Pre-M&A Planning for Startup Founders

Royse Law Firm
Pre-M&A Planning
for Startup Founders
Roger Royse
@rroyse00

Disclaimer
No information contained in this presentation is to be construed as legal advice. No
information contained in this presentation is intended or related to any particular factual
situation. Nothing herein forms an attorney-client relationship. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.

Topic Overview
• Due Diligence & Cleanup
• IP Issues
• Tax and ERISA Issues
• Employment Issues
• Shareholder Planning – Individual and Estate Planning
• Basic Structures
• Transaction Process

Due Diligence & Cleanup
• Organize company books and records
• Organizational documents; check for good-standing and resolve any outstanding
issues
• Corporate minutes / board approvals; draft if necessary
• Shareholder / member records and cap table; share certificates; draft documents if
necessary
• Regulatory Issues
• Tax Returns and other government filings
• Balance Sheet
• Earnings Statements
• Third Party Consents
• Resolve or quantify outstanding lawsuits and claims

Intellectual Property Issues
• Establish ownership of IP
• File trademarks, patent applications, etc.
• Properly document transfers of IP to the company
• Properly record transfers of IP to the company
• Discuss any possible infringement
• Retain executed confidentiality of information and invention assignment agreements
for all employees
• IP documents
• Review licenses of company-owned IP and licenses of IP used by the company; third-
party consents

Tax and ERISA Issues
• 409A issues
• Option valuation
• Severance agreements
• Deferred compensation
• 280G Golden Parachute Payments
• ERISA plan compliance
• State tax nexus
• Foreign tax compliance
• Transfer pricing

Employment Issues
• Employment Agreements
• Offer letters; employment agreements of executives
• Confidentiality of information and invention assignment agreements for all employees
• Payments triggered by change of control / sale
• Stock, stock options, bonus plans, or other equity awards
• Identify Key Employees
• Compliance
• Compliance with employee classification laws
• Compliance with wage and hour laws

Shareholder Planning
• Sale to intentionally defective grantor trust
• Gifts of stock through family limited partnership
• Charitable trusts
• S corporation distributions
• Avoiding double taxation
• Capital gain versus ordinary income
• Installment sales
• Earn-outs

Transaction Process
• Negotiations
• Letter of Intent
• Due Diligence
• Purchase Agreement
• Ancillary Documents
• Closing

Basic Structures
• Tax Free Reorganizations
• Type A – Merger
• Type B – Stock for Stock
• Type C – Stock for Assets
• Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations
• Taxable Transactions
• Stock Sale
• Asset Sale
• Partnership Techniques
• S Corporation Strategies

Type A Reorganizations – Section 368(a)(1)(A) Statutory Merger
• Statutory Merger – 2 or more
corporations combined and only one
survives (Rev. Rul. 2000-5)
• Requires strict compliance with statute
• Target can be foreign; Reg. 1.368-
2(b)(1)(ii)
• No “substantially all” requirement
• No “solely for voting stock” requirement
Requirements:
• Necessary Continuity of Interest
• Business Purpose
• Continuity of Business Enterprise
• Plan of Reorganization
Tax Effect:
• Shareholders – Gain recognized to the extent of boot
• Target – No gain recognition
• Acquiror takes Target’s basis in assets plus gain
recognized by Shareholders
• Busted Merger – taxable asset sale followed by
liquidation
Target Acquiror
Shareholders

Type B Reorganizations – Section 368(a)(1)(B) Stock for Stock
• Acquisition of stock of Target, by
Acquiror in exchange for Acquiror
voting stock
• Acquiror needs control of Target
immediately after the acquisition
• Control = 80% by vote and 80% of
each class
• Acquiror’s basis in Target stock is the same as
the Shareholder’s basis prior to the acquisition
• Solely for voting stock
• No Boot in a B
• Reorganization Expenses – distinguish between
Target expenses and Target Shareholder
expenses (Rev. Rul. 73-54)
• Creeping B – old and cold stock purchased for
cash should not be integrated with stock
exchange
Target Acquiror
Shareholders

Type C Reorganizations – Section 368(a)(1)(C) Stock for Assets
• Acquisition of substantially all of the assets of
Target, by Acquiror in exchange for Acquiror
voting stock
• “Substantially All” – at least 90% of FMV of
Net Assets and at least 70% of FMV of Gross
Assets
• Target must liquidate in the reorganization
• 20% Boot Exception – Acquiror can pay boot
(non-stock) for Target assets, up to 20% of
total consideration; liabilities assumed are
not considered boot unless other boot exists
• Reorganization Expenses – Acquiror may
assume expenses (Rev. Rul. 73-54)
• Assumption of stock options not boot
• Bridge loans by Acquiror are boot
• Redemptions and Dividends – who pays and
source of funds
Target Acquiror
Shareholders
Target Assets
Acquiror Stock
Acquiror
Stock

