Seattle Merge Briefing, March 12, 2013

Seattle Merge Briefing

Date & Time:

    Tuesday, March 12th, 2013
    2:30 pm to 4:00 pm


Davis Wright Tremaine LLP

    1201 Third Avenue, Suite 2200
    Seattle, WA 98101


Use DWTSEA2013 to receive complimentary registration.

Interested in the M&A market? Get educated!

Selling your tech company is about changing your life and achieving a dream. However, while it’s likely the most important transaction of your life, it’s also by far the most complicated–80% of owners who try to handle a sale by themselves fail. To achieve an optimal outcome, you need to get educated. This introductory overview of the merger market and trends, the process and pitfalls, will help you understand the basics of a successful M&A process.

Your instructor is a former company owner who sold his company. The event will also feature presentations by several industry experts. Please forward to anyone who might find this event interesting (owners and executives in the software, IT and related technology industries).


  1. Tech M&A Overview: Market Perspective
  2. M&A Activity: 2013 Valuations and Structures
  3. 8 Steps to an Optimal Outcome in the M&A Process
  4. Avoiding Deal Disasters/Due Diligence Landmines
  5. Improve Your Odds: Get Educated
  6. Q&A

Record cash, disruptive change, aggressive new buyers, and rising valuations are making 2013 the best time to sell in a decade.

  • Many owners are taking advantage–but are you ready?
  • What are the latest trends, deal metrics and valuations?
  • When is the best time to sell? How do you get the attention of global buyers?
  • Preparation – how do you keep from being due diligence road-kill?
  • What are the 8 steps to achieving an optimal outcome – maximum price and structure?

Find out March 12 in Seattle, at the Merge Briefing for owners and executives in software, IT and related technology. Join us!

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How Many Shares To Authorize?

I am frequently asked this question: How many shares should my startup authorize in its charter (its Articles or Certificate of Incorporation)?

The trite, short answer is—authorize enough.  The longer answer is more nuanced, and basically boils down to—authorize enough to cover founder stock issuances (obviously), the equity or stock plan pool, reasonably foreseeable preferred stock issuances, and some headroom to cover the reasonably foreseeable growth of the Company.

Like other legal framework questions in starting a company, one of the tricks is to build a legal structure which is ready to accommodate growth.  As your company grows, if you have the right legal structure in place, you will have less legal work that you have to do along the way to keep up with the growth. (For example, authorize enough shares so that you don’t have to amend your charter later on to authorize more. Authorize blank check preferred so that you don’t have to amend your charter to close your first preferred stock financing, etc.)

Authorized shares are the  shares a company is authorized to issue, not the number of shares the company will necessarily issue. For example, you might authorize 10 million shares, but only issue 2 million.

“Authorized but unissued shares” are shares that are authorized but not issued. In the example just given, a company with 10 million shares authorized, but only 2 million shares issued, the “authorized but unissued shares” would be 8 million.

Why would you authorize more than you might issue? Because you want head room. You want the shares available in case you need to issue them.

In the above example, you might need that remaining 8 million authorized, but unissued, shares for things like:

  • common shares that might be issued on the conversion of preferred shares that are issued later (if you sell 2M shares of preferred stock, you will need at least 2M shares of common stock available and reserved for that preferred to convert into later);
  • shares that will be issued on the exercise of stock options or warrants issued later;
  • shares that will be issued pursuant to other forms of compensatory equity awards (perhaps outside the plan options);
  • shares which might be issued in future financing transactions; or
  • shares which might be issued in forward stock splits (especially if you grow spectacularly fast).

Sometimes founders get nervous and want to make sure that they are forever going to control the entity – and thus if 10 million shares are authorized, they want 6 million issued to them as founder shares – to make sure that no one in the future can obtain a majority of the shares without their consent.

This doesn’t make sense and can be problematic for a couple of reasons. First, if you authorized 10 million shares, you probably included in that authorized share figure some number of authorized preferred shares, such as 2 million. So, if you authorized 10 million shares overall, and you split that between 8 million common and 2 million preferred, 2 million of the common should be thought of as set aside for the potential conversion of the preferred, thus leaving only 6 million common theoretically available – all of which you would have issued in the above example to the founders– leaving no room for an option pool.

Don’t be afraid to have headroom for future growth.


Posted in Business/Corporate Law, Startup Jargon/Definitions | 10 Comments

The Washington Supreme Court Holds That I-1053 Is Unconstitutional

By Garry Fujita

The Decision is in:  The Washington Supreme Court holds that I-1053 is unconstitutional, but did the Court properly construe Art. II, Sec. 22 of the Washington State Constitution?

