Planning for Exit Events

Planning for Exit Events Mick Bain

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What to do now? Isn’t it too early?

Focus on Certain Cost-Effective Things Too Often Not Done or Not Done Well – Select proper form of entity

– Select experienced advisors

– Equity allocation

– Tax, tax, tax

– Observe formalities

– Protect intellectual property

– Watch for problematic contract provisions

– Conduct employee checks

– Risk management


Carefully Select Entity

Tax concerns

Limited liability

Keep things simple

Typically a “C” corporation

Take care with respect to board composition

Clarity as to equity ownership at all times

Example: closely-held company with no records


Properly Maintain the Corporate Form

Observe corporate formalities – Have good records

– Hold regular board meetings; keep minutes

Properly authorize stock issuances and major contracts


Properly Maintain the Corporate Form

Adopt policies in key areas such as – trade secrets

– non-discrimination

– corporate communications/confidentiality

– harassment

– securities compliance


Provide for Proper Equity Allocation/ Incentives Capital constrained; need to use equity to attract and retain

Consider how to allocate property

Avoid the “woodwork”

Need compliant equity plans – tax reasons


Provide for Proper Equity Allocation/ Incentives Watch out for “hidden” tax and accounting problems

– 409A

– 123R

– 83(b) elections

– Cheap stock


Carefully Allocate Ownership

Non-accredited investors and the securities laws

Don’t use non-registered capital raisers

Proper records are a must

Offer letters/oral promises

A shareholders agreement can help


Provide for Good Title to Intellectual Property Robust form of agreement for inventions and NDA

Make sure everyone signs it

Need advice from a labor/IP lawyer here


Provide for Good Title to Intellectual Property Take reasonable steps to protect your trade secrets, such as

sensibly limiting access

Perform trademark search early


Check Out Prospective Employees Carefully Background checks

Are they subject to a non-compete?

Are they subject to a non-disclosure?


Review Tax Treatment for Employees and Plans Carefully Cultural inclinations vs. IRS positions

Use of independent contractors

Be sure all filings are being made, e.g., forms 5500


Risk Management

Central person, often CFO

Any complaint, threat or demand should be centrally filed

Disaster recovery plan – off-site storage and back up; consider IT infrastructure

Insurance e.g., D&O, casualty, etc.

Privacy Laws

Document Retention

Policies – whistle blower, etc.


Be Vigilant in the “Big” Contract Context

Unfavorable provisions can have significant impact

Exclusive distribution arrangements

Consents required in a change of control

Use of the term “affiliate” in non-compete or a license

Right of first offer in public offerings

CONFIDENTIAL TREATMENT


Carefully Allocate Ownership

Watch out for conflicting promises, e.g., registration rights agreements, rofr’s, etc.

Make sure promises terminate at the right time, e.g., guarantees for founders, ability to nominate to board, etc.

Problems with big/controlling shareholders


Select Advisors Carefully Lawyer, at a minimum, should provide good form files to save

you money and time – Need SEC and M&A experience

– Ask about experience dealing with liquidity events

– Can perform audits to minimize future problems


Select Advisors Carefully Public accountants critical if IPO is an option

– Need SEC and M&A experience

– Can help avoid big problems in areas such as revenue recognition and earnings charges

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Planning for Exit Events

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