Wednesday, February 29, 2012

Founders Under 40™ Group Members, Know Your Term Sheets


*For Founders Under 40 Group members

Often, an M&A advisor or other third-party representative drafts the Term Sheet as a memorial of the terms that have already been discussed and agreed upon. By contrast, an [letter of intent] LOI is often used as a proposal, usually from the buyer to the seller, which is meant to start negotiations.

What Should be Covered? The Letter of Intent or Term Sheet is the basis for negotiating a definitive agreement and, therefore, certain things will remain "to be determined" during the due diligence period, and covered in the definitive agreement. What follows are some of the major sections of a good LOI or Term Sheet, in addition to many customary boilerplate sections.

Purchase Consideration and Equity Participation: This section should include not only a "price," but the structure of the price. Is it all cash? Is the seller going to hold a note? Is a portion contingent on future events (an earnout)? Will there be a holdback? Will existing owners or management get stock in the buying company or hold stock in the company being acquired? The fine details can be covered in the definitive agreements, but all of these questions should be answered by this section of the LOI or Term Sheet.

Closing Adjustments and Balance Sheet Treatment: This section should outline all known adjustments that are expected to be made at closing. There will certainly be other things that come up in due diligence, but a reasonable outline of how to treat the Balance Sheet and items that fluctuate, such as inventory, liabilities, pre-payments, accounts receivable, and so forth, should be covered.

Stock, Assets and/or Liabilities being Transferred: The opening paragraph will most often state whether the transaction is proposed to be the purchase of stock, membership interests, or assets. However, a section should be dedicated to exactly what is being purchased and note any excluded assets or liabilities.

Consulting or Employment of Owners: In most transactions, even an exiting owner will stay on board for some period of time, whether as a consultant or employee. The details are sometimes better left to negotiate after the LOI or Term Sheet is signed, however important expectations should be set in the LOI or Term Sheet to ensure the deal does not fall apart later because expectations were misaligned in this area.

Restrictive Covenants and Reps and Warranties: Many pages will be dedicated to such topics as non-compete, non-disclosure, and representations and warranties in the definitive agreements. These provisions do not have to be completely hashed out in the LOI or Term Sheet, however, a framework should be included to make sure, for example, that the buyer isn't thinking of a 5 year non-compete when the seller is thinking one year.
Representations and warranties will cover many things and often make up a large portion of the agreements. They are often statements one party makes to the other, such as a representation that all financial information provided is true and correct, which are then backed up by such things as indemnifications and hold backs. The Letter of Intent or Term Sheet usually simply notes that customary representations and warranties will be included in the definitive agreements.

Conditions and Due Diligence Provisions: Since the LOI or Term Sheet is a framework from which to negotiate, it should contain detailed provision for due diligence, conditions that affect the LOI or Term Sheet and any known conditions to close the final transaction. The due diligence provision should set forth the items to be reviewed by the buyer, the time frame, and any special provisions such as when contact with employees and customers will occur. Likewise, any known contingencies, such as the buyer obtaining financing should be stated.

Closing Details and Costs: Closing dates are like baby due dates. Closings happen early and late, but rarely on the date planned. However, it is still important to select a target time frame in the LOI or Term Sheet and outline any known provisions such as whether it will happen over time (a progressive close), whether there will be a escrow period, or if everything is expected to happen on a single day (a sign and close). In addition, the LOI or Term Sheet should clearly set forth who pays what costs associated with due diligence, closing, and so forth. Usually, each party bears their own expenses.

Exclusive Negotiations: More often than not, a buyer will require that once a LOI or Term Sheet is signed, that the seller negotiate exclusively with them and no other buyer. These provisions should be spelled out clearly and in detailed fashion, including upon what provision or dates the exclusivity no longer applies.