Five times, in I- 601, R-49, I-960, I-1053 and I-1185, the Washington voters limited the legislature’s ability to increase taxes, requiring approval by the 2/3 majority standard.  The critical question in the case was:  What does Art. II, Sec. 22 of the Washington Constitution mean?  That provision says:

SECTION 22 PASSAGE OF BILLS. No bill shall become a law unless on its final passage the vote be taken by yeas and nays, the names of the members voting for and against the same be entered on the journal of each house, and a majority of the members elected to each house be recorded thereon as voting in its favor.

In the opinion, the Court scrutinized two critical words — “a majority”.  Does the plain meaning of these two words really mean three words:  “a simple majority”? The Court’s majority answered yes.  A single dissenter (there were two more dissenters, but they dissented on the point that there was no judicable controversy) answered no.  Both the majority and the single dissenter focused on constitutional history but came to different conclusions about whether “a majority” actually meant “a simple majority.”

Both opinions explored interesting historical considerations.  This was appropriate because both the majority and the one dissenter relied on the well-established legal premise that if there is an ambiguity in the words, then the court should resort to external sources to determine the intent of the words.  The majority lays down the entire principle:

Determining whether the constitution prohibits a particular legislative action requires the court to first examine the plain language of the constitutional provision at issue. Wash. Water Jet Workers Ass’n v. Yarbrough, 151 Wn.2d 470,477, 90 P.3d 42 (2004). The court gives the words “their common and ordinary meaning, as determined at the time they were drafted.” !d. (citing State ex rel. 0 ‘Connell v. Slavin, 75 Wn.2d 554, 557, 452 P.2d 943 (1969)). The court may look to the constitutional history for context if there is ambiguity. Id.

League of Educ. Voters v. State, Slip. Op., No. 87425-5, p. 13.

Was it really necessary to resort to intent, history and populace values at the time the provision was adopted to interpret these two words?  It would be if there is ambiguity in the words used.  Is there ambiguity in these two words?

A case can be made for the position that there is no ambiguity in “a majority.”  Let’s take “majority” first.  According to Merriam-Webster’s online dictionary, majority means:

3. a : a number or percentage equaling more than half of a total <a majority of voters> <a two-thirds majority>  So, majority means “a number or more than half of a total.”  There is no limitation as to how much more than half is necessary.  Is 51% more than half?  Yes, it is.  Is 66.6% more than half?  Yes, it is.  Then, it is true that either 51% or 66% meets the definition of “majority.”

The review standard is to apply the “ordinary and common” meaning.  Is there anything in “a majority” that mandates a simple majority?   To answer that question, we next turn to the article “a”.  What does the indefinite article “a” mean?  The Washington courts have considered indefinite articles, explaining:

We agree with the Douglas court that the legislature unambiguously defined the unit of prosecution in RCW  9A.56.160(1)(c) as one count per access device by using the  indefinite article “a” in the clause “a stolen access device.” Webster’s provides the following definition for “a”:

1–used as a function word before most singular nouns other than proper and mass nouns when the individual in question is undetermined, unidentified, or unspecified …; used with a plural noun only if few, very few, good many, or great many is interposed.

WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY OF THE ENGLISH LANGUAGE 1 (2002). Thus, because the word “a” is used only to precede singular nouns except when a plural modifier is interposed, the legislature’s use of the word “a” before “stolen access device” unambiguously gives RCW 9A.56.160(1)(c) the plain meaning that possession of each stolen access device is a separate violation of the statute.

State v. Ose, 156 Wash.2d 140, 146, 124 P.3rd 635 (2005).  In Ose, the defendant was charged with 45 crimes but argued that the statute meant that one occurrence of possessing several stolen devices constituted one chargeable crime, not 45.  The Court concluded that the indefinite article “a” modified “stolen access device” to mean possession of each device constituted one crime.

How would that rationale affect the constitutional analysis of I-1053?  One could argue that “a” majority means “an undetermined, unidentified, or unspecified” majority.  In other words, the framers did not care what the extent of the majority approving the law might be, as long as it was a majority.  It is reasonable to conclude that a constitutionally valid majority could be simple, 2/3 or unanimous, because the indefinite article “a” means that the term majority is “undetermined, unidentified, or unspecified.”  Whether such greater majorities are good policy or not (there’s plenty of room in another post to discuss the policy merits) is not the Court’s concern so long as the words that it interprets have been given their plain meaning, absent ambiguity in the words used.