Type D Reorganizations –
Section 368(a)(1)(D) Divisive Spin Off, Split Off, Split Up
• Divisive – transfer by a corporation of all or part of its assets to another
corporation if, immediately after the transfer, the transferor or its shareholders
are in control of the transferee corporation. Stock or securities of the transferee
must be distributed under the plan in a transaction that qualifies under Section
354, 355, or 356.
Transferor Transferee
Shareholders
Transferor Assets
Transferee Stock
Transferee
Stock

• If shareholders of Transferor stock receive
Acquiror stock and own at least 50% of
Acquiror stock, the transaction may be
treated as a non-divisive D REORG even if
it fails as an A REORG for lack of continuity
Transferor Acquiror
Shareholders
with 20%
Acquiror Stock
Acquiror
Stock
Transferor Assets
Merger
Merger Treated as Acquisitive D
Failed Type C Treated as D
Shareholders
Transferor Acquiror
Assets
Cash & Stock
Liquidation / Reincorporation
Shareholders
Transferor Acquiror
Type D Reorganizations – Section 368(a)(1)(D) Non-Divisive

• Shareholders have gain or loss
• P takes cost basis in Target shares
T P
S
T Shareholders Cash Reverse Triangular Merger
Treated as Stock Sale
Key:
T = Target P = Acquiror S = Merger Sub
Taxable Stock Purchases

Asset sale followed by
liquidation of Target
• Target has gain on
sale
• Target shareholders
have gain on
liquidation (unless
332 applies)
• P takes cost basis in
Target assets
Key:
T = Target P = Acquiror S = Merger Sub
T P
S
T Shareholders
Merger
P Survives
T P
T Shareholders
Variation with Merger Sub:
Cash Forward Merger

Royse Law Firm
Pre-”Event”
Wealth Strategies
for
Business Owners
David Spence
dspence@rrosyelaw.com

Commonly Used Pre-”Event” Tax Planning Techniques
• ESTATE PLANNING MOTIVATED:
• Gifts
• GRAT
• CLAT
• INCOME TAX MOTIVATED:
• QSBS
• “Packing” and/or “Stacking” QSBS Exemptions.
• May also be used with certain other tax planning strategies where gift tax-free/deferred
ownership transfer becomes attractive.
• DING
• CRUT
• Self-Beneficiary CLAT
• ESOP

Qualified Small Business Stock Exemption
• Potential to avoid up to $10MM per qualifying shareholder in capital gains tax on
sale of company stock. Requirements include (but are not limited to):
• C-Corp Stock only.
• Stock purchased upon original issue from Corp.
• Stock held for 5 years at time of sale.
• Other, corporation-level requirements also apply (e.g., qualified trade or
business, and asset usage requirement).
• May also be used for various other tax planning strategies where gift tax-
free/deferred ownership transfer becomes attractive.

Delaware Incomplete Gift Non-grantor Trust
“DING”
• Potential to Minimize, Defer, or Avoid altogether California State Income Tax on
Liquidity Event.
• Potential to “Pack” and/or “Stack” QSBS Exemptions.
• May also be used for various other tax planning strategies where gift tax-
free/deferred ownership transfer becomes attractive.
• Does it work in California? It is as yet untested, but it should…

1 – Formation of NING Trust
Non-CA
Bene 2
Delaware Trust
Trust
Protector
(Outside
California)
Client
(CA)
Non-CA
Bene 1
Distribution Committee
Non-CA Bene 1 & Non-CA Bene 2
+ Client
Investment
Adviser
(Outside
California)

2 – Formation of Investment LLC (Transfer of Assets for share of LLC Membership)
Trust
Protector
(outside
California)
Client
(CA)
Delaware Trust
Client
Holdings,
LLC
(DE)
Investment
Adviser
(Outside
CA)

3 – Final Structure
Trust
Protector
Client
Distribution
Committee
DING
Client
Holdings,
LLC
(DE)
Investment
Adviser
(Outside
CA)

4 – Operational Phase
Reasonable
Management fees*
Trust
Protector
Client
DING
Client
Holdings,
LLC
(DE)
LLC Manager
(not a member)
Non-CA
Bene 1
Non-CA
Bene 2
Distributions to beneficiaries*
*taxable in the state of “residence” at time of distribution/payment

DING RISKS COULD BE SIGNIFICANT
• Must Avoid “Substance over Form”/”Sham Transaction” Doctrines—Non-tax
objectives are a good thing.
• Using multiple DINGs to multiply QSBS can be subject to section 643(f) “multiple
trust rule.”
• Untested in California courts—But the test is likely to come.
• Incomplete gift transfer to trust is not addressed by section 1202 QSBS rules.
• Beware the California “throwback rule” Calif. Revenue & Taxation Code 17745.

