Startup Founder : Trade sale options for startup founders

Startup Founder: Every year we see eye-popping merger and acquisition transactions and in this period of tech startups. For example In December 2020, Salesforce the Global MNC SAAS company acquired Slack for 27.7 billion and Chipmaker Nvidia in Sept 2020 acquired UK Chipmarker Arm for $40 billion. 

Any potential sale transaction poses many legal issues for startup founders and this this article will explain the basics of valuation and then go on to examine 3 Key Legal Issues that Singapore Startup Founders need to explore when faced with an exit situation.

#1: Share Sale Legal Issues for a startup founder

If your company is currently in good shape and has growing revenue year on year and the startup founders and the major investors deem it fit to seek a share sale by selling the shares of the company to a third party buyer. 

How do we determine the valuation of the sale shares? 

If tech company is relatively early in its fund raising journey (i.e. Series A to Series C), it would be based on the VC method of valuation (i.e. on a pre-money and post-money basis).

If the tech company is relatively later in its fund raising journey (i.e. after Series C), it would be based on a private equity basis or at a discount to the publicly traded securities.

How to get the best value for the sale shares? 

• If your startup sale price is estimated to be worth less than 20 million, it would be better to use a business broker. 
• If your sale price is estimated to be worth between 20 million to 100 million, you can look for a small investment bank to look for potential buyers for your sale shares. 
• If your sale price is estimated to be worth about 100 million, it would be good to seek a global investment bank to arrange for a sale of your shares.

In any event, before considering an exit deal it would be best to seek advice from a good corporate lawyer so that as a founder you would not sign a term sheet that is overly detrimental to the founders.

#2: Asset Sale legal issues for a startup founder

For some companies, the underlying intellectual property or the assets held by the company may be more valuable to a potential buyer than an acquisition of sale shares.  Some reasons for this may include, too much debt held by the holding entity that the buyer does not want to assume, or unpaid taxes which cannot be resolved by any potential buyer.

Speaking to your corporate lawyer at an earlier stage would be useful to understand some of the key legal implications of the current deal terms. 

#3: Acqui-Hiring Legal Issues for a startup founder

Some potential buyers look at a startup/tech company to acquire their tech talent rather than buying such companies assets or products.  This is known as acqui-hiring.  Some other potential buyers also decide to hire the best engineers from firms that are failing/winding up.  This type of deal is potentially legally complex as not all existing employees would want to join the potential new buyer and each employment contract needs to be reviewed from the selling entities’ point of view. 

In conclusion, negotiating the sale of your company can be a complex matter and entering into negotiations and signing a term sheet can expose the selling shareholders and the company to potential legal liability or accepting a potential deal from a potential buyer.  Do engage a good corporate lawyer early in your potential sale journey to help you navigate the sales process.

If you have any comments on our article, please leave a comment below.

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