IPO readiness workshop Power your...

IPO readiness workshopPower your potentialNovember 6, 2018

Bay Area IPO readiness workshopCopyright © 2018 Deloitte Development LLC. All rights reserved. 2

WelcomeBrian GoncherManaging DirectorDeloitte Services [email protected]+1 408 704 4553

mailto:[email protected]


Agenda

Time Topic Presenter

7:45–8:15 Registration and breakfast

8:15–8:30 Welcome Brian Goncher, Managing Director, Deloitte Services LP

8:30–9:00 State of the capital markets Lucy Wang, Executive Director, J.P. Morgan

9:00–9:30 JOBS Act and changes in the IPO market

Jorge del Calvo, Partner, Pillsbury Winthrop Shaw PittmanHoward Lee, Managing Partner, Founders Equity PartnersLucy Wang, Executive Director, J.P. Morgan

9:30–10:00 Getting ready for an exit Barrett Daniels, Partner, Deloitte & Touche LLP

10:00–10:15 Break

10:15–10:45 Managing M&A and tax issues Marc Holzer, Partner, Deloitte & Touche LLPGordon Perl, Managing Director, Deloitte Tax LLP

10:45–11:15 Building a high-powered team and board

Chris Faralli, Managing Director, Russell Reynolds Associates

11:15–11:45 Successful IPOs Duston Williams, CFO, Nutanixto be interviewed byPrevin Waas, Partner, Deloitte & Touche LLP


About this presentation

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

As used in this document, “Deloitte” means Deloitte & Touche LLP, which provides audit, assurance, and non-attest accounting services as well as M&A services and Deloitte Tax LLP, which provides tax services. These entities are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

http://www.deloitte.com/us/about


For inquiries related to the State of the Capital Markets segment, please contact Lucy Wang: [email protected].


Pillsbury Winthrop Shaw Pittman LLP

IPO Process: Recent Developments and Trends

Changes Affecting IPO Issuers

EGC threshold: Annual gross revenue less than $1.07B in last completed fiscal year (adjusted up from $1.0B)

Confidential submission of registration statement: Now permitted for all IPO issuers, not just EGCs Initial filing and all amendments must be publicly filed at

least 15 days before roadshow

7 | IPO Process: Recent Developments and Trends

Changes Affecting IPO Issuers (cont’d)

Financial Statement Requirements: Confidential Submission: IPO issuers may omit annual and

interim financial information for certain periods otherwise required by Reg S-X at time of confidential submission, provided issuer reasonably believes the information will not be required to be included at the time of the contemplated offering (EGCs) or at the time of the first public filing (non-EGCs).

Public Filing: Interim financial statements that will be included in a historical period that issuer reasonably believes will be required to be included at the time of the offering may not be omitted from a filed registration statement.


Additional JOBS Act Benefits for EGCs

Testing the Waters: EGCs may make oral or written offers to QIBS and institutional accredited investors before or after initial filing of registration statement

Exempt from auditor attestation requirements of Section 404(b) of SOX

Extended phase-in for new or revised accounting standards


Additional JOBS Act Benefits for EGCs (cont’d)

Reduced disclosure requirements, particularly regarding executive compensation:

Required only for top 3 executives (principal executive officer plus two other most highly compensated who earned more than $100K in last fiscal year), rather than top 5

Only required to include Summary Compensation Table, Outstanding Equity Awards at Fiscal Year-End Table and Director Compensation Table

Must include termination and CIC disclosure and material terms of retirement plans

No requirement for CD&A, Say on Pay/Frequency, Pay versus Performance or Pay Ratio disclosure

One year of compensation disclosure required for S-1, same as current rules (but going forward, only need 2 years instead of current 3 year requirement)


Updated Disclosure Requirements

General: Removed disclosure requirements where similar disclosures are required elsewhere, e.g., MD&A or notes to financial statements

Disclosure re following items no longer required in Business section: Financial information regarding segments (segment disclosure still

required in notes to financial statements and MD&A, if applicable) Amounts spent on R&D, though disclosure of material trends

related to R&D still required in MD&A Financial information by geographic area, risks associated with

foreign operations and segment dependence on foreign operations Seasonality (required in annual reports but deleted for interim

reports)


Updated Disclosure Requirements (cont’d)

Other (some may not be applicable to Form S-1) Market for Issuer’s Common Equity: Disclose trading symbol in lieu of high

and low sale prices Options, Warrants, etc.: Eliminated requirement to disclose amount of

common stock subject to outstanding options, warrants or convertible securities where common stock has no established public trading market

Dividends: Eliminated requirement to disclose information re cash dividends Where You Can Find More Information: Only required to disclose availability of

