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13 January 2020

Start-ups and venture capital: There is no gift shop at the exit!

In the life cycle of a start-up1, the exit is the final act and beginning of the next cycle.

Like any other sell-side M&A transaction, selling the start-up (exiting) is a major event, especially for the founders, who see it as their chance to harvest the fruits of their labour.
Besides a solid business, you also need a solid exit strategy. But when it comes to the actual implementation of the exit, the founders (and other shareholders) need to exercise caution, because there is no gift shop at the exit. Mistakes will not be forgiven. If done wrong, the exit can destroy a lot of value for the sellers and the fruits that have stood in view will disappear.

Here are some important sell-side M&A issues that we regularly come across in our exit practice:

  1. Preparation / Vendor DD: As always, preparation is the key. Here it means collecting and organising the data room information and identifying potential gaps, ideally in the course of a (limited) vendor due diligence. In the preparatory stage, gaps can typically be filled, but gaps identified by a purchaser can become expensive. Typical gaps include lack of documented IP transfers, missing written documents (e.g. material agreements, corporate approvals), expired contracts and non-compliances in agreements.
  2. Structuring: When structuring the transaction, consideration should be given to liability issues for sellers and buyers, because such buyers may turn back on sellers eventually.
  3. Process: M&A is a process that needs to be defined and tailored for the specific exit situation. The process allows visibility for both potential buyers and sellers and should aim to maximise value. A bad process may also turn away potential buyers, reducing the ability to maximise value.
  4. Documentation: M&A documentation tends to be complex and is therefore prone to being misunderstood, misleading or incomplete. Shrewd legal advice is essential to properly document the transaction.
  5. W&I Insurance: Where risks and benefits are out of balance, warranty & indemnity insurance may be helpful to bridge gaps and get the deal through.

In short, founders and start-up investors should be aware that selling a business isn't easy and mistakes may be costly. Good legal support is essential.

1 The life cycle of a start-up



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