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September 2018

Letter from the Editors

Dear Readers,

Happy September!

We are often asked why we don’t simply provide “forms” on our MintzEdge website that can be downloaded and used. After all, a number of law firms let you download term sheets and other forms such as SAFEs. Our simple answer: THE FORM IS ALWAYS WRONG! Legal forms are merely starting points and most forms are typically only half an inch deep. A successful enterprise truly needs so much more depth than what is provided in a basic form.

While many of the issues involved in various transactions are similar, every single transaction that we get involved in is nuanced and different in some way from other similar transactions. Pattern matching is important, but each successful enterprise is successful in a unique way. Building an enterprise requires a balancing of the economic interests of the various parties. The founders may want to control their destiny or be captains of industry, in addition to making outsized returns. Investors will be laser focused on those returns but may also be interested in promoting activities that involve sustainability or technical breakthroughs. Employees will be hoping for financial rewards but may also want to be involved in cutting-edge technologies and a flexible workplace. Finally, the board of directors needs to monitor the enterprise and provide relevant advisory insights. Getting this right is so much more than processing a form; it requires deep domain knowledge of the industry sector and a good sense of the people involved. It is similar to why the best doctors examine a patient before prescribing medication. Knowing the context of the situation truly matters and one size never fits all.

One other aspect that we all need to remember is that different sectors have different customs as to what is “market.” While much of the popular press is focused on information technology companies, such as social media and e-commerce businesses, a significant portion of venture capital activity involves other sectors such as life sciences, biotech, and energytech. Each industry sector has its own patterns and customs. To try to simplify it so that one size fits all would be a disservice to each and every entrepreneur who is trying to build a large and meaningful enterprise.

Finally, as a number of pundits have pointed out, we are in an era in which experts and expertise are often ignored. Why do you need an expert when you can find it on the Internet? But as we have all witnessed, information on the Internet is often misinformation, out of date, or simply not relevant or applicable. Using a legal form without legal advice reminds us of the commercial where people are deemed knowledgeable about many esoteric topics simply because they stayed at a Holiday Inn Express. In reality, that is really not the case. We have on too many occasions had to correct mistakes that were made in forms used before we represented a particular client, often at greater expense than if the client had sought legal advice initially instead of using a form.

As always, we welcome your questions and inquiries, and we invite all of you to visit our website for emerging companies mintzedge.com.

Sincerely yours,

Dan + Sam

Editors

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Contents

From the Edge: Ben Stone and Skillist Co-founders on Disrupting the Job Application Space

What to Do Now if You Want to Sell Your Company

Innovator Profile: Rocketbook

Innovator Profile: The Zeus Network

Upcoming Events

From The Edge: Ben Stone and Skillist Co-founders on Disrupting the Job Application Space

In this episode of MintzEdge’s From the Edge podcast, attorney Ben Stone talks to Ananth Kasturiraman and Caroline Fay, co-founders of Skillist, about how their company connects employers with untapped talent in order to increase the efficiency of the labor market.

Skillist addresses underemployment through a skill-based, identity-blind online process. Find out what we miss when we rely entirely on resumes for job applications, how a new platform addresses unconscious bias in hiring, Skillist’s backstory, and more in this exciting podcast.

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What to Do Now if You Want to Sell Your Company

By Jeremy Glaser

The global M&A market has remained strong from the end of 2017 into 2018. With stockholders pressuring larger companies to grow their revenues and the strong liquidity position of many companies, it is a seller’s market. For companies looking to sell and participate in the global M&A market of $3.7 trillion in 2017[1] and $890.7 billion in Q1 2018[2], the toughest question is often how to start.

Before starting the process of soliciting potential buyers, how does a company prepare for a sale so it is best positioned for a positive outcome? A typical sale transaction can take six to eight months, or even longer, to complete from the time the decision to sell is made. This process can be significantly longer if unnecessary hurdles are encountered because the seller is unprepared. Consequently, it is important that any business owner seeking to sell his or her business in the near term take certain immediate steps. The following are some key questions every potential seller should ask to assess its readiness. In addition, below is a checklist to assist with a potential seller’s preparation for a sale.

Are your corporate records up to date and accurate?