SEC filings at SEC website and SEC internet address ((no longer need to reference address and phone number of SEC Public Reference Room)

Exhibits: Various exhibit requirements removed (Items 601(b)(11), (12), (19), (22) and (26) (computation of per share earnings and ratios, report to security holders, report re maters submitted to vote of shareholders and invitation for competitive bids)


SEC proposal to simplify public company disclosure requirements (comment period ended January 2018)

Streamline CTR process: May omit or redact from exhibits immaterial confidential information that would cause competitive harm if disclosed No need to submit unredacted copy and formal CTR in advance

but must provide if requested and may do so on supplemental basis using Rule 83

May omit personally identifiable information without CTR Exhibits: Permit omission of schedules and similar attachments to exhibits

(unless they contain material information not otherwise disclosed) May instead include list briefly identifying contents of omitted

schedules and must furnish supplementally upon request


SEC Proposal (cont’d)

Description of Property: Required only to extent property is material and may be provided on collective basis if appropriate Risk Factors: Move to standalone Item 105 and

eliminate example risk factors to encourage issuers to tailor risk discussion Other changes (some may not be applicable to

EGC/IPO issuers): outside front cover of prospectus, MD&A, proxy and 10-K disclosure items, two-year lookback requirement for material contracts, undertakings, etc.)


IPO Trends

SEC comment letters Decrease in average number of comments (generally between 20-30

comments on initial submission, split roughly 50/50 between legal and accounting)

Comments have focused on accounting matters (e.g., cheap stock and revenue recognition), and back-up support for claims as to market opportunity, market share, and competitive position, etc.

Note: number and substance of comments varies by industry, e.g., back-up support and revenue recognition comments more common for issuers in technology industry than in other industries

Time from initial submission to pricing has decreased over past couple years (approx. 4.5 months versus 7 months)

Continued increase in multiple class structures, particularly for technology issuers


Thank you


17CONFIDENTIAL 17CONFIDENTIAL

Changes in the IPO Market and Venture Secondary Opportunities

Howard LeeFounders Equity Partners

November 2018

18CONFIDENTIAL

IPO Activity 2019

• While money raised in 2019 IPOs is expected to exceed 2000, expect fewer IPOs

• 2019 likely to be dominated by fewer but larger IPO offerings (Palantir, Uber, Lyft, et al)

• No correlation between IPO Proceeds and S&P since 2009

Sources: Michael Ewens and Joan Farre-Mensa, “The Deregulation of the Private Equity Markets and the Decline in IPOs” Sept 2018,https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3017610 and Judith Elsea, “An Unintended Consequence of Capital Efficient Companies,” LinkedIn https://www.linkedin.com/pulse/unintended-consequence-capital-efficient-companies-judith-elsea/

• Not necessarily end of the bull market

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3017610

https://www.linkedin.com/pulse/unintended-consequence-capital-efficient-companies-judith-elsea/

19CONFIDENTIAL

IPO Activity 2019

• Key driver for increased money raised : median revenue at IPO is higher than in 2000


• Aggregation of IPO proceeds to fewer “Unicorn” deals



20CONFIDENTIAL

Time to IPO

• Large amounts of very late stage capital will continue to allow companies to delay public offerings

• Median age of VC-backed companies that are a potential fit for secondaries is ~ 4 years

• Demand for partial liquidity driven by life events (divorce, tuition, house purchase, etc) which are expected to be independent of the market

• Anticipate increased secondary activity as companies and boards see partial liquidity as a retention tool for key employees

21CONFIDENTIAL

Secondary Activity in 2019

• The % equity ownership by founders has increased dramatically compared to 2000


• These two trends of longer time to IPO and more equity held by founders will lead to increased secondary activity in 2019



22CONFIDENTIAL

Best Practices – The Right Secondary Partner

• Secondary Investor as a trusted partner

• Should be previously known by the company and investors as long-term investors with experience in both primary and secondary investments: Silicon Valley “insider”

• Understand the concerns faced by VC-backed companies and know how to partner with them to provide not only a partial liquidity solution for employees, but also a seamless solution that contributes to the company’s long-term goals and ultimate success

• Ability to make investment decisions quickly certainty to close

• Value-added partners with interests aligned with the existing investors and management, with the same long-term view and emphasis on trusted relationships

• Extensive relationships in investment and entrepreneurial communities

23CONFIDENTIAL

Best Practices

• The direct venture secondary investor (buyer) will work closely with management and the board to manage a smooth process for the company, buyer, and seller

• Different structures that are suitable for all stakeholders and are the most likely to have a minimal impact on the company’s 409A valuation. Ease of implementation and simplicity of structure are key

