This is part 1 of 4 of an introduction to Preparing your Company for a Liquidity Event:
- 8 Step Preparation
- 8 Considerations
- 8 Legal Points
- 8 IPO Points
What is a Liquidity Event?
First and foremost, a liquidity event is an exit strategy for investors to convert their equity into cash and occurs when any of the following typical change of control events takes place:
3. sale purchase – part or whole, shares or assets
4. leveraged recapitalization – debt to finance purchase of equity
6. IPO of a company
The occurrence of liquidation, dissolution or winding up of a company may also be included as a liquidity event.
This is usually an exciting and most looked forward to event in the business cycle. For some it means injection of new growth capital, for others it means cashing out their multi-million dollar exits. While it is certainly an event to look forward to, it is also something that should be planned towards.
Here are 8 steps that should be considered in the preparatory stage:
Determine the team that will be involved in the transaction as well as the effect of laws and business in cases of cross-border related events. Apart from conducting an internal due diligence and legal audit which would help in sanitization and preparation, the following steps may be considered while preparing for a liquidity event.
Depending upon the type of liquidity event, the document providing for the liquidity event such as convertible notes, instruments for future equity, share purchase or stock acquisition agreements, funding and investments agreements should be reviewed. Any action needs to be sanitized before occurrence of the liquidity event.
It is also highly important to note where the important clauses are in each of these contracts and how they can be manipulated.
Sample Liquidity Event Clause in a Share Purchase Agreement:
Upon the occurrence of a Liquidity Event (as hereinafter defined), the Borrower shall prepay the outstanding Principal Amount of all Notes in accordance with the redemption prices (the “Mandatory Redemption Prices”) set forth below (expressed as a percentage of the outstanding Principal Amount being prepaid), together with Interest accrued and unpaid on the outstanding Principal Amount of the Notes so prepaid through the date of such prepayment and reasonable out-of-pocket costs and expenses (including reasonable fees, charges and disbursements of counsel), if any, associated with such prepayment. If a Liquidity Event shall occur during any Loan Year set forth below, the Mandatory Redemption Price shall be determined based upon the percentage indicated below for such Loan Year multiplied by the Principal Amount which is being prepaid. For the purposes hereof, “Liquidity Event” means (i) the occurrence of a Change of Control, or (ii) the liquidation, dissolution or winding up of Parent or Borrower or of one or more of Parent’s Subsidiaries that, individually or in the aggregate, constitute a material part of the business, operations or assets of the Credit Parties and all of their respective Subsidiaries, taken as a whole.
Obtain company valuation, of shares or assets, around liquidity event for negotiation. Many good deals fall apart due to unrealistic expectations of founders. While you cannot have unrealistic expectations, you shouldn’t have one that is too low either. In negotiations, it is always helpful to have an independent 3rd party valuation.
3. IP Portfolio
Identify and register all IP of the company, obtain licenses, review licensed products. Having an independent IP valuation would also help in the negotiation process since it is always cause for price differences.
Appointment or change in financial management. Exchanges in different countries will have different requirements for financial managers.
Conduct an audit to analyze revenue recognition and depreciation and amortization policy. Exchanges in different countries will have different requirement for audits.
6. Corporate & Contractual Compliance
Updating and review of minute books, confidentiality or non-solicitation or non-compete contracts, book of contracts, corporate records, accounting records, ESOP, third party consents.
7. Statutory & Regulatory Compliance
Updating of approvals and licenses, company law authority reporting, employment law compliance and tax compliance.
8. In-house counsel
In-house counsel will assist in controlling cost and preparing documentation as well as avoiding pitfalls. While most see the role as an additional cost centre, this may prove untrue. An in-house counsel knows exactly which areas to concentrate on, the right questions to ask and the right people to approach. On the broader scale, this would result in less time spent and lesser cost attached.
Stay tuned to the next few parts!
If you would like to learn more about Preparing your Company for a Liquidity Event, we are holding a 4-hour Masterclass on the 13th of November, 2017 at Singapore Business Federation Centre.
Early Bird discount available till 4th of November, 2017!
Click on the below to find out more!
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