Every founder’s dream is to start and grow a successful startup; for many, the ultimate goal is usually a successful exit or restructuring. This is when they can cash in on the hard work and risk-taking of building a successful business. However, exiting or reorganizing is not as simple as signing a piece of paper. To make sure the process goes as smoothly as possible, there are a number of legal and financial things to think about. These include figuring out contracts and rules and calculating assets and values.
Legal Considerations
- Stock options and equity: If stock options or equity have been issued to employees or investors, the terms of those options or equity will need to be reviewed and potentially amended as part of the exit or restructuring process.
- Contracts: Any existing contracts or agreements, such as leases, independent contractor agreements, partnerships, employment contracts, and shareholder agreements, will need to be reviewed and possibly renegotiated to ensure they are still relevant and enforceable after the exit or restructuring.
- Intellectual property: Any intellectual property owned by the startup, such as copyrights, trademarks, or patents, must be transferred appropriately.
- Employee considerations: The startup will need to consider the rights and obligations of its employees as it relates to the restructuring process.
- Regulatory compliance: Depending on the industry the startup operates in, there might be certain regulations, such as data protection laws and securities laws, that would need to be complied with in the event of an exit. Accordingly, the startup will need to ensure that it complies with all relevant laws and regulations.
- Legal Due Diligence: Depending on the type of exit or restructuring, the company will have to undergo a due diligence exercise where the buyer will examine the company’s legal documents and information to ensure no irregularities.
- Closing documents: The closing documents, such as purchase agreements, must be prepared to complete the transaction.
Financial Considerations
- Valuation: The startup’s value will need to be determined to negotiate the exit or restructuring terms properly. This valuation can be based on factors such as the startup’s revenue, growth, profitability, and assets.
- Tax implications: The exit or restructuring will undoubtedly have tax implications for the startup and its shareholders. Hence, there is a need to ensure that all tax laws and regulations are followed in the process. Also, If the shareholders sell their shares, they will have to consider the taxes that might apply to the sale, such as capital gains tax.
- Financing: To finance the transaction, the startup may need to raise additional capital through debt or equity financing. The need for this largely depends on the type of exit or restructuring.
- Debt repayment: If the startup has any debt, it will need to consider the repayment of that debt. This could include negotiating with the lender to extend the repayment period or refinance the debt.
- Distribution of proceeds: The startup will need to consider how proceeds from the exit will be distributed among the shareholders and stakeholders.
- Financial due diligence: Depending on the type of exit or restructuring, the company will have to go through a Due Diligence exercise where the buyer will examine the company’s financial documents and information to ensure no irregularities.
- Post-exit financial planning: The startup must prepare a plan for its financial future after the exit or restructuring. This includes planning for how the proceeds will be used and distributed, repayments of debts, future investments, and so on.
The process of an exit or restructuring is a complex one that requires the right amount of planning and taking into account all the considerations mentioned above. Founders who want to navigate these considerations seamlessly will benefit from engaging experienced professionals to guide them through the process.