• Direct purchase agreement: directly enter into a stock purchase agreement for the purchase and sale of a fixed number of shares at a fixed price

• Series FF shares: Common shares created at inception that automatically convert into shares of the company’s most recently issued series of preferred stock

• Structured Liquidity Programs (SLPs) : Enable employees to sell a percentage of their vested holdings (stock and/or options) to a single buyer or group of buyers to address employee retention issues for companies in competitive labor markets

[ 24 ]CONFIDENTIAL

A Unique Secondary Direct Fund

A unique secondary direct fund that is second to none. www.fepfund.com

Thank You

[email protected]


Preparing for an IPOReady to unlock your potential?Barrett DanielsPartner, IPO Center of Excellence LeaderAccounting & Reporting AdvisoryDeloitte & Touche [email protected]+1 415 783 7897



Preparing for an IPO

IPO readiness

IPO execution

• IPO audits

• F-pages

• S-1

• Quarterization

• SEC filings, timeline

Life as a public company

Topics


IPO readiness

IPO readiness is not just a finance thing. It involves tax, investor relations, human resources, corporate governance, etc.

IPO readiness is a luxury.

IPO reality is often a chaotic scramble.

IPO timelines can be impossibly bad. The goal is to be ready when the callcomes.


IPO readiness

Inc.’s expected IPOs for 2015

Four years later, half are still private.

US News most anticipated IPOs of 2017

Two years later, seven of 10 are still private.

Anticipated 2017 IPOsAnticipated 2015 IPOs Actual IPO


IPO readiness

“IPO windows are fickle. Be ready when the call comes.”

IPO windows

• Point – you never really know

• IPO windows are fickle

• Right now – the IPO window is very open

• Tomorrow – maybe not

• Be ready – whenever the call comes, it will feel like a surprise


IPO readiness

Finance

Put together a strong team

Streamline the close

Get your audits in order

Clean up your cap table

Starting thinking about Qs

Collaborate with the right advisors

Assume the current timeline is wrong, because it isValuations


IPO execution

S-1

SEC filings and commentsIPO audits

QuarterizationF-pages

IPO execution


IPO executionAudits

• IPO audits are generally significantly more diligent

− Risk profile dramatically increases

− AICPA vs. PCAOB

− Be prepared for more:

◦ Auditors

◦ Questions

◦ Memos

◦ Tie-outs

◦ Checklists

• Better financials (see F-page discussion)

• Additional valuation (409a) and tax analyses


IPO executionF-pages

• SEC-ready F-pages

− No more cutting corners

− Stock compensation, business combinations, debt, derivatives, equity, etc.

• EPS and segment disclosures

− These can be challenging for private companies

• Interim stub periods

• Rule 3-05 financials for significant acquisitions

• Stock (reverse) splits and conversions – eventually


IPO executionF-pages

• Emerging growth company (EGC)

− Created by JOBS Act in 2012

− Less than:

◦ $1B in revenue

◦ $1B in non-convertible debt

◦ $700M public float

• EGC benefits

− Reduced financial statement requirements

◦ FAST Act

− Delayed compliance for new GAAP pronouncements


IPO executionS-1

• F-pages, discussed previously

• MD&A

− Components of income statement

− Results of operations

− Critical accounting policies

− Cash flow, contractual obligations, etc.

− Quarters

• S-1 front – summary and selected data, dilution, capitalization

• EGC – confidential filings and reduced CD&A


IPO executionQuarterization

• Quarters are not required, but often requested

− A lot of work – always underestimated

− Less for biotechs, etc., but prior year quarters will be needed as publiccompany and stub periods could be required depending on IPO timing

• Quarterization

− SAS 100 reviews – different than management reports

− Information required dependent upon level of comfort required

◦ SAS 100 lite or heavy

◦ Excel financials vs. full 10-Q-like financials


IPO executionSEC filings and comments

• Ensure F-pages and S-1 are SEC-ready (see F-page and S-1 discussions)

• Staying on schedule is hard, especially for finance

• Drafting and printer sessions

• Navigating SEC comment letter process

− Revenue recognition

− Stock compensation (cheap stock)

− EPS

− Contingencies

− Derivatives

− Fair value

− MD&A and more


IPO executionSEC filings and comments: Sample timeline under JOBS Act

IPO PREP SEC REVIEW PRICE, ROAD, IPO

Address final SEC comments, cheap stock update, stock split, public

company readiness, pricing, trading

15 days required between 1st public filing and road show

Assumes eight-day road showAssumes three days to price and close

SEP 15First

public filing

OCT 1Road show

OCT 11InitialPublic

Offering

Close audit, F-pages, MD&A, revenue recognition, segment analysis, EPS, non-GAAP / key metrics, quarterization, and cheap stock

Drafting sessions

Approx. 1-2 months between org. meeting and initial confidential submission

MAY 6Org.

meeting

JUN10Initial

submission

Approx. 30 days to receive initial comments from SEC (best case, 25 days)Approx. 2 weeks to respond to initial comments from SEC (best case, 1 week)Subsequent comments received approx. 2 weeks (best case, 10 days)Common to have 3 rounds with SEC (best case, 2 rounds) with each getting progressively quicker (i.e. 1st round 30 days, 2nd round 2 weeks, 3rd round 1 week, etc.)

