In a recent study polling more than 400 business owners, founders and leaders across the U.S., Harris Williams reports that despite mixed positions on the nation’s general political climate, interest in M&A among middle market private companies continues to rise.

Puzzle pieces representing mergers & acquisitions
Copyright: bas121 / 123RF Stock Photo

Key findings included:

  • 95% of survey respondents are interested in M&A over the next three years – up from 81% in 2015
  • 65% said they were interested in acquiring other companies
  • 52% said they would consider selling
  • 36% would consider a merger

Drawing on this data, the report concludes that business leaders are optimistic about their companies and the economy, and companies appear to be primed for growth. The result is record levels of interest in M&A. Opportunities are strong, and business owners are in a position to leverage today’s M&A market to fuel expansion. The full report is available on the Harris Williams website.

This piece is slated to appear in an upcoming edition of the American Bar Association’s Business Law Today.

An abbreviated version of this article will appear in the American Bar Association’s Business Law Today, Fall 2017 Edition.

Is your startup brand so strong that consumers tattoo the logo on their arm? Or so hard to pronounce that investors, vendors and customers are disinclined to do business with you?

"Hello, my name is..." nametagAccording to a study published in the peer-reviewed academic journal Venture Capital, your company name matters even more than you think.  The study, entitled “The Effect of Company Name Fluency on Venture Investment Decisions and IPO Underpricing,” found that a startup’s name can seriously affect how a company is perceived by investors and customers alike.

Names that are easily pronounced, such as Uber and Lyft, are preferred by both early and late-stage investors. They tend to be offered more money, whether its through crowd funders, angel investors, VCs or IPO investors.  The study also found that “uniqueness” is virtue, but only with early-stage investors.  According to the study, since very little is known about a company in the early stages, unique names give the impression there is something special about the company.

On the other hand, difficult names “evoke cues of unfamiliarity and create a perception of high novelty, which is valued by these pre-venture stage investors,” according to the study. The study cautions, however, that novelty wears off by later stages, when unique names can make more risk-adverse investors feel uncomfortable.

This study adds to the list of impacts that name can have on a venture, including:

  • An easy to pronounce and remember company name could get you more funding and customers as you grow
  • Company names and logos which are “unique”, “unobvious” and/or “novel” when associated with your services get stronger trademark protections faster with the USPTO
  • Securing 360-branding including a web domain, Instagram and Twitter handle, and an issued trademark on the name and logo early in the process with the help of an IP attorney saves cost and time as you roll out your product

Often founders launch or pivot on a name only to realize the Instagram account or web domain is taken, causing confusion in the market and requiring expensive litigation or licensing deals to consolidate your brand.  A strategic approach to choosing your company name ensures a consistent and easy brand association across digital and print media as well as adding to your successes with investors and customers, saving you time and money as you go to market.

On January 10, 2017, the U.S. House of Representatives passed a bill commonly known at the “HALOS Act”, which directs the Securities and Exchange Commission (SEC) to revise Regulation D.  Prior to the proposed amendment, Regulation D exempts certain offerings from SEC registration requirements but prohibits “general solicitation” with respect to such offerings.  The proposed amendment states that the prohibition shall not apply to events with specified kinds of sponsors — including “angel investor groups” unconnected to broker-dealers or investment advisers — where presentations or communications are made by or on behalf of an issuer, but:

  • the advertising does not refer to any specific offering of securities by the issuer;
  • the sponsor does not provide investment recommendation or advice to attendees, engage in investment negotiations with attendees, charge certain fees, or receive certain compensation; and
  • no specific information regarding a securities offering is communicated beyond the type and amount of securities being offered, the amount of securities already subscribed for, and the intended use of proceeds from the offering.

If the bill becomes law, early stage companies which present at demo days and other “pitch events” will have clear guidance that such actions are exempt from violating the SEC’s prohibition on “general solicitation”, avoiding the need to verify investors as “accredited” as a result of their pitches.  Investors likewise would have better assurances that companies have not tripped the general solicitation trigger.

Matthew R. Kittay is a corporate attorney in Fox Rothschild’s New York office and Co-Chair of the American Bar Association’s Angel Venture Capital Subcommittee.

