This is a comprehensive set of answers to many of the typical questions investors have regarding private equity. The answers are roughly organized into sections along these lines: General questions/background, legal questions, performance questions, due diligence questions, and exit questions. That said, there is overlap between the answers. The author’s originally published this article for VC Experts, while most of the information is current (and all of it is informative) there have been some changes with the Dodd Frank Act. In particular this is true of the information related to the investment adviser registration. We will add some updated information to that section in the near future. Read More
Effects of the Financing Environment and Intangibles
The supply of and demand for capital play an important but measured role in the valuation a company is likely to command. Capital is most restricted or expensive and valuations under greatest pressure during and following a period involving a sudden market correction or a downturn in the economy. None of us has a crystal ball for future economic growth; pricing is therefore more a function of the current or most recent nature of the marketplace.
During periods of economic softening or market correction, the public markets, as well as the market for mergers and acquisitions, are in flux and directly affect venture investors’ valuation analyses. Venture investors look to the prices established in the marketplace to put a prospective exit value on their investments. The values investors are willing to pay in a public offering and the values corporations are willing to pay to make acquisitions come under pressure and typically decline during a market correction or economic downturn. There is consequential downward pressure on valuations during these periods and, at times, a disconnect between a company’s expectations with respect to valuation and those of investors. As a result, the feeling in the marketplace is a tightening of sources of capital.
The following post consists of a comprehensive “Equity Joint Venture” Checklist prepared by Gene Barton, a Principal in the Boston office of Fish & Richardson P.C. The purpose of this checklist is to ensure that you cover all of your bases when considering a Joint Venture to ensure there are no surprises. It originally appeared in VC Experts ‘Intellectual Property and Joint Ventures’ Reference book.
In this second segment of a two-part series (see Part I – “Answering Common Legal Questions When Starting Your Startup”), ACE Portal’s General Counsel, Jason Behrens, and Evan Bienstock, a partner with Mintz Levin, discuss several key terms and considerations that are applicable to start-up capital raises.
For anyone who has just formed a new company, is beginning to consider capital raising for their company or is interested in start-up financing generally, this interview is particularly informative.
VC Experts has teamed up with Aspatore Books to reprint some of the more salient sections of Alex Wilmerding’s Deal Terms, The Finer Points of Venture Capital Deal Structures, Valuations, Term Sheets, Stock Options and Getting Deals Done. This excerpt features an interview with a leading legal expert in the private equity arena, James M. Crane, who has served as counsel at the Boston law firm of Testa, Hurwitz & Thibeault, LLP.
Jim’s perspective is representative of the candid, forthright demeanor that entrepreneurs and venture professionals look for in counsel. And it’s a fascinating look at what a seasoned lawyer thinks you should look out for term sheet. Read More
Employee Incentive Plans for Privately-Held Companies
Despite the recent improvement in capital markets activity, many small, privately-held technology companies continue to face reduced valuations and highly dilutive financings, frequently referred to as “down rounds.” These financings can create difficulties for retention of management and other key employees who were attracted to the company in large part for the potential upside of the option or stock ownership program.
When down rounds are implemented, the investors can acquire a significant percentage of the company at valuations that are lower than the valuations used for prior financing rounds. Lower valuations mean lower preferred stock values for the preferred stock issued in the down round, and as preferred stock values drop significantly, common stock values also drop, including the value of common stock options held by employees.
Consequently, reduced valuations and “down round” financings frequently cause two results: (i) substantial dilution of the common stock ownership of the company and (ii) the devaluation of the common stock, particularly in view of the increased aggregate liquidation preference of the preferred stock that comes before the common stock. The result is a company with an increasingly larger percentage being held by the holders of the preferred stock and with common stock that can be relatively worthless and unlikely to see any proceeds in the event of an acquisition in the foreseeable future.
Watch Peter Williams, the ACE Founder and CEO, talk with Michael Nobes, the CEO of Sixbridges Capital, about why a fund administrator is important and what services they provide. This is a great look at the behind-the-scenes considerations required for fund managers.
In this interview ACE Portal’s CEO, Peter Williams, sits down with David Pritchard, Principal at Aequitas Advisors to talk about deal structuring in the Private Markets.
In this episode of Insights, ACE Portal’s Co-Founder and CFO, Carl Torrillo, discusses deal terms and conditions with Ross Barrett, Co-Founder and CEO of VC Experts. The interview drills down into areas of interest for private market investors.
Specific topics covered include:
- Anti-dilution provisions
- Valuation considerations
- Maintaining management incentives (the law of unintended consequences)
- Dividend rates (accrued or not)
- Covenants and Board Rights
In our travels, we’ve talked with many folks who work at startups and two common threads have emerged:
- Startup employees don’t have sufficient avenues for liquidity, and
- Startup employees don’t have a clear understanding of how they are paid.
The former is a primary reason why EquityZen does what it does and the latter is the topic of this post. We will break down the basics of incentive compensation at startups, survey tax considerations, and identify key points to raise with employers during compensation negotiations.