The Ins and Outs of Getting In and Out of Deals

How can venture capital deals best be structured? What about leveraged buyouts?

Gary Silverman, ’90, a partner at the Chicago law firm of Kaye Scholer, offered some answers March 4 at a Law and Business class at Gleacher Center.

The market for secondary venture-capital investment in private companies has grown dramatically in recent years, said Silverman, who specializes in mergers and acquisitions. Whole funds exist to buy out other funds, usually at a discount, by investors who are willing to wait longer [for returns] than the old investors, he said.

Venture capitalists typically seek to structure a deal based on convertible preferred stock, Silverman said. This is the right-down-the-middle, everybody-understands-it, it’s-been-done-a-million-times method, he said.

To protect their investment, venture capitalists seek various covenants that, for example, require approval of major transactions. Don’t change the basic nature of the company I invested in, Silverman said. Don’t triple the CEO’s salary without talking to me.

In a leveraged buyout, the two parties start by signing a letter of intent that says the buyer is done shopping and lays out such details as price and financing. The buyer’s going to have a bunch of conditions, and each condition is a reason the deal may fall apart, he said. Many of these same issues will be covered in the eventual purchase agreement.

During due diligence, the buyer will send out an overwhelming set of questions to the target company. It’s a very, very invasive process, he said. It takes up an enormous amount of management’s time, which is why you don’t enter into these things lightly.

As with a venture capital investment, leveraged buyouts will contain pre-closing covenants that require the seller to operate in the normal course of business, Silverman said.

 

Ed Finkel