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…)
Have We Hit Bottom? Reading Tea Leaves in Bankruptcy Statistics
Not quite the bottom, but getting closer.
Bankruptcy filings rose 20 percent in the 12-month period ending June 30, 2010, according to statistics released by the Administrative Office of the U.S. Courts.
This is generally hailed as bad news; at most the Economist is invoking Schumepeterian creative destruction as necessary evil before new growth can blossom. (more…)
September 17, 2010 at 1:03 pm Gunther Hofmann Leave a comment
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…)
Demystifying Valuations for Venture Backed Companies
There are many occasions for a valuation in the life of a start-up company: preparing for the sought-after financing from a premier VC, the highly anticipated sale to a strategic partner at a hefty premium, or even pricing the initial public offering. (more…)
There’s Often Drama in Changing CEOs in a Young Company
As I look back on issues involving changing a CEO, I always pause and sometimes even get a chuckle.
How many times does an entrepreneur with a great idea believe they are the only one suited to run their new venture? Usually, they believe they need to be the CEO. However, even if they are the well suited to lead a venture in the beginning, they are not the one to drive to higher levels beyond development. When this expansion phase occurs, the board usually has the difficult task of letting the entrepreneur/CEO know that it is time for him to take a new role in the company.
Often this communication does not go well, and the end result is that the entrepreneur cannot understand the message and leaves the company. (more…)
The Case for Being Either the Pursuer or the Pursued
Earlier this year I wrote two pieces on expectations and thoughts related to why being a business buyer or a business seller were again beginning to make sense. I also discussed some general wisdom as to how to be either a good buyer or a good seller. As referenced in those pieces, an early year survey of more than 800 senior corporate executives worldwide conducted by Ernst & Young Transaction Advisory Services and the Economist Intelligence Unit provided a strongly optimistic view of expected corporate merger and acquisition activity through the 2010 year. (more…)
Only 3 Things Can Go Wrong in VC-backed Businesses
In my many years of working with companies and seeing what works and what doesn’t, I have come to realize that every challenge faced by a venture funded technology company falls into one of only three buckets: (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…)
Palm Reading: HP Extends the Life Line
On April 28, HP announced the $1.2 billion acquisition of Palm for $5.70 per share.
The acquisition will provide discussion fodder for months if not years to come, and we will see if HP can turn Palm into a serious competitor for the iPhones, Androids and Blackberries of the world.
In this post, I will stay clear of any strategic speculation, but rather focus on the process of the transaction. (more…)
The Purchaser Representative – the Shortcut to “Sophistication”
It is good to be sophisticated!
This is true in general, but can become a prerequisite in connection with securities laws[i].
Many of our clients are venture-backed technology companies. Most of the capital that they raise comes from accredited investors, if not institutional venture capital funds. Some of their money may come from unaccredited investors, and virtually all venture-backed companies issue stock options to employees that are sooner or later exercised. Most of the employees of course are not accredited investors. An annual income of at least $200 thousand or net worth of at least $1.0 million renders you an accredited investor[ii] . (more…)