PALO ALTO
1717 Embarcadero Road
Palo Alto, CA 94303
LOS ANGELES
11150 Santa Monica Blvd.
Suite 1200
Los Angeles, CA 90025
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Palo Alto Office: 650-813-9700
CONTACT US
www.rroyselaw.com
@RoyseLaw
MENLO PARK
149 Commonwealth Drive
Suite 1001
Menlo Park, CA 94025
SANTA MONICA
520 Broadway
Suite 200
Santa Monica, CA 90401
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Menlo Park Office: 650-813-9700
CONTACT US
www.rroyselaw.com
@RoyseLaw
ORANGE COUNTY
135 S. State College Blvd.
Suite 200
Brea, CA 92821

Presented by:
Successful Business Succession
October 2019
Justin T. Miller,
J.D., LL.M., TEP,
AEP®, CFP®
National Wealth
Strategist

Agenda
– Landscape and Challenges
– Know How to Build a Transition Plan
– Understand Retirement and Cash Flow Management
– Address Wealth Management for the Next Generation

3
Today’s Landscape for Privately Held Business Owners
‒ 50%-76% expect an ownership change within 10 years1
‒ 47%-65% want to transition ownership of their business
to the next generation2
Studies and Statistics
1 Exit Planning Institute, 2013 “State of Owner Readiness” Survey; Grant Thornton, Business Owner Survey, 2005; MassMutual, American Family Business Survey, 2007.
2 PricewaterhouseCoopers, Family Business Survey, 2012; Exit Planning Institute, 2013 “State of Owner Readiness” Survey.

4
Business Owner Planning Challenges
– 73%-83% have no documented succession plan1
– More than 50% expecting to retire in five years have not
yet selected a successor2
– 64% have no plan to minimize capital gains and estate
taxes3
– More than 50% have no buy/sell agreement4
– 31%-36% have no estate plan2
Studies and Statistics
1 Exit Planning Institute, 2013 “State of Owner Readiness” Survey; PricewaterhouseCoopers, U.S. Family Business Survey, 2015.
2 Mass Mutual, Kennesaw State University, Family Firm Institute, American Family Business Survey, 2007; Exit Planning Institute, 2013 “State of Owner Readiness” Survey.
3 PricewaterhouseCoopers, Family Business Survey, 2006; TNS Global, Phoenix Wealth Survey, 2005.
4 Marquette University—Center for Family Business, Survey of Family Business Issues, 2003.

5
Business Transitions
CHALLENGES FACING BUSINESS OWNERS
1. Know How to Build a Transition Plan
2. Understand Retirement and Cash Flow
Management
3. Address Wealth Management for the Next
Generation

6
Members
of the
Right Team
Corporate
Accountant
Personal
Accountant
Corporate
Attorney Trust
and
Estate
Attorney
Insurance
Advisor
Lending
Specialist
Wealth
Manager
Investment
Banker
Business
Valuation
Expert
Team of Advisors
BUILDING THE RIGHT TEAM

7
Structuring the Deal
TOP TEN PITFALLS
Structuring the Deal
TOP TEN PITFALLS
1. Overestimating (or Underestimating) Sale Proceeds and What
They Yield
2. Failure to Consider Immediate (Tax) and Future (Lifestyle and
Legacy) Cash Needs
3. Lack of Commitment and Limited Resources for Deal
4. Failure to Accurately Assess Market Conditions
5. Inaccurate or Indefensible Projections
6. Inability to Complete Due Diligence in a Timely or Orderly
Fashion
7. Distracting or Damaging Impact of Deal on Business
8. Failure to Maintain Focus on Objective
9. Excessive Legal Wrangling
10.Loss of Key Employees or Employee Sabotage

