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How Do I Cover Myself in an Aqui-hire?

My company is close to being acqui-hired. It's a low value "soft landing" kind of deal -- an asset purchase for some cash at close and some stock units to be earned out on a schedule.

I'm the tech co-founder and own a bit less than half the stock, almost 3/4 vested. My vesting accelerates upon "change of control." I'm a "key employee" that must be hired. My one co-founder will walk away.

Another important fact is that my co-founder has aways controlled the finances and legal issues. I do not have access to our bank account. I have recently lost some trust in him. And oh yeah, he is currently living outside of the U.S. in his home country. I have some questions, mostly about the mechanics of the deal and how to protect myself.

Because it's an asset purchase, the payments will be made to the company, and the company will pay me.In general I'm feeling nervous and want to find out how to ensure I'll actually get my cash and stock. Some specific questions:

1. Is an asset purchase a "change of control?" If not, how do I ensure my shares vent or that I somehow get my correct share of the proceeds?

2. Is there any way that my co-founder could go totally rouge -- just cash the check and never give me a dime of the cash? Maybe he doesn't care about the stock I'm earning out, and what's to stop him other than an international legal fight? How can I protect myself?

3. What are the actual steps that must take place between the time the acquirer pays the cash and I see it? Same question for the stock? I know we have to pay some corporate taxes on the cash.

4. Any other tips or insights???

Thanks!!!

9 Replies

Bill Wittmeyer
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Bill Wittmeyer Entrepreneur
CEO Electronic Sensor Technology INC
Get a lawyer that is familiar with acquisitions. Do not go it alone. Get the lawyer now before the deal is finalized
Matt Farnell
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Matt Farnell Entrepreneur • Advisor
Engineering, Growth at AdRoll
there are various reasons the acquirer will want to structure this as an purchase however you could see if they were open to reducing the asset purchase amount to something negligible and pay the remainder to you directly as a signon bonus.
Brian McConnell
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Brian McConnell Entrepreneur
Head of Localization at Medium.com
There are a ton of ways you can get screwed royally (your co-founder can simply not pay you, and he's in another country, so you're totalmente jodido in that case). People have a funny way of grabbing the cash when given the opportunity, so I'd say the risk level here is very high. Asset purchases in general are high risk. I was totally wiped out financially in an M&A deal structured like this (the people who acquired the business turned out to be total bullies and crooks, really nasty pieces of work). Since you are the one sticking around, you have a lot of leverage since the other guy's got nothing if you bail or scuttle the deal. I recommend getting as much as you can via your employment comp package, with a well defined vesting schedule with acceleration a) on change of control, and b) in the event of project cancellation. They will probably insist on language that excludes termination for cause, but be careful with that, as it should be limited to termination for willfully negligent or criminal behavior (otherwise they can trump up a bad performance review, shitcan you, and screw you that way). This way you can protect yourself in case the co-founder takes the money and runs, or if things go sideways at the new place post acquisition.
Gordon McDougall
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Gordon McDougall Entrepreneur
Director
Tell the buyer your concerns. Transparency will work. Then you, your partner and the buyer work out an escrow mechanism. Regards, Gord Sent from my iPhone
David Still
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David Still Advisor
Founder of Start-ups, Entrepreneur, Financier and Advisor

