Negotiating with venture capitalists – guidance for pre-IPO companies  Alex Woodfield Partner Head of CIS Business Team ww...
Table of content <ul><li>Venture Capital: </li></ul><ul><ul><li>Buyouts </li></ul></ul><ul><ul><li>How is a venture capita...
Cass Business School Report <ul><li>Key findings include:  </li></ul><ul><li>private equity-backed IPOs outperform other I...
Cass Business School Report <ul><li>The report also shows that: </li></ul><ul><li>private equity-backed IPOs account for m...
Situations funded <ul><li>Existing company and managers seeking growth capital </li></ul><ul><li>MBOs (Management buyouts)...
(1)  How is a VC funding structured? <ul><li>Key terms of a VC financing: </li></ul><ul><li>Debt and equity </li></ul><ul>...
(2) Final Structure -ownership Managers/ Owners Private Equity Fund Newco 1 Target Co Newco 2 Debt Providers
(3) Final Structure - Financing Owners/ Managers Private Equity Fund Newco 1 Newco 2 Target Co Debt Providers prefs mezzan...
(1)  How is a VC funding structured? <ul><li>Competing interests of debt/equity providers: </li></ul><ul><ul><li>Costs of ...
(2) Final Structure -ownership <ul><li>Participation </li></ul><ul><li>Ratchets for performance </li></ul><ul><li>Liquidat...
(3) Final Structure - Financing <ul><li>Tiers of lending </li></ul><ul><li>Leverage </li></ul><ul><li>Cost </li></ul><ul><...
Exit Strategies <ul><li>IPO </li></ul><ul><li>M&A / Trade Sale </li></ul><ul><li>Dual – track strategies (IPO and Trade Sa...
Exit Strategies <ul><li>Consolidations  </li></ul><ul><li>Secondary buy-outs / re-caps </li></ul><ul><li>Break-up and dist...
Why IPO? <ul><li>Clean exit? But lock-ins </li></ul><ul><li>Higher valuations? </li></ul><ul><li>Access capital markets </...
IPOs – Conflicts and Alignment <ul><li>Pre-IPO restructuring </li></ul><ul><li>Conflicts and tensions on commercial terms ...
<ul><li>Structure: </li></ul><ul><ul><li>% free float </li></ul></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Underw...
Board restructuring pre-IPO – Legal Issues <ul><li>Corporate Governance for listed companies </li></ul><ul><ul><li>The Com...
Markets Choice <ul><li>Official List or AIM: </li></ul><ul><ul><li>Depends on the company’s size, development stage, growt...
Key distinctions between AIM and the Main Market No prior shareholder approval for Class 1 transactions. Approval only req...
Field Fisher Waterhouse LLP <ul><li>Full service European law firm  </li></ul><ul><li>AIM Lawyer of the Year – 2007 </li><...
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  1. 1. Negotiating with venture capitalists – guidance for pre-IPO companies Alex Woodfield Partner Head of CIS Business Team www.ffw.com/CIS Date June 2008
  2. 2. Table of content <ul><li>Venture Capital: </li></ul><ul><ul><li>Buyouts </li></ul></ul><ul><ul><li>How is a venture capital funding structured? </li></ul></ul><ul><li>Exit strategies and structures </li></ul><ul><ul><li>Why IPO? </li></ul></ul><ul><ul><li>IPOs – Conflicts and Alignment </li></ul></ul><ul><ul><li>Board restructuring pre-IPO – Legal Issues </li></ul></ul><ul><ul><li>Markets choice </li></ul></ul>
  3. 3. Cass Business School Report <ul><li>Key findings include: </li></ul><ul><li>private equity-backed IPOs outperform other IPOs by more than 9% one year after their public listing </li></ul><ul><li>they also outperform the FTSE ALL Share Index by 20% over the same period </li></ul><ul><li>venture capital-backed IPOs typically spend up to five times as much on R&D as their non private equity-backed counterparts at the time of flotation </li></ul><ul><li>typical private equity-backed IPOs spend twice as much on capital expenditure in relation to total assets as non private equity-backed companies. </li></ul>* The report was commissioned jointly by the British Private Equity and Venture Capital Association and the London Stock Exchange, and covers the period January 1995 to December 2006 , available from www.bvca.co.uk
