© Copyright 2017 by K&L Gates LLP. All rights reserved.

Presented by Stan Lewandowskistan.lewandowski@klgates.com Direct: +1 (650) 798-6743May 18, 2017

Silicon Valley Startup: Idea to IPO

How to Build Your Startup for a Successful Acquisition - A Legal View

These materials have been prepared solely for educational purposes.The presentation of these materials does not establish any form ofattorney-client relationship with the author or K&L Gates. Particularlegal issues should be addressed through consultation with your ownlegal counsel, not by reliance on this presentation or these materials.Attorney Advertising. Prior results do not guarantee a similar outcome.© K&L Gates LLP 2017.

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INTRODUCTIONS AND BACKGROUND

Stan Lewandowski, Partner in K&L Gates’ Palo Alto office with 10+ years of experience working in Silicon Valley and Europe Emerging Growth/Corporate/M&A/Energy Practice

Advise start-ups and emerging growth companies on optimal legal entity selection and structuring issues; angel, venture and project financings; licensing; strategic relationships and M&A transactions

Have led and worked on many buy and sell side M&A transactions

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OVERVIEW

Market M&A Data Negotiating strategy M&A process Different stages Documents

Role and key provisions of a term sheet Preparing for an acquisition

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1409

230

1732 1

DEAL ACTIVITY BY TYPE

Merger/Acquisition

Corporate Divestiture

Public to Private

Distressed Acquisition

Recapitalization

Source: Pitchbook

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0

10

20

30

40

50

60

70

DEAL ACTIVITY BY TOP 10 INDUSTRIES

# of Deals

Source: Pitchbook

TOP 10 DEALS BY SIZECompany Size (millions)Time Warner Cable 80,000.00Spectra Energy 43,000.00Precision Castparts 37,200.00Broadcom (Acquired) 37,000.00Baxalta 32,000.00Chubb Group of Insurance Companies (Acquired 2016) 29,700.00LinkedIn 29,000.00Tyco International 26,940.00St. Jude Medical 25,000.00Energy Transfer Partners 21,320.00

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10 MOST RECENT DEALSCompany Status DateSilver Bay Realty Trust Completed 5/9/2017WRB Communications Completed 5/8/2017Maple Completed 5/8/2017Headwaters Completed 5/8/2017PT Tech Completed 5/5/2017Empire Resources Completed 5/5/2017Stillwater Mining Company Completed 5/4/2017Pharmathene Completed 5/4/2017Pathology Associates Medical Laboratories Completed 5/4/2017Paragon Customer Communications Completed 5/4/2017

Source: Pitchbook

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396

1013

AVERAGE DEAL SIZE/EBITDA

Deals with data Deals without data

9.89x

898

511

AVERAGE DEAL SIZE/REVENUE

Deals with data Deals without data

4.66x

Source: Pitchbook

NEGOTIATING STRATEGY

Keep multiple potential bidders in play (or the perception of multiple bidders) to enhance the value of your business

Investment bankers can help keep multiple bidders in play if the deal size is large enough

Don’t sign a no shop too early; no “standard” so have your Company’s counsel review before signing

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NEGOTIATING STRATEGY

Revenues usually drive a potential buyer’s measure of “strategic” value Public company board members are actively

involved in acquisition decisions and need to be persuaded by business performance

Have an aggressive but achievable financial model

Optimize value by persuading the buyer as to revenue potential; valuation depends on quality customers and quality revenues (visible and sustainable)

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OVERVIEW OF M&A PROCESS

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TERM SHEET: ROLE AND KEY PROVISIONS

Purpose is to create a blueprint for the transaction

Time at which to have the greatest opportunity to impact transaction terms

Better to be specific rather than general even though only some provisions are binding

Price Structure

Stock, cash or both

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TERM SHEET: ROLE AND KEY PROVISIONS

Earn-out Tax free as to stock; stock liquidity Size and period of escrow holdback Company/personal representations and

warranties IP representations and warranties

Non-solicitation of employees

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NO SHOP PROVISIONS

Purpose is to prevent target from “shopping” the deal

Usually in a term sheet but may show up in an NDA Target will not solicit, initiate, entertain, encourage,

facilitate, support an alternative transaction Exceptions for financing and/or commercial

transactions Time period/duration

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PREPARING FOR AN ACQUISITION

Create price drivers Know your stockholders Have a credible intellectual property position Keep key employees sticky for a potential buyer Have credible financial statements and

corporate governance

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CREATE PRICE DRIVERS – AVOID PRICE DISCOUNT FACTORS

Avoid financing, licensing, and other agreements that limit your acquisition alternatives

Avoid off-balance sheet and other non-conventional financings Limit exclusivity in fields of use and duration in

licensing and other technology agreements Avoid giving a ROFR to buy the company Drag-along rights may limit your alternatives

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CREATE PRICE DRIVERS – AVOID PRICE DISCOUNT FACTORS

Avoid pitfalls that will prevent a public company acquisition or, at a minimum, reduce the price

Comply with 409A valuation requirements for stock option pricing

Loans to board members and executives for stock purchases or otherwise - target should provide for repayment on the acquisition even though it is not certain if the borrower will be an executive with the buyer

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KNOW YOUR STOCKHOLDERS

The buyer will want to make sure all “owners” are known to avoid claims from other purported “owners”

Adopt and maintain stock option plans which comply with federal and state securities and tax laws

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KNOW YOUR STOCKHOLDERS

Prepare and retain proper stockholder documentation from the outset

Board resolutions approving stock transactions Stock purchase agreements Option agreements Securities laws filings for stock transactions Ledgers of stock transactions – cap table

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HAVE A CREDIBLE INTELLECTUAL PROPERTY POSITION

Inventory IP assets and understand the strengths and weaknesses of your IP positionU.S. and global protectionProvisional and utility patents Trademarks – brand names for businessesCopyrights and trade secrets –

independent developmentResolve demand letters or litigation

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KEEP KEY EMPLOYEES STICKY FOR A POTENTIAL BUYER

Your key employees will likely be an important value factor

Retention of employees should be at the option of the buyer

Avoid vesting accelerators based only on a change of control; use double trigger acceleration for key executives if required

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KEEP KEY EMPLOYEES STICKY FOR A POTENTIAL BUYER

Stock option plan change of control provisions A large liquidation preference that leaves little

value for management and other employees will leave them unmotivated - may need a carve-out for employees

Carve-out: 10% proceeds go to designated individuals – usually plan approved by board

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HAVE CREDIBLE FINANCIAL STATEMENTS AND CORPORATE GOVERNANCE

Strong corporate governance and internal controls have a positive impact on value

Audited financials are preferable to minimize the risk of having misstated financials

Financial statements must fairly present the condition of the business

Establish compensation and audit committees of the board of directors Especially important if the acquiror is a public company

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RECAP

Negotiating strategy

M&A process

Role and key provisions of a term sheet

Preparing for an acquisition

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THANK YOUFor Further Questions Please Contact:

Stan LewandowskiPartner, K&L Gates LLP

Office: +1 (650) 798-6743E-mail: stan.lewandowski@klgates.com

www.klgates.com/s-lewandowski/www.linkedin.com/in/stanlewandowski

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