Rules Of Thumbs

In general, the same team that runs a merger, acquisition, divestiture, or strategic investment, should also be the point person for the communications plan.  Marketing or corporate communications often wants to take this part and run with it, but it is critical that a person that is familiar with nuances of the “deal” take the lead, with Marketing and Communications (MarCom) heavily involved.

For example, any press releases, customer communications, employee communications, etc., need to reflect not only the confidentiality requirements of the deal (or the mandatory disclosures), but also the “spirit of the deal”.  MarCom will provide the majority of the content of the communications but must be reviewed by the deal lead for consistency with deal terms and the TIMING.  The importance of timing can not be overstated, since if handle poorly it can put the companies at legal risk, not to mention, a bad position for rumors, morale, customer satisfaction, etc.

A general rule of thumb for a contingent fee agreement is that for a personal injury claim case it will take 9-12 months to reach agreement on compensation.

The general rule of thumb for the lump sum value of a structured settlement is approximately 50% or less of the total value of the settlement payments.  For example, if you have a settlement worth $1 million spread out over 10 years, if you were to sell the structured settlement you could expect to receive $500,000 due to the discounting due to the time value of money (obviously, this holds true if you intended to buy structured settlements).

For a myriad of complex legal reasons, Limited Partners require General Partners to contribute their own capital into their venture capital fund.  While this amount can vary, the vast majority of the time GPs need to contribute 1% of the committed capital with LPs contributing the remaining 99%.   Thus the 99/1 rule. 

Private equity funds (including venture captial funds) are typically structured to be “self-liquidating”.  This means that they dissolve at a pre-determined time, which is typically 10-12 years after its founding.  However, if the fund is not fully invested and/or liquidated by the pre-determined time, the Limited Partners generally grant an extension to the General Partners.

• When incorporating a new venture, a good rule of thumb is to authorize (or issue) 10 million shares @ 1/10 of cent. 50% of these shares should be issued to the founders (with a vesting schedule). 10% should be set aside for future employees. The remaining 40% will go to future investors.

• Also, ALWAYS elect to “pay” taxes on any shares immediately, even if they will vest over time. This way you will not have to pay any income tax on the difference of the value of the shares at time of receipt and their market value at that time.

A good rule of thumb regarding equity ownership in your company is to institute a vesting schedule on stock grants. This has numerous benefits the two primary being:

1. Better terms than the vesting schedule a VC will impose on you…and they will impose a vesting schedule on you.
2. Helps eliminate problems and costs associated with individuals leaving the firm with equity before a liquidity event.

The rule of thumb for vesting time horizon is a 1 year cliff followed by straightline monthly vesting.

A good rule of thumb for a startup environment is to avoid “deferred” compensation. Any type of investor (bank, angel, friends and family, and especially venture capitalists) will view deferred compensation as a significant deterrant. Since deferred compensation has seniority over all other stakeholders, it adds a level of risk to their investment. A better way to compensate yourself is through paying yourself in equity through an earnout or vesting schedule.