How to run your tech business as if you're about to sell
16 - 05 - 2019
Over the years we have dealt with the sale of many tech businesses, and one thing is clear - those businesses that haven't been set up from the beginning with an eye to sale are going to have a lot of work to do to catch up if or when they do sell; but equally when they attract investment, expand, acquire or wherever their lifecycle takes them.
This might be true for any business, but in technology businesses some specific issues are amplified, and as specialist lawyers in this sector, we've seen this again and again. Highlighting someone's these, we'd mention particularly the follwoing:
1. Use share options to spread ownership
Technology businesses like to reward those who have been part of their growth, and quite understandably. This can mean giving out parcels of shares at a time when revenue is tight, as an incentive to be part of a payday if things go well. But there are risks, in loss of control, in difficulties in sale process, in shareholders leaving (but still having shares, or having to be bought out).
Would share options be better, so the team still get value on a sale, but they don't actually own the shares until immediately before the sale. These can also be done tax efficiently. There are costs in set up, but they can benefit the employees whilst avoiding a lot of pain later.
2. Make sure you own your intellectual property
If key software is developed by contractors, even ones close to the business, and even founders, there is a real risk that the IP in the business will not be owned by the business; that it's owned by those individuals. That's a huge red flag on sale or investment - you haven't got control of your crown jewels. You may be able to put it right - but at a cost.
3. Understand your use of third party software
Have you got the right licenses for what you're doing? If you don't - perhaps you've taken a shortcut to save cost - the cost of remedying that, if capable of remedy, is going to be a lot more than getting it right at the outset.
4. License Open Source software
If you have used OS components which are subject to restrictive licenses, you could have lost the proprietary nature of your own product. Check early, swap out restrictive-licence software, and have a firm policy and knowledge of open source issues.
5. Explore privacy by design
If your product uses personal data, be sure you have built it from the ground up in accordance with data protection principles and legislation - GDPR. Retrofitting will be much more difficult, or impossible. Good practice will be a good selling point: bad practice will be a major disincentive to an investor or buyer.
6. Invest in great contracts
A buyer will want to see you've had good contracts, specific to what you're doing, from day 1. Not your customers' contracts, not something you've borrowed from another business. Do your contacts give you revenue recognition problems, or compromise your intellectual property? Do they allow customers to walk away on a change of control of the business?
What we've seen is that where we have lived the business lifecycle with a company, and been able to advise along the journey, value is maximised and opportunities to chip away at the value are minimised; instances where investors and buyers may be scared off are reduced; and the chances of success are increased.
And if you don't sell, and don't seek investment - you'll still have increased the value of the business and its prospects of success.
Paul Berwin is Head of Digital Law at Berwins Digital. He offers targeted advice to a global client base of digital and tech businesses. Industry ranked and with decades of experience, he is one of the foremost authorities on digital law in the North of England.