Buyers will typically require a seller to represent that its capitalization and corporate records are accurate and up to date from formation through the date of a sale. Despite the importance of these records, industry sources report mistakes in company capitalization and stock ledger records of up to a third of private companies.[3] Mistakes discovered after a deal expose sellers to liability, and mistakes discovered during a transaction can cost companies valuable time and money and result in a sale not closing.

How many stockholders will need to approve a sale? Is any other party’s approval required? How likely is it that such approval can be obtained?

Many private venture-backed companies today have gone through multiple financing rounds. Some of these rounds may have added new investors or imposed conditions that must be met or stockholder approvals that must be obtained in the event of a sale. In addition, if a company has any outstanding debt or other securities, holders of those instruments may have separate and independent approval rights or even blocking rights. Before adding the time pressure of a close date, companies should start evaluating which groups of stockholders (or other parties) will need to approve a sale and how likely it is that such approval can be obtained. Waiting until the sale process has begun under a strict deadline can put a seller in a tough negotiating position. It may then face having to negotiate key deal terms with not only a potential buyer, but also with its own stockholders in order to obtain their approval. If the seller plans to rely upon a voting agreement compelling minority stockholders to approve a transaction, that agreement should be reviewed to confirm what type of transaction triggers that right to vote and how extensive that obligation is. Analyzing stockholder voting rights and understanding the approval requirements under any debt or other security instruments up front can prevent the complexities of a three-way negotiation among the seller, the securities holders, and the prospective buyer and can save valuable time in getting the sale closed.

How will the “waterfall” flow in the event of a sale? What liquidation preferences need to be considered in soliciting offers?

Sellers may want to prepare one or more “waterfall” analyses to review and consider. A “waterfall” is an analysis of the liquidation proceeds in a sale including funds that would be distributed to debt holders, preferred stockholders, and common stockholders. The “waterfall” helps a company understand which investors receive proceeds in a sale and how much each category of investors receives. This information can be very helpful in determining how likely it is that required approvals can be obtained.

How accessible and assignable are your company’s “material” contracts, and will the terms of the contracts, particularly employee contracts, be acceptable to a buyer?

Buyers will likely want to review a seller’s “material” contracts. Whether or not a contract is material depends on a company’s individual circumstances, but contracts with officers and other key personnel, important vendors and customers, financing agreements, contract templates, and government contracts (if any) will likely need to be provided to a buyer. Additionally, the material contracts provided to a buyer will need to be the signed and executed versions. If a seller is unable to quickly locate these documents it may give buyers the impression the selling company does not efficiently run its business operations. This not only costs time, but also affects a buyer’s overall impression of a company’s value.

Also, contracts may require approval or notice to permit the seller to transfer the contract to the buyer or to permit a change in control of the company caused by the sale. Again, in a time crunch, this can put a seller in the precarious position of having to negotiate with the buyer and its employees, customers, vendors, and/or financing sources. Employment contracts with officers and key personnel require additional scrutiny as the buyers will likely want to retain some or all of these individuals, and the terms of their employment, severance, and any change of control payments may need to be renegotiated during the sale process. Renegotiating compensatory agreements can take a significant amount of time and cause management to lose focus on the key terms of the sale itself. Sellers seeking to close a sale should have their contracts evaluated by legal counsel to determine materiality and transferability and should have the terms of employment and other compensatory arrangements reviewed as soon as possible to avoid unnecessary delays.

Are your company’s financial records in good order?

Providing a prospective buyer with accurate and complete financial statements is a prerequisite for any sale. While some buyers will accept unaudited financial statements, depending on the size of the transaction, most buyers will require audited financial statements for at least the last completed fiscal year prior to the closing of the sale. An audit, especially a first-time audit, of a company’s financial statements can take months to complete even if there are no surprises. Companies should carefully review their internal controls and procedures, financial policies, and any “off balance sheet” transactions now to avoid any surprises that could delay the delivery of an auditor’s opinion on the company’s financial statements.

How strong are your company’s compliance policies?

Almost all business activities are regulated in some way, but it is often difficult for companies to determine which regulations apply to their business and to further determine if they are in compliance with all applicable regulations. Buyers will, nonetheless, expect a company to comply with all applicable regulations whether a selling company is aware of these regulations or not, and to make representations to that effect in the purchase agreement. In light of this, companies should evaluate the state of their compliance with applicable governmental regulations before entering into a sales transaction.