Finalize quarters, update numbers, cheap stock update, address SEC comments

Q1 number update (FAST Act)

Test the waters


IPO executionSEC filings and comments: Timeline examples

Example 1

• Initially filed in 2015

• Completed in August 2018

Example 2

• Initially filed in June 2018

• Completed in September 2018

Timing can vary dramatically.


Life as a public companyS-1

• Life as a public company can be hard

• 10-Qs and 10-Ks, related reviews and audits

• Rigid calendar can feel like the process never stops

• SOX

− EGC deferral

− Eliminate attestation report on internal controls

Questions?

IPO readiness workshopCopyright © 2016 Deloitte Development LLC. All rights reserved. 42

Break


M&A exit readinessNavigating the process

Marc HolzerPartnerDeloitte & Touche [email protected]+1 415 783 5496



M&A lifecycle

Transaction planning

Pre-sale due

diligence

Projected synergies

and valuation

Marketing transaction Management

presentation Negotiations

Transaction closing

preparation

Government and

corporate approvals

Due diligence

Indications of interest or letters of

intentExecuted purchase

agreement

Closing—transfer of ownership

Term sheet

Approval to go to market

Pre-sale planning

Preparation for sale

Buyer selection and due diligence

Closing the transaction

Buyer identification

and qualification

I

Our focus today

Letter of Intent Valuations generally move only one way… DOWN!

Primary role of company management is To Create and Preserve Shareholder Value:• Keep end goal in mind: IPO, M&A exit, and recapitalization.• M&A transactions are often opportunistic.• Seller readiness/organization builds confidence.• Diligence materials need to be organized, consistent, complete, and thoughtful.

II III IV


What are the buyer’s priorities and their focus?Best practice no. 1—Stand in buyer’s shoes

PEI Buyer Focus Strategic Buyer Focus

• Disciplined approach

• EBITDA and cash flows

• Revenue growth potential

• Cash taxes focus

• Debt capacity

• Stand-alone future (most often)

• Three- to five-year view (often)

• Varied approach

• Net income and EPS accretion/dilution

• Cash and Effective Tax Rate focus

• Synergies and potential cost savings

• Looking to integrate operations with existing business

• Long-term/permanent view

Approach the transaction from the buyer’s perspective


Best practice no. 2—Understanding your value drivers

Example value drivers

• Revenue

• EBITDA/Cash flow

• Products

• Intellectual Property

• Technology and R&D

• People/Quality of Target Management

• Synergies & Economies of Scale

• Geographical/Industry Footprint

• Channels of Distribution

• Consolidation

• Diversification

• Customers

PEI value drivers Strategic value drivers

• Cash Flow • Varies: Net Income, IP, Technology, Customers, Talent, Scale, Footprint, etc.

Craft your story based upon what the buyer cares about


Perpetual data roomBest practice no. 3—Be prepared with the data room

• Multifunctional: Financial, Tax, Sales, Product, Vendor, Legal, Intellectual Property, HR, and Environmental

• Update regularly

• Prepopulate with key data (but do not give away the house)

• Consistency & accuracy

• Organization builds confidence with buyer

• Existence can preserve confidentiality of the deal from seller staff

Begin developing diligence materials and populating the data room early


Best practice no. 4—Know your enemies to the process

• Time

− Set timelines and execute against them

− Anticipate

− Line up advisors early

• Surprises

− Know your exposures before the buyers do

− Know mitigating factors

• Letter of Intent Valuation

− Generally moves only one way through diligence… down!