Founding a company is an exciting moment in an entrepreneur’s career.  But even on Day 1, there are steps entrepreneurs should take to avoid major financial and diligence issues in the future.  In this series of posts, we’ll cover some basics that often trip up founders to help guide you through those early steps.

Entrepreneurs often assume they own their company de facto (i.e., by virtue of the fact that they formed it, without any other required action)- a proposition that seems so logical and fundamental, it’s hard to believe its not true.

45594856 - fit and confident woman in starting position ready for running. female athlete about to start a sprint looking away. bright sunlight from behind.

Later in their company’s lifecycle (typically, when there’s pressure on due diligence because the founders either consult an attorney knowledgeable in the space or there’s an interested incubator, accelerator or angel investor), many founders are surprised to learn that after forming their company, they must take another critical step to become shareholders in the company they founded – purchasing their company’s stock.

This often overlooked step works to the founder’s benefit, when it’s done correctly.  In fact, we often tell founders that the ability to purchase their company’s stock on Day 1 is one of the core economic upsides to founding a business in the first place.  While this seems backwards (why should you have to buy stock in a company founded by you- isn’t that the investor’s role?), it makes sense considering the price the founders pay for that stock, as long as the stock is purchased at or near the time of formation of the company.  Because at formation of the company, there’s typically no assets or value associated with the company other than the nominal par value of the stock, allowing a founder to purchase their shares at a fraction of a penny per share (whatever the par value is set to).

Of course, there’s nuances and unique circumstances to each company formation that need to be discussed with your lawyer and financial advisor.  Sometimes, there is real value associated with the stock, even on Day 1 (for example, if the company is a spinout with assets).  And there are other steps that a prudent founder or founding team may need to take at inception along with the purchase of their stock (e.g., consider imposing vesting restrictions on the stock and filing an 83(b) election).

But first things first, make sure you purchase your stock on Day 1, before that hockey stick growth you’re projecting becomes a reality…

Fox Rothschild’s Emerging Company Resource Center includes formation document checklists developed by our nationally recognized emerging companies attorneys; information on relevant intellectual property issues (trademarks, patents, licenses); data room portals for investor due diligence; and other resources for emerging companies.  We encourage our entrepreneurs to reach out to us with questions as they grow their company with these resources. 


Montréal, QC, Canada; Thursday, April 7, 2:30pm

Title III Equity Crowdfunding goes live in May 2016.  As co-chairs of the ABA’s Angel Venture Capital Subcommittee, Fox Rothschild attorneys Emily J. Yukich and Matthew R. Kittay will host a panel conversation featuring Amos J. Richards, General Counsel of leading equity crowdfunding platform EquityNet, alongside former SEC  Division of Corporation Finance Special Counsel David J. Lavan, for insights on legal and practical implications.

Unlike traditional capital markets, the crowdfunding market has no gatekeepers – underwriters, accountants and lawyers that are able to monitor the process and press issuers when offerings may run askew of regulatory rules or when deal terms become too one-sided – which  may spur new regulatory as well as commercial concerns.  The group will discuss topics including the tension between state and federal securities regulators , how lawyers can provide input on deals that are capped at $1mm without pricing themselves out of the market, and the need for the crowdfunding market to police itself to avoid increased regulation.  We’re excited to discuss these and other issues as the new rules go live.

If you plan to attend the conference, please join us for this informative discussion.

As chairs of the American Bar Association Business Law Section’s subcommittee on Angel Venture Capital, Fox Rothschild is undertaking an ongoing analysis of early stage convertible notes and their current market terms. Over a series of blog installments, we will analyze the state of the market and present results of the subcommittee’s informal national survey of convertible note term trends.

As Fox Rothschild attorney Alexander Radus noted in our first entry in this series, convertible notes offer advantages to priced equity rounds for early stage companies- faster and cheaper to close, fewer terms to negotiate, and the ability to delay the ultimate question on the valuation of the company.  But once a Founder has resolved to raise capital on convertible debt, the inevitable question they face is “what are the market terms on the economics for a convertible note round?”

In September 2015, Fox Rothschild conducted an informal national survey of 24 attorneys leading private equity and venture capital practices.  Respondents included lawyers from the west coast (3), the southwest (1), the midwest (3), the southeast (2), and the northeast (15).  One goal of this survey was to quantify market economic terms on several of the most common features of convertible notes.