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Delaware Franchise Tax Frights

Around Delaware franchise tax reporting times, I’ll receive emails like this one:

“Slight problem..…my Delaware franchise tax report says I owe $45,000.”

Or this one:

“The number in this notice is terribly high, is that a mistake? The total amount due is more than 222K? !!!”

Or this one:

“Ummm, how can we owe $126,000 in taxes if we don’t even have a business or revenues yet?
I sure hope this is a misprint…or I am off to Delaware to start serving my prison sentence….”

For some reason Delaware likes to freak people out.

If you do something typical like authorize 10 million shares, the front page of your Delaware franchise tax report will show some outlandish amount of taxes owed. If you’ve never been through this before, you might be alarmed and send your attorney an email like the one above. I’ll respond with:

“Turn the form over. Calculate the tax using the alternative, par value method.”

When you do this, and you recalculate your taxed owed, you’ll email me back and say something like:

“I just recalculated using the assumed par value method, and it brought the bill down to $400. Does that sound right?”

And I will say, “Yeah, that sounds about right.”

Posted in Uncategorized | 9 Comments

What Would Derek Zoolander Say About Crowdfunding?

By Christina Chan & Joe Wallin

I don’t want to bring you back to your high school days (aren’t we all glad those days are over?), but remember when you sat down for a test and your teacher said “Remember to read the instructions before starting”?  Maybe you even had one of those particularly cruel teachers who actually put the answers in the instructions just to see who would read them. If you were anything like me, you probably rolled your eyes and ignored the advice.

When it comes to reading the new crowdfunding law under the JOBS Act, however, you would do well to listen to the words of your old high school teacher.  Before the JOBS Act was passed in March of 2012, there was a lot of excitement in the blogosphere anticipating the legalization of equity crowdfunding.  To the dismay of many in the startup world, the crowdfunding provisions in the JOBS Act  read like a list of what companies can’t do, rather than what they can.  (I’m reminded of that great scene in Zoolander when Derek is presented with a model of the ridiculously named “Derek Zoolander Center For Children Who Can’t Read Good And Wanna Learn To Do Other Stuff Good Too” and Derek’s response is angrily yelling “What is this?!”)

There are many limitations and qualifications on equity crowdfunding in the JOBS Act and it will be important to read and understand them all before embarking on an offering, when crowdfunding ultimately does become legal.

In this post I want to draw attention to a commonly misunderstood crowdfunding provision in the JOBS Act: the monetary limitations on how much investors can invest.

Section 302(a)[1] of the JOBS Act limits the aggregate amount an investor can invest in a company during a 12 month period through the following provision:

(B) the aggregate amount sold to any investor by an issuer, including any amount sold in reliance on the [crowdfunding] exemption provided under this paragraph during the 12-month period preceding the date of such transaction [must] not exceed —

(i) the greater of $2,000 or 5 percent of the annual income or net worth of such investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; and

(ii) 10 percent of the annual income or net worth of such investor.

This provision does not sound so onerous by itself; you might conclude that under this provision an investor can invest in a number of different crowdfunding offerings, as long as the investor does not exceed the cap with respect to any one issuer.

But keep on reading…

Section 302(b)[2] of the JOBS Act places certain requirements on persons acting as intermediaries in a crowdfunding transactions (a registered broker or funding portal).  This includes a requirement that the intermediary “make such efforts as the Commission determines appropriate, by rule, to ensure that no investor in a 12 month period has purchased securities offered pursuant to section 4(6) that in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B).” (emphasis added).

In other words, imposed on the intermediaries through which a company must conduct its crowdfunding offering[3] is an additional limitation to the dollar amounts investors can invest. The cap on investment described above applies to the aggregate crowdfunding investments made by an investor in a 12 month period, not just the investment made in a particular company.

It’s not clear how portals and brokers are going to coordinate keeping track of all the past crowdfunding investments made by a particular investor.  Nor is it clear yet what the SEC will actually require portals and brokers to do to ensure investors do not exceed the cap in the rule.  For now, just keep in mind Derek Zoolander.


[1] New Section 4(6) of the Securities Act of 1933.

[2] New Section 4A of the Securities Act of 1933.

[3] Remember under the new crowdfunding exemption, issuers can only sell stock through an intermediary: either a broker-dealer or registered crowdfunding portal. Section 302(a) of the JOBS Act (new Section 4(6)(C) of the Securities Act of 1933).

Posted in Federal Law & Regulation, Financings | 10 Comments