What You Need To Know – Bolsters Advisory

Bolster: to support, reinforce and strengthen

WHAT YOU NEED TO KNOW?

1. Nondisclosure Of Financials

Sellers and fund-raisers are generally prevented and rarely have the ability to share financial information, as one of the advantages of companies remaining private is that they are not obliged to share financial information publicly. To ensure this, private companies looking to raise funds make sure that the sellers are committed to keeping such sensitive information confidential by signing a nondisclosure agreement (NDA). Financial information is generally only shared with a select group of primary round investors.

If a potential investor is interested to know more regarding a private company’s investment potential, they can achieve this through understanding its macro-environment, studying its comparables (comps) and looking at the track record of its previous round investors, in addition to other publicly available data.

2. What Exit Strategies Do Private Startups Follow?

Mergers & Acquisitions (M&A)

In this scenario, the startup is sold to a larger company or competitor for a profit, enabling its owners and investors to cash out. Such a transaction results in larger growth opportunities for the buyer, who can gain complementary skills, economies of scale and a new customer base.

This transaction is conducted via cash or stock compensation, whereby key executives and employees from the startup can stay at the company for a period of time before cashing out or vesting their stocks. In such exits, startup investors receive capital, which then translates to returned money to venture capitalists and other investors.

Preferred shareholders who benefit from pro-rata rights are prioritized over common shareholders in cashing out and receiving an upside on their investment.

Initial Public Offerings (IPO)

When a private company is ready to obtain more funding through distributing shares via the public stock market, large sums of capital are assigned to all parties involved, including founders, early employees and investors. If preferred shareholders do not exercise their right to sell pre IPO, they will receive four common shares for each preferred share held, in addition to voting rights.

3. How Long Does A Private Placement Deal Take?

Once the investor(s) commits to signing a private placement deal, we will arrange for a SPV (special purpose vehicle), enabling the transfer of capital to invested preference shares in the fund raising private company. This process takes an average of 2 weeks to complete, whereby a legal entity is established. All legal documentation, compliance issues, tax and administrative work is handled in order to ensure the secure implementation of the investment. Within two weeks the investor(s) should expect a detailed capital account statement, which details the investors’ financial contribution and ownership stake in the invested company and provides an equity account recorded in the accounting ledger of the partnership.