Like traditional loans, convertible notes accrue interest and have a maturity date.  However, unlike traditional loans, convertible note capital raises assume that a priced round of equity financing will follow the convertible note financing, typically termed the “Qualified Financing” (e.g., a new money Series A investment of $1 million).  When the company closes the Qualified Financing, the note debt converts into preferred stock along with the purchase of Series A by the new money investors.  Although there’s variation among structures, convertible note investors have, over time, established a market set of mechanisms to compensate them for their earlier and riskier investment- the “Discount” and the “Cap”.

  • Discount. Notes typically convert at a discount (e.g., 10-30%) to the price paid by the new Series A investors. This results in investors converting the principal and interest of their notes at a lower price than the purchase price paid by the other Series A investors, thus receiving additional “bonus” shares in the Series A round.  Founders want to negotiate the lowest Discount possible.
  • Cap.  Although the Discount is a great feature for “juicing” the number of shares a noteholder receives in the Qualified Financing, investors often also negotiate a valuation “cap” on the pre-money valuation at which the notes will convert. Caps provide a backstop on runaway increase in value of the company for the purposes of calculating the conversion price of the notes.  The Cap ensures that if the company’s pre-money valuation in the Series A round is higher than the Cap, the note converts at Capped valuation.  In effect, this guarantees the minimum number of shares the noteholder will get on conversion in the Qualified Financing.  Founders want to negotiate the highest Cap possible, or even better, no Cap at all.

Typically, noteholders have the right to convert their note at the lower of (a) the conversion price determined by applying the Discount and accumulated interest to the pre-money valuation or (b) the conversion price determined by applying the Cap. For example, on convertible notes with a 20% discount and a $4 million valuation cap, the noteholder would receive a 20% discount on the Series A price up to a valuation of $5 million, and if the Series A investors are paying a price per share based upon a valuation higher than $5 million, the convertible notes will convert at a discounted price per share based upon the $4 million valuation cap.

Cap and Discount, therefore, are two of the main economic terms Founders and investors negotiate when offering notes.  So, what’s market?  Each of our survey respondents confirmed the Discounts and Caps on their five most recent convertible note financings.

Blog 1 Blog 2

A few interesting points based on these survey results:

  • While Discount shows strong center at the “standard” 20% (28% of deals), a surprising number of deals (16%) reported no Discount on the offering.
  • Nearly a third (30%) of note deals indicated “uncapped notes”, highlighting a market deviation from what most would consider as a “standard” feature; perhaps the growing number of “unicorn” companies (private emerging tech companies achieving a +$1B valuation) has given Founders leverage to eliminate the Cap feature from note offerings.
  • For those note offerings that include a Cap, almost all Caps are at or above $3mm- a good sign for Founders typically raising their first round on convertible notes.

In addition to these economic terms, the survey produced insights related to timing of the offerings, alternative “convertible equity” offerings, and other unique features, which will be discussed in our next installment in the series.

As legal advocates, we counsel companies to enter into NDAs (non-disclosure or confidentiality agreements) whenever they share proprietary information.  An NDA serves several purposes.  It substantiates the date and terms on which information was shared, and if properly drafted, it can be enforced to halt damaging use of the information and give the company a boost when seeking compensation for any resulting damages.

A company undergoing a private equity investment or merger transaction enters NDAs with at least two parties: investment banks which may negotiate the deal and any potential acquirer before substantive meetings takes place.

But Angels and “Alphabet Stage” VCs serially refuse to enter into such agreements with target companies.  Eric T. Wagner frames the tension in this Forbes article, noting that “when it comes to courting professional investors… who literally see hundreds, if not thousands, of [pitches] every year, you can forget about it. Stick your NDA back in your pocket because it won’t get signed. And worse, you’ll look like a fool for asking.”

Angels and VCs articulate at least three reasons for not signing NDAs:

  • Company execution, not an uniqueness of an idea, propels the opportunity
  • NDAs create undue liability for investors, considering the high volume of pitches they hear
  • Companies would not pitch to them if they have a reputation for stealing ideas from entrepreneurs

Each of these points are valid for the most part.  However, there are horror stories alleging unethical dealings (if not theft) perpetrated by investors that would cause any entrepreneur to think twice.