Binding and Non-binding Sections: In most transactions, a Letter of Intent or Term Sheet is a non-binding document, which means that it sets for the parties understanding to enter into more formal negotiations, due diligence and ultimately the definitive agreements, but does not legally bind or force the parties to move forward with the transaction. It is important, however, that the LOI or Term Sheet be written in a very specific way. Some sections, such as due diligence provisions, confidentiality, and exclusive negotiations may be binding, while others such as purchase price may not. The LOI or Term Sheet must state which sections are binding and which are non-binding.
If a legally binding contract is desired, then a full blown stock or asset purchase agreement should be used and drafted by an attorney.
Whether drafting a Letter of Intent or evaluating a Term Sheet, part of the art is balancing the needed details that should be covered at this stage and not getting bogged down with those details that should be left for the definitive agreements. In any event, if you are sure to address the items listed above, you'll be off to a good start.

* Originally written by John Burley
Sunday, February 26, 2012

Not Every Founder is a Caucasian Christian Male


Not every founder has a pronounceable last name like "Morgan" or "Campbell". I run into more  and more founders with first names, that's so uncommon that I'm appreciative of the diversity.

We are in a age where a founder and co-founder team will likely look more like smarties than a bag of red apples.  What ethnicity the person is should not matter. I believe a lot of organization  are still missing a great opportunity to tap into a huge market of fresh perspective.  The 3000+ members of Founders Under 40 Group are from all corners of world. There are women and men of all ethnicity pursuing a dream. Their aspirations are no different from a Person in Egypt  or California.

Sure we all naturally gravitate to people who look and act like us. I'll suggest to anyone that it's time to mix voluntarily. The way the future is going, you either fully embrace the world or sit alone in corner trying to protect a world that no longer exist.  There are black presidents, awesome Asian basketball point guards like Jeremy Lin. Asian Football player, Ward of the Pittsburgh Steelers. White hip-hop star, Eminem. 

I can't wait for an Indian shooting guard like Kobe or the Oprah Winfrey of the tech world.  

I'm lovin' diversity. 
Tuesday, February 7, 2012

Sharing More Effective than Ad Placement?


According to General Electric it is. “People exposed via sharing had a significantly bigger lift in positive attitudes toward GE -- associating the brand with such things as creativity and innovation -- than people exposed via paid placements.”

"We all would intrinsically think that if you see something your friend has shared or a community you're part of has shared, you're more likely to value it differently" than paid placement, Paul Marcum, director of global digital marketing and programming at GE said. "But no one we could find had actually tried to quantify the difference."

Though the study found earned media packs more punch than paid, Mr. Marcum acknowledged it's still hard to get one without the other. Marketers, he said, still "need to dial up the paid and hope the earned goes with it."

So this might be something to consider when spending advertising dollars. Invest in communities or group where there are a greater amount of sharing and discussion activities.  - me
Saturday, February 4, 2012

Should You Use More Flat Price and Less “99cent”

 
US retailer, JC Penny, is on a mission to reinvent itself- new logo, new pricing strategy, and new campaign such as using the tagline, "Enough. Is. Enough." “Consumers throughout the spot scream when faced with sale signs, coupons and a mailbox overflowing with circulars and direct mail. A Facebook component includes a "No Meter" and consumers can work through "challenging" exercises to try to get a discount.”  JC Penny is hoping to capture the consumer's imagination on a monthly basis. By focusing on one month at a time, Mr. Francis said, JC Penney can highlight important consumer events, such as Valentine's Day, Super Bowl or the Academy Awards.

JCP will use a pricing strategy that completely eliminates the “50cent” or “99cent “. I wondered if small business owners should also consider this pricing tactic. In my opinion the 299.99 pricing still has a psychological influence on consumers willingness to buy compared to $300. Since JCP is not a luxury store, pricing without the .50cent or .99cent will hurt JCP. And for some reason they appear to be repositioning themselves directly against wal-mart.

Relationship More Important than Knowledge


“I don’t care how great the market opportunity is. If you don’t have a good culture and good relationships among the team, you will fail. So from a tactical perspective, me being over there isn’t necessary. But from a relational perspective, I do believe it’s important that I spend time with them. We’re human beings. We each have our specialties, but we have a relationship, and I think when I go over there, we are just strengthening our relationship in a way that you can’t do online via e-mail or Skype.” -  Jason Johnson of   security apps business, bluesprig and also former Dolby Laboratories executive

I totally agree. Jason makes a good point. How do you have a relationship and how do you maintain it?  (Not endorsing Jason or his business)

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