Understand your internal bandwidth for dedication to the diligence process

M&A process and common issuesBuyer’s focus and financial and tax common issues


Buyer's diligence focus areas: Financial and tax

• Availability of information—at least three years of financial data and all the open years for tax (generally three to four years)

• Consistency of information—does data contradict itself?• Ability to anticipate issues• Mitigating factors for exposures or issues that may arise during diligence

Key Overriding Themes

Key Overriding Themes

• Quality of Earnings• Forecasts & Projections• Working Capital & Balance Sheet• Commitments, Contingencies, and Exposures• Tax Compliance, IRS Audits, and other Tax Audits• Tax Attributes (e.g., Net Operating Losses and R&D Credits)


Quality of earnings

• Future cash flow indicators:− EBITDA, Operating Income, Net Income, Cash Flows from Operations, Revenue, Free Cash Flow,

backlog, and others− Multiplier makes small differences more relevant− Buyer may reconcile/calculate EBITDA differently—be ready

• Quality of earning adjustments− Anticipate all potential adjustments and have support− Be prepared for buyer diligence adjustments and have mitigating story

Common Valuation Metrics

Key Areas

• Repeatability of cash flows• Identification of non-cash, non-operating, and non-recurring items• Pro forma cost savings (synergies, etc.)• GAAP exceptions• Revenue recognition and impact of deferred revenue• Definition of tax for purposes of EBITDA (taxes that may be included)


Forecasts and projections

Key Concerns in M&A

• Significant time in performing diligence is on historical results; however, forecast/projected future performance is a fundamental value driver.

• Expectation to bridge historical results with forecasts− Do the key themes/trends in historicals line up to forecasts?

Key Areas

• Customer retention and quality• Ability to maintain margins• Backlog• Product pipeline• Synergies• Model assumptions (growth, working capital, etc.)• Capex and other capital requirements of business (has capex been deferred?)• Tax structure drives projected tax costs/savings


Working capital

Key Concerns in M&A

• Buyer’s focus: Working Capital impact on future cash flow, setting a “peg” as high as possible (purchase price adjustment).

• Seller’s focus: Potential impact on purchase price. Seller prefers ”ordinary course” provision to provide flexibility (but be ready to support your position on a “peg”).

Key Areas

• Valuation and quality of current assets (collectability of A/R, inventory valuation, etc.)• Completeness of current liabilities (cutoff, accruals, etc.)• Seasonality and trends• Non-operating balances within working capital (e.g., accrued interest expense, related party loans,

taxes) • Deferred revenue• Types of Taxes to include in Working Capital (generally exclude income taxes from Working Capital and

address separately in the agreement)


• On and off balance sheet potential future cash outflows.• Buyers try to treat as debt items when possible. Undisclosed commitment could be treated as reduction

of purchase price.

Commitments and contingencies

Key Concerns in M&A

Key Areas

• Change in control payments (golden parachute payments, severance, etc.)• Employment contracts (gross-up provisions for change in control payments)• Lease terms• Debt (early prepayment penalties)• IP/royalty commitments• Guarantees & purchase commitments• Legal exposures• Environmental exposures• Tax contingencies


Tax exposures and compliance

• Tax returns timely filed (income, sales, property, payroll, escheat, value-added tax, etc.)• Tax exposures and reserves

Key Concerns in M&A

Key Areas

• Sales and use taxes− Nexus (physical presence within a state)− Sources of revenue subject to tax

• Transfer pricing• Permanent establishment (physical presence within a country)• Withholding tax• Outstanding intercompany balances• Interest deduction limitations• Tax audit history


Tax attributes

• Validity of tax attributes (e.g., net operating losses and R&D credits)• Prior limitations of tax attributes due to an ownership change

Key Concerns in M&A

Key Areas

• Expiring attributes—NOLs and R&D credits can be carried forward for up to 20 years for federal tax purposes.

• Ability to use tax attributes after a sale or a round of equity financing may be limited under Section 382.− Generally triggered if there has been a cumulative change in the company’s equity ownership of more

than 50% within a three-year period− Other tax provisions may limit the ability to carryback losses and offset the income of other entities

• Supporting documentation for net operating losses and R&D credits.

M&A process and common issuesDeal structure andother key tax issues


Types of transactions: The basics

M&A Transaction

Sale of Stock

Asset Sale Stock

Consideration

Cash Consideration

Other

338(h)(10)


Types of transactions

Asset Deal

Buyer Implications Seller Implications

Asset basis stepped up to purchase price Two levels of taxation to corporate seller; portion of gain on assets may be taxed as ordinary income

Amortization of intangibles and goodwill over 15 years

Corporate shell remains

Limited historic liabilities are inherited Retains primary responsibility for historic liabilities

Renegotiation of contracts required

Tax attributes (NOLs, credits) do not carry over Tax attributes can be used to shelter gain on asset sale


Types of transactions (cont.)


Roll over existing basis in assets One level of tax; gain generally taxed at capital gain rates

Inherit all historic liabilities, including unrecorded and contingent

Generally relieved of historic liabilities

Cash consideration: stock acquired has basis equalto purchase price

Cash consideration: gain on sale is taxable

Stock consideration: if certain requirements are met, transaction can be a tax-free reorganization, and stock acquired has carryover basis.

