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Private companies often have many different shareholders on their cap table. If the company undergoes a liquidity event, such as an IPO or a sale through M&A, each shareholder will receive a different portion of the proceeds based on the size of their stake and other potential variables. A waterfall analysis (or liquidation analysis) helps investors and other stakeholders stay abreast of the estimated value of their holdings in a private company. What is a waterfall analysis? A waterfall analysis is a tool used by companies and their investors to model how the proceeds of an exit would be distributed among shareholders based on the terms of a company’s operating agreement. This structure for the distribution of exit proceeds is also known as a liquidation preference waterfall, waterfall chart, or waterfall graph. In venture capital and private equity, investment firms typically build waterfall analysis models to predict the value of their holdings across various portfolio companies based on a number of variables, such as the class of share, the timing, and the predicted valuation in an exit. Most company operating agreements (for example, LLC operating agreements) define a clear pecking order for how different types of shareholders will be paid out in the event of an exit. This liquidation event payout structure is called an exit waterfall because of how distributions spill over from one class of shareholder to the next, moving their way down the cap table. Depending on the company’s valuation in a liquidity event, some shareholders may receive a larger return than others.

IPOs & Fundraising tactics: How an 'Of' to 'For' changes the game! In the realm of securities markets, IPOs (Initial Public Offerings) are often discussed without delving into the specific strategies companies use to raise funds. Essentially, fundraising through IPOs involves issuing shares to potential investors. The Companies Act 2013 provides frameworks for this process, specifically through Sections 25 and 28, though they can be confusing at first glance. Section 25 pertains to an 'Offer for Sale' where securities are issued to an intermediary, known as an issue house. This issue house, in turn, sells the shares to the public, following preliminary eligibility requirements set by the company being that such intermediary issues to the public within six months OR Second condition being that money has not been received by the company up to the date of offer. This process is initiated by the company itself. Section 28 deals with an 'Offer of Sale' which occurs when a shareholder or a group of shareholders decides to sell their shares to the public. In this case, a prospectus is issued to facilitate the sale, and this process is initiated by the shareholders, not the company. It's worth noting that the Companies Act 2013 does not provide extensive provisions for the Offer of Sale mechanism. As a result, companies predominantly use the Offer for Sale method under Section 25 for fundraising. Despite this, the liabilities associated with the prospectus or deemed prospectus remain unchanged in both scenarios. Why check?- An Offer for Sale (OFS) allows existing shareholders too , like promoters or large investors, to sell their shares, issue new capital to the public. IPOs create new capital for the company. In the Offer of Sale, it's crucial for bidders to be vigilant and thoroughly assess the situation before participating in an IPO. Prospective bidders should investigate why the majority shareholders are choosing to liquidate their holdings, as well as their objectives, purposes, and vision. While bidding based on the prospectus documentation is essential, understanding these factors can help prevent potential losses and avoid investing with unrealistic expectations of quick profits.

📣PSA: You need a robust shareholder/founder agreement! 📣 You’re busy building and growing a business, so these things are often deprioritised, forgotten or overlooked while you’re deep in product development, GTM strategy, etc. Or you decide to look each other in the eye and agree you’re all in it for the long haul. But if you have co-founders, investors, etc. this needs to be in place… Why? Sadly, because founder fall-out is so common and it can be catastrophic. You won’t believe it will happen, but it does, often. As a company grows the potential for diverging ideas on how to run it increases.😐 And if there’s a serious disagreement where founders can no longer agree on how to work together: 👉it will be difficult/ impossible to find an agreed way forward, 👉the business becomes hamstrung and difficult/ impossible to run, and 👉it becomes difficult/ impossible to attract investors. So, you need a mechanism to deal with it quickly, including a legally enforceable ability to remove a founder and get back some or all of their shares. This is where terms you’ve probably heard of come in, e.g. good/ early/ bad leavers, (reverse) share vesting, cliffs, etc. Institutional investors insist on them for good reason. 📃 ‼️Don’t let this slip down your list of priorities, investing in it early on will save time, stress and potentially significant legal, accounting, etc fees in the future. 📧To discuss it in more detail, get in touch with us here info@legaledge.co.uk. https://lnkd.in/eXbFgK7n #ShareholderAgreement #FounderAgreement #Shareholders #Legal #LegalSupport

IPOs: A Necessary Evil or a Chosen Route for Private Equity? The initial public offering (IPO) process remains a contentious topic within the private equity industry. While some firms view it as a necessary evil, others see it as a strategic exit route. The debate often revolves around the trade-offs between liquidity, control, and valuation. Proponents of IPOs argue that they offer several advantages for private equity firms. First, IPOs provide liquidity, allowing private equity firms to realize their investments and return capital to investors. This can be particularly important for funds with limited investment horizons or that need to meet redemption requests. Second, IPOs can often result in higher valuations than other exit strategies, generating significant returns for investors. Third, publicly traded companies enjoy increased visibility and brand recognition, which can benefit their businesses in the long run. Finally, IPOs can provide companies with access to capital markets, enabling them to raise additional funds for growth and expansion. However, IPOs also come with significant drawbacks. First, going public typically involves a loss of control for the private equity firm. Public companies are subject to greater scrutiny from shareholders, regulators, and the media. Second, public companies face a more complex regulatory environment, including financial reporting requirements, disclosure obligations, and governance standards. Third, the pressure to meet market expectations can lead to a short-term focus, potentially hindering long-term strategic planning. Fourth, the IPO process itself can be uncertain, with no guarantee of a successful listing or a favorable valuation. Given the drawbacks of IPOs, private equity firms are increasingly exploring alternative exit strategies. These include mergers and acquisitions, secondary buyouts, and management buyouts. Each of these options has its own advantages and disadvantages, and the best choice will depend on the specific circumstances of the company and the private equity firm. Conclusion The decision of whether to pursue an IPO or an alternative exit strategy is a complex one that requires careful consideration. Private equity firms must weigh the benefits and drawbacks of each option and select the strategy that is most likely to maximize value for investors while considering the long-term interests of the company and its stakeholders. As the private equity landscape continues to evolve, it is likely that we will see a greater diversity of exit strategies. The changing needs and preferences of firms and investors will drive innovation and adaptation in this area.

