Raise your hand if you’ve recently heard someone say that their company’s valuation rose to hundreds of millions of dollars by managing to secure “series A” investors. Keep your arm up if you know what that means.
If your hand is no longer in the air, don’t worry – unless a lawyer takes the time to investigate the “structure” of the deal, nobody knows what that statement really means.
What Does “Structuring” A Deal Mean?
Experienced corporate lawyers and corporate finance people are able to structure deals which may appear to be the same on the surface, but have details that make the structure different.
The structure of a deal involves the interplay of several functions in the company, so as to achieve certain desired outcome(s) for the company. These include:
Allow me to show you three examples of how deals may be structured. Suppose Company A is restaurant. It has two outlets in Singapore and they have been very successful for more than ten years. The owners are all family members. They have a few loyal and key staff. They have key know-how, recipes and supply chain established.
Let’s assume that the key intent of Company A is to expand and open new outlets. To do this, they will need funds from either banks or investors.
This gives lawyers at least two possible ways to structure the deal: 1) Set up a special purpose vehicle (SPV) for each new outlet and get investors or banks to finance the SPV or 2) Create licenses and get franchisees to invest.
Suppose the key intent of Company A is to be publicly listed in three years. One possible approach is to structure series A, B and C rounds of investments with the view to increase the perceived valuation of the company; so that when it eventually gets listed, they manage to get a high enough valuation.
Alternatively, the valuation can be increased through mergers and acquisitions of other companies.
In this example, let’s say Company A wants its existing management to retire. It can consider creating a fund for key employees to eventually buy out the management, or implement an employee share option scheme, or to simply buy out the retiring management team.
There Is No Standard Way To Structure A Deal
Many of my clients seem to think that there is a fixed meaning to terms like “angel investors”, “series A investors” and “crowd source investors”.
Naturally, they also expect me to give them a standard agreement template, which they believe will be enough to encapsulate their objectives.
After reading this post, I hope that I’ve been able to convince you that such simplistic thinking will not work. Instead of worrying about being unable to structure a deal in a standard way, SMEs should embrace the freedom to transform their businesses in whichever way that best suits their objectives.
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