The Road to the IPO: Late Stage Private Placements & IPO Readiness January 28, 2020 Event Materials 1. Presentation: The Road to the IPO 2. Navigating your IPO (PwC) 3. IPO Prospectuses: Avoiding and Responding to Common SEC Comments (LexisNexis) 4. IPOs, Follow-On Offerings, Road Shows, and Earnings Guidance: FAQs on Publicity, Communications, and Offers (LexisNexis) 5. Market Trends 2018/19: Lock-Up Agreements (LexisNexis) 6. IPO Accommodations for EGCs, FPIs, and Non-EGCs (Mayer Brown) 7. JOBS Act IPO On-Ramp Accommodations (Mayer Brown) 8. Comparing the Registration, Reporting and Governance Requirements for Domestic (U.S.) Companies and Foreign Private Issuers (Mayer Brown) 9. Initial Public Offerings: At A Glance 2019 (Mayer Brown) The Road to the IPO Late Stage Private Placements and IPO Readiness January 28, 2020 Rationale • There may be a variety of different motivations for a late stage or pre- IPO private placement – Company may want to defer IPO and need to raise additional capital prior to the IPO – Company may want to take out early friends and family and angel investors and “clean up” capitalization table or provide partial liquidity for longstanding holders – Company may want to bring in strategic investors – Company may be advised that it should prepare itself for the IPO by gaining support and validation from key sector investors that are opinion leaders – Company and bankers may want to “de-risk” IPO by bringing in cross- over investors that will also invest in the IPO – Company may be advised that an up round will make higher IPO pricing easier for IPO investors to accept – May be quite sector dependent 2 Market Trends 3 Late-stage Private Capital – Last 3 years 973 $204B companies invested $30.00B 160 $24.42B 140 $25.00B $22.60B $19.73B $20.11B 128 120 $20.00B $19.18B 119 $18.42B 100 111 $17.00B 83 139 120 $12.23B $14.97B 108 $15.00B $13.93B 80 $12.77B 77 103 95 60 $10.00B 66 $9.07B 61 40 $5.00B 20 $0.00M 0 2017 Q1 2017 Q2 2017 Q3 2017 Q4 2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2 2019 Q3 2019 Q4 Capital Invested Deal Count Source: Pitchbook Data Includes Venture Capital and Growth-oriented Private Equity PwC 4 Late Stage Investments 5 The Private Placement Road Map Positioning Process Pricing • Understand / develop / set • Review possible investor • Maximize process tension to your key capital raising universe and create set of key drive final investor(s) to the objectives targets best terms o Investor type(s), • Refine investor approach o Value sizing, timing, use of o Type of investor o Investor rights proceeds o Quantum of initial o Exit / liquidity • Develop expectations around outreach considerations / timing valuation and terms • Launch marketing process o Choose best investors • Create / update investor to match company narrative and key materials • Define investor timeline early with a structured process objectives o NDA, teaser, investor • Facilitate confirmatory presentation • Further screen investors based on feedback from diligence sessions and deliver • Prepare / update diligence management information in a timely manner information and data room • • Detailed analysis of terms Negotiate and finalize • Align all parties to the received purchase and sale agreement process (legal, accountants, and other required consultants) documentation 6 Late stage investment characteristics • Impact on structuring and negotiating • Typically made into existing, relatively mature companies – Late stage • Proven product viability • Exhibits signs of increasing adoption and revenue growth • Focused on marketing and sales – Very late stage • Cash flow is dependable • Past initial hyper-growth period and reasonable to expect sale or IPO within 12 - 24 months 7 Types of securities • Late stage equity – Typically equity deals based on the previous A-D series of preferred – However, later stage deal can depart greatly from venture – Can be greater upside depending on liquidation preference – Key is calculation of preference, whether there is participation and whether/how many additional rounds to exit 8 Types of securities (cont’d) • Alternative is to take debt that looks like equity and includes: – Interest payments to match PIK dividends – Mandatory prepayment on trigger events to match redemption rights – More financial control in terms of covenants – Possible security interest in assets of issuer – Convertibility features and warrant coverage – Complications involve intercreditor/subordination issues with other lenders, particularly financial institutions – Less up-side, particularly in IPO, and therefore utilized more in pre-sale transaction – Consider tax issues (treated as equity) 9 Liquidation preference • Liquidation preference of the investor’s preferred stock – Typically senior to