Get a civil litigation lawyer with 'standing' in a location of your choice to negotiate your deal, whatever it is. As an entrepreneur/ceo I spent circa 11 years and $3 million in legal fees and costs on 15 consecutive legal actions on comparable/almost exact issues, which regrettably are the norm more than the exception. This stuff is super complicated and I am a lawyer as well. My advice is singular: engage "litigation counsel" to get you cash now (discounted value) - take no shares; get whatever cash you can get; do not secure obligations from to the company with your shares that would bring the U.C.C. into play; and get out of ownership of the selling company ASAP. Because you do not control cash you have no practical power. If for cash they require a require a new employment agreement, then establish mandatory arbitration, no litigation, as the approach for any disputes or claims be resolved by binding arbitration, rather than litigation, before the American Arbitration Association (www.adr.org) or JAMS (www.jamsadr.com/) (the largest private alternative dispute resolution (ADR) provider in the world specializing in arbitrating complex, multi-party, business/commercial valuation cases - those in which the choice of neutral is crucial. The agreement should pay you "minority fair value" and accelerated vesting in a 'minority fair value state' for your minority interests, not 'fair market value.' The shares should be valued based on 1959 act methods, again, by two experts in business valuations. The three formal approaches are: 1. Trading Multiples Valuation Approach (Note: without telling you the VC buys the trading multiple numbers from Thompson-Financial and you are in the dark because you have no numbers); 2 Acquisition Multiples Valuation Approach and Discounted Cash Flow Valuation Approach. A annual board-approved forecast (be sure to have votes for each Board Manager in the Minutes) should be used by two valuation experts (yours and theirs). Forget formulas and magic ways used by others to calculate value - you will lose. This entire scenario can be very, very complicated' especially in front of an uneducated jury who listen to the best stories. But just remember you always want cash; "future" deals for shares are almost always to you disadvantage; and never get in a law suit with someone who has allot more time and money. You will probably lose. Many corporate lawyers who would normally document these matters have never been into a court as a litigator. You are walking a fine line with no power unless you have the intellectual property secret sauce in your head. Without knowing the facts, I would probable take 50 cents on the dollar value just to get cash unless the money is so small that you can gamble against the house.

Steve Simitzis
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Steve Simitzis Advisor
Founder and CEO at Treat
Get the acquirer to structure the deal so your share of the cash is a retention bonus directly to you. Right now you have all the leverage - the deal doesn't work unless you're on board.
Michael Barnathan
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Michael Barnathan Entrepreneur • Advisor
Co-Founder of The Mountaintop Program, Google Alum
Having been the target of an asset purchase acquisition in the past, I'll answer your first question, about change of control:

The purchase would constitute a change of control as well as an equivalent class C merger. The key provision, IIRC (IANAL, etc.), is that the existing aggregate pool of investors will own less than 51% of the voting stock, that control being transferred to the acquirer. For tax purposes, the existing corporation will cease to exist and all of its property will be transferred over to the new corporation. You'll use Form8594 to represent this purchase and break down your assets on your corporate taxes (assuming C corp), which will be due early, by the 15th day of the 3rd month after the dissolution. Check the "final" box on the tax return.

As for your cofounder, you absolutely need to take care of that risk before the deal can close. You will likely have to give him something; recognize that you're essentially playing the Ultimatum Game with him and plan your strategy accordingly: https://en.wikipedia.org/wiki/Ultimatum_game
Dina Destreza
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Dina Destreza Entrepreneur
Digital Content Manager at Keyideas Infotech
As I don't have much experience in this field, I can only wish you good luck and take the advice given by the members if it suit your needs.
Tim Kilroy
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Tim Kilroy Entrepreneur • Advisor
Analytics - LTV - Boosting Profits - Digital Marketing
I have been through this scenario:
  1. I assume that your company has legal counsel representing you in the asset sale. If not, they should. You may want to have YOUR attorney review the documents.
  2. Your co-founder could totally screw you. If you are key to the deal, they are going to want to take care of you - so they can split payments if they so choose. Your or your company's attorney can insure that you get compensated. I also assume that you have a shareholder's agreement with your co-founder. If not, you need to wrestle with him until it is completed - before the asset sale.
  3. If the corporation that currently holds the assets is to continue on, what is your responsibility there and have you cleared that involvement with the acquirer?
  4. Work with your acquirer and discuss your concerns. Clearly they value YOU more than the company, so you should be in a good spot with them, and they can insure that you are made whole. Nothing worse to start a new relationship than with the taste of sour grapes in your mouth.
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