LS

Question 1

Liquidation Preference Overhang

Answer 1

Liq preference overhang leaves management with no incentive to exit when value falls below certain threshold and can limit subsequent fundraising if current investors have preference claim on majority of the value

Question 2

Purchase Price Adjustment SPA

Answer 2

“Purchase Price Adjustment” means an amount (which may be positive or negative) equal to the sum of (A) the Base Purchase Price, plus (B) an amount (which may be positive or negative) equal to (I) Final Closing Working Capital, minus (II) Target Working Capital, plus (C) Final Closing Cash, minus (D) Final Closing Indebtedness, minus (E) Final Closing Transaction Costs, minus (F) the Final Tax Liability Amount, minus (G) the Closing Payment.

Question 3

What to keep in mind negotiating M&A contract?

Answer 3

• Economics
• Control / Governance
• Exit / Dilution
• Incentives

Question 4

Def Payment / Earnouts / Rachet

Answer 4

• Deferred payment (can claw back in case something was wrong with the company)
• Earnouts (sellers get if the company hits certain targets)
• Rachet to increase the stake post-acquisition if performance targets are not met (if the company / management needs certain amount and you can’t do an earnout)

Question 5

Types of liqudation preference

Answer 5

• Participating (double dipping - get liq pref and then participate pro rata with common shareholders)
• Non-participating (not double dipping)
• Capped participating (2-3x avoids risk of deteriorating value of the company after the investment and incentives management)

Question 6

Types of pref dividend

Answer 6

• PIK (can motivate management to exit earlier so that they experience less dilution over time)
• Cash (can the company afford additional cash drag)

Question 7

Methods to ensure control / governance

Answer 7

• Board seats
• Subcommittees and special board approval requirements for specific decisions like capex over x$
• Voting rights per share
• Different classes of shares
• Consent rights