Author Archive
Is Strong IPO Market Momentum Benefiting VC Backed Companies?
PwC just released its US IPO Watch which tracks IPO activity on US stock exchanges. According to PwC, “…the surge of activity in the fourth quarter of 2010 confirms the IPO market has recovered from the doldrums of 2008 and 2009.” (more…)
Does 409A kill the IPO Bump?
Several Silicon Valley bloggers have been pondering the question of whether 409A rules are leading to the end of the IPO Bump. The IPO Bump refers to the difference in the exercise price of stock option grants and the offering price of an IPO. In particular, several companies, such as Facebook, have had trades in privately held common stock reported on sites such as Sharespost.com. For instance as one blogger, Don Dodge, put it “The effect of the 409A requirement, and the new movement of private investors buying vested stock options from employees, is that pre-IPO valuations, and thus the employee stock option prices are very close to the expected IPO price. So, how will there be a big bump in the stock price at IPO?” See Will Facebook have an IPO Bounce? Has 409A Changed the Game? for his full posting.
ASC 718 (formerly FAS 123R) and IRC 409A Valuation Challenges Aren’t Just For Pre-IPO Companies
The attorneys at Latham & Watkins and the SEC Institute have written an interesting and detailed monograph on cheap stock valuation issues for companies that are preparing for an IPO: Cheap Stock: An IPO Survival Guide.
Here is a link to the document: cheap stock whitepaper
While the focus of the document is on SEC compliance challenges for pre-IPO companies, a key risk it identifies concerns tax compliance with IRC 409A. Additionally, in our view, the recommendations it puts forth also apply to companies contemplating an M&A exit. (more…)
Hidden In Plain Sight – How Differences in Preferred Equity Rights Impact the Value of a Company and its Common Shares
Part One – The Impact on Amounts Distributed Upon Exit
Many venture-capital backed technology companies raise capital in multiple rounds of preferred equity financings (Series A, Series B, Series C, etc). At each round, the lead investor estimates the value of the company and submits a term sheet that sets forth the proposed size, pricing, and terms of the new series of preferred stock.
Clearly, the company’s board of directors must evaluate whether the proposed transaction provides sufficient capital to fund the company’s business plan. The board will also consider the adequacy of the proposed price and the other terms and conditions.
Typically, the new investor quotes a post-money valuation (or pre-money valuation) which assumes that every share of equity is equal in value to the proposed price of the new preferred shares. However, as I have blogged before, this “VC valuation” may be very different than the “fair market value” estimated for 409A compliance purposes (or “fair value” as that term is used by the accounting profession). In particular, the VC valuation does not reflect the impact of differences in liquidation preferences and participation rights. (more…)
M&A Agony and Ecstasy for Early Stage Technology Companies: Purchase Price Allocation
When I speak with the CFOs of our clients about the acquisitions they are making, it reminds me of the title of that old 1965 Charlton Heston flick, The Agony and the Ecstasy .
Many of our clients are venture capital backed technology companies that have been growing successfully and have commenced making acquisitions. On the one hand, they feel the ecstasy of getting their deals done. On the other hand, they must confront the agony of fair value accounting. (more…)
Preferred Equity Basics Part Three
There Is A Reason Why Preferred Equity Is Called Preferred:
Preferred Equity’s Big Impact on the Value of Common Stock
The terms and conditions of preferred equity issued to venture capitalists may seem arcane, but the impact on the value of common stock (and stock options) is significant! While these impacts are important for tax and accounting compliance, more significantly, they determine the amount of money stockholders will receive when the long hoped-for “exit” is finally realized.
This is the third in a series of posts meant to help explain many of the typical terms for preferred equity we see in our daily valuation work. This analysis will provide some guidance on the impact to the holders of common shares. (There can be legal issues which also come into play, especially in contested matters. However, this blog is not legal advice, and the specific facts and circumstances for any particular case will differ from the examples described herein). (more…)
Preferred Equity Basics Part 2
There Is A Reason Why Preferred Equity is Called Preferred:
Preferred Equity Has a Big Impact on the Value of Common Stock
The terms and conditions on preferred equity frequently issued to venture capitalists may seem arcane, but the impact on the value of common stock (and stock options) is significant! These impacts are important for tax and accounting compliance. But more importantly, they determine the amount of money shareholders will receive when the long hoped-for “exit” is finally realized. (more…)
Preferred Equity Basics Part 1
There Is A Reason Why Preferred Equity is Called Preferred:
Preferred Equity Has a Big Impact on the Value of Common Stock
The terms and conditions on preferred equity frequently issued to venture capitalists may seem arcane, but the impact on the value of common stock (and stock options) is significant! These impacts are important for 409A compliance. But more importantly, they determine the amount of money employees may receive when the long hoped-for “exit” is finally realized.
This is the first in a series of posts meant to help explain many of the typical forms of preferred equity we see. We will provide guidance on the impact to the holders of common shares. (more…)
IRS 409A: Another Inconvenient Tax
Here at The Brenner Group, we often get comments from our friends in the venture capital and entrepreneurial communities about the burden of 409A compliance and the closely related 123R accounting rules for stock option expensing.
The comments range from expressions of pain and dismay to colorful language that is not suitable for reading at the family dinner table. (more…)
5 Classic and Costly Start-up Mistakes
Ivan Gaviria, an attorney at Gunderson Dettmer’s Silicon Valley office, recently posted 5 classic (and costly) mistakes startups make with their people.
What made #5 on his list? Ignoring Internal Revenue Code 409A. (more…)
