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7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Week #2:Corporate Entities and theCorporate Life Cycle
September 14th, 2015
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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REMINDER!
A how-to guide:
think like a businessperson, but act like a lawyer.
2
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Areas of Corporate Law
3
Areas of Corporate Law review:
1.IP2.M&A3.Tax4.RE5.Bankruptcy6.Fund Formation7.Securities / Public Markets8.Secured Transactions
9.Corporate Governance10.L&E11.VC12.Financial Banking / Regulatory
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Quick Review: Corporate Law Areas
4
Private Funds:PE / VC
Public / CapitalMarkets
Debt /Recaps
M&A
Private Entities
Securities
Formation /
Investing
SecuredTransactions
TaxBankruptcy /Restructuring
Real Estate
Contracting
Regulatory IP
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Infrastructure
5
Corporation / Company Departments:
1. HR2. CEO3. COO4. Legal
5. Accounting6. Marketing7. OCR8. CFO9. Sales10.Finance11.Supply Chain12.Recruiting13.IT14.Production15.R&D16.Admin17.Strategy / Big Data / Analytics18.Facilities19.Ops
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Organizationand legal implications by department
6
Operations
C-suite
Sales &Marketing
Strategy /NPD
Finance /M&A
Legal /Compliance
HR
Board
Supply Chain EmployeeSales Contracts goods or services
MarketingAgencies
Ads /Sponsorships
Newproducts /offerings
R&D / IP
Public:securities
Debt / Recaps
M&A
IP
Keyman liabilityprotections
IT
Vendors
Supports all areasand hires law firms
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Org Chart:GE Example
7
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Org Chart:Apple Example (from Jobs days)
8
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Structure
9
Types of corporate entities:
1.S-Corp2.LLC3.C-Corp4.LLP5.GP6.LP7.Sole proprietorship8.LLLP
9.PLLC
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Corporate Structure - Generalities
Area GP / LP C-Corp LLC
Other (sole,
LLP, LLLP,
PLLC, S-Corp)
Usage
PE / VC fund
structures; Professional
services groups
Public Co.s;
Larger privately held
Co.s
Smaller privately held
Co.s;
PE / VC GP entities
Rarer usage
Set-upEasy to form
GP = mgmt. entity
Most effort / cost &
ongoing reporting (+
BOD)
Medium effort -
Capital
Must be LP to be
investing
Easy; pro-rata profit
distribution via
dividends; most VCs
require/convert to C-
More difficult;
distribution allocation is
variable; membership
interests, not stock
-
LiabilityGP has unlimited
liability; LP has limited
Least liability;
Independent entityLimited -
Taxes Pass-through Double-tax
Pass-through (can
choose tax structure
default is partnership)
-10
Business Associations in 10 minutes or less
Note: this does not contemplate all legal implications of each entity this is more of a business overview
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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PE
11
What is it?
How does it work?
1.2.3.
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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What is private equity?
PRIVATE EQUITY =private investments in companies
In our society, typically refers to PE Firms = firms that pool capital from private orinstitutional investors to make investments in established companies via a leveraged
buy out (LBO) model Private investors = family offices, high net worth individuals (were talkinghundreds of millions to billions here); must qualify with the SEC
Institutional investors = retirement / pension funds
Ex: one of the largest is CalPERS = Cali Public Employees RetirementSystem has$300Binvested - $44B exposure in PE
LBO = using debt to get a higher return on your capital Note: banks used to lend at very high leverage ratios (meaning high amounts ofdebt to capital70 80% of debt at the peak!); now, most investments maximizetheir leverage ratio around 1:1, or 50% debt
PE Firms usually have investing theses = the types of industries preferred (verticals)to invest their capital
Ex: biotech, healthcare services, manufacturing, pharma, etc.
PE Firms usually only invest in companies that have an established performancerecord and are usually operating at a profit
Ex: Although not always (this is an acquisition by JWN, NOT PE sale, but still
interesting) Chicagos Trunk Club was purchased by Nordstrom last year for$350M and they were operating break-even
12
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Understanding the LBO
13
What is a LBO?
How does it work?
1.2.3.
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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What is private equity?
LBO Example Company A purchased for $10M Company A sold for $20M
If 100% of purchase funded with equity:Invest 100% of equity = $10M
Return $20M - $10M = $10MROI (Return on Investment) =$10M Return / $10M Invest = 100%
If purchase partially funded with debt and equity:Invest 50% of equity = $5MBorrow 50% of debt = $5MTotal purchase cost = $10M
Debt = paid off at time of sale (cash flow from ownershipperiod used to pay interest and pay down principal)
Return = $20M Sale price - $5M Equity (- any remaining debt,assuming $0)= $15MROI = $15M Return / $5M Invest = 300%!!!
Other $5M in equity can be invested elsewhere optimal use of ALL capital! 14
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Understanding Fund Structure
15
How are PE / VC funds formed?
1.2.3.
How does the life cycle work?
4.5.
6.
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Private Equity Fund Structure
16
Fund GP,LP
PortCo A, LLC
Institutional$$
Fund UGP,LLC
Fund MgmtCo, LP
FundParent CoGP, LLC
PortCo B, LLCPortCo C,C-Corp
Private$$
FundMgmt.
FundMgmt.
FundMgmt.
THE FUND, LP
7/23/2019 Week #2 Lecture for Business Priciples for Lawyers Class: Corporate Entities & Intro to Investors
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Fund Life Cycle
Fundclose
Investor
A
InvestorB
InvestorC
FundFormation
Fund Formationand capital
commitments
PortCo Aacquisition
PortCo Bacquisition
PortCo Cacquisition
PortCo Asale
PortCo Bsale
PortCo Csale
Years#1 - 4
Years#4 - 10
Fund
wind-down
Capital calls for
PortCo acquisitions
PortCo sales /
exits