The Exit – Preparing for a Sale of the Company
In the salad days of the dot-com boom, exiting your internet startup through an IPO inside of three years almost became the expectation of any company with “.com” in the name. In these more sober web2.0 days, the path to exit has become significantly longer and more tumultuous. And despite the recent uptick in technology IPOs in the last few years, the most common path to exit for technology startups is typically via an acquisition by a larger company. As you’ve labored away, building your technology startup from scratch over the last several years, you likely haven’t given much thought to what an acquisition would look like, and what you can do now to help make the transaction go through smoothly. Below, you’ll find six things you can do now to make yourself attractive to potential acquirers, and to help ensure a smooth closing of the sale of your company.
- Clean up Shop. Often times (and especially if you have used outside counsel sparingly), there are loose ends that need to be tied before a sale of the company can occur. Acquirers will want to see, among other things, that all of your capitalization records are complete, that all agreements have been fully-executed, that all material transactions have been properly documented, that complete minutes of board and shareholder meetings have been kept, that proper board and shareholder resolutions have been passed to approve all transactions requiring board and shareholder approval, that all taxes have been paid, proper insurance levels have been maintained, and that the company has valid title to all of its assets. It’s always a good idea to stay on top of keeping good records, even if you’re not actively preparing for a sale, as having your house in order will make any due diligence process (whether for a financing or an M&A event) much quicker.
- Clean up the Cap Table. Make sure your cap table is up to date, and go through it line by line to ensure that every issuance of securities (common stock, preferred stock, stock options, warrants, convertible notes, etc.) has been properly approved and documented. If you keep your cap table in Excel, go through it to make sure all formulas are correct, and that your numbers for total shares outstanding and total fully-diluted capitalization are accurate.
- Prepare for Due Diligence. Hand-in-hand with cleaning up your corporate records is organizing them in preparation for due diligence. If you have raised money from institutional investors (i.e., venture capital firms) you have likely had to deal with extensive due diligence in the past, and hopefully processes you have used at those times will come in handy now. If your company hasn’t yet gone through extensive due diligence, now is the time to make sure your minute books are accurate and up to date, and that material contracts, employee/service provider agreements, intellectual property information, and other key documents have been catalogued for easy retrieval and review.
- Update and Clean Up Financials. If you have outside investors, you have likely been preparing and delivering financials at least quarterly, but consider whether your financials are in compliance with GAAP and whether they are audited. Consider what other things you can do to clean up the company’s balance sheet. If there is some glaring debt or other oddity that gets a lot of questions from potential investors, think about whether you can put more resources towards clearing it, and making the company look more attractive to potential acquirers. Few things will turn a potential acquirer off faster than seeing a balance sheet that shows all kinds of ugly arrangements on the debt side.
- Organize Intellectual Property Matters. Now is also a good time to double check all of your company’s intellectual property matters. Make sure all necessary filings and registrations have been made, check that all employees and service providers have executed confidentiality and invention assignment agreements, and confirm that your company owns or has valid rights to all of the intellectual property used in the business (whether it’s direct ownership or a valid license). If you have any intellectual property loose ends to tie up, it’s best to do that before you start serious discussions with potential acquirers.
- Understand Other Agreements. If you have raised money from investors and/or if you have entered into certain strategic transactions, a sale of the company may trigger certain rights or require certain approvals. Check the protective provisions in your certificate/articles of incorporation and other agreements with your investors, and check any strategic agreements entered into with third parties (including your lease and other material contracts), as you may need to get specific approvals in order to enter into an agreement for the sale of the Company. It is good to have a handle on what mechanical hoops you’ll need to jump through in order to close.
Although you may not be actively seeking a sale of your company yet, you can begin implementing these 6 steps now to ensure that your technology startup is always presenting itself in its best light to potential investors and acquirers.