A large portion of my practice involves helping high-growth companies prepare for and work through the process of selling their company. Many M&A deals are messy in ways that could have been avoided if the right procedures had been followed. With that in mind, I thought a series of blogs on ensuring that your company is ready for an acquisition and how to navigate the sale process would be helpful.
As a starting point, there are two key items that any company, large or small, should have nailed down. The first is having every member of the company’s team sign a PIAA (Proprietary Information and Assignment Agreement). “Team” should be viewed as broadly as possible, and includes employees, contractors, advisors, co-founders, etc. A PIAA binds the signing person or entity to maintain the confidentiality of your information. Equally or more importantly, it confirms that they are assigning ownership to the company of all IP rights for any contribution they make to the company, whether it be software, documentation, marketing materials, or anything else.
Having a good PIAA form prepared as soon as the company starts developing a product or service is a simple matter, but is too often overlooked. The failure to get PIAAs from all members of the team can be difficult to remedy after the fact, as personnel changes over time. But not having proper signed PIAAs for all present and past team members is a giant red flag for due diligence in any acquisition, and failure to have them will delay or potentially derail a transaction. If the company doesn’t have a full set of PIAAs it leaves the company open to charges that some parts of its intellectual property are owned by former employees or contractors – big problem!
Another key item that should be addressed from the outset is having a clean and clear cap (capitalization) table. Early stage companies are usually cash-poor and often grant equity in the company to employees and other service providers in exchange for services. However, these agreements are often done on a handshake, by exchange of emails rather than formal documents, or by a poorly written agreement that was prepared without the involvement of legal counsel.
A variety of disputes and litigation often result from informal arrangements. But lack of clarity as to exactly who the company owners are and the ownership percentages is also an obvious red flag for a buyer. The saying “no one wants to buy a lawsuit” is especially true here. The easy way to avoid this problem is to grant equity in your company sparingly, and only under written agreements (no hand-shake or email deals!) that have been properly reviewed by experienced legal counsel.
Having PIAAs from all team members and a clean cap table is plain good business, but it will also be a good first step to ensure your company is ready for sale. In my next blog I’ll address some other key items that will be similarly helpful.