Are the company’s data security and privacy policies and practices strong and compliant?

A growing concern for buyers is the data security and privacy compliance, policies, and practices of a potential acquisition target. As part of the due diligence process, buyers will consider the company’s privacy policies, contractual commitments, industry regulations and standards, and actual practices. As with all compliance matters, companies should evaluate their data security and privacy compliance, policies, and practices in advance of any sale. An evaluation should consider applicable laws and regulations which differ based on industry, location, and business. Sellers should also review third party contracts for privacy obligations, review existing written privacy policies and/or terms of use, and assess existing practices for compliance with current laws and regulations.

How well protected are your company’s intellectual property assets?

A company’s intellectual property is often its most valuable asset and, for most technology companies, may be the primary reason a buyer is interested in purchasing the company. Issues impacting intellectual property rights discovered during a transaction can delay or even kill a deal. Problems found in advance can often be remedied, but these actions may take time. Consequently, companies should review their intellectual property portfolio now to determine if there are any risks with respect to their intellectual property assets.

Are there any pending or threatened claims or litigation matters by or against the company? Does the company have records of past litigation matters?

A buyer will want to know of any pending or threatened litigation matters, and will likely want a history of the company’s past litigation. Like clear and complete contract, financial, and corporate records, clear and complete records of litigation matters affect a buyer’s overall impression of the company and its value. Buyers will typically require a seller to represent that all pending or threatened litigation has been properly disclosed to the buyer, and mistakes or omissions discovered after a deal may expose sellers to liability. Having a complete and accurate picture of the company’s current and past litigation will prevent issues later in the process.

Key Steps in Preparing for an M&A Exit

Poor preparation for a sale can complicate, delay, or even kill a deal. The questions outlined above and the checklist below are the right place to start and can help a potential seller prepare for a sale.

• Review and update corporate and capitalization records and documents.
• Review approval requirements. How many shareholders need to approve an M&A transaction? Who else’s approval is necessary? Will you be able to obtain these approvals?
• Review liquidation preferences. Prepare a waterfall analysis. Check for acceleration and change in control provisions in warrants, stock option agreements, and other equity compensation plans and agreements.
• Review material contracts. Are the material contracts assignable? Do any contracts, including employment contracts, contain change in control provisions that might affect an M&A transaction?
• Get financial statements in order. Consider an audit if one has not recently, or ever, been performed. This may take months to complete.
• Review and evaluate company compliance with applicable governmental regulations.
• Review and evaluate company data security and privacy compliance, policies, and practices. Identify any risks or issues, and implement remedies and proactive improvements.
• Review and evaluate the company’s intellectual property portfolio. Identify and remedy any risks.
• Review and consider all pending and threatened litigation matters by and against the company. Review and summarize the company’s litigation history as well.
• Meet with or engage third parties to assist in preparing and executing an M&A transaction: legal counsel, an accountant, and an investment banker or broker may be necessary.
  
  

Endnotes

1 J.P. Morgan Chase & Co., 2018 Global M&A Outlook: Navigating Consolidation and Disruption, January 2018.

2 Mergermarket, Q1 2018 Global M&A Report, April 4, 2018.

3 Paul Koenig & Mark Vogel, Tales from the M&A Trenches, Third Edition, printed by R.R. Donnelly and Shareholder Representative Services, Jan. 2012. (“In SRS’s experience upwards of a third of the [stockholder ledger] spreadsheets received [from companies] have issues that require further clarification before distributions can be made.”)

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Innovator Profile: Rocketbook

Inspired by his own experience forgetting the correct notebook for an important meeting, Rocketbook co-founder Joe Lemay set out to find a modern solution for note taking in 2014. After testing out electronic pens and smart tablets, which were ultimately disappointing, Lemay teamed up with Jake Epstein to develop a new product, a reusable cloud-connected paper notebook called Rocketbook.

Over the next year, Joe and Jake not only announced the world’s first microwavable reusable notebook, the Rocketbook Wave, at the 2015 Launch Festival, they also went on to raise $2 million in crowdfunding and graduated from the Techstars Boston start-up accelerator to make Rocketbook a reality.

