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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
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- 3. …but first, what’son 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
- 4. What’s Market inthe Market?
- 5. IPO Industry Breakdown(as of December 2014) IPO investment firm Renaissance Capital (www.renaissancecapital.com)
- 9. What Are Trendsin the Market?
- 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
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- 14. The New DigitalLanguage • “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
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- 18. • Big Data/Analytics • Native Buzzwords • Omnichannel/Cross-Device/Media Agnostic • Real-Time • Programmatic • Real Time Bidding
- 19. Show Me theMoney
- 20. 10 Social MediaStatistics 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/
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- 22. What are myfinancing options? 1. Merger or Acquisition 2. Initial Public Offering (IPO) 3. Reverse Merger 3. Secondary Private Market Sales
- 23. How Can IPrepare?
- 24. No matter whatthe 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 pricedrivers • Diversity of key employees • Reputation of company as great workplace • Growth potential • Company • Industry • Proprietary product or procedure
- 26. 2. Know yourshareholders • Voting participation • Communication • Impact on shareholders
- 27. 3. Keep keyemployees 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 keyemployees 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 keyemployees 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 acredible 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 • Inthe 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 • Copyrightprotects 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 • Protectionfor 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 fordue diligence process • Minute books • General corporate matters • Material contracts and agreements • Virtual dataroom • “Paper everything”
- 35. 6. Formalize goodcorporate governance practices • Board composition • Organizational documents (i.e., charter, bylaws, etc.) • Capitalization (i.e., authorized shares, stock split required) • IPO only: • Add anti-takeover mechanisms • Sarbanes-Oxley Act of 2002 • SEC rules • Stock exchange rules (e.g., NASDAQ or NYSE) • Form an audit committee
- 36. 7. Finance functionis 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 robustreporting 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 executivecompensation, 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 reportingobligations (IPO Only) • Annual Report on Form 10-K • Quarterly Report on Form 10-Q • Proxy Materials • Form 8-K • Statements of Beneficial Ownership
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- 41. 1. Focus oncreating value for customers, not money for yourself 2. Competition is a good thing: validation 3. Keep your burn low
- 42. Social Media WhitePaper – 3rd Edition www.reedsmith.com/networkinterference
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Editor's Notes
- #6 Talk about convergence of healthcare, social and technology – wearables, etc.
- #11 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.
- #12 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.
- #13 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
- #14 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.
- #15 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?
- #16 15
- #17 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.
- #18 How is this proliferation of digital and social media platforms impacting our advertising and the tech landscape in general?
- #19 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.
- #20 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
- #23 “Liquidity event”
- #31 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
- #36 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
- #37 Auditor: will be engaged early in IPO process specifically to assist with comfort letter; due diligence
- #39 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
- #41 RANDOM TIDBITS:
- #43 3rd Edition of our social media white paper. Securities factor – covers every practice area including securities law, advertising, litigation, etc.