Week #2:

Corporate Entities and the

Corporate Life Cycle
September 14th, 2015

REMINDER!

A how-to guide:
think like a businessperson, but act like a lawyer.

Areas of Corporate Law

Areas of Corporate Law review:
1. IP
2. M&A
3. Tax
4. RE
5. Bankruptcy
6. Fund Formation
7. Securities / Public Markets
8. Secured Transactions
9. Corporate Governance
10. L&E
11. VC
12. Financial Banking / Regulatory

Quick Review: Corporate Law Areas

Formation /
Investing

Securities

Private Funds:
PE / VC

Public / Capital
Markets

M&A

Tax

Secured
Transactions

Bankruptcy /
Restructuring

Debt /
Recaps

Real Estate

Private Entities

Contracting

Regulatory

IP

Corporate Infrastructure
Corporation / Company Departments:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.

HR
CEO
COO
Legal
Accounting
Marketing
OCR
CFO
Sales
Finance
Supply Chain
Recruiting
IT
Production
R&D
Admin
Strategy / Big Data / Analytics
Facilities
Ops
5

Corporate Organization

and legal implications by department

Board

C-suite

Operations

Sales &
Marketing

Strategy /
NPD

Finance /
M&A

IT

HR

Supply Chain

Sales Contracts

New
products /
offerings

Public:
securities

IP

Employee

Marketing
Agencies

R&D / IP

Debt / Recaps

Vendors

Keyman liability
protections

goods or services

Ads /
Sponsorships

M&A

Legal /
Compliance
Supports all areas
and hires law firms

Corporate Org Chart:

GE Example

Corporate Org Chart:

Apple Example (from Jobs days)

Corporate Structure
Types of corporate entities:
1.
2.
3.
4.
5.
6.
7.
8.
9.

S-Corp
LLC
C-Corp
LLP
GP
LP
Sole proprietorship
LLLP
PLLC

Corporate Structure - Generalities

Business Associations in 10 minutes or less
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-up

Easy 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

Liability

GP has unlimited
liability; LP has limited

Least liability;
Independent entity

Limited

Pass-through (can
Taxes
Pass-through
Double-tax
choose tax structure
Note: this does not contemplate all legal implications of each entity this isdefault
more ofisa partnership)
business overview

10

PE
What is it?
How does it work?
1.
2.
3.

11

What is private equity?

PRIVATE EQUITY = private investments in companies

In our society, typically refers to PE Firms = firms that pool capital from private or
institutional investors to make investments in established companies via a leveraged
buy out (LBO) model
Private investors = family offices, high net worth individuals (were talking
hundreds 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 Retirement
System has $300B invested - $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 of
debt to capital70 80% of debt at the peak!); now, most investments maximize
their 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 performance

record 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

Understanding the LBO

What is a LBO?
How does it work?
1.
2.
3.

13

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 = $10M
ROI (Return on Investment) =$10M Return / $10M Invest = 100%
If purchase partially funded with debt and equity:
Invest 50% of equity
= $5M
Borrow 50% of debt
= $5M
Total purchase cost
= $10M
Debt
= paid off at time of sale (cash flow from ownership
period used to pay interest and pay down principal)
Return
= $20M Sale price - $5M Equity (- any remaining debt,
assuming $0)= $15M
ROI
= $15M Return / $5M Invest = 300%!!!
Other $5M in equity can be invested elsewhere optimal use of ALL capital!

14

Understanding Fund Structure

How are PE / VC funds formed?
1.
2.
3.

How does the life cycle work?

4.
5.
6.

15

Private Equity Fund Structure

Fund
Mgmt.

Fund
Mgmt.

Fund
Parent Co
GP, LLC
Fund Mgmt
Co, LP

Fund UGP,
LLC

Fund GP,
LP

Fund
Mgmt.

Institutional
$$
Private
$$

THE FUND, LP

PortCo A, LLC

PortCo B, LLC

PortCo C,
C-Corp
16

Fund Life Cycle

Fund
Formation
PortCo C
acquisition
Investor
A
Investor
B

PortCo B
acquisition

PortCo A
sale

PortCo B
sale

PortCo A
acquisition

Investor
C

Fund
close
Fund Formation
and capital
commitments

PortCo C
sale

Years
#1 - 4
Capital calls for
PortCo acquisitions

Years
#4 - 10
PortCo sales /
exits

Fund
wind-down