While continuing to perfect the Rocketbook app’s scanning abilities and adding digital connections with the likes of Google Docs, Dropbox, Evernote, and email, Joe and Jake also developed a wipe-to-erase version of Rocketbook called the Everlast. Today, the Wave and Everlast have combined to sell over 1 million units worldwide and inspired new Rocketbook colors, products, and form factors. They’ve also added even more app integrations with Slack, Box, and iCloud, as well as machine learning and Optical Character Recognition (OCR) abilities.

Rocketbook primarily sells its reusable digital notebooks on getRocketbook.com and Amazon, where it has earned the top spot for best-selling notebook, surpassing even traditional notebook brands. Rocketbook notebooks also appear in most of the big retailers you’ve heard of and even receive a healthy amount of bulk and branded orders from corporations like Nike, Pepsi, Accenture, and Genentech for special events and employee use.

In addition to creating the best products that bridge the gap between traditional notes and the cloud-connected future, Rocketbook has also demonstrated a strong and ongoing commitment to supporting teachers and students. For every notebook sold on its website, Rocketbook donates $1 to DonorsChoose.org, an organization that connects public school teachers with funding for classroom materials.

Rocketbook believes that writing by hand is more than tradition – it’s human. And with its products, you can stay organized in the digital age without giving up the scientifically proven best way to take notes.

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Innovator Profile: The Zeus Network

Platforms such as Instagram, Snapchat, and Twitter have created celebrities with huge loyal followings – in some cases, millions or even tens of millions of followers – who have never appeared in a Hollywood movie or TV show. These influencers instead generate content – videos, photos, tweets, and the like – on the social media networks, and that content is shaping popular culture among younger consumers and attracting significant advertising dollars.

One of the first in-depth traditional media stories on social media influencers was an interview of three important influencers, who happened to live together in the same building in Los Angeles. That interview aired on 60 Minutes on October 23, 2016.

Nearly two years later, two of the three creators profiled in the 60 Minutes episode, Amanda Cerny and Andrew “King Bach” Bachelor, have partnered with Hollywood producer Lemuel Plummer and Emmy-nominated influencer DeStorm Power to launch a new subscription-based video-on-demand platform called The Zeus Network, which went live on July 13, 2018. Zeus is available on iOS and Android as well as on the network’s website at www.thezeusnetwork.com, and there are plans to make it available on all devices on which its subscribers might want to watch videos.

Zeus currently offers a broad selection of series, including talk shows, fitness, scripted, and comedy shows created by Cerny, Bachelor, Power, and dozens of other social media influencers, and charges subscribers $3.99 per month. According to Zeus Chief Executive Officer Plummer, Zeus will enable creators to earn more than they might on the likes of Instagram or YouTube. Zeus will provide its influencers total creative freedom, along with the resources to produce content in a more serialized, series-based, premium manner. From the company’s perspective, its sales and marketing costs will be a tiny fraction of the amount that it would ordinarily cost to reach the 120 million followers of all of its influencers.

Zeus is not yet releasing its subscriber numbers, but the founders say that viewer and subscriber numbers since July 13 have exceeded expectations.

Three weeks after the Zeus launch, on August 7, 2018, Hollywood titan Jeffrey Katzenberg (former partner of Steven Spielberg and David Geffen at DreamWorks) announced the $1 billion financing of start-up NewTV. NewTV, whose CEO will be former eBay and HP CEO Meg Whitman, plans to focus on short original programming designed for smartphones.

The massive investor interest in NewTV is to some degree a validation of Zeus’s own focus on short-form content, though Plummer acknowledges that Katzenberg is in a league of his own.

It is too early to tell if Zeus will be able to become Netflix for influencers, but we will be watching.

