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03/12/2018
Key Insights: From Capital Raising to Exits Academy Session 2 – Term Sheets 101
CohnReznick and McCarter & English have collaborated to co-host a year-long series for technology companies, From Capital Raising to Exits Academy. The program covers financing alternatives, term sheets, public offerings, strategic alliances, and monetization events, and features experts in the accounting, legal, and venture capital fields, as well as successful growth company representatives who share their personal insights of the process.
From Capital Raising to Exits Academy – Term Sheets 101 featured a well-informed panel that included Shaune Scutellaro of CohnReznick, Joe Allegra of Edison Partners, Doug Clinton of Loup Ventures, and moderator Dave Sorin of McCarter & English. Marc Betesh, President of KBA Lease Services, LLC was the evening’s featured client.
Session 2 – Term Sheets 101
Betesh started the discussion by sharing his experience working with lawyers and accountants, giving helpful tips, such as the great impact that market forces have on whether a technology company is financeable from a venture capital perspective.
The panelists shared their respective insights and views on the provisions most important to them when they are thinking about a transaction from both a company and investor perspective.
Company perspective
- Founders should make sure their accounting and legal teams are considering the tax implications associated with alternative deal structures.
- It’s imperative to recruit experienced accounting and legal teams early in the process; they must consider and understand both current needs, goals of the respective parties, and potential exit strategies.
- Choose your investment partner wisely.
- When founders can select among value-add, high quality investors, one consideration is the stage of the venture fund itself.
- Keep time in mind. It’s very rare for a founding team to start a company and in two months raise venture capital; it is usually at least a year-long process.
- When you’re thinking about your company’s equity incentive strategy, consider various forms of equity incentive from options (incentive/non-qualified), equity grants, and stock appreciation rights. The considerations must include related tax effects.
- The people you want on your board are people who have done what you are trying to do or have skill sets complementary or supplementary to those of the management team and other members of the board.
Investor perspective
- Investors at or near the very end of their fund’s term seek a monetization event earlier than the founders may desire.
- The biggest red flag for subsequent investors is if sellers or earlier investors are selling or seeking to sell more than five percent.
- When representing investors, demand registration rights triggerable after a date certain are preferred; when representing the company, however, demand registration rights should not triggerable by the investors until six months after the company goes public.
- From entity formation on, always consider the proper form of entity. For example, is qualified small business stock a critical part of the analysis? Knowing this and being on the same page with your accountants and lawyers can lead to a greater rate of return on investment.
The next session in this series, From Capital Raising to Exits Academy: Advanced Financing 301 and Monetization 405, will take place on Tuesday, April 17, 2018 at CohnReznick’s New York office. Topics to be discussed include Reg A+, IPOs, strategic partnering, and M&A. The panel, consisting of Jeremy Swan of CohnReznick, Barry Osherow of Level Equity, Andrew Perlman of XpresSpa Group and Dave Sorin of McCarter & English, will discuss how to prepare, what challenges to consider, and what to avoid in this stage of the process.
Subject matter expertise
Asael Meir
CPA, Partner - Technology Industry Leader
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This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.