Following up on the series of posts addressing issues in mergers and acquisitions, I did a guest post over on my friend’s blog which discussing how to negotiate and position yourself (as a seller) with respect to a situation where an acquirer is proposing or requiring a holdback payment. Holdbacks are becoming more and more common in a number of industries.
The JOBS Act from way back in 2012, set forth the Crowdfunding exemption to the securities laws, and required that any Funding Portal that engaged in Crowdfunding registered with the SEC and became a member of FINRA. In late 2015, the SEC came out with the Regulation Crowdfunding Final Rules and forms to permit companies to offer and sell securities through Crowdfunding and to regulate the intermediaries which can sell the crowdfunded securities. The latest Funding Portal rules have been finalized by the SEC and FINRA.
This is a response to a post by Ken Adams of Adams on Drafting. In one of my earlier posts about the desires of certain clients to have as short a contract as possible, I stated that it was beneficial to draft an agreement a certain way, including certain terms and language, because judges have seen similar items before. Ken identified this and he reiterated his position that a contract drafter should not rely on what he deems “tested” contract language.
Yesterday the SEC released its long awaited crowdfunding rules. The Proposed Rules are available here (and SEC’s press release here), and at 585 pages will make labored reading. I’ve seen plenty of press coverage on the topic and most stories have taken the premise that equity crowdfunding (which the SEC is calling “Regulation Crowdfunding”) is something that the SEC is “considering” allowing. I want to dispel that notion, and as I’ve discussed before (and here), the JOBS Act passed by Congress directs the SEC to promulgate regulations to allow equity crowdfunding. The SEC has no choice in the matter, although it did take its time (these proposed rules were supposed to be issued by the end of last year – 2012). And unfortunately the SEC can make compliance with the Regulation Crowdfunding rules so difficult that very few issuers will choose to use them to raise capital.
As you may have heard, the Senate is working on a bill which looks like it may be passed on May 6th called the Marketplace Fairness Act of 2013. If passed into law (it looks like the House will also approve it, but we’ll see) it would allow state governments to force Internet retailers to collect sales tax from their customers and remit the proceeds to the state and local governments where the purchaser lives. The States would have to provide free software to Internet retailers which would allow them to do the calculations, and Internet retailers with revenues under $1M would be exempt. That’s some small relief.
There are seemingly two goals of the legislation. The first is to fund state and local governments which are, for the most part, starved for cash and seeking any new revenue sources (ie tax moneys) they can find. Second, brick and mortar retailers claim that they are at a disadvantage because customers can come in and look at items in their stores, check the price of the item on their smart phone and then order the same item online and not have to pay any sales tax on it.
My thought is that the effect of the legislation, if passed into law, would be more economically stifling (from a nationwide perspective) than it would actually serve the goals it presumes to address.
One of the most important issues when raising money from investors is the valuation of the company. This will drive all of the other financial terms of the deal: how many shares will be sold, at what price per share, and how much equity the investor will own in the company after the transaction.
In essence, for early stage (pre-revenue) startups, the company’s valuation is whatever the market deems it to be. I’m not being glib, that’s actually how it works. For example, say that I have a flat screen TV that I want to sell, if someone offers me $800, and then someone else offers me $900. I’m selling it for the $900 and that’s the TV’s market value. If an investor values you at $1M, then that’s your market value. Now he could be undervaluing you, but probably not by a large amount, and if the investment goes forward at that valuation then it’s the de facto market price. Now that doesn’t mean that there is no room to negotiate. That’s why it’s always said that early stage company valuation is an art and not a science.
One way that a startup can take seed or angel investments is by doing a convertible debt financing, sometimes called a bridge loan or bridge financing. It is essentially a loan the company receives which allows the investor to later convert the amount due into a certain number of preferred shares upon the company’s next round of equity financing.
A client of mine just got a great write up in entrepreneur.com (read it here). MyMusic has a great product and have a huge promotional caimpaign about to begin – see their website here. What they needed was a software upgrade for their product, digital music stands. They came up with the brilliant idea that they could host a hack-a-thon, get the best programmers around to pull a weekend long hack-fest to upgrade their software, and give any donations received to charity. This particular one gave the proceeds to the local symphony, hence its title Hacking for Music.
As discussed in the Entreprenuer article, this particular type of program is an off-shoot of crowdfunding, but instead of funding, people give their programming talent. MSNBC did a similar write up.
To hit on the legal aspects of this, and one I stressed prior to the event, was that each hacker should sign off on an Participation Agreement which transfers all of that programmers efforts to the entity hosting the hack-a-thon.
Also look for an article in the NY Times regarding Hack-a-thon’s soon.