Light at the end of tunnel . . .

Series A Crunch??

The Result??

So What Are We Talking About?

• Asset Sales

• Wind Downs (Shut downs)

• Recaps

• Dissolving

Asset Deals

• Could be multiple asset sales – Patent Portfolio, platform,

acqui-hires and more

• Pros

– Purchaser only assumes specified liabilities

– No Purchaser shareholder vote required

• Cons

– Liabilities not specifically assumed by Purchaser remain with

Seller

• There are exceptions to even an asset purchaser’s ability to exclude

certain types of liabilities, including certain taxes, product liabilities,

environmental liabilities, ERISA liabilities and Cobra liabilities

– Third party consents will likely be required (“assignment of

contracts”)

– Very difficult to meet tax-free requirements – but tax

considerations likely not important

– Post closing distributions and wind down matters

Multiple Asset Deals

• Difficulty separating IP assets

• May need to negotiate license back for

sale of remaining assets

– Can be complicated with sale of

patent portfolio

Recaps

Recaps Mechanics

• Conversion – Convert existing preferred stock to

common stock – may need some syndicate of non

investing preferred investors to approve

• Reduce preference overhang – investors will need to

consider target preference post closing

• Preserve (or restore) value of prior preference based

upon participation – this is the exchange or “pull

through”

– Common Stock (from old preferred stock) exchanged

for new preferred stock at exchange ratio tied to

preference pull through

• Effect reverse stock split of common stock –

reduces old common and old preferred ownership

• Issue options to remaining team

Recaps Mechanics

• Consult with company and investor counsel on

fiduciary obligations (if board member) and ways to

mitigate litigation exposure

• Some key considerations:

– Disinterested lead investor in new financing (if possible)

– Clear record of thorough search for disinterested lead

investor

– Rights offering to all affected stockholders

– Disinterested approval of special committee of board of

directors

– Disinterested stockholder approval

– Price-based antidilution likely triggered – don’t forget to

consider impact

– Process and paperwork pricey

Alternatives to Recaps

Convertible Notes with Multiple on Sale

• Simpler and cheaper paperwork

• Still must consider “fairness” issues

• Does not address preference overhang

– Consider success bonus or carveout plans to

address overhang – set aside portion of exit

proceeds for employees who stick around

• May be able to secure debt with Company

assets

– Consider existing lender rights

Wind Downs

• PREPARE PREPARE PREPARE

• GET YOUR NUMBERS DOWN

• And then do the numbers over

again

• And remember to run them

without a “going concern”

assumption

Personal Liability

Risks

• YEP, IF YOU’RE ON THE BOARD OR AN OFFICER,

YOUR PERSONAL ASSETS CAN BE AT RISK

• Some key areas to ensure company counsel (or your

counsel) locks down:

– Unpaid wages (including vacation, benefits and other

compensation)

– Continued employment when the company doesn’t have the

cash to pay

– Use of taxes withheld from employees’ pay for other

purposes

– Nonpayment of unemployment, workers’ compensation,

disability and other payroll-related taxes

– Nonpayment of municipal, state sales and use taxes

– WARN act issues

Wind Downs

How to manage:

–Self-managed?

–Assignment for benefit of

creditors?

–Bankruptcy filing?

–Friendly foreclosure?

Sample Checklist

• Identify all bank accounts and money market accounts. Revisit

signature authority

• Identify all lease agreements. Identify associated security

deposits, and consider negotiating to apply deposits to rent as

it comes due. In hot market, consider terminating early

• Identify and review material contracts, particularly contracts

critical to the company’s continued operations. Identify

contracts where the company is in default and evaluate

penalties

• Identify and review all secured loans

• Identify continuing obligations (those that may survive sales,

mergers or shutdowns)

• Identify all prepaid expenses and try to recoup them

• Collect and cancel all corporate credit cards

Recap on the Wind Down

• Communicate Communicate

Communicate

• I typically refer to interested parties as

“Stakeholders”

– Employees

– Stockholders

– Creditors

– Bridge Note holders

– Secured Creditors

Recap on Wind Downs

• Four Star Word Time – “Fiduciary obligations”

– I’m an investor, so who do I look out for? Yourself

– I’m also a board member, so what now? Oh yeah.

Obligations owed to Company and stockholders

– And creditors?

Lawyers often advise D&Os on shifting obligations to

creditors in “zone of insolvency”• BUT Delaware cases over the last few years have reduced (or

eliminated) director duties to creditors

• Nuanced advice: Maximize enterprise value without considering the

effect on creditors

• Not so nuanced advice: Be sure to understand stakeholders’

contractual rights

• When can secured creditor trigger repayment?

• When about remaining severance obligations?

Who Should Lead the Charge on the

Process?

• Short Answer: Company management should

manage process with guidance from Board

• Longer harder answer: Oftentimes, management has

no incentive to stick around. Conflicting stakeholder

interests may make “by the book” process difficult

• IMPORTANT TIP: VCs should not usurp functions of

the Company board. But there’s nothing wrong with

creditors negotiating

• SUPER IMPORTANT REMINDER: COMMUNICATE

COMMUNICATE COMMUNICATE

A Note on “Dissolution”

• Filing a “Certificate of Dissolution” only

BEGINS the wind down process

• Company continues to survive with limited

authority to process wind down activities

• Not unusual to forego filing Certificate of

Dissolution – DE generally doesn’t pursue

for franchise taxes

• BUT be sure to withdraw registration in other

states. CA will come looking for $$

Contact

Josh Cook, Gunderson Dettmer

650-463-5267

jcook@gunder.com

@joshcook

Gunderson Dettmer

140 Second Street, Second Floor

San Francisco CA

p: 650-321-2400

Twitter: @gundersonlaw

www.gunder.com

Gunderson Dettmer Stats

• More than 2,000 company

clients

• More than 950 venture

financings each year

• More than 60 venture fund

formations annually

500 Startups

And, of course,

>500 dealsfor