On January 30, 2024, McDermott Partners Edward (Jed) Gordon, Kate Vera, and Todd Kornfeld and Associate Allison McSorley Tassel discussed on a panel the current market conditions and shared different capital raising options and practical strategies for getting a deal done. They also highlighted essential steps companies should take to become market ready and considerations for said companies as they move toward closing a transaction.

Below are the key takeaways from this panel.

IN DEPTH

• Protecting Intellectual Property (IP) Is Essential for Many Emerging Growth Companies. The group discussed how companies often do not realize that they have not fully protected their IP rights until they enter the diligence process for a potential transaction, such as an initial public offering (IPO) or the sale of their company. Taking reasonable actions early in the lifecycle will not only help protect the business from legal challenges but will also help in raising capital.

• Get Executive Compensation Right Early On. Failing to do so could have major consequences for companies looking to raise capital. Executive compensation is an important tool in attracting and retaining key employees, especially for smaller companies, and there are nuances to properly aligning incentives. Companies should be mindful of compliance with tax and securities laws as failure to comply can lead to expensive delays in IPOs or mergers and acquisitions (M&A). In particular, “cheap stock,” a situation in which insiders acquire stock or options at a price below fair market value, can raise various accounting, tax and disclosure issues.
• Be Prepared for a Cybersecurity Incident Before It Happens. Both private and public companies should be aware that failure to maintain proper cybersecurity policies and procedures can result in reputational damage, loss of customers, government investigations and financial losses. Publicly traded companies and companies considering an IPO should also be aware of the US Securities and Exchange Commission’s latest cybersecurity incident disclosure rules. Having an incident response plan ready before a security breach occurs makes both the response and the required public disclosure less burdensome for companies. Unlike with other disclosure requirements, there is no scaled reporting requirement for smaller companies.
• Artificial Intelligence (AI): Challenges and Opportunities. AI presents both challenges and opportunities for companies looking to raise capital. The use of AI has led to more convincing and effective cyberattacks. However, companies also have the opportunity to leverage AI to prevent and respond to cyberattacks, for example, by more easily sweeping their IT systems and automatically filtering out phishing scams before they reach their intended targets. Companies should educate themselves on the benefits and risks of AI as it relates to their business.
• Good Recordkeeping and Corporate Hygiene Are Crucial. Many smaller companies, as well as some larger ones, find themselves short-staffed and short on resources. As a result, companies find that their corporate records and general corporate hygiene are lacking. Oftentimes, records of board resolutions and meetings, such as those relating to equity compensation and other issuances of stock, may be missing, incomplete or ambiguous. These problems can be expensive, time-consuming and difficult to fix, and they can impact the timing and pricing of an IPO or an M&A transaction.