all other outstanding classes or series of common stock and preferred stock – Sometimes pari passu to an existing series of preferred stock, particularly if the investment is priced as a flat or up round (using the same or higher pre-money valuation as the previous financing round) – Typically includes all accrued and accumulated dividends in the liquidation value of the preferred stock – Usually participating (sharing in any residual liquidation value of the common stock on an as-converted basis) – If participating, is generally not capped in a down round investment, but usually capped (by dollar amount or multiple of return on investment) in a flat or up round investment 10 Dividend rights • Dividend terms for preferred stock: – Typically accrue a fixed dividend on the original liquidation value, with the dividend rate typically higher than in early stage deals (which typically have lower fixed dividend rates if they accrue a dividend at all) – Are more likely than those in an early stage deal to be payable periodically in cash and, if not, are usually cumulative, unlike those in early stage deals, which are usually non cumulative even when they do accrue a dividend. In addition, the cumulative dividend is often compounding (earning a dividend on the accrued dividends) on a quarterly or annual basis (whether or not declared by the board) – Often allow accumulated dividends to be convertible into common stock or, in some cases, are payable in cash on conversion (rather than forfeited on conversion as with many early stage deals that have cumulative dividends) – Participating, with the right to share pro rata on an as converted basis in any dividends paid on the common stock 11 Redemption rights • Redemption rights — much more common in late stage deals – Not preferred exit method because investor relies on upside return of their underlying common equity value rather than minimal return of redemption and risk of non-payment of redemption price if company is struggling • Primary issues to consider: – What securities will be redeemed and how many shares? – Which particular stockholders will be redeemed or will redemption be pro rata for all stockholders? – Full redemption or partial redemption? – Tax implications of the redemption – Manner of redemption 12 Anti-dilution rights • Specific issues for late stage private placements include: – Price for late stage investor that triggers rights, particularly if have to pay a much higher valuation – Full ratchet versus weighted average: can negotiate full ratchet if high valuation, however, this is very unusual; previous investors usually require weighted average using same formula as previous rounds – “Pay to play”: much less common in later stage rounds (unless down- round) but may be required as condition to consent from early investors; if don’t participate, then lose anti-dilution protection: late stage investor more likely to receive anti-dilution rights in such cases – Exempt securities: issuances that trigger anti-dilution; much more heavily negotiated in late stage; issuer often desires to use equity in acquisitions and third-party partnerships without triggering anti-dilution 13 Participation rights and restrictions • Right of first refusal (“ROFR”) – Mirrors rights of previous investors to have the right to buy when designated stockholders sell – Issues around percentage trigger for stockholders who are subject to the right – Usual threshold is 1-5%; however, if retain same threshold, (a) aggregation of sales can have material impact and (b) may exclude senior management (if you don’t want them to sell out) because of dilution in round – Late stage investors typically not subject to ROFR • Right of first offer – Typical right to have securities offered by the issuer first to investors prior to third parties 14 Representations & warranties • How much to rely on work of previous investors in diligence – Careful to distinguish between strategic and financial investors given risk profile and desired outcomes – Timing of last investment and composition of investors • Usually include more detailed representations and warranties and disclosure schedules – Longer operating histories – More “material” agreements, partnerships, joint ventures – More complex balance sheets – U.S. regulatory compliance — issues like privacy and environmental matters – International compliance — issues like FCPA – Intellectual property issues 15 Secondary purchases • Secondary purchases — often combine investment directly in issuer with purchase in secondary directly from existing stockholders – “Cross-purchase” structure – Less cash from investment available for company – Typically purchase of common stock from management and employees to provide liquidity – Can also purchase preferred from