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TECH EXITS: GETTING REWARDED FOR YOUR BLOOD, SWEAT AND TEARS
Paul Chen, Head of Corporate Asia, DLA Piper
Andy Tam, Associate, DLA Piper 15 December 2015
Strategic Options (not exhaustive list)
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IPO M&A Licensing
Valuation IPO Multiples M&A Multiples N/A
Liquidity Gradual Immediate Gradual
Cost: Time Money
High High
Moderate
High
Low - Moderate
Low
Upside Potential/ Downside Risk
Significant Limited Moderate to Significant
Liabilities Securities law Shareholder
derivative suits
Indemnification Shareholder
derivative suits
Breach of License
Global Tech Exit Activities
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Recent Tech IPOs – Exchange & Proceeds
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NASDAQ; US$ 685 million
New York; US$ 201 million
New York; US$ 460 million
New York; US$ 841 million
NASDAQ; US$ 306 million New York; US$ 245 million
NASDAQ; US$ 1.8 billion
Hong Kong; US$ 207 million Hong Kong; US$ 196 million
Sample Tech Exits
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Sequence of Events
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VC and/or entrepreneur choose between going public or selling
the firm to an acquirer
Time 0 Time 1 Time 2
Product market Exit competition takes decision place Cash flows are realized Valuation expectations increase
Strategic Considerations
IPO Preparation of financial statements
Public disclosure and ongoing compliance matters
Market windows
Impact of share performance post-IPO
M&A Identifying Buyers
Negotiation leverage
True exit? Seller indemnification and lack of liquidity for shares/options
Impact of “busted deal”
Concurrent Exit Tracks and Timing Versus Key Business Milestones Cornerstone Pre-IPO investors
Impact on company resources, morale and stakeholder expectations
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Timing & Logistics – IPO (US example)
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IPO process can vary in timeframe, usually 4-6 months
Sample timeline:
Timing & Logistics – M&A
Timeline Inherently Less Structured than IPO Preparation Time Sale Process – 4-6 weeks – VDR set up; Seller's draft agreements;
bidding procedures; teaser Dual-Track – Piggyback on IPO work
Negotiation Weeks to months
Consummation – Days to Months, Drivers include: Due Diligence / Regulatory Issues Stockholder Approval Requirements
Cash deals Stock deals
Key consents, etc.
Generally conducive to overlap or parallel tracking with IPO
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Listing Requirements (Selected)
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Hong Kong NASDAQ Capital Market
(Equity Standard)
NASDAQ Global Market
(Equity Standard) Main Board GEM
Audited track record
3 years of audited accounts 2 years of audited accounts
2 years of operating history
Finance Profit test: Profit for the most recent year: ≥ HK$20 million Aggregate profit for 2 preceding years: ≥ HK$ 30 million Market cap: ≥ HK$200 million
Cashflow for 2 preceding years: ≥ HK$20 million Market cap at the time of listing: ≥ HK$100 million
Income N/A Minimum Publicly Held Shares 1 million shares Minimum Bid Price US$4/share Minimum Stockholders’ Equity US$5 million
Income N/A Minimum Publicly Held Shares 1.1 million shares Minimum Bid Price US$4/share Minimum Stockholders’ Equity US$30 million
Market Cap/ Revenue/ Cashflow test: Market cap: ≥ HK$ 2 billion Revenue for the most recent year: ≥ HK$500 million Cashflow for 3 preceding years: ≥ HK$100 million
Market Cap/ Revenue test: Market cap: ≥ HK$ 4 billion Revenue for the most recent year: ≥ HK$500 million
Accounting standards
Hong Kong FRS or IFRS
US GAAP or IFRS
Number of investors
≥ 300 ≥ 100 ≥ 300 round lot shareholders
≥ 400 round lot shareholders
Public float ≥ HK$50 million ≥ HK$30 million
≥ US$15 million ≥ US$18 million
US SEC Review
JOBs Act
Allows "emerging growth companies" (companies with less than $1 billion in revenue) to make a confidential SEC submission.
Foreign Private Issuers (FPIs) that are qualified as emerging growth companies are eligible to file as an EGC.