8
Management
Generation

9
Determining How Much You Need
ASSESSING YOUR PERSONAL BALANCE SHEET
Business Interests
Investment Portfolio/Trusts
Concentrated Equity Holdings
Stock Options
Restricted Stock
Deferred Compensation
Executive Benefits
Pension Plan
Retirement Plan
Real Estate and Personal
Property
Life Insurance
Mortgages
Health Care
Country Club Membership
Car/Gas
Bookkeeper/CFO
Personal Assistant
Vacations
Tickets
Credit Obligations
Future Expenses—Taxes,
insurance umbrella policy,
personal spending, other
business endeavors, etc.
LIABILITIESASSETS

2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
Jan-18 Feb-18 Apr-18 May-18 Jun-18 Aug-18 Sep-18 Nov-18 Dec-18
INDEXLEVEL
As of 12/31/2018. Source: Strategas and BNY Mellon.
Dec. 31, 2018
2,506.85
Dec. 29, 2017
2,673.61

2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
INDEXLEVEL
Trump Davos
Speech
Commerce
Report on
Tariffs
Jobs
Report
State of the Union
Extra
$100bn
of
Tariffs
Steel &
Aluminum
Exemptions
Extended
One Month
232 Tariffs
Auto Imports
Trump
Requests List
of Additional
$200bn of
Chinese
Goods
$50bn
List
Released
$200bn list
released
Trump-
Juncker
Meeting
US-Mexico
Deal
Trump
Announces
Round 2
China
Tariffs
Trump
changes
trade policy
strategy
USMCA Deal
Pence Speech
Trump
China
Trade Deal
Movement
Navarro
Comments
Trump-Xi Dinner

2,300
2,400
2,500
2,600
2,700
2,800
2,900
3,000
INDEXLEVEL

P l a n f o r N e w F i n a n c i a l R e a l i t y :
0
20
40
60
80
2017 2027 2037 2047
Generating
Assets
Drawing
on Assets
Retirement
$MILLIONS
With Capital Market Assumptions After All Taxes
After Taxes, Living Expenses & Inflation After Taxes/Living/Inflation & Health Care Expenses
Projected Growth with 1980-2016 Return Assumptions
Asset allocation based on a 50/50 portfolio, diversified across asset classes. Annual living expenses in retirement are 5% of the portfolio value, increased at an assumed inflation rate of 2.5% per annum.
Annual health care costs in retirement are $20,000 annually, increased at an assumed inflation rate of 6% per annum. Source: BNY Mellon Wealth Management.
While working (through 2027), the couple contribute $125,000 annually to their initial $5 million portfolio. Retirement at age 65 (in 2027). Their blended 50/50 portfolio comprises 27.5% U.S. large cap
equity, 5.6% U.S. mid cap equity, 3.7% U.S. small cap equity, 7.9% developed international equity, 6.2% emerging markets equity, 1.5% equity REITs, 39.4% tax-exempt fixed income, 3% high yield fixed
income, 1% emerging markets debt, 1% commodities and 3.2% managed futures. The illustration is based on a linear growth projection based on annual return assumptions of approximately 5.71% pre
tax and 4.77% after tax.
2017 tax policy assumes 39.6% federal income tax, 20% long-term capital gains tax, 20% dividends tax, 5.3% state income tax and a 3.8% surtax on net investment income for certain high income
taxpayers.

14
Management
Generation

15
Motivate—Why Clients Need to Act Now
HIGHEST INCOME TAX AND ESTATE TAX RATES: 1939-2019
Source: Internal Revenue Service
PERCENT
0%
20%
40%
60%
80%
100%
Top Estate Tax Rates Top Income Tax Rates
2019
Income Tax: 40.8%
Estate Tax: 40%
1944-1945
Income Tax: 94%
Estate Tax: 77%

16
The chained CPI tends to increase more slowly than the regular CPI. The exclusion amount is $11,400,000 per person in 2019 (which is more
than twice the previously announced exclusion amount of $5,600,000 for 2018). Rev. Proc. 2017-58, 2018-18 and 2018-57.
Motivate—Why Clients Need to Act Now
LOW RATES AND A HIGH EXEMPTION AMOUNT

Effective Techniques
• Intra-Family Loan
• Family Limited Partnership (FLP) or Family LLC
• Grantor Retained Annuity Trust (GRAT)
• Intentionally Defective Grantor Trust (IDGT)
• Irrevocable Life Insurance Trust (ILIT)
• Charitable Remainder Unitrust (CRUT)
• Charitable Lead Annuity Trust (CLAT)

