Snapchat
Space Exploration Technologies
Square
SurveyMonkey
Uber
Vice
12. Market Trends
• 2013/2014: venture capitalists have been building tech
companies to sell, not to take public
• 2013:
• 43 tech stock IPOs occurred
• Venture capitalists sold 376 of their portfolio companies in
trade sales
• Thus far in 2014: 55 tech stock IPOs occurred
WHY: Young tech companies finding organic growth process too
time consuming – value maximized when company sold out to a
large tech company that can immediately integrate new tech
14. The New Digital Language
• “Like”
• Pin
• User Generated Content
• Advercasting
• Social listening
• Key Words and Metatags
• Omnichannel
• Streaming Music and Video
• Interactive Gaming
• Pre-Roll/Post Roll, Interstitial Advertising
• Trolling
• Viral and Buzz Marketing
• Twitterjacking
• Cybersmearing
• Embedded Players, Gadgets and Widgets
• Podcasts and Webcasts
• Promercials
• Microsodes, Mobisodes
• Digital Downloads
• CGI and Video FX
• Tweet
• SMS, WAP
• Advergaming
• Astroturfing
• Typosquatting
• Social broadcast channel
• Second Screen
• Hashtag
15. Tickets to
Entertainment
Events
E-mail
Telephone
Discount
Coupons
Newspapers
& Magazines
Credit Cards Prescriptions
Passport
Radio
Programs
Currency
Television
Programs
Music
Books VCR/DVR
GPS
Keys via
Bluetooth
20. 10 Social Media Statistics from 2013
1. 4.2 billion people use their mobile device to access social media sites
2. Facebook has 1.15 billion total users
3. 23% of them check their account more than 5x per day
4. Twitter has 500 million + total users
5. The fastest growing age demographic is 55-64
6. 40% of marketers use Google +, 70% want to learn more and 67% plan to
increase activities
7. 42% of people update their profile information regularly on LinkedIn
8. Every second 8,000 users like a photo on Instagram
9. 350 million photos are uploaded to Facebook every day
10. 60% of consumers say that the integration of social media makes them
more likely to share a company’s products and services
Source: http://www.digitalbuzzblog.com/infographic-social-media-stats-2013/
24. No matter what the event, pre-planning steps are
crucial, and can differentiate your company
1. Create price drivers
2. Know your shareholders
3. Keep key employees incentivized
4. Have a credible intellectual property position
5. Preparation for due diligence process
6. Formalize good corporate governance practices
7. The finance function is crucial
8. Establish robust reporting and management systems
9. Address executive compensation, legal, and tax matters
10. Ongoing obligations
25. 1. Create price drivers
• Diversity of key employees
• Reputation of company as great workplace
• Growth potential
• Company
• Industry
• Proprietary product or procedure
26. 2. Know your shareholders
• Voting participation
• Communication
• Impact on shareholders
27. 3. Keep key employees incentivized —
Shareholders’ “Buy / Sell” Agreement
• Provides for control of transfers
• Preserves team and controls new members
• Voluntary transfers — right of first refusal
• Involuntary transfers — termination, death, divorce, disability,
debt — stock valuation issues
28. 3. Keep key employees incentivized —
New Team Members
• Equity Compensation
• Grant triggers income (and withholding); as price rises, tax cost of
stock grant increases
• Options:
• Require payment of exercise price (eventually)
• Don’t vote; can’t be transferred
• Tax holding period doesn’t start until stock is purchased
• Vesting
• Three-year or four-year vesting periods
• One-year cliff and subsequent monthly vesting still common
• Company right of first refusal on any proposed sale of stock
• For new team member with objectives —key engineering,
marketing or others objectives — consider milestone vesting
29. 3. Keep key employees incentivized —
Non-Compete Covenants
• Employment
• In California, non-compete covenants are generally
unenforceable with two exceptions:
1. Sale of a business
2. Trade Secrets
• Confidential & Proprietary Information
30. 4. Have a credible intellectual property position
• Who owns it?
• Employees? Founders? Contractors? Open source?
• Proprietary information agreements
• Are patents worth the money?
• Can I keep others from competing with me?
31. Patents
• In the United States, must file within one year from the date the
invention is first used or offered for sale
• In other countries, must file before disclosure.
• By treaty, filings in the United States will protect foreign rights in
most countries, as long as patents are filed in the country within
one year
• Consider provisional patents to lock in filing dates. Full utility
patents can be filed within one year
32. Copyright
• Copyright protects artistic expression (i.e., a song, artwork or
computer software code)
• Filing a US copyright can be done at any time. Filing provides
(statutory damages and attorneys fees)
• Requires disclosure in a public document (which is why code is
rarely copyrighted)
• For Work for Hire, lasts until the earlier of 120 years from
creation, or 90 years from publication
33. Trademarks
• Protection for the “brand” in the market (market confusion)
• The same mark may be used by different companies, as long
as the public is not confused (different products)
Trade Secrets
• Protected by state law, requires protection of the trade
secrets
• NDAs and invention assignments
34. 5. Preparation for due diligence process
• Minute books
• General corporate matters
• Material contracts and agreements
• Virtual dataroom
• “Paper everything”
36. 7. Finance function is crucial
• Credible financial statements
• Design/implement personnel, systems, policies infrastructure
• IPO only:
• Engage and establish relationship with independent auditor
• Registration statement requires three years of annual
audited financial statements (NB: under the JOBS Act,
emerging growth companies only need to provide two)
• Unaudited interim financial statements may also be required
• Pull up your SOX: CEO and CFO certifications
37. 8. Establish robust reporting and management systems
• Implement formal risk management practices for management
to monitor and communicate to board, as necessary
• Once public, a company will be subject to extensive disclosure
requirements – both financial and otherwise
• Benchmark financial reporting capabilities against SEC criteria:
• U.S. GAAP or reconciliation
• Need for an external expert to assist
38. 9. Address executive compensation, legal, and tax
matters
• Perform any changes to executive compensation plans and
employee benefit plans
• Note impact of any such changes on legal and tax matters
39. 10. Ongoing reporting obligations (IPO Only)
• Annual Report on Form 10-K
• Quarterly Report on Form 10-Q
• Proxy Materials
• Form 8-K
• Statements of Beneficial Ownership
Talk about convergence of healthcare, social and technology – wearables, etc.