  4. 4. Cass Business School Report <ul><li>The report also shows that: </li></ul><ul><li>private equity-backed IPOs account for more than 50% of the total number of companies in the consumer services, industrials, healthcare and technology sectors in the Main market. The majority of venture capital-backed IPOs are in the health and technology sectors </li></ul><ul><li>out of 1,735 IPOs on the London Stock Exchange Main and AIM markets between 1995 and 2006, private equity-backed IPOs accounted for 22% of the number of IPOs and 27% – or £18.9 billion – of the total sum raised </li></ul><ul><li>the average length of time a private equity firm invests in a company before flotation is 4.5 years for venture-capital-backed IPOs and 3.8 years for PE-backed IPOs </li></ul><ul><li>IPOs in the Main Market perform relatively better than their AIM counterparts </li></ul><ul><li>the PE firm typically holds an average of 33.2% in venture capital-backed IPOs and 59.2% in PE-backed IPOs just before flotation. Immediately after flotation, these holdings are at  19.8% and 28.5% respectively, showing the continuing involvement that the original investors have in the business. </li></ul>* The report was commissioned jointly by the British Private Equity and Venture Capital Association and the London Stock Exchange, and covers the period January 1995 to December 2006 , available from www.bvca.co.uk
  5. 5. Situations funded <ul><li>Existing company and managers seeking growth capital </li></ul><ul><li>MBOs (Management buyouts) </li></ul><ul><li>MBIs (Management buy-ins) </li></ul><ul><li>BIMBOs (Buy-in/management buyouts) </li></ul><ul><li>IBOs (Institutional buyouts) </li></ul>
  6. 6. (1) How is a VC funding structured? <ul><li>Key terms of a VC financing: </li></ul><ul><li>Debt and equity </li></ul><ul><li>High leverage </li></ul><ul><li>Cost of financing </li></ul><ul><li>Tax rate on investment </li></ul><ul><li>Tiers of lending </li></ul><ul><li>Liquidation preference on Exit (based on ongoing investment) </li></ul><ul><li>Board representation </li></ul>New Managers Private Equity Fund Existing Owners FundingTarget
  7. 7. (2) Final Structure -ownership Managers/ Owners Private Equity Fund Newco 1 Target Co Newco 2 Debt Providers
  8. 8. (3) Final Structure - Financing Owners/ Managers Private Equity Fund Newco 1 Newco 2 Target Co Debt Providers prefs mezzanine
  9. 9. (1) How is a VC funding structured? <ul><li>Competing interests of debt/equity providers: </li></ul><ul><ul><li>Costs of funding </li></ul></ul><ul><ul><li>Tax Structuring </li></ul></ul><ul><ul><li>Priority of security/tiers of lending </li></ul></ul><ul><li>Board Representation </li></ul><ul><li>Leverage </li></ul>New Managers Private Equity Fund Existing Owners Funding Target
  10. 10. (2) Final Structure -ownership <ul><li>Participation </li></ul><ul><li>Ratchets for performance </li></ul><ul><li>Liquidation Preferences </li></ul>Managers/ Owners Private Equity Fund Newco 1 Target Co Newco 2 Debt Providers
  11. 11. (3) Final Structure - Financing <ul><li>Tiers of lending </li></ul><ul><li>Leverage </li></ul><ul><li>Cost </li></ul><ul><li>Deductible Payments </li></ul>Owners/ Managers Private Equity Fund Newco 1 Newco 2 Target Co Debt Providers prefs mezzanine
  12. 12. Exit Strategies <ul><li>IPO </li></ul><ul><li>M&A / Trade Sale </li></ul><ul><li>Dual – track strategies (IPO and Trade Sale) </li></ul><ul><li>But, traditional exits are not the only options </li></ul>
  13. 13. Exit Strategies <ul><li>Consolidations </li></ul><ul><li>Secondary buy-outs / re-caps </li></ul><ul><li>Break-up and distribution of proceeds </li></ul><ul><li>Redemption of shares </li></ul><ul><li>Portfolio sale (VC1 to VC2) </li></ul><ul><li>Portfolio merger (intra-portfolio) </li></ul><ul><li>Insolvent liquidation </li></ul><ul><li>Accelerated IPOs </li></ul>
