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Pre-Offering Due Diligence and PreparationsPre-Offering Due Diligence and Preparations
Review of Review of Material Agreements (cont) Agreements (cont) Customer and strategic agreements Customer and strategic agreements
– Confidential treatment needed?Confidential treatment needed? Use of customer logos or case studiesUse of customer logos or case studies Employee Benefit PlansEmployee Benefit Plans
– ERISAERISA– Securities laws (e.g., 701 compliance – the Securities laws (e.g., 701 compliance – the
Google fiasco)Google fiasco)– Shares in Option Plan? Shares in Option Plan? – Adopt other Plans?Adopt other Plans?
Credit and loan agreementsCredit and loan agreements
Pre-Offering Due Diligence and PreparationsPre-Offering Due Diligence and Preparations
Revising Revising Articles and and Bylaws (cont)Bylaws (cont)
Advantages to anti-takeover provisionsAdvantages to anti-takeover provisions– Adopting before needed looks better in Adopting before needed looks better in
context of a takeover fightcontext of a takeover fight– Give control over timing and processGive control over timing and process– Encourage bidders to negotiateEncourage bidders to negotiate– Higher price end resultHigher price end result– Long-term perspectiveLong-term perspective
DisadvantagesDisadvantages– Discourage sophisticated investorsDiscourage sophisticated investors– May serve to entrench managementMay serve to entrench management
Non-Legal Preparations and ConsiderationsNon-Legal Preparations and Considerations
Accounting Changes
Examples: Examples: revenue recognition policies, revenue recognition policies, deferred charges, business combinations, deferred charges, business combinations, related party transactions, stock-based related party transactions, stock-based compensationcompensation
Discuss with accountants and Discuss with accountants and underwritersunderwriters
Prepare for likely SEC questionsPrepare for likely SEC questions Internal Control requirementsInternal Control requirements Stub periods to be audited?Stub periods to be audited?
and/or SEC reportingand/or SEC reporting– Investor relations manager or VPInvestor relations manager or VP
Don’t overhire!Don’t overhire!
Non-Legal Preparations and ConsiderationsNon-Legal Preparations and Considerations
Director & Officer Insurance and Indemnity
Evaluate current insuranceEvaluate current insurance Price and evaluate post-IPO coveragePrice and evaluate post-IPO coverage
– ““Claims-made” policiesClaims-made” policies– A, B, and C coverageA, B, and C coverage
Side ASide A: Protects officers and directors on claims for which : Protects officers and directors on claims for which company cannot indemnify themcompany cannot indemnify them
Side BSide B: Protects officers and directors indirectly by : Protects officers and directors indirectly by reimbursing company for claims where it is required to reimbursing company for claims where it is required to indemnifyindemnify
Side CSide C: Entity coverage for claims made against the : Entity coverage for claims made against the company, so don’t need to negotiate allocation between company, so don’t need to negotiate allocation between company and D&Oscompany and D&Os
– Examine Exclusions and DefinitionsExamine Exclusions and Definitions Indemnification AgreementsIndemnification Agreements
Financial and Legal ComplianceFinancial and Legal ComplianceCheap Stock Issues
Tax consequences I.R.C. Tax consequences I.R.C. § 409A§ 409A– price less than FMV is a “deferred comp” price less than FMV is a “deferred comp”
arrangement arrangement →→adverse tax consequences for adverse tax consequences for employer and employee (taxation and employer and employee (taxation and withholding on vesting, instead of exercise or withholding on vesting, instead of exercise or sale) plus 20% additional taxsale) plus 20% additional tax
– Review previous option grants and stock Review previous option grants and stock issuances – decide how or whether to cure issuances – decide how or whether to cure issuesissues
Financial and Legal ComplianceFinancial and Legal Compliance
Cheap Stock Issues (cont)
Valuation MethodsValuation Methods– Status Quo: Status Quo: fine so long as FMV in fact = or > fine so long as FMV in fact = or >
exercise exercise price →but burden of proof is on company to price →but burden of proof is on company to prove this method was reasonableprove this method was reasonable
– Informal Valuation: Informal Valuation: company performs internal company performs internal valuation using 5 specified factors valuation using 5 specified factors →but burden of →but burden of proof is on company to prove this method was reasonableproof is on company to prove this method was reasonable
– Presumptive Valuation Methods: Presumptive Valuation Methods: put burden on IRS to show that the option prices are put burden on IRS to show that the option prices are
below FMV below FMV andand that the company did not use a that the company did not use a reasonable valuation methodreasonable valuation method
must use consistently for all equity-based must use consistently for all equity-based compensation plans compensation plans
Independent appraisalsIndependent appraisals Clearest presumption available (best Clearest presumption available (best
protection)protection) can be no more than 12 months oldcan be no more than 12 months old update quarterly or more often, as update quarterly or more often, as
Illiquid Start-Up PresumptionIlliquid Start-Up Presumption Can’t use if expect to go public in the Can’t use if expect to go public in the
next 12 monthsnext 12 months Must be a non-public company in Must be a non-public company in
business for less than 10 yearsbusiness for less than 10 years must meet 5 requirements:must meet 5 requirements:
– written reportwritten report– present value of future cash flowspresent value of future cash flows– comps from public or private companiescomps from public or private companies– whether method is used for other purposeswhether method is used for other purposes– was all information taken into accountwas all information taken into account
Binding formulas (e.g., in Binding formulas (e.g., in stockholder agreement)stockholder agreement)– formula price must be used for all formula price must be used for all
noncompensatory purposes requiring noncompensatory purposes requiring the valuation of the company’s stockthe valuation of the company’s stock
– not available if the stock may be not available if the stock may be transferred outside of the stockholders transferred outside of the stockholders (buy-sell) agreement under which the (buy-sell) agreement under which the formula price applies formula price applies
Financial and Legal ComplianceFinancial and Legal Compliance
Sarbanes-Oxley Compliance
Officer Loans – be sure are none or Officer Loans – be sure are none or make arrangements to be re-paidmake arrangements to be re-paid
Internal Control Compliance [Internal Control Compliance [§404 of S-§404 of S-Ox] – work with auditors re necessary Ox] – work with auditors re necessary timing for compliancetiming for compliance– underwriters may require to be in place at underwriters may require to be in place at
All IndependentsAll Independents Financial ExpertFinancial Expert CharterCharter
– Nominating and Compensation CommitteesNominating and Compensation Committees NYSE: All IndependentsNYSE: All Independents NASDAQ: Majority IndependentsNASDAQ: Majority Independents
Non-Reporting Issuers may continue to Non-Reporting Issuers may continue to publish “regularly released factual publish “regularly released factual business information”business information”– Consistent with past practiceConsistent with past practice– Customary formCustomary form– No projectionsNo projections
All Issuers: Safe harbor for All Issuers: Safe harbor for communications more than 30 days communications more than 30 days prior to filing registration statementprior to filing registration statement
Educate executives and PR/MarketingEducate executives and PR/Marketing Website reviewWebsite review Pre-approve all releases, speeches, Pre-approve all releases, speeches,
Keep alert to IPO potential well in Keep alert to IPO potential well in advance advance → easier and less expensive to fix → easier and less expensive to fix issues in advance than to fix during processissues in advance than to fix during process
Be organizedBe organized Be prepared – Be prepared – stay ahead of the processstay ahead of the process
Make sure your client Make sure your client understands process and reasons understands process and reasons for processfor process