Legal bickering will steal attention from struggling startups over the next year as Silicon Valley venture capitalists manage the sales of companies they hurriedly negotiated this year.
For the past several months, VCs have pruned startups from their portfolios at fire-sale prices to avoid losses in a protracted downturn. While this weeding frees money otherwise spent to support struggling companies, it also opens firms to the wrangling of post-closing negotiations in a tough economy.
Tough markets make conflicts more likely, says Paul Koenig
Observers say these clashes – which can result in legal action – will increase at just the wrong time: when VCs should be helping to steer companies through a tough market place.
Difficult days make buyers more aggressive and controversies all the more likely, says Paul Koenig, co-founder of Shareholder Representative Services, a company that helps venture-backed companies manage acquisitions. “We would expect to see an increase” in post-buyout clashes.
In today’s environment, VCs are sometimes letting startups go for little more than the cash on their balance sheets. Fund managers are picking winner and losers at a rapid pace to avoid carrying companies through years of a market recovery.
Koenig says he has seen distressed deals taking place, but also smart ones not made in haste. “It’s not all doom and gloom,” he says
Still, post-merger negotiations will be a burden on VCs, especially those named the post-merger representative of the selling company stockholders.
As problems crop up, negotiations between buyers and sellers take place, many times over collecting receivables, managing inventory reserves, keeping track of cash on the balance sheet and resolving issues brought by employees let go.
When times are tough, organizations sue each other more frequently, he said.
Koenig says the environment should be good for his San Francisco company. Shareholder Representative Services launched its service in September 2007 and this year handled 28 deals for clients.
Next year’s workload should be between 50 and 60 deals at a minimum. It is possible the firm will reach 100, he said.
Jean-Baptiste Su
Mark Boslet