Here's a great article by my colleague Matt Mauney on using an equity "freeze" for employees departing before an exit - take a minute and take a look! #goodwin #mergersandacquisitions

#ICYMI Our Executive in Residence Neal Maglaque shared really important insight to help CEOs and other C-Suite leaders at small and mid-sized firms confront today's biggest challenges: consolidation, private equity investment and large firms recruiting advisors. Read his advice here: https://lnkd.in/d-4t-nqB #wealthmanagement #wealthtech #finserv

Private equity investments are transforming the security and cleaning industries. Our latest blog discusses how these investments drive growth and innovation, providing insights into the potential impact it could have on your business. Read more: https://ow.ly/S5q650SAL0t #PrivateEquity #IndustryGrowth #BusinessInnovation #BusinessInsights

IPO Investing has become very popular and lucrative. Here's a framework that you can use when Investing in IPOs: What are IPOs? A process by which Companies transition from private ownership to public ownership. This happens by selling shares to the general public for the first time. IPOs can be highly rewarding, They often provide substantial returns to early investors. But note that IPO investing comes with its fair share of risks. Here's a framework that you can use to mitigate your risks: [1] Market Situation and Hype Consider the market situation in which the IPO is being launched Assess the level of hype surrounding it. Look for IPOs launched in a good market with moderate levels of hype. [2] Understand the Business Model It's crucial to know how the company generates revenue and makes money. If the business model is unclear or you don't have confidence in its prospects, it's best to avoid investing in that IPO. [3] Identifying the Competitive Advantage Identify the "moat" of the company. A moat refers to the unique advantage that sets a company apart from its competitors. [4] Evaluating the Valuation Look at the price-to-earnings (P/E) ratio of the company and compare it with industry averages. It’s also crucial to check who the underwriter of an IPO is. Ensure that this is legitimate and that they are credible. [5] Examining Red Flags This could be bad management, wrong intentions for IPOs, etc. Look into the company's offer for sale versus the fresh issue This indicates whether existing stakeholders are selling their shares or new equity is being added [6] Identifying Tailwinds Look for industry trends, government policies, or market conditions that could create favorable conditions for the IPO. [7] Assessing Management Quality Evaluate the quality of the company's management team. Remember, There is no 100% clarity when making IPO investments. That level of risk is the reason that IPO investments lead to higher possible returns. What would you add to this framework? PS: If you found this post valuable, please consider reposting ♻️! 🔗 For more content like this, follow our LinkedIn page: Wisdom Hatch

🤝A thoughtful piece on alignment from Team Goodwin for your reading pleasure… “One of the keys of successful private equity investing is properly aligning the economic incentives and interests of the sponsor and its portfolio companies’ management teams as they evolve over time. Unlike a public company, where management may receive higher annual compensation (typically taxed at higher rates as ordinary income) because no exit event is contemplated, much of the compensation for a portfolio company’s management team is often tied to proceeds from a future exit transaction by the sponsor (often taxed as more favorable long-term capital gains), which helps ensure the management team and the sponsor target the same value-maximizing sale outcome and timeline. These arrangements are typically put in place at the time of the sponsor’s initial investment or shortly thereafter, often via direct investment (which may be “rollover” equity) and incentive equity grants.” #privateequity #incentives #structuring #equity #alignment #goodwinlaw

IPO Knowledge series by Saurabh Agarwal - Article 3 How to Choose the Right Advisors for Your IPO Selecting the right IPO advisor is crucial when preparing to go public. This advisor will guide you through every phase of the IPO process, making it essential to choose someone with the right expertise and experience. Here’s what to look for:  1. Business and Financial Acumen Your advisor must possess both business insight and financial expertise. While legal and compliance experts are necessary, the advisor should bridge the gap between your company and the IPO stakeholders, ensuring strategic and financial alignment.  2. Vision Alignment Choose an advisor who shares your long-term vision. Engage in discussions about your goals and past achievements. If they offer valuable feedback and strategic direction, they’re likely the right fit.  3. Strategic Insights An e Effective advisor goes beyond IPO management. They should offer strategic guidance, anticipate challenges, offer proactive solutions and align the IPO with your business objectives.  4. Effective Communication Clear communication is vital. Your advisor should simplify complex concepts and keep all stakeholders informed, listening attentively and responding promptly.  5. Extensive Network A well-connected advisor can introduce you to key professionals, such as lawyers and underwriters, ensuring a smooth process.  6. Proactive Leadership Your advisor should lead the process, coordinating with stakeholders and ensuring tasks are completed efficiently, allowing management to focus on other business priorities.  By focusing on these qualities, you’ll be well-equipped to select an advisor who can successfully guide your IPO. "Take the first step toward IPO success, follow the series or connect with me!" #IPOCountdown #IPOReady #InvestInTheFuture #MarketDebut #IPOOpportunities #SharesToWatch #NewListingAlert #InvestSmartly #IPOInsights #UnlockingPotential #StrategicAdvisory #InvestmentPartnership #businessgrowth #successstory #CollaborativeSuccess #investmentround #angelinvestors #growthstrategy #advisoryservices #investmentopportunity #strategicpartnership #venturecapital #businessdevelopment #entrepreneurship #FinancialAdvisoryFirm #InvestmentPortfolio #angelinvestment #Kennis