Operations, Flips & Financing

Transcription

1 Setting up in the USA: Operations, Flips & Financing Julie Wicklund June Cooley LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto, CA The content of this packet is an introduction to Cooley LLP s capabilities and is not intended, by itself, to provide legal advice or create an attorney-client relationship. Prior results do not guarantee future outcome. Setting Up in the US What are my choices? Subsidiary Flip creating US Holding Company Fundraising: Accessing Venture Capital Will US VC invest directly in European company? Are you ready for VC financing? Interpreting a VC term sheet 2

2 Setting Up in the US: Subsidiary Subsidiary Delaware corporation One One Director Officers: President, Treasurer, Secretary Common Stock (ordinary share equivalent) Timing:1 day Qualify in California or other States where operate 3 Flips Setting Up a New U.S. Patent Objective: Established company overseas ( TechCo ) needs access to U.S. venture capital, customers and partners Process: Flip the business from overseas to the U.S. by inserting a new U.S. Parent company above TechCo Key Steps: Incorporate a new Delaware company ( US Newco ) Existing shareholders of TechCo contribute their TechCo shares to Newco in exchange for US Newco shares NewCo seeks U.S. venture financing using $ to fund operations in the U.S. and for TechCo Business conducted in U.S. by US Newco; certain overseas activities continue through TechCo or other subsidiaries, as needed CEO and sales staff typically U.S. based R&D; technical, development and support staff in Europe 4

3 Flips Setting Up a New U.S. Patent, continued Flips to U.S. seen from: Western Europe, Israel, Australia Tax issues/valuation of TechCo tax rollover/deferral IP Keep IP in TechCo or migrate to U.S. US Newco management and capital structure Compel exchange of TechCo shares for US Newco shares? Share purchase unanimity required Drag Along rights in Articles/constitutional documents Takeover Offer or similar compulsory purchase mechanism Ability to unwind? Share valuation issues Tax considerations Contractual/control mechanism: options; drag-along rights, etc. 5 Flips Setting Up a New U.S. Parent, continued Existing Structure Post-Flip TechCo U.S. Newco TechCo 6

4 Flip Tax Consequences Tax consequences of exchanging Belgian company shares for US Newco shares: Individual s: Tax rollover available Must be Belgian tax resident 3-year holding period Corporate s: Rollover not available for share exchange with US corporation Rollover only available (tax deferred) if Flip is into EU country Establish whether Flip is even possible given current shareholder base Is Flip to US still preferred route for access to capital? Customers? 7 Flip Tax Consequences, continued Effect Flip sooner rather than later, prior to creation of signficant value in Belgian entity? Leave minority shareholders at Belgian entity level? Put-Call Option/Drag-Along in place to force exchange upon Exit Event at US Newco Complexity/cost of handling minority shareholders Unattractive to US investors due diligence needed on Belgian entity/put-call arrangements; ongoing corporate compliance cost, etc. 8

5 Venture Capital Financing Convertible Debt vs. Equity the Form of the security 1. Equity (stock/shares) and Convertible Debt have similar characteristics 2. VCs traditionally invest into equity 3. We will focus on equity because debt is just a bridge to equity 9 The Package of Rights: Documents Initial terms reflected in Term Sheet Definitive documents in US VC deal include: Articles/Certificate of Incorporation Stock Purchase Agreement Investor Rights Agreement Right of First Refusal and Co-Sale Agreement Voting Agreement Forms/ Examples: See documents/model docs.html 10

6 The Term Sheet Is nonbinding, except for: Confidentiality obligations Exclusivity no-shop provisions Contains a summary of significant terms Starts the process of document preparation Starts the process of detailed due diligence 11 The Term Sheet What Security? Preferred stock What Price? Per share based on pre-money valuation and outstanding capitalization Watch for size of option pool Preferred stock terms Board representation Restrictions on founder shares Right of first refusal Co-sale right Vesting on founder shares When does it start Acceleration Single trigger (either acquisition or termination without cause) Double trigger (acquisition plus termination without cause) 12

7 The Term Sheet (continued) Registration Rights Preemptive rights (right to participate in future rounds) Information and inspection rights Board representation Conditions to closing (diligence, documents) Exclusivity: typically 4-6 weeks maybe longer if Flip involved 13 Due Diligence Due diligence is the process of investigating the business and legal structure of a company. In addition to being a good business practice, the VC firm needs to comply with fiduciary duties to its limited partners. Business diligence (VC firm): business model, background checks, customer reference checks Legal diligence (VC s law firm): confirm capitalization table, review material contracts, analyze outstanding risks Intellectual Property Diligence (IP attorney or consultant) 14

8 OUR CLIENTS! /hn 15 Thank you! Julie D. Wicklund Cooley LLP Boston Broomfield Los Angeles New York Palo Alto Reston San Diego San Francisco Seattle Shanghai Washington, DC /hn 16