TECH EXITS: GETTING REWARDED FOR YOUR BLOOD, SWEAT AND TEARS

Paul Chen, Head of Corporate Asia, DLA Piper

Andy Tam, Associate, DLA Piper 15 December 2015

Strategic Options (not exhaustive list)

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IPO M&A Licensing

Valuation IPO Multiples M&A Multiples N/A

Liquidity Gradual Immediate Gradual

Cost: Time Money

High High

Moderate

High

Low - Moderate

Low

Upside Potential/ Downside Risk

Significant Limited Moderate to Significant

Liabilities Securities law Shareholder

derivative suits

Indemnification Shareholder

derivative suits

Breach of License

Global Tech Exit Activities

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Recent Tech IPOs – Exchange & Proceeds

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NASDAQ; US$ 685 million

New York; US$ 201 million

New York; US$ 460 million

New York; US$ 841 million

NASDAQ; US$ 306 million New York; US$ 245 million

NASDAQ; US$ 1.8 billion

Hong Kong; US$ 207 million Hong Kong; US$ 196 million

Sample Tech Exits

TECHLAW Hong Kong 2015 5 Source: Crain’s NY Business, February 17, 2015 `

Sequence of Events

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VC and/or entrepreneur choose between going public or selling

the firm to an acquirer

Time 0 Time 1 Time 2

Product market Exit competition takes decision place Cash flows are realized Valuation expectations increase

Strategic Considerations

IPO Preparation of financial statements

Public disclosure and ongoing compliance matters

Market windows

Impact of share performance post-IPO

M&A Identifying Buyers

Negotiation leverage

True exit? Seller indemnification and lack of liquidity for shares/options

Impact of “busted deal”

Concurrent Exit Tracks and Timing Versus Key Business Milestones Cornerstone Pre-IPO investors

Impact on company resources, morale and stakeholder expectations

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Timing & Logistics – IPO (US example)

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IPO process can vary in timeframe, usually 4-6 months

Sample timeline:

Timing & Logistics – M&A

Timeline Inherently Less Structured than IPO Preparation Time Sale Process – 4-6 weeks – VDR set up; Seller's draft agreements;

bidding procedures; teaser Dual-Track – Piggyback on IPO work

Negotiation Weeks to months

Consummation – Days to Months, Drivers include: Due Diligence / Regulatory Issues Stockholder Approval Requirements

Cash deals Stock deals

Key consents, etc.

Generally conducive to overlap or parallel tracking with IPO

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Listing Requirements (Selected)

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Hong Kong NASDAQ Capital Market

(Equity Standard)

NASDAQ Global Market

(Equity Standard) Main Board GEM

Audited track record

3 years of audited accounts 2 years of audited accounts

2 years of operating history

Finance Profit test: Profit for the most recent year: ≥ HK$20 million Aggregate profit for 2 preceding years: ≥ HK$ 30 million Market cap: ≥ HK$200 million

Cashflow for 2 preceding years: ≥ HK$20 million Market cap at the time of listing: ≥ HK$100 million

Income N/A Minimum Publicly Held Shares 1 million shares Minimum Bid Price US$4/share Minimum Stockholders’ Equity US$5 million

Income N/A Minimum Publicly Held Shares 1.1 million shares Minimum Bid Price US$4/share Minimum Stockholders’ Equity US$30 million

Market Cap/ Revenue/ Cashflow test: Market cap: ≥ HK$ 2 billion Revenue for the most recent year: ≥ HK$500 million Cashflow for 3 preceding years: ≥ HK$100 million

Market Cap/ Revenue test: Market cap: ≥ HK$ 4 billion Revenue for the most recent year: ≥ HK$500 million

Accounting standards

Hong Kong FRS or IFRS

US GAAP or IFRS

Number of investors

≥ 300 ≥ 100 ≥ 300 round lot shareholders

≥ 400 round lot shareholders

Public float ≥ HK$50 million ≥ HK$30 million

≥ US$15 million ≥ US$18 million

US SEC Review

JOBs Act

Allows "emerging growth companies" (companies with less than $1 billion in revenue) to make a confidential SEC submission.

Foreign Private Issuers (FPIs) that are qualified as emerging growth companies are eligible to file as an EGC.