Stock consideration: if certain requirements are met, transaction is tax free to seller to extent stock is received (non-stock consideration is generally taxable).

Tax attributes (NOLs, credits) generally carryover Tax attributes go to buyer; additional consideration could be received for value of tax attributes

Stock Deal


Types of transactions (cont.)


Asset basis stepped up to fair market value Gain on deemed asset sale is taxed, but depending on the facts, may not increase the amount of tax incurred.

Inherit all historic (non income tax) liabilities,including unrecorded and contingent

Generally relieved of historic (non income tax) liabilities

Will generally compensate seller/make seller whole for any increase in tax resulting from election

Increase in tax basis may increase the sales price of the business (beyond the incremental tax cost incurred).

Tax attributes (NOLs, credits) generally lost Tax attributes from Target company no longer available

Stock Deal: 338(h)(10)


Circular 230 disclaimer notice

• Any tax advice included in this presentation was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency;

• This tax advice was written to support the promotion of the matter addressed by the presentation; and

• The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.


Tax IPO strategyThe readiness approach

Gordon PerlManaging DirectorDeloitte Tax [email protected]+1 408 704 4839



• Tax structure• Tax compliance• Ongoing compliance, governance, and

reporting• Tax function• Tax operations

$

Tax

As you move through the IPO readiness phases, the below key areas and activities will need to be addressed and focused on throughout the process of going public.

The IPO readiness approach

Tax services


Are you ready for an IPO?

Considerations:

Has the founders and initial investors considered the tax implications of the IPO?

Have you planned for what the effective tax rate could look like post IPO?

Do you have adequate reporting systems, and processes in place?

Have you considered IPO impact to your tax attributes?

Do your corporate governance policies and practices comply with the requirements necessary for a public company?

What could a tax auditor learn from your financial statements that are now public?

Leading practices:

Tax planning for the founders: Individual income tax planning for the IPO event

Structure review: Plan pre-IPO for international structure including any potential restructuring.

Tax department assessment: Plan for the responsibilities and size of the tax department post IPO, SOX Documentation

382 analysis and R&D study: Preserve tax attributes that would be important disclosure for tax footnote and DTA.

Indirect taxes: Sales and Use Tax nexus analysis, VAT considerations.

162(m) compliance: Appropriate approval and disclosure for performance based awards

Global rewards: Understanding tax laws on global rewards and stock benefits

Transfer pricing documentation: Compliance with governmental laws on documenting transfer pricing.

Tax services

Questions?


Circular 230 disclaimer notice

• Any tax advice included in this presentation was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed by any governmental taxing authority or agency;

• This tax advice was written to support the promotion of the matter addressed by the presentation; and

• The taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Private and Confidential

Building an Impactful Finance Team

November 2018

Chris FaralliRussell Reynolds Associates

69Private and Confidential

Financial Leadership Insights

Private and Confidential 70

Top trends defining today’s CFOs

1. RRA survey of 32 best-in-class US public-company CFOs, Nov. 2016. 2. RRA analysis of CFOs at 25 largest companies in major markets. | 1706GLV4R

BIG DATA, AIAND ROBOTICS

ROLE EXPANSION INDUSTRY EXPERIENCE BUSINESS ENABLEMENT DIVERSITY AND INCLUSION

Increased sophistication of AI and robotics will eventually replace routine finance tasks; some CFOs are preempting the inevitable, redefining traditional finance roles and placing more focus on tech-enabled solutions.

34% of best-in-class CFOs1

say big data, AI and robotics will fundamentally transform finance in the near future

With an increased focus on succession planning, many companies, other than the very largest, have broadened the CFO role well beyond the core finance function and collapsing the traditional COO role into the CFO role.

About 30% of major US companies have a COO, down from 48% in 2000

To minimize risk and ramp-up time, companies seek CFOs with experience in either or both their specific industry segment or business stage, further constraining an already limited CFO talent market.

In the US, number of externally hired CFOs with industry experience is increasing approximately 9% a year

Advent of shared services has pushed finance to more proactive business partners and produce insights that drive business performance. With increased complexity in many global businesses, the ability to influence and communicate with a clear, concise and transparent manner is critical.

Armed with a slew of new studies showing the positive impact diversity has on the bottom line, CEOs and boards are anxious to improve gender and ethnic diversity among their most senior leaders

On average, less than 10% of CFOs at the world’s largest companies are women

DELIVERING RESULTS GLOBAL EXPERIENCE WAR FOR TALENT CONTINUOUS TRANSFORMATION

TALENT BENCH

CFO must have a total return mentality and drive well-thought out, multi-year capital allocation strategies to balance the competing demands of reinvestment, M&A, dividends, share buy-back programs, etc.