An EGC must publicly file its initial confidential submission and all confidentially submitted amendments at least 21 days before marketing its "road show"
Traditional FPI Public Offering vs. JOBs Act Offering
FPIs that choose to use the traditional FPI registration statement procedures will not be able to avail themselves of any of the benefits available to EGCs under the JOBs Act
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US SEC Review
Key benefits available to EGCs under JOBs Act include: the ability to engage in pre-IPO marketing communications to determine
potential interest in the IPO;
the ability to confidentially submit a registration statement and any amendments to the SEC;
the ability to include only two (instead of three) years of audited financial information (with only two years of MD&A comparisons) and only two (instead of five) years of selected financial data in the registration statement (under a separate SEC accommodation, first time foreign registrants that elect to prepare financial statements under U.S. GAAP may also provide two years of audited financial information and MD&A comparisons, but still need to present five years of selected financial data under home-country GAAP);
the ability for underwriters to engage in pre-deal and expanded post-deal research on the company; and
a delay for up to five years in complying with the requirement to provide an auditor’s attestation under Section 404(b) of the Sarbanes-Oxley Act.
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Backdoor Listing (Australia example)
A “backdoor listing” or “reverse takeover” refers to a company becoming publically listed through being acquired by an existing listed company rather than seeking to list and apply for admission itself through an initial or “front door” listing.
There has been a recent increase in the number of backdoor listings (or reverse takeovers) on the Australian Securities Exchange (ASX).
Requirements: Shareholder approval of the listed company since: acquisition is likely to constitute a change in the nature or scale of the business
activities; and re-compliance process often involves the issue of securities to the vendors.
Prospectus or information memorandum with detailed information on the new business.
The re-listed entity having a minimum net tangible assets of A$3 million.
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Typical Flip Structures
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HK Corp
Shareholder 1 Shareholder 2
Pre-Restructuring
US NewCo
Shareholder 1 Shareholder 2
Post-Restructuring
HK Corp
New Investors
Intercompany Relationship
Benefits of Flip Structure
Easier access to US investors (Angels, VC funds, Emerging growth funds) and US/Global markets Pitch Book
Term Sheet
Greater access to engineers and other tech employees
Easier implementation of equity incentive plan (stock options)
Potentially more options for the eventual exit
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Scenario
The subject company is a FinTech company which provides software to online marketplaces for P2P trading of financial assets.
It has been a success so far, and is currently in its third year of operation.
The founders are considering options for “exit”: IPO in Hong Kong / the US; or
Inviting strategic investors to invest in the company (and buy out some of his shares).
The founders do not want to sell 100% of the company.
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Buyer
A large insurance company with headquarters in Nebraska
Looking for opportunities to sell complex financial products through online exchanges
B*
Founders
Andy Once a frustrated corporate lawyer CEO and COO
Amy Software engineer Brains behind the technology
Andy and Amy
Company
Proposed Valuation: $50 million
25 employees
3 major customers
Respectable revenues but no profits (yet)
One potential strategic partner wanting to acquire A&A’s IP through a licensing arrangement
A&A Holdings
Parties
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Major Considerations
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Deal Structure
Deal Certainty
Management Incentives
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Accuracy of Representations Each of the IP representations and warranties made by the Founders shall have been accurate in all material respects as of the date of this Agreement and shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date.
Drop Dead Date Either party may terminate this Agreement if the Closing does not occur within one month after the signing (to allow parties to obtain material third party consents).
Negotiations – Deal Certainty
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accurate and complete lists of target’s registered IP
title to target’s IP
validity and enforceability of target’s IP
in-bound licenses of third party IP
out-bound licenses of target’s IP
no infringement (or alleged infringement) by target of third party IP; sufficiency of target’s IP
no infringement by third parties of target’s IP
no “viruses” or other defects in target’s products
use of “open source” software
Sample IP Reps
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This presentation is intended merely to provide a general introductory overview of certain legal matters relating to securities laws, M&A and other legal matters. This presentation is not intended to provide a complete analysis of the matters covered, but rather is intended to be used and referred to in conjunction with a more comprehensive oral presentation regarding those matters. Accordingly, there are potentially important exceptions and qualifications that are not reflected in this presentation. All names used in this presentation are fictional and any resemblance to any real names is a coincidence. All names and circumstances portrayed in this presentation are fictitious. No identification with actual persons, products or events is intended or should be inferred. This presentation is not intended to provide legal advice or to establish an attorney-client relationship.
The following disclaimer is provided in accordance with the United States Internal Revenue Service’s Circular 230 (21 CFR Part 10): Any tax advice contained in this presentation is intended to be preliminary, for discussion purposes only and not final. Any such advice is not intended to be used for marketing, promoting or recommending any transaction or for the use of any person in connection with the preparation of any tax return. Accordingly, any such advice is not intended or written to be used, and it cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed on such person.
Caveats
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