  14. 14. Why IPO? <ul><li>Clean exit? But lock-ins </li></ul><ul><li>Higher valuations? </li></ul><ul><li>Access capital markets </li></ul><ul><li>Liquidity </li></ul><ul><li>Prestige </li></ul><ul><li>Use of paper for M&A post-IPO </li></ul><ul><li>But: cost, compliance, publicity, board restructuring </li></ul>
  15. 15. IPOs – Conflicts and Alignment <ul><li>Pre-IPO restructuring </li></ul><ul><li>Conflicts and tensions on commercial terms and ongoing roles and obligations: </li></ul><ul><ul><li>Founders </li></ul></ul><ul><ul><li>Directors </li></ul></ul><ul><ul><li>Early investors (seed, angels, early-stage VCs) </li></ul></ul><ul><ul><li>Late-stage VCs </li></ul></ul><ul><ul><li>Scientists </li></ul></ul><ul><ul><li>Option-holders </li></ul></ul><ul><li>Timing: </li></ul><ul><ul><li>Pressure for exits on any terms? </li></ul></ul><ul><ul><li>Market issues </li></ul></ul><ul><ul><li>Role of investment banks </li></ul></ul><ul><ul><li>Impact on option holders </li></ul></ul>
  16. 16. <ul><li>Structure: </li></ul><ul><ul><li>% free float </li></ul></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Underwriting </li></ul></ul><ul><ul><li>Lock-ins </li></ul></ul><ul><ul><li>Irrevocables </li></ul></ul><ul><li>Terms of preference shares </li></ul><ul><ul><li>Conversion </li></ul></ul><ul><ul><li>Liquidation preferences </li></ul></ul><ul><ul><li>Consents / vetoes </li></ul></ul><ul><li>Reps and warranties </li></ul>
  17. 17. Board restructuring pre-IPO – Legal Issues <ul><li>Corporate Governance for listed companies </li></ul><ul><ul><li>The Combined Code </li></ul></ul><ul><ul><li>When does it apply? </li></ul></ul><ul><ul><li>Official List or AIM </li></ul></ul><ul><li>Non-executives </li></ul><ul><li>Directors’ interests </li></ul><ul><li>Incentives </li></ul><ul><ul><li>The Model Code </li></ul></ul><ul><li>Committees </li></ul>
  18. 18. Markets Choice <ul><li>Official List or AIM: </li></ul><ul><ul><li>Depends on the company’s size, development stage, growth strategy, capital requirements </li></ul></ul><ul><ul><li>Different admission criteria </li></ul></ul><ul><ul><li>Different regulatory regime </li></ul></ul><ul><ul><li>Different listing options available </li></ul></ul>
  19. 19. Key distinctions between AIM and the Main Market No prior shareholder approval for Class 1 transactions. Approval only required for reverse takeovers. Prior shareholder approval required for Class 1 acquisitions and disposals. (25% on class tests) Nominated adviser required at all times. Sponsors needed for certain transactions. Admission documents not pre-vetted by Exchange or UKLA. Pre-vetting of admission documents by the UKLA. No minimum shares to be in public hands. Minimum 25% shares in public hands. No trading record requirement. Normally three year trading record required. No minimum market capitalisation. Minimum market capitalisation of £700,000. AIM Main Market
  20. 20. Field Fisher Waterhouse LLP <ul><li>Full service European law firm </li></ul><ul><li>AIM Lawyer of the Year – 2007 </li></ul><ul><li>Equity Markets Practice provides advice to a strong client base of fully listed and AIM listed companies as well as a wide range of investment banks, brokers and nominated advisers </li></ul><ul><li>Dedicated CIS Business Team - active involvement in the CIS for major Russian, Ukrainian, Kazakh and other CIS businesses </li></ul><ul><li>Advising CIS listed companies </li></ul>If you would like more information about Field Fisher Waterhouse LLP CIS Business Team, please follow the link: www.ffw.com/cis or alternatively contact Alex Woodfield or Arik Aslanyan on +44 (0) 207 861 4000

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