As businesses enter new markets, complexity soars—and with it the demand for finance executives who can navigate and organize this complexity.

41% of top-tier CFOs from around the world have worked in another country

Sitting CFOs, especially those at public companies, are in high demand, but average CFO tenure continues to decline. Net result is CFOs, especially female CFOs, can be very discerning about new opportunities.

As companies experiment with organizational models that favor agility and expertise over structure and hierarchy, continuous transformation is the new normal.

Greater CEO succession attention has created more attention on CFO succession, so that many companies are actively seeking to build out strong CFO bench talent.


Core competencies of best-in-class CFOs

Emphasis on shareholder value, profitability and competitive advantage Leverages knowledge of market and competitors to advance the business Translates hidden opportunities into results Consistently evaluates decisions in terms of impact on the business Poses questions that provoke new and different thinking about opportunities

Attracts, inspires, manages and develops top talent Sets an example of high performance, endurance and energy Instills a robust and highly disciplined culture

Possesses an extensive and distinctive track record—makes things happen Sets and achieves ambitious targets for his or her area of responsibility Operates business units at the highest level of efficiency Goes beyond conventional performance benchmarks Consistently demonstrates decisiveness

Develops innovative strategies to address future business scenarios Successfully anticipates market trends, leveraging knowledge to advance business Considers all functions with strategy; values cross-functional contributions

Builds and sustains relationships at multiple levels in the organization Communicates with passion, energy and intensity; inspires team to exceed expectations Leverages existing and builds new relationships with all key stakeholders

Setting Strategy & Vision

Business Acumen

Leadership & Team Building

Building Relationships

Execution


Chief Financial Officer for the IPO

Responsibility:Full financial oversight for the organization; recruitment of the team; serve as a strategic thought partner to CEO/Founder in lead the business

Impact to IPO:Project manage the transaction, establish controls, banker selection and interaction, primary spokesperson to the market

Ideal timing of hire:

Company specific, often times driven by strength of legacy management team, growth rate of organization, and preferences of the Board

Trends in Role

• Preference for IPO experience, though most companies prioritize public company experience first

• Experience leading or participating in investor relations increasingly in demand

• Team development and mentorship critical

Talent Pools

• Sitting CFOs at both public and private companies (with previous public company experience)

• Divisional CFOs• Corporate Controllers• Investment Bankers


The IPO – What Changes for a CFO and team?

1. Public company reporting and accounting requirements2. Investment Community engagement & communication3. The need for more accurate and sophisticated forecasting


Building the Team

Not surprisingly, CFOs prioritize:

1. Corporate Controller/Chief Accounting Officer


Controls & Accounting

Responsibility:Ensure timely and accurate reporting of financial results; oversee revenue recognition

Impact to IPO:Sophisticate the controls environment and reporting capabilities; ensure compliance with accounting standards; data and financial quality


One year prior to transaction (or more) to ensure “no surprises”

Trends in Role

• Demand for accounting leaders with proven business acumen; experience in other functions preferable

• “Transformation” responsibilities of systems and processes falling to these leaders

Talent Pools

• Sitting Corporate Controller/CAO – with public company experience!

• Assistant Controller / Director of Accounting –with public company experience!

• Public Accounting


Prioritized Hires


1. Corporate Controller/Chief Accounting officer2. Head of Investor Relations


Investor Relations

Responsibility:Develop and manage company messaging; serve as primary spokesperson to investors and analysts; lead shareholder targeting initiatives

Impact to IPO:Craft investment thesis and content; establish relationships with shareholders and analysts; manage process and subsequent earnings


Prior to the IPO, with enough time to influence strategic messaging, participate on the roadshow, and learn the business

Trends in Role

• Increased expectations on financial acumen, understanding of business, and analytical ability for IR

• IROs increasingly “earning a seat at the table,” presenting at conferences, and engaging the market

• Proactivity critical

Talent Pools

• Sitting IRO in a public company• #2 on a well-regarded IR team – with

considerable market exposure• Sell-side equity research• Buy-side


Prioritized Hires


1. Corporate Controller/Chief Accounting officer2. Head of Investor Relations3. Head of FP&A


FP&A

Responsibility:Strategic planning, budgeting, forecasting, and financial analysis activities. Monitoring KPIs; developing corporate metrics and management reporting

Impact to IPO:Accurate and reliable forecasting become critical in a public company environment, given need to set guidance and manage growth and spend


As early as possible, even if it may feel like an “over-investment” at the time

Trends in Role

• FP&A becoming the critical skill-set for many first-time CFOs, leading to increased demand for world class leaders in the function

