Startup shutdowns are at an all-time high in 2023. According to Carta, hundreds have shut down or gone bankrupt in 2023. Amid the gloom of these shutdowns is a positive trend, startups buying other startups, giving those short on cash a second chance at an exit. In a market where cash preservation is critical and borrowing costs are high, stock-heavy deals are more and more common. But, how do they work and what are the key considerations founders should consider before starting a process?

In this episode, Christian Hassold, host of the In/organic Podcast sat down with Lesley Adamo, Partner & Vice Chair, Tax and Meredith Beuchaw, Partner, Emerging Companies at Lowenstein Sandler, a full-service law firm with a large emerging companies venture capital practice that has extensive experience with fundraising and M&A in early stage companies. In this episode, Lesley and Meredith provide rich insights into what kinds of structures and strategies are getting deals done and how to avoid killing these kinds of deals.

Key Takeaways:

• Stock-based deals are increasingly popular in the current market as a way to acquire startups.
• The mix of cash and stock in deals varies but is heavily weighted on common stock versus preferred, with buyers preferring to use cash only when necessary to get a deal done.
• Valuation differences between buyers and sellers can be resolved by agreeing on a mutually acceptable value or using a multiple that applies to both parties.
• Proper deal structuring and tax advice are crucial to avoid tax issues and ensure a successful transaction.
• Complexity and broken term sheets can be deal killers, and deals are taking longer to negotiate and close in the current market.

Highlights

[00:00] Introduction and Background

[04:09] Different structuring options for M&A (asset vs. stock deals)

[08:47] How little cash can an acquirer get away with (reasons why you need cash at close)

[13:51] Relevance of valuation of stock deals and the significance of 409A’s

[18.48] When in the process of getting tax advice and why

[23:34] Impact of stock consideration and form types for employees

[31:30] How to solve valuation differences in stock-based deals (esp in the current environment where most companies are below pre-money from 2-3 years ago.

[35:21] Common Deal Killers

[36:21] Success Rate of Deals

[37:56] Wrap Up

Connect with Lesley and Meredith on LinkedIn:

https://www.linkedin.com/in/lesley-adamo-44481436/

https://www.linkedin.com/in/meredith-beuchaw-31305b37/

Learn more about Lowenstein Sandler practice: https://www.lowenstein.com

Connect with Christian & In/organic Podcast

Christian's LinkedIn: https://www.linkedin.com/in/hassold/

In/organic on LinkedIn: https://www.linkedin.com/company/inorganic-podcast

In/organic on YouTube: https://www.youtube.com/@InorganicPodcast/featured

Articles References in this show:

https://news.crunchbase.com/startups/venture-backed-mergers-acquisitions-exits/

https://www.vccafe.com/2023/09/28/startup-death-rates-spike-as-we-approach-q4-2023/

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