Selling a Business
Sooner or later, investors leave even the most successful startup. Venture funds have a limited lifetime, angels want to get cash, and the founders are considering switching to something else.
In such a case, selling the startup entirely to a large industry player, or, putting it in legal English, “merger and acquisition” (M & A) is the best option.
Getting ready for the deal
Until recently, negotiations were practically not regulated under Russian law. That is, after signing the term sheet, completing the assessment and throwing a party, the partner without a second thought could declare that he changed his mind and there was nothing to be done to hold him accountable.
However, now Article 434.1 “Negotiations on the conclusion of a contract” has appeared in the Civil Code. From now on, concealment of important information, as well as sudden termination of negotiations, is qualified as deliberately inequitable conduct, and therefore the victim has the right to recover the losses incurred.
But here's what's more important. Now the parties can sign a negotiating agreement: Thus, start-up participants can agree, even before selling their shares, on who will perform what function during negotiations and to what degree they can be held accountable. Moreover, it is possible to establish a penalty for failure to negotiate, for refusing pre-agreed terms or delaying the approval of a transaction.
It is possible to sign an agreement with a potential buyer, so that later, without haste, parties can agree on all the basic terms within the framework of the term sheets. And waiver to negotiate would entail a fixed penalty and thus ensure that your time will not be wasted.
Options for the transaction
When a venture investor wants to exit a startup, the other participants can:
exit with him (if there is a large buyer);
buy out his share;
exchange one investor for another.
In the first optimal scenario, the team will finally receive real money; in the second they will get cheaper financing (instead of the high investor requirements they shall have the rate on the loan), and in the future they can have full control over the prosperous company. In the third case, nothing will change for the founders.
With MBO, startups buy out a stake, risking their money and personal property. Expediency shall be considered differently in each case, it will depend on the state of the market, the prospects of the startup and the adequacy of its founders.
What needs to be done to part successfully?
Firstly, oddly enough, to think about it even at the time of the investor’s entry into the project and work out all parting scenarios with lawyers. For example, to provide for an option of joining an investor in a transaction or buying out a share from him on certain terms.
Secondly, it is imperative that the investor provides only relevant and reliable information when conducting negotiations and Due Diligence.
Thirdly, one must remember that the goals of a strategic investor are different from those of a venture investor, which means that the entire structure of the transaction will need to be worked out anew with lawyers.
And the most important thing to keep in mind: Russian law has many tools that effectively structure transactions and protect the rights of the investor and the project.
Author: Roman Yankovskiy