week #2 lecture for business priciples for lawyers class: corporate entities & intro to investors

7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors

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Week #2:Corporate Entities and theCorporate Life Cycle

September 14th, 2015


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REMINDER!

A how-to guide:

think like a businessperson, but act like a lawyer.

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Areas of Corporate Law

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Areas of Corporate Law review:

1.IP2.M&A3.Tax4.RE5.Bankruptcy6.Fund Formation7.Securities / Public Markets8.Secured Transactions

9.Corporate Governance10.L&E11.VC12.Financial Banking / Regulatory


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Quick Review: Corporate Law Areas

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Private Funds:PE / VC

Public / CapitalMarkets

Debt /Recaps

M&A

Private Entities

Securities

Formation /

Investing

SecuredTransactions

TaxBankruptcy /Restructuring

Real Estate

Contracting

Regulatory IP


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Corporate Infrastructure

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Corporation / Company Departments:

1. HR2. CEO3. COO4. Legal

5. Accounting6. Marketing7. OCR8. CFO9. Sales10.Finance11.Supply Chain12.Recruiting13.IT14.Production15.R&D16.Admin17.Strategy / Big Data / Analytics18.Facilities19.Ops


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Corporate Organizationand legal implications by department

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Operations

C-suite

Sales &Marketing

Strategy /NPD

Finance /M&A

Legal /Compliance

HR

Board

Supply Chain EmployeeSales Contracts goods or services

MarketingAgencies

Ads /Sponsorships

Newproducts /offerings

R&D / IP

Public:securities

Debt / Recaps

M&A

IP

Keyman liabilityprotections

IT

Vendors

Supports all areasand hires law firms


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Corporate Org Chart:GE Example

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Corporate Org Chart:Apple Example (from Jobs days)

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Corporate Structure

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Types of corporate entities:

1.S-Corp2.LLC3.C-Corp4.LLP5.GP6.LP7.Sole proprietorship8.LLLP

9.PLLC


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Corporate Structure - Generalities

Area GP / LP C-Corp LLC

Other (sole,

LLP, LLLP,

PLLC, S-Corp)

Usage

PE / VC fund

structures; Professional

services groups

Public Co.s;

Larger privately held

Co.s

Smaller privately held

Co.s;

PE / VC GP entities

Rarer usage

Set-upEasy to form

GP = mgmt. entity

Most effort / cost &

ongoing reporting (+

BOD)

Medium effort -

Capital

Must be LP to be

investing

Easy; pro-rata profit

distribution via

dividends; most VCs

require/convert to C-

More difficult;

distribution allocation is

variable; membership

interests, not stock

-

LiabilityGP has unlimited

liability; LP has limited

Least liability;

Independent entityLimited -

Taxes Pass-through Double-tax

Pass-through (can

choose tax structure

default is partnership)

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Business Associations in 10 minutes or less

Note: this does not contemplate all legal implications of each entity this is more of a business overview


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PE

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What is it?

How does it work?

1.2.3.


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What is private equity?

PRIVATE EQUITY =private investments in companies

In our society, typically refers to PE Firms = firms that pool capital from private orinstitutional investors to make investments in established companies via a leveraged

buy out (LBO) model Private investors = family offices, high net worth individuals (were talkinghundreds of millions to billions here); must qualify with the SEC

Institutional investors = retirement / pension funds

Ex: one of the largest is CalPERS = Cali Public Employees RetirementSystem has$300Binvested - $44B exposure in PE

LBO = using debt to get a higher return on your capital Note: banks used to lend at very high leverage ratios (meaning high amounts ofdebt to capital70 80% of debt at the peak!); now, most investments maximizetheir leverage ratio around 1:1, or 50% debt

PE Firms usually have investing theses = the types of industries preferred (verticals)to invest their capital

Ex: biotech, healthcare services, manufacturing, pharma, etc.

PE Firms usually only invest in companies that have an established performancerecord and are usually operating at a profit

Ex: Although not always (this is an acquisition by JWN, NOT PE sale, but still

interesting) Chicagos Trunk Club was purchased by Nordstrom last year for$350M and they were operating break-even

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Understanding the LBO

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What is a LBO?

How does it work?

1.2.3.


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What is private equity?

LBO Example Company A purchased for $10M Company A sold for $20M

If 100% of purchase funded with equity:Invest 100% of equity = $10M

Return $20M - $10M = $10MROI (Return on Investment) =$10M Return / $10M Invest = 100%

If purchase partially funded with debt and equity:Invest 50% of equity = $5MBorrow 50% of debt = $5MTotal purchase cost = $10M

Debt = paid off at time of sale (cash flow from ownershipperiod used to pay interest and pay down principal)

Return = $20M Sale price - $5M Equity (- any remaining debt,assuming $0)= $15MROI = $15M Return / $5M Invest = 300%!!!

Other $5M in equity can be invested elsewhere optimal use of ALL capital! 14


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Understanding Fund Structure

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How are PE / VC funds formed?

1.2.3.

How does the life cycle work?

4.5.

6.


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Private Equity Fund Structure

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Fund GP,LP

PortCo A, LLC

Institutional$$

Fund UGP,LLC

Fund MgmtCo, LP

FundParent CoGP, LLC

PortCo B, LLCPortCo C,C-Corp

Private$$

FundMgmt.

FundMgmt.

FundMgmt.

THE FUND, LP


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Fund Life Cycle

Fundclose

Investor

A

InvestorB

InvestorC

FundFormation

Fund Formationand capital

commitments

PortCo Aacquisition

PortCo Bacquisition

PortCo Cacquisition

PortCo Asale

PortCo Bsale

PortCo Csale

Years#1 - 4

Years#4 - 10

Fund

wind-down

Capital calls for

PortCo acquisitions

PortCo sales /

exits

week #2 lecture for business priciples for lawyers class: corporate entities & intro to investors

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