An EGC must publicly file its initial confidential submission and all confidentially submitted amendments at least 21 days before marketing its "road show"

Traditional FPI Public Offering vs. JOBs Act Offering

FPIs that choose to use the traditional FPI registration statement procedures will not be able to avail themselves of any of the benefits available to EGCs under the JOBs Act

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US SEC Review

Key benefits available to EGCs under JOBs Act include: the ability to engage in pre-IPO marketing communications to determine

potential interest in the IPO;

the ability to confidentially submit a registration statement and any amendments to the SEC;

the ability to include only two (instead of three) years of audited financial information (with only two years of MD&A comparisons) and only two (instead of five) years of selected financial data in the registration statement (under a separate SEC accommodation, first time foreign registrants that elect to prepare financial statements under U.S. GAAP may also provide two years of audited financial information and MD&A comparisons, but still need to present five years of selected financial data under home-country GAAP);

the ability for underwriters to engage in pre-deal and expanded post-deal research on the company; and

a delay for up to five years in complying with the requirement to provide an auditor’s attestation under Section 404(b) of the Sarbanes-Oxley Act.

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Backdoor Listing (Australia example)

A “backdoor listing” or “reverse takeover” refers to a company becoming publically listed through being acquired by an existing listed company rather than seeking to list and apply for admission itself through an initial or “front door” listing.

There has been a recent increase in the number of backdoor listings (or reverse takeovers) on the Australian Securities Exchange (ASX).

Requirements: Shareholder approval of the listed company since: acquisition is likely to constitute a change in the nature or scale of the business

activities; and re-compliance process often involves the issue of securities to the vendors.

Prospectus or information memorandum with detailed information on the new business.

The re-listed entity having a minimum net tangible assets of A$3 million.

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Typical Flip Structures

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HK Corp

Shareholder 1 Shareholder 2

Pre-Restructuring

US NewCo

Shareholder 1 Shareholder 2

Post-Restructuring

HK Corp

New Investors

Intercompany Relationship

Benefits of Flip Structure

Easier access to US investors (Angels, VC funds, Emerging growth funds) and US/Global markets Pitch Book

Term Sheet

Greater access to engineers and other tech employees

Easier implementation of equity incentive plan (stock options)

Potentially more options for the eventual exit

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Scenario

The subject company is a FinTech company which provides software to online marketplaces for P2P trading of financial assets.

It has been a success so far, and is currently in its third year of operation.

The founders are considering options for “exit”: IPO in Hong Kong / the US; or

Inviting strategic investors to invest in the company (and buy out some of his shares).

The founders do not want to sell 100% of the company.

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Buyer

A large insurance company with headquarters in Nebraska

Looking for opportunities to sell complex financial products through online exchanges

B*

Founders

Andy Once a frustrated corporate lawyer CEO and COO

Amy Software engineer Brains behind the technology

Andy and Amy

Company

Proposed Valuation: $50 million

25 employees

3 major customers

Respectable revenues but no profits (yet)

One potential strategic partner wanting to acquire A&A’s IP through a licensing arrangement

A&A Holdings

Parties

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Major Considerations

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Deal Structure

Deal Certainty

Management Incentives

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Accuracy of Representations Each of the IP representations and warranties made by the Founders shall have been accurate in all material respects as of the date of this Agreement and shall be accurate in all material respects as of the Closing Date as if made on and as of the Closing Date.

Drop Dead Date Either party may terminate this Agreement if the Closing does not occur within one month after the signing (to allow parties to obtain material third party consents).

Negotiations – Deal Certainty

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20

accurate and complete lists of target’s registered IP

title to target’s IP

validity and enforceability of target’s IP

in-bound licenses of third party IP

out-bound licenses of target’s IP

no infringement (or alleged infringement) by target of third party IP; sufficiency of target’s IP

no infringement by third parties of target’s IP

no “viruses” or other defects in target’s products

use of “open source” software

Sample IP Reps

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This presentation is intended merely to provide a general introductory overview of certain legal matters relating to securities laws, M&A and other legal matters. This presentation is not intended to provide a complete analysis of the matters covered, but rather is intended to be used and referred to in conjunction with a more comprehensive oral presentation regarding those matters. Accordingly, there are potentially important exceptions and qualifications that are not reflected in this presentation. All names used in this presentation are fictional and any resemblance to any real names is a coincidence. All names and circumstances portrayed in this presentation are fictitious. No identification with actual persons, products or events is intended or should be inferred. This presentation is not intended to provide legal advice or to establish an attorney-client relationship.

The following disclaimer is provided in accordance with the United States Internal Revenue Service’s Circular 230 (21 CFR Part 10): Any tax advice contained in this presentation is intended to be preliminary, for discussion purposes only and not final. Any such advice is not intended to be used for marketing, promoting or recommending any transaction or for the use of any person in connection with the preparation of any tax return. Accordingly, any such advice is not intended or written to be used, and it cannot be used, by any person for the purpose of avoiding tax penalties that may be imposed on such person.

Caveats

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