Prepping for Exit - a Founder’s Perspective on M&A - Issue #34

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Prepping for Exit - a Founder’s Perspective on M&A

Is it time to consider selling your startup? Looking for a founder’s perspective? Dave Parker is a five-time founder with >10 exits. This reading list is practical advice on prepping for exit, pricing and the process.

This is part three in the series of breaking down the DD checklist and current M&A news. You can find an M&A Due Diligence Checklist here.
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Current M&A News
Black And Female Founders Land 30% Of The Largest US Early Stage Rounds In 2021 – Crunchbase News
Why some edtech investors could finally be set for a post-pandemic payday | PitchBook
Due Diligence Breakdown - Part 3
Financials Statements
From a DD perspective, you’ll need to have your most recent financial statements up to date early in the process. You’ll also need to have all financial statements back to either your incorporation date or the date of first revenue.
If you don’t have a financial manager on your team, please look for an outsourced CFO. The cost is worth the benefits. You will need to have you monthly financials completed or closed, so all transactions from prior month can be reconciled. Sorry if that means you need to get those expense reports finished finally (not sorry). Depending on your stage, you may or may not have audited financials. You won’t be asked to do a last minute audit, it will take too much time.
Securities Issuances
All capital invested into the company needs to be documented. From the early, no terms loans from family and friends to the stack of convertible debt documents that may have accrued overtime with different CAP amounts. The buyer/investor will want to understand the “Preference Stack” or how each investor class will be treated at payout based on the documents and timing of prior rounds. This will also effect you as a common shareholder, because you will be paid last after the preferred shares.
Each round of funding has a unique set of documents and terms. You’ll place all executed copies of each investor documents in the data room. If your corporate hygiene is good here, awesome, this will be easy.
You’ll use either a CAP Table management software product or your lawyer to do the initial Exit Waterfall calculations. An Exit Waterfall allows you to calculate who will get paid what amount based on class of stock, timing of investment (Cap Amount) and stock class preferences.
You can do some of the initial (and unofficial) calculations yourself. But keep in mind that you’re going to have your law firm do the final calculations and opine on the payouts. It’s what you pay the law firm to do. Your initial communications with investors should be general communications on the terms, not specific to their investment, that comes after the law firm review.
Final Waterfall changes will vary right up to closing. Closing costs are paid first and that will cause the Waterfall to fluctuate until the end.
Employee /Service Provider Agreements
You’ll need a copy of all of your employee and service provider agreement. This includes all employees that have ever touched the code base, even in the early day. This should include PIIA, Proprietary Information and Invention Assignment agreement. Which assigns all work done for hire to the company (this included the founders).
Service provider agreements should also be in this folder. Professional services for legal and accounting as well as consultants—including advisors for a sale transaction. This folder can often look “lite” and you may need to go back to Docusign history folder to get all of the consulting agreements.
Remember, keeping up on corporate hygiene isn’t fun, but it’s better to do it an hour a month than to have to pay your lawyer to “find document” like Board Minutes.
Book Release - Trajectory: Startup April 13
Dave’s new book Trajectory: Startup—Ideation to Product/Market Fit launches today 4/13. For more information go here or directly to Amazon.
Techstars Startup Digest Prepping for Exit - a Founder’s Perspective on M&A is curated by:
Dave Parker Dave Parker
dave.parker@startupdigestmail.com
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