Company Firesale During the COVID-19 Crisis
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Your company was in the middle of a capital raise or M&A process when the COVID-19 crisis struck. The deal falls apart. What do you do?
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Company Firesale During the COVID-19 Crisis
- 1. April 2nd, 2020 Is it time for a fire sale of your company? When do you start and what do you
- 2. Agenda 1. Definition 2. Cost Reduction 3. Communication 4. Employment Contracts 5. Investor Relationship 6. Decision Making 7. Expectations 8. Emotions 9. Transparency 10. Legal Considerations 11. Leadership Giovanni Soleti Managing Partner Louis Lehot Founder
- 3. Before we start… Slides and recording will be sent out after the webcast Use the Q&A function Contacts: g.soleti@gscap.co and louis.lehot@L2counsel.com
- 4. Sale of company at a price that is well below market value (and likely for less than the preference stack) Investors are not going to get their money back Common is out of the money and wiped out 1. Definition of Fire Sale
- 5. Source: London Business School - The economics of a pandemic: the case of Covid-19 by Paolo Surico and Andrea Galeotti Reduce Cost as quick as possible! Team Overhead Expansion Marketing Sales Salary Vendors 2. Cost Reduction
- 6. Internal communication Communication with shareholders & board External communication 3. Communication
- 7. Customer, supplier, license, commercial, employment, consulting, corporate, investor agreements 4. Agreements
- 8. Get Consensus Deal with Nay-sayer 5. Investors & Shareholders
- 9. Take a decision, agree with the board, shareholders, & move forward Management carve-out plan? 6. Decision Making
- 10. Don’t burn bridges 7. Set the right Expectations
- 11. Keep your emotions at check! 8. Emotions 8. Emotions
- 12. Be transparent and constantly in touch with your investors. Lack of communication makes people think you are hiding something and cutting side-deals. Build trust! 9. Transparency
- 13. 10. Legal Considerations Entity deal, asset deal, licensing deal? Who is in the deal, who is out? Management carve-out plan? Sign-on bonuses? Disclose everything! Skeletons will come out of the closet... What to do with what remains?
- 14. Lead your team through rough times 11. Leadership
- 17. Q&A Giovanni Soleti Managing Partner Louis Lehot Founder
- 18. Thank you. Louis Lehot Founder P: 650.796.7280 www.l2counsel.com louis.lehot@l2counsel.com Giovanni Soleti Managing Partner P: 305.924.6100 www.gscap.co E-mail: g.soleti@gscap.co For more information:
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- Story about my personal experience in the 90s. Rejected offers, because had a ½ billon valuation Conversion from llc to Inc - increase issued stock. – guaranteed through green shoe IPO never happened- 1m personal debt – great start into the new millennium Went from hero to loser. Lost my girlfriend.
- Eliminate employees that are not an asset. Engineers and technicians are an asset if you should do an acquihire Generate revenues through service business - Survive with service business if you were bootstrapped through some service business – keep the people important to service business Reduce office space. Do it at once and not a little at a time. Eliminate any marketing activities. Make sure you can get out of existing contracts. You are not an established company that needs to get visibility during bad times. You are most likely a small company that didn’t get traction during good times. You won’t get any during bad times. Stop international expansion Convert Sales salary into 100% commission based salary
- Speak to your investors. Get trusted outside advisors. – mediator Make sure on which side the mediator will be. Will he help the entrepreneur or is he more concerned about his relationship with the VCs/ investors? Try to find out Don’t tell everything to your employees. No one wants to hear bad news. Insulate the execution team. Lead the company better than ever - give them confidence. – don’t be cocky and pretend we will be back in church by easter. On the other side don’t walk around like a scared chicken. Don’t tell clients and partners- words move faster than you think
- Have a good understanding what you can do and cannot do with your employees, investors. What happens if there is change of hand? IP at what stage is the registration? Your counsellor needs to help you. He might come up with some tactics based on your existing contracts
- Talk to your investors and other shareholders once you have a clear picture. Open discussion with existing investors Work out common strategy and tactics Make it clear there will be a loss. Avoid last minute blocks And most important - Get permission to negotiate on behalf of all investors Get Nay Sayers on board. Avoid too many people negotiating. Too many opinions will drag out negotiations
- Decide that you are going forward with a fire sale. Don’t be fixated on valuation and terms Have investors and board support Check contracts Speed is of the essence Create a short-list of potential buyers Continue to look for other investors on parallel Find out who is really interested and who is a tire kicker. Find out what their internal decision-making process is? To whom am I talking? Am I talking to an angel or to God?
- Don’t try to maximize returns. Make sure investors don’t try to maximize. Have an agreement of expectations Preserve reputation with employees and investors Live to fight another battle.
- Some proposals won’t sound fair and you’ll want to explode – this is not going to help. Focus on finalizing a deal - it won’t be the best of your life Don’t get offended by any offer Keep your investors at check The advisor can be the bad cop. Try to be the good cop. Don’t through anyone under the bus Avoid bringing home all your office problems Distract yourself – sport, etc
- Every sales agreement has a representations and warranties. Prepare a data room asap. Speak to your accounts: Get as a many up to date financial statements as possible. Disclose tax situation if any. Information of any kind of debts. Exact burn-rate after the cost reduction Have an updated cap-table ready. Go through your investment agreements and highlight liquidation preferences, common vs preferred stock, convertible notes, warrants, etc Check our commercial agreements. Are the any change of hand provisions? Have you given any exclusivity? Signed any NDAs with your clients? What is your real IP situation? What has been granted and what has been filed. When and have you had any pushbacks? Registration status with regulators?
- A very successful entrepreneur once told me, “I learned a lot during good times, but much more during bad times when I had to fire employees, sell assets and shut down my company.” I didn’t understand it at that time, but with experience, this really grew on me.
- The first quarter of 2019 saw about $968 billion in announced deals, close to 25% of the $3.9 trillion total for the year, according to Refinitiv. If Q1 of 2020 ends up being roughly 25% of the global volume for the year, the industry is looking at massive declines year over year. Data from Dealogic published in The Wall Street Journal showed January M&A deal value at about $151 billion. February saw $230 billion in deals. The first two of five fiscal weeks in March saw $131 billion in activity, on pace to surpass February by a wide margin. But the last three fiscal weeks of March saw only a fraction of that activity, contributing just $49 billion to the month, according to Dealogic. The Journal cited several examples of how COVID-19 is directly affecting deals. Increased difficulty in securing debt financing from banks that are dealing with more pressing immediate concerns, violent swings in the stock market that make valuations difficult and an inability to meet face to face for negotiations were cited as three primary reasons deals have gone south.
- If you are a revenue-generating company looking to raise capital or explore a sale or are on the enterprise side looking in, please reach out to me. Likewise, if you are looking for legal support from one of the most experienced corporate attorneys in Silicon Valley, please reach out to Louis.