[HN Gopher] Lessons from a Private Equity Earn Out: How I Lost P...
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Lessons from a Private Equity Earn Out: How I Lost PS550K Due to a
Lowercase 'C'
Author : seasicksteve
Score : 36 points
Date : 2024-07-17 18:39 UTC (5 days ago)
(HTM) web link (www.entrepreneur.com)
(TXT) w3m dump (www.entrepreneur.com)
| com wrote:
| Excellent advice.
|
| I'm not convinced that it's possible to get the 100-day
| integration to start only after the earn-out is completed.
|
| Anybody managed to get this in the sale agreement?
| fortran77 wrote:
| The "P" in "Parties" also needed to be capitalized.
| blackeyeblitzar wrote:
| What I don't get is even in the absence of capitalization
| wouldn't the default interpretation be whatever the prevailing
| reasonable meaning would be?
| hluska wrote:
| In legalese, there is a massive difference between proper and
| improper nouns. Capitalization matters a tremendous amount.
| phoenixy1 wrote:
| From the article, it's not clear that the prevailing
| reasonable meaning _was_ Connected Parties. In fact, it
| sounds like the author thought the meaning was connected
| parties -- otherwise he would not have bothered to disclose
| the relationships of the two shareholders who were connected
| parties (lowercase) but not Connected Parties (uppercase).
| blackeyeblitzar wrote:
| I feel like in general, the complex structures and legalese in
| the startup world are set up against founders and against
| employees. Is there anyone pushing for simplification or standard
| forms or structures that are not just in the VC's or acquirer's
| interests?
| ralph84 wrote:
| Attorneys like repeat business. They're much more likely to do
| business again with a private equity firm than a founder, so
| even if they nominally represent the founder they're not going
| to do anything that would jeopardize their prospects for future
| business with the private equity firm.
| vmfunction wrote:
| > so even if they nominally represent the founder they're not
| going to do anything that would jeopardize their prospects
| for future business with the private equity firm.
|
| Ouch! Seems like there should be some 'unionised' legal
| representation for founders. Seems like representation for
| founder and VC to be a conflict in interests.
|
| This seems to be much heavily emphasised on capital vs
| talent.
| JumpCrisscross wrote:
| > _Seems like there should be some 'unionised' legal
| representation for founders_
|
| Just pick a lawyer who works for founders. (Any competent
| firm will also find this in conflicts.)
| RcouF1uZ4gsC wrote:
| I feel the biggest issue was that there was a desperation for the
| sale which caused to the OP to agree to something out of their
| comfort zone and experience.
|
| Once you do that, the advantage is for the acquiring company.
| sealeck wrote:
| Presumably any private equity firm you'd want to work for would
| respect the fact that you were capable of getting a good deal
| for your founder client (and the implicit assumption that
| because they have additional evidence that you are a better
| lawyer who is also loyal to their clients that they are more
| likely to hire you)?
| egl2021 wrote:
| "...you'd want to work for..." This is a misleading framing.
| The private equity firm only wants to make the deal work
| financially and only for them. Anything else is secondary.
| You shouldn't be thinking about their respect, wanting to
| work for them, or anything beyond the deal terms.
| hluska wrote:
| When dealing with private equity, there are three things to
| remember:
|
| 1.) You may negotiate with them two or three times in your life.
| They negotiate with people two or three times a day. You are the
| least experienced and most vulnerable party.
|
| 2.) They are not your friends. They'll pretend but they're not.
| If you're in music, think better paid A&R with fewer morals.
|
| 3.) If a term can sink a deal, they were never interested in
| signing. Adults can deal with disagreements without crashing the
| whole plane.
| tptacek wrote:
| This particular story doesn't seem like a negotiation failure
| so much as a grave failure of this person's legal counsel in
| drafting the final agreement.
| hluska wrote:
| They chose the wrong counsel - they went to a general
| practice firm as opposed to finding a lawyer capable of
| navigating 1 - 3.
|
| A lawyer may be great at holding little old ladies' hands
| while preparing their wills. That does not mean they're
| qualified to deal with PE.
| bankcust08385 wrote:
| If it's not fatal, don't "marry" a third-party of questionable
| integrity for some cash.
| infecto wrote:
| Great article and great takeaways. People should always keep in
| mind that in business people are not your friends. Does not mean
| they are evil though. The takeaway here is the what I take as the
| main point. Hire proper legal representation.
| Havoc wrote:
| If you read this carefully you'll notice this story is presented
| back to front.
|
| >revenue must not have involvement with "connected parties."
|
| >disclosed that two of my shareholders also worked at companies
| that were customers
|
| ...and surprise surprise the revenue gets disputed. Disclosing
| things doesn't invalidate pieces of the contract - if anything it
| strengthens it given solid evidence to the opposing party here.
|
| That's it. End of story. And yes, good advice - lawyers may have
| saved this.
|
| The rest reads like the result of a desperate laymans search for
| anything that might back an alternate
| interpretation....absolutely anything that might get these two
| obviously excluded revenue pieces back into scope. To call it a
| longshot would be generous:
|
| >Had the "C" in "connected parties" been capitalized, it would
| have fallen under the HMRC Taxation of Chargeable Gains Act,
| which in the UK formally defines a Connected Party as a person
| who has control of a company, which was not the case with either
| of my shareholders.
|
| Why would UK tax law definitions have any bearing on
| interpretation of what revenue is in scope for a valuation
| calculation?
|
| But lets assume it somehow is via some unnamed mechanism. The act
| doesn't even _mention_ "Connected Party" let alone define it. It
| does talk about connected persons but you'd need to squint pretty
| hard to turn party in persons via a capital C...and ignore the
| minor detail about it dealing with tax matters not M&A matters.
|
| I'm gonna go out on a limb here and say there was no lawyer
| involved in the capital C part of the story at all.
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