Ultimately its the investor’s prerogative however, since they’re421837-throw-on-a-floor-photo-with-paths writing the checks.  So what should a cautious company do to protect itself, knowing that asking for an NDA won’t get anywhere, and might even make the entrepreneur look unseasoned just for asking?

Here’s some ideas:

  • Learn about a potential investor’s process and reputation by talking to their portfolio companies, companies who have pitched them, and connected advisers
  • Don’t overshare, and appreciate that digital media makes it very easy to copy and forward sensitive information
  • Execute company-judo, using lack of an NDA to motivate an in-person meeting for sharing more critical and sensitive details after the potential investor has reviewed sanitized materials
  • Have a draft term sheet ready to go which does include confidentiality restrictions- they are more acceptable at this later stage of negotiation

While it is true that a company won’t get the protection of an NDA when dealing with Angels and VCs, a thoughtful approach to the conversation can increase investor confidence and help you land the funding.

Matthew R. Kittay is a corporate attorney in Fox Rothschild’s New York office and Co-Chair of the American Bar Association’s Angel Venture Capital Subcommittee

Founders and investors alike are often rewarded for betting on “disruptive” technologies, which in some cases means pushing legal boundaries.  Sometimes, early stage companies hoping to mimic the success of companies like Uber and Airbnb brush issues aside related to employment law, municipal regulations or tort liability at their own peril.

Several notable “sharing economy” companies have recently reached multi-billion dollar valuations, causing them to become bleeding-edge targets for serious law suits and regulatory efforts.  As the sharing economy develops, novel and far-reaching liabilities mushroom around these now deep-pocketed companies.

The below list of recent headlines highlights a few of the legal issues facing some of the world’s leaders in the sharing economy which have grown to global scale along with their companies.

House Sharing (Airbnb;KidandCoe)

  • Property damage caused by guests, which sparked Airbnb’s Host Guarantee.
  • Calls for new legislation in San Francisco restricting house sharing; residents claims that Airbnb creates an economic incentive for landlords to take units off the market in order to rent them out full-time to tourists on home-sharing platforms, cannibalizing much-needed housing stock.

Ride and Other Service Sharing (Uber; Lyft; Handy):36544378_l

  • Actions against Uber/Lyft (which may soon rise to class action lawsuits) and Handy, arguing that their drivers and cleaners should be classified as employees.
  • Lawsuits claiming that driving apps are distracting and causing accidents.

But for all of the new liabilities being created, these companies are also proving value beyond saving users time and money, perhaps saving lives and encouraging legal behavior.  Recently, on a trip to the airport, my Uber driver shared that he’s seen a notable decrease in the number of DUIs and inebriated drivers on the road in the last year as Uber use has surged.

Big and small dogs.
Copyright: / 123RF Stock Photo

At an open meeting on March 25, 2015, the SEC adopted final rules to facilitate smaller companies’ access to capital via update and expansion of Regulation A, summarized in this press release.

A Two-Tier Approach

One core feature of the new rules is the establishment of a tiered system for these so-called “mini-IPO” style offerings, which will allow non-accredited investors to participate in two types of offerings:

  • Tier 1, for offerings that raise up to $20 million in proceeds in a 12-month period, including no more than $6 million of securities sold on behalf of selling securityholders; and
  • Tier 2, for offerings that raise up to $50 million in proceeds, including no more than $15 million of securities sold on behalf of selling securityholders.

Eligibility Requirements and Offering Restrictions

Although the new rules provide companies and investors with a powerful option for fundraises alongside Regulation D / Rule 506 offerings (see here for a helpful Reg. A / Reg. D comparison chart by Kiran Lingam of SeedInvest), there are various restrictions to the regime, including:

  • The final rule will include a limitation on the overall amount of securities that may be sold on behalf of selling securityholders.
  • The exemption will not be available to certain bad actors and to other entities, such as investment companies.
  • Tier 2 will require the issuer to provide audited financial statements, file regular and special event reports, and limit the amount of securities non-accredited investors can purchase in a Tier 2 offering.

Industry response has been generally positive, recognizing that the new rule will permit smaller and emerging companies to have an opportunity to raise substantial capital.

The new rules should be effective 60 days after publication in the Federal Register.