• Operational orientation; ability to work with the business and not in a vacuum

Talent Pools

• FP&A teams• Divisional finance leaders• “Academy” financial management programs• Investment banking


Additional Learnings & Advice from CFOs

1. Leverage the Board2. Hold to public company standards – early!3. Invest in systems and people4. Audit considerations5. Share data thoughtfully; consider long-term implications6. Post IPO – rely on team for balance and time management7. Own the IPO process


Diversity Matters


The business impact of diversity and inclusion is clear

Grow the bottom

line

Attract and retain the

best talent

Ensure a sustainable

workforce

Stay competitive

Capture new

opportunity

Creating investor

value

Companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians. Companies in the top quartile for gender diversity are 15% more likely to have financial returns above their respective national industry medians. (McKinsey) Companies with the most women board directors outperformed those with the least on return on sales by 16%

and return on invested capital by 26%. (Catalyst)

When employees feel part of a diverse and inclusive workforce, the turnover diminishes by up to 20% and employee effort increases 12%. (CEB)

Employees with the highest level of engagement perform 20% better and are 87% less likely to leave the organization. (Diversity Inc.)

By the year 2050, there will no longer be a clear racial or ethnic majority in America. And over the next 40 years, immigrants and their children will account for 83% of our country’s workforce growth. (Center for American Progress)

80% Improvement in business performance among firms with high diversity levels (Deloitte)

Work teams which have high levels of inclusion outperform others by 8:1. (Deloitte)

70% Higher likelihood of capturing a new market among firms with high gender and ethnic diversity (HBR)

Employees in a ‘speak up’ culture are 3.5 times as likely to contribute their full innovative potential. (HBR)

Investors would have been better off, on average, investing in companies with women on their management boards than in those without. (Credit Suisse)


Where Are You In Your Diversity and Inclusion Journey?

Best Practice D&I = Performance + Innovation + New Product & Market Entry + The Best Talent

Align Attract Select Develop Retain

Is D&I part of your employer brand?

What are you currently doing to attract diverse and inclusive talent?

How effective are these methods?

Where are you losing diverse talent in the recruitment journey and why?

Where are the opportunities to be more visible to diverse groups and / or cast a wider net?

Is D&I important to your business strategy?

What are your D&I goals?

Is D&I promoted from the top down and the bottom up in your organization?

Where is diversity currently represented in your organization?

Where are the opportunities to engage more diverse talent?

How open and inclusive is your organization’s culture?

Are your selection methods automatically excluding certain groups?

Do you feel that unconscious bias is holding you back?

Do you insist on a diverse slate of candidates?

Do you ensure your candidates are being assessed by a diverse selection panel?

Do your HR policy and practice encourage a transparent, fair selection process?

Do you have dedicated development programs for diverse talent?

Do you have mentors and resource groups?

Do you ensure diverse talent is exposed to broad network within the organization?

Is D&I development part of your leadership training curriculum?

Does your onboarding plan include D&I training?

Do you connect diverse groups with cross-cultural mentors?

Does your culture truly embrace diversity in thought process, work style, and perspectives?

Do your HR policies allow for flexibility?

Do you encourage networking and exposure through initiatives such as affinity groups and reverse mentoring?

Is your career development plan inclusive?

Why are you losing diverse talent?


Chris Faralli

101 California StreetSuite 4200San Francisco, CA 94111-5829Phone: +1-415-352-3300 [email protected]

Based in San Francisco, Chris joined the firm in 2008 and is a member of our Corporate Officers Sector and Financial Officers Practice. Chris regularly advises clients on the recruitment of senior corporate and divisional CFOs, controllers, treasurers and heads of internal audit and tax. He also leads the firm’s Investor Relations Practice. Chris’ work spans multiple industries, but the majority of his client portfolio is focused around technology companies, financial services institutions, healthcare, and nonprofit organizations.

Professional Experience Chris leads public and private company Chief Financial Officer searches. He recently recruited the CFO for a private global technology services business as well as a public enterprise software company and public optoelectronic products manufacturer.

Chris recently completed Investor Relations leadership searches for a Fortune 10 company, a global industrial leader, and a global semiconductors leader. He also worked closely with a global, diversified metals and mining company on its Head of Investor Relations search.

Chris’ work spans multiple industries, but the majority of his client portfolio is focused around technology companies, technology-enabled industrials, financial services institutions, healthcare, and nonprofit organizations.

Education Chris received his BA in Political Science from The University of Pennsylvania.

Professional Affiliation Chris is a member of the National Investor Relations Institute (NIRI).


Duston WilliamsCFONutanix

Previn WaasPartnerDeloitte & Touche LLP

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