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Upcoming Events

New York

September 17-18: Code Commerce

September 18: 33 Under 33 Awards, NYC Entrepreneurs

September 20: Collude With Us

September 20-21: NYC Media Lab ’18

September 24-27: FinovateFall

September 26: WE Legal: Protect Your Ideas from Pre-Startup to Launch

September 26: Startup & Entrepreneur Networking

September 26: Bloomberg Global Business Forum

October 1-4: VentureOut Fintech

October 4: TAP

October 16: Sooner Than You Think

October 18: Business, Design & Technology Conference

October 22-23: New York Summit (in Spanish)

October 22-26: Fast Company Innovation Festival

October 23-24: Onward18

October 25: 122 Startup Battle, Venture & Crypto

October 30: New York Business Expo and Conference

October 30: The CIO Exchange

November 1: DealBook

November 12-13: Cloud Expo

November 13: Entrepreneurs Roundtable 124

November 14-15: Strengthening Cyber Defenses Against the Threats of Tomorrow

Boston

September 10-14: Boston FinTech Week

September 11-12: Big Data Innovation Summit

September 11-12: Data Visualization Summit

September 11-13: The Personalization Summit 2018

September 11-14: EmTech 2018

September 12: Summer School @ the BPL: Social Media for Startups & Small Businesses

September 12: Time-Tested Rules of FinTech Venture Investing with Matt Harris

September 12-13: FP&A Innovation Summit

September 13-14: Token Fest

September 17: Perfectly Fair Equity Splits for Bootstrapped Startups

September 18: Blockchain Technology: Patents vs. Open Source

September 18: CompCon

September 18: Pitch Deck Workshop: Build a 12-Slide Pitch Deck for Investors

September 21: Young Entrepreneurs Conference

September 21: Legal Bootcamp: The Top Ten Legal Mistakes for Businesses

September 24-27: Navigate2018

September 26: Inside Innovation

September 26: Artificial Intelligence in Healthcare: The Sooner the Better

September 26-28: Future Pharma: Connecting Marketing and Sales in the Digital Era

September 27: MIT IDEAS Fall Generator Dinner 2018

September 27: Robotics Connect 2018

September 27: Open Source Hardware Summit

September 27-28: Product Innovation Summit

October 1: Fall 2018 Start Smart Class

October 1-3: BLN Business of Software Conference

October 2: InspireHER: Café Night at District Hall

October 2-3: DigitalXChange

October 8-14: HUBweek

October 10-11: Horizon18

October 15-17: PAPIs 2018

October 16-18: TUGG Tech Gives Back

October 17: MITX Data Summit: Turning Data into Customer Value

October 18-19: MassCue Conference - LearnLaunch Innovation Space

October 18-19: Talk UX

October 23: Launch Smart Clinic with Blockchain Startups

October 25: NECEC's 11th Annual Green Tie Gala

November 8: Shoobx Drive - Conference for Startups

San Francisco

September 9-15: Startup Europe Comes to Silicon Valley

September 13: Startup Game Changers

September 13-14: Disruptive Strategy Summit

September 13-14: Digital & Content Marketing Summit

September 15: Female Founders Conference

September 18: IAM Patent Licensing 2018

September 18-20: The AI Summit

September 19: The Chatbot Conference

September 25: Leveraging Customer-Focused Strategies to Achieve High Growth

September 25-28: Dreamforce

October 1: How Do Bioinformatics Startups Collaborate With Corporations?

October 1-3: Fog World Congress

October 4: Cloudflare Internet Summit

October 9: Puppetize Live

October 10-11: Launch Scale 2018

October 11: Pete Flint Fireside Chat

October 12-15: Wired 25

October 13-14: Igniter Conference

October 15-17: Tech Inclusion

October 15-18: Virtual Reality Strategy Conference 2018

October 16: NPR's How I Built This Summit with Guy Raz

October 16-17: Kafka Summit

October 16-17: GitHub Universe

October 22-25: Oracle Open World

October 30-31: Minds+Machines 2018

November 5-9: QCon San Francisco

November 13: Empire Startups Fintech Conference

November 27-28: Open Digital Summit

San Diego

September 12: Partnering Without Pitfalls

September 15: Hera Venture Summit

October 11: Making the Leap to Entrepreneur

October 24: QuickPitch

October 25: Small Business Expo

Washington, DC

September 20-22: 2018 Disability Entrepreneurship Network Convention

September 21-23: Techstars Startup Weekend Washington D.C. Grow with Google

September 24-27: SpringOne Platform

September 24-28: DC Startup Week

October 20: 10th Annual Women's Entrepreneur Expo

October 30: TEDCO’s Entrepreneur Expo & Stem Cell Symposium

November 14: Emerging Technology Meets National Security

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