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Valuation > Purchase Agreement - Pg. 74

Financing a Game Development Venture 74 · What is the price, and how/when will it be paid? The three main currencies are cash, acquiror stock, and assumption of debt (in other words, if you owe a $100,000 electricity bill, the acquiror will pay it and consider that part of the purchase price). The precise mix is a subject of intense negotiation: $35,000,000 in stock is a lot different from $35,000,000 in cash. Will all of the com- pensation change hands at the closing, or will the purchase price be paid in installments? Keep in mind that $35,000,000 in a lump sum is worth a lot more than $7,000,000 every year for the next five years and not just because of the time value of the money--this is a volatile business and publishers go under, too. Are there contingencies/bonuses? For example, if the company ships its next product on time, it receives $1,000,000. · What happens to the status quo at the company? Will all the employees remain? Will they receive the same or better compensation and incentives? Will the office remain where it is? Where will the company fit into the reporting structure of the acquiror? · Key men. Employment agreements, non-competes and non-solicits (for example, nopoaching rules) will need to be negotiated for key executives. It is likely that key employees will be required to stick around for a certain amount of time, or risk losing stock options or other compensation. Due Diligence After the LOI is signed (though they may start the financial/valuation diligence before it's signed), the acquiror does its due diligence on the target company, the equivalent of kicking the company's tires. The acquiror (or its attorneys, more likely) will comb over your financial records, dig through your contracts, read any of your corporate (or LLC or partnership) documents, and poke and prod wherever necessary to get a solid understanding of your company's position. One of the most im- portant portions of the due diligence is the intellectual property audit, in which the acquiror re- searches what you own, the conditions and terms of any licenses, and any problems with your title (ownership) to the property (like an independent contractor who worked on your license without signing an assignment of invention agreement). Note NOTE You will need to have an NDA,reviewed by your attorney, signedand in place before the due diligence process begins. Purchase Agreement The purchase agreement contains the terms of the LOI, but adds in a lot of representations and warranties, conditions to closing, and post-closing covenants as well as other provisions that will flesh out the terms of the LOI. If significant problems came up during due diligence, they will be addressed here. The purchase agreement will also make reference to several other documents that are likely to be included as exhibits, such as the key executives' employment agreements with the acquiror, the target's outstanding publishing agreements, the target's original shareholders' agree- ment, an escrow agreement (if some shares are put into escrow for purposes of a future purchase price adjustment), and many more. Special note on the employment agreements: these are sometimes left until the 11th hour because both sides think that they have an "understanding" as to the employment arrangements. On the contrary, employment arrangements deal with more personal issues (what's my title, who do I report to, how do my new stock options vest?), and they are often the subject of the most heated nego- tiations. If you are a founder or key employee, make sure everyone is on the same page about your arrangement; otherwise, you may get accused of holding up the deal and may feel pressure to cave in on important issues.