Startup CXO. Matt Blumberg

the CEO and Board during negotiation of valuation terms and deal documents. As you choose a banker, the most important thing you can vet is their relationships and knowledge of your industry and the corporate development groups of prospective buyers. They can quickly give you a sense of valuation and strategically how you should approach your particular sale situation.

       Financial models. Almost every M&A process will require a new set of financial models. For buy‐side, it involves merger models and the impact of adding a new company or asset to your business. For sell‐side, it is usually normalizing your financial history for how your company looks today. For example, if you sold a division in the past couple of years, you will need to build pro‐forma financials (mainly the income statement and key bookings numbers) as if your company did not have that sold division. It is also building a multi‐year forecast. Typically, to run a startup you don't need to have a forecast past your current budget. To sell, you will need to re‐create some of the way you forecast your key sales and cost drivers and build a two‐ to three‐year forecast.

       Due diligence. You will (unfortunately) typically have to respond to due diligence requests even before you get a term sheet or letter of intent (LOI). These are usually high level regarding corporate documents, organization charts, financials, forecasts, and key business metrics like bookings and client base. Most of this is hopefully on hand and can be handled entirely by the finance team. Once an LOI is signed, the due diligence expands to include many others in the organization. As CFO, you will need to quarterback the diligence process for your company. To prepare for this, the best thing you can do, well before the sale process, is to review a typical due diligence request and assess your readiness. Once it starts, the major areas can include the following critical requests:Legal: All material agreements, client agreements, NDAs, IP items like patents and trademarks, data licensing, partnership agreements, key vendor agreements, real estate leases as just a start. Much of this can usually be negotiated from a sense of materiality or importance. Typically, the buyer/buyer's lawyers will press on certain items they consider important.Human Resources: Employment agreements, stock compensation agreements, employee termination agreements, signed sales commission agreements, and payroll.Corporate areas: All historical corporate documents such as shareholder rights agreement, stock purchase agreements, and Charter. They will typically push for every version of these and the required signatures.Finance areas: All recent tax returns, audit information, state filings, DBA filings, and definitely Good Standing certificates in any state you are registered in.Data security: Buyers may hire third‐party firms to test your company's data security process, test your systems, and audit your information storage policies and procedures.Accounting: Even if you get annual audits from a global account firm, buyers may want to hire a firm to do a “quality of earnings” analysis which will include not only analysis of things like your accounts receivable, accounts payable, fixed assets, really any and all accounting, but also the trends of your sales bookings and the likelihood of them continuing in the future.Product, client and service: Buyers will also spend a lot of time analyzing your client base, including client concentration, segments, and retention, but also want to know about your roadmap and development process.

      The CFO will need to coordinate a lot of this work with the different groups in the company that will respond to the requests. The use of secure data rooms (your lawyer or banker will help you set that up if needed) will be your friend in helping you have one place to manage the multiple possible buyers and keeping it easy to follow which buyer saw what data. The CFO will also need to negotiate with the buyer which diligence is really necessary vs. what's on the checklist. Buyers and their lawyers will look for any opportunity to get more and more information so you will need to work with your side to keep it reasonable.

      Other sell‐side items that are typically more for later stage companies:

       Flow of funds analysis: The flow of funds is exactly what it sounds like, detailed instructions of where every dollar goes with wire instructions. This will include paying for bankers and lawyers so you will want to be aligned with your outside counsel on their fees. This will need to be approved by all parties involved so it is a good idea to set the structure up as soon as is reasonable.

       Working capital adjustment: Because you will be operating your business during the sale process, your working capital could be higher or lower than usual. Especially if you have a seasonal business or stopped paying invoices during the process. So typically, you will agree with the buyer on a reasonable working capital number that is usually based on some average balance over the last twelve months. Then the final purchase price will be adjusted based on whatever the working capital number is at the close versus this agreed to number. Additionally, there is often a 90‐day working capital escrow that can cover any expenses that come up that weren't, and should have been, included in the closing balance.

       Fairness opinion: Consider doing this to protect against shareholder lawsuits.

       Shareholder communication: Required mailings, waiting period, compliance filings, compensation for insiders.

       Seller representations and indemnification: Work with your bankers and lawyers to understand which types of representations are seen in the market and how you can use rep and warranty insurance to simplify this part of the deal.

       Shareholder representation and M&A platforms: Once a deal is closed, there may still be a lot of communication, including tax form preparation, with seller shareholders to go and guidance needed on any liability and working capital escrow issues. By hiring a shareholder rep and using an M&A platform, you outsource a bunch of that work. This becomes valuable if you have a lot of small unknown shareholders. If you are a small group with a couple of investors, this will not be necessary. But if you have 400 shareholders of all sizes and sophistication, it is very helpful to hire a shareholder rep.

Chapter 22 Bonus Section: What We Used for Our Internal Systems When We Started Bolster

      The company was formed on April 1, 2020, in the midst of the COVID‐19 pandemic. As everyone was going to be working remotely for the foreseeable future, it was very important to establish the tools and operating systems as soon as possible. We had the advantage of receiving some support from our early investor High Alpha's venture studio on a few of the tools and processes. We started to put these systems into place on day one and completed almost all of this in the first couple of weeks. This of course is very different than twenty years ago when we started Return Path, but I also feel it has come a long way the last five years. This section will become dated as systems are improved and new choices are established but I thought the overall process will have some interest.

Selected Systems

      Communication: Slack

      We created a free account. Planned to upgrade when we hit feature requirements. In the early days, we kept channels to a minimum. General was reserved for rare company‐wide events that don't need context. Water Cooler for open conversations, random fun facts, and pictures. Then let it be organic with curation as it grows.

We established integrations with Trello, Outlook, and Zoom. The Zoom Integration enabled quick video chats to happen with a simple/Zoom command. The Outlook plugin enabled a nice schedule within Slack and put a calendar flag in your status to let other Slack users know that you are currently in a meeting. With the Zoom integration, if a Zoom meeting went on a long time, it kept the flag active. When the meeting was over, the flag cleared.

      Project Management: Trello

      We created a free account. Trello has a very good free platform for a small number of users and boards.

      Focused one board to manage the activities of the eight of us. The first column was a “How to use this Board” card, the “Weekly Goals” card, and the parking lot for cards to be assigned/discussed. Then each column had cards for each functional area with appropriate people as members on the card. We used labels for “Need to get done this week,” “Blocked,” and “Ready to Review” to promote asynchronous review