We are seeing a convergence of advertising, technology and media like never before.
Digital and social media companies have dominated the capital markets landscape of late.
While tech companies in the pipeline cover a wide spectrum of valuations with some just entering nine figure valuation territory, there are 26 companies on the list that have raised a financing round at a real or rumored valuation of $1B or more. This is the full list of companies.
Focus in the IPO markets has been on biotech IPOs – 2014 will likely set record for the most biotech IPOs of any year
Young tech companies are finding that growing organically is taking too long
Companies as a result are finding that the value-maximizing strategy is to sell out to a large tech company that can immediately integrate the new technology into its existing products
Internet companies make up over half of the 2014 Tech IPO Pipeline, followed by mobile & telecom companies. And both have seen significant growth in their share of the pipeline.
And this conversation is using terms that didn’t exist just a few years ago. This slide illustrates the new vocabulary. How many of these words were even in our language five years ago? How many are now in your vocabulary? Anyone remember when the hashtag was just the pound sign?
15
These are the 6 platforms that have risen to the top for most businesses. I think Google+ is still debatable, and I think Tumblr should be on there. LinkedIn is less for marketing and more for HR functions.
Tie in to which of these companies have engaged in financing already – IPO or private financing. YouTube now owned by Google, Facebook bought Whatsapp, etc.
How is this proliferation of digital and social media platforms impacting our advertising and the tech landscape in general?
There’s an app for that used to mean that we could now access via our phones the content and brands that we used to only access via the Internet. Now, it means that for every offline event or interaction there is a corresponding app that provides value-added content and interaction with consumers. It is no longer acceptable to just put out a movie or concert. That movie or concert now has an app. And with the app comes the analytics and data to further target and refine consumer information.
Where are the dollars?
According to a Zenith Optimedia study, ad spend in the US is expected to grow by 4.6% in 2014.
Internet is still the fastest growing medium by some distance.
Forecast an average of 15% annual growth for 2014 to 2016.
Social media advertising is growing at 28% a year.
The increase in Internet/mobile comes at the expense of print.
Where are the eyeballs?
Millward Brown's 2014 annual AdReaction study examined multiscreen habits and advertising across TV, laptop, smartphone and tablet usage
Television remains the most common first screen among US multiscreen users, but mobile is poised to challenge TV for that status.
Screen time- 2:31 smartphone vs. 2:27 TV
“Liquidity event”
Who owns it?
Bottom Line – Get IP assignment agreements from EVERYONE!
Contractors – THEY own it unless in writing otherwise
Employees – Employer usually owns (“Shop rights”, work for hire), but not necessarily, eg patents must be applied for by INVENTOR, then assigned
Open Source – be careful! e.g. GNU requires open source license to derivative works you create
Worth the $?
Trademarks – YES, file (~$2K)
Copyrights – automatic (Free)
Patents – Sometimes ($10K-50K+), Industry-specific (e.g. pharma, med devices vs software)
- For better or for worse, patents becoming more valuable; more active/mature “market”
- Example – Facebook buys AOL patents $550M
Stop Competing?
Copying, YES. Competing, NO (software, mobile, internet)
Copyrights, trademarks, trade secrets – prevent direct copying
Patents – potentially create long-term value
Especially important for a public company – investors and regulators increasingly focused on a strong corporate governance structure
STRONG BOARD:
To oversee goals, strategies, plans, initiatives
Familiarize self with industry and competing peers to better understand challenges company faces
Stock exchange rules: NASDAQ majority of company’s directors must be “independent” within a relatively short period following proposed IPO – better to have it at time of IPO though
Note: will need to disclose any agreement with director in registration statement
Audit committee
Generally must all be independent
May not receive any fees other than board fees as compensation from the company
Must be able to understand financial statements, and one must be a “financial expert”
Review organizational documents
Ensure that desired offering is permitted under the documents
Ensure sufficient shares authorized
Assess requirements for any conversions of outstanding preferred stock or compliance with registration rights
Anti-takeover mechanisms – consider adding before going public to add anti-takeover devices not standard for a private company
Staggered board
Supermajority requirements
Elimination of action by written consent
Restriction on ability of shareholders to call a special meeting
NOTE: Have come under increased scrutiny in recent years; may affect company’s ISS (Institutional Shareholder Services) corporate governance rating
Auditor: will be engaged early in IPO process specifically to assist with comfort letter; due diligence
IPO process requires extensive disclosure regarding compensation to directors and named officers, and under employee benefit plans – attracts investor interest. Changes easier to implement pre-IPO
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