United States
China
France
Germany
India
Italy
Japan
Korea
Mexico
Portugal
Scotland
Sweden
United Kingdom
– Shirtsleeves to shirtsleeves in three generations
– Wealth never survives three generations 富不过三代
– The 1st generation builds, the 2nd strengthens, and the 3rd spends it all
– The father creates it, the son receives it, the grandson ruins it
– Peasant’s shoes to peasant’s shoes in three generations
– From stalls to stars to stalls
– Three generations of wealthy persons 長者三代
– No rich man goes beyond three generations 부자가 3대 못간다
– 1st generation traders, 2nd generation gentlemen, 3rd generation beggars
– Rich dad, noble son, poor grandson
– The father buys, the son builds, the grandchild sells, and his son begs
– Acquire, inherit, ruin
– Clogs to clogs in three generations

0%
25%
50%
75%
100%
SurvivalofFamilyWealth
Entrepreneurs,
CEOs,
Real Estate
Developers
Doctors,
Attorneys,
Accountants
Actors, Artists,
Musicians,
Ski Patrol
-90%
-70%
Sources: Beckhard, R., and Dyer, Jr., W.G., “Managing Continuity in the Family-Owned Business,” Organizational Dynamics, 1983;
Ward, J. L., “Keeping the Family Business Healthy: How to Plan for Continuing Growth, Profitability, and Family Leadership,” Jossey-
Bass, 1987; The Economist, “The New Wealth of Nations,” June 16, 2001.

Hard Questions:
• How much is enough?
• How much is too much?
• How much is enough that they’ll do something, but not too
much that they’ll do nothing?
Answer with a Question:
• How much have you prepared them for?

How Do We Prepare Our Family for the Money and Avoid
“Shirtsleeves to Shirtsleeves?”
Five-Step Process for Family Governance
1. Education: Learn the possible problems and potential solutions
2. Communication: Discuss and evaluate in a safe family setting
3. Mission, Vision and Values: Plan for the future using family values
4. Teamwork Practice Opportunities: Test drive using Steps 1-3
(Family Philanthropy)
5. Transition to Family Leadership: Structure and process for
management of family wealth

The Who, What, When, Where, Why and How Questions
• Who do we want to be as a family?
• What are we trying to accomplish?
• When should we start?
• Where do we want to end up?
• Why do we care?
• How are we going to get there?

23
“It requires a great deal of boldness
and a great deal of caution to make a great fortune;
and when you have got it,
it requires ten times as much wit to keep it.”
— Nathan Mayer Rothschild (1777-1836)
Son of Mayer Amschel Rothschild

Justin T. Miller, J.D., LL.M., TEP, AEP®, CFP®
National Wealth Strategist
As a national wealth strategist at BNY Mellon, Justin Miller works collaboratively with other
advisors to provide comprehensive wealth planning advice to clients and their families. He also is
an adjunct professor at Golden Gate University School of Law, a Fellow of The American College
of Trust and Estate Counsel (ACTEC), and a sought-after speaker on tax, estate planning and
family governance topics for conferences throughout the country, including events hosted by the
AAML, ABA, ACTEC, CalCPA, Santa Clara University, Stanford University, State Bars of
California, Georgia, Nevada, Texas and Washington, STEP, UCLA, University of Notre Dame,
Vistage International, and YPO. In addition, he has published numerous articles in publications
such as the American Journal of Family Law, California Tax Lawyer, California Trusts and Estates
Quarterly, Probate & Property, Real Property, Trust and Estate Law Journal, State Tax Notes, Tax
Notes, and Trusts & Estates, and he is frequently quoted as a national thought leader in a variety
of publications.
Mr. Miller has served as an executive committee member of the State Bar of California Taxation
Section, an executive committee member of the Los Angeles County Bar Association Taxation
Section, the chair of the Century City Bar Association Taxation Section, and the editor-in-chief of
the California Tax Lawyer. Prior to joining BNY Mellon, he was an attorney at a major law firm,
where he advised wealthy families, senior corporate executives and closely-held business owners
regarding tax-efficient estate and business succession planning, trust law and management and
asset preservation.
Mr. Miller received a master of laws in taxation and a juris doctor from New York University School
of Law and a bachelor's degree, with honors, from the University of California at Berkeley.

26
This material is provided for illustrative/educational purposes only. This material is not intended to
constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material
presented herein is accurate at the time of publication. However, this material is not intended to be a
full and exhaustive explanation of the law in any area or of all of the tax, investment or financial
options available. The information discussed herein may not be applicable to or appropriate for every
investor and should be used only after consultation with professionals who have reviewed your
specific situation.
BNY Mellon Wealth Management conducts business through various operating subsidiaries of The
Bank of New York Mellon Corporation.
©2017 The Bank of New York Mellon Corporation. All rights reserved.
Disclosure

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