Bartlett’s ‘Get Out of Jail Free’ Card

Joseph W. Bartlett

Various attacks are mounted against the boards and managers of U.S. publicly held companies based on alleged deficiencies in the disclosure of financial results, the prosecution’s case buttressed by a emails discovered in the cloud from disgruntled insiders. The legal issues have been analyzed ad infinitum by the media and legal commentators. There is no effort from this corner to add to that enhanced commentary.

One point, however, strikes me as a prudent prophylactic for public companies and their managers who are reporting valuations and other material information to the marketplace, including but not limited to existing shareholders and creditors.

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Outbrain – The Ever Changing Deal Terms

Outbrain has created a marketplace for publishers and buyers of content. They caught our eye not only from the jump in deal terms used in each financing round, but also how they have created serendipity through their data.

With two product offerings (Engage and Amplify) both sides of the marketplace are able to grow, whether it be from publishers that use the service or buyers of traffic that come to the platform for traffic needs. The more the marketplace grows the more valuable Outbrain becomes. This late stage company has recently raised ~$50M as part of their Series G round, putting them at a valuation north of $640M. Most interesting is their terms used throughout the rounds of financing. Below we did a breakdown of each round and the terms used. What stuck out to VC Experts was the constant manipulation of terms. Industry wise we see a lot of weighted average, either participating or conventional convertible, up rounds etc. However Outbrain has out-done the industry standards with a variety of deal terms used through each of their financing events. To get a complete company profile including PPS, Valuations, EFDS, and Deal Terms click here.

*Please note – The latest round (Series G) is based off of the authorized share count for Series G and PPS from their latest Amended and Restated Certificate of Incorporation filed 2/11/2015.

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Participating PreferredParticipating Preferred Up Round Up Round Weighted Average Weighted Average
Conventional ConvertibleConventional Convertible Down Round Down Round Full Ratchet Full Ratchet
CappedParticipation Capped Participation Pay to Play  Pay-to-Play  Post Money ValuationPost-Money Valuation
Junior Security Junior Preferred Liquidation MultipleLiquidation Multiple Investment Amount Investment Amount

Term Sheets and the “Boilerplate” Fantasy

Joseph W. Bartlett

The classic “boilerplate” in a non-binding term sheet (a/k/a a letter of intent or memorandum of understanding) includes express language that the indicative terms are “non-binding” except for such as the paragraphs on confidentiality, no brokers on either side, and responsibility for expenses. Amongst the provisions ostensibly non-binding one often finds a provision regarding the upcoming definitive agreement(s), which the parties undertake to negotiate in “good faith.” All boilerplate in the eyes of many practitioners.

I am a determined advocate for the proposition that there is no such thing as “boilerplate” if that means language which can be inserted robotically in an agreement, including a term sheet, because the wordsmiths need not waste their time in hyper-analyzing the meaning … just plug in the excerpts from a model form.

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Late Stage Deal Term Teardown

Take a moment to check out some of the trends surrounding Late Stage Valuations and Deal Terms. Included in the report is an analysis of over 200 companies and 270 deals.
VC Experts – Late Stage Deal Term Teardown is FREE, please don’t hesitate to pass it along.

Screenshot 2015-03-13 16.33.10

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Legal Reflections for the Venture Community on the “Serial” Podcast

Guest post by Stuart Gasner, Partner Keker & Van Nest LLP

No doubt many venture capitalists were, like millions of others, captivated by the recent podcast “Serial,” produced and narrated by This American Life reporter Sarah Koenig. The podcast had all the charm of an old-fashioned radio serial, telling the story from several perspectives of the murder of Baltimore high school student Hae Min Li, and the trial and conviction of her former boyfriend Adnan Syed.

As a former federal prosecutor, I was curious about the real story. So I dug into the transcripts and exhibits and other source materials available on Reddit and elsewhere, and have the following to report of potential interest to the venture community.

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What is a Section 351(a) Tax-Free Exchange?

Generally, transferring property into a corporation in exchange for its stock is a taxable event. The transaction is treated as if you sold property to the corporation in return for cash.  The difference between the stock value received and the tax basis in the property transferred to the corporation will result in a gain or loss.


Concern about a tax liability as the result of incorporating your currently unincorporated business could act as a barrier to incorporation. Consequently, years ago, Congress enacted Section 351 to remove this barrier to incorporation of an unincorporated business. The idea was to allow unincorporated businesses to develop, unimpeded by any immediate tax consequence resulting from the exchange of property for stock. In other words, Congress thought that any gain on an exchange of property for stock should be deferred (put off) until a future time, such as when the stock received in the exchange was eventually disposed of by the shareholder.

Note that a loss on an exchange is not deductible if you own, directly or indirectly, more than 50% of the stock.

Exchanging Property for Stock in a Corporation

Whether you’re setting up a new corporation with just yourself or other people, such as partners in a partnership, or getting involved in an existing corporation, under IRC Section 351(a) you can defer (put off) any resulting tax consequence.

Under Section 351(a):

No gain or loss is recognized (reported) provided:

1 – You receive Only Stock in exchange for your property, and

2 – You are in Control of the corporation immediately after the exchange.

Section 368(c) defines control:

Control means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of outstanding shares of all other classes of stock of the corporation.

Transferor group: If you, along with others, transfer property into a corporation, your group is referred to as a transferor group.

Qualifying For a Tax-Free Exchange Under Section 351(a)

Two requirements must be met to qualify for tax-free treatment under Section 351(a):

1 – You get Only Stock in exchange for your property; NOT stock PLUS other property.

  • You (or you and your transferor group, for example, partners incorporating the partnership) may Only Receive Stock (other than nonqualified preferred stock) from the corporation in exchange for the property you transfer, and

2 – Control:

  • You (or you and your transferor group) must be in Control of the corporation, immediately after the exchange.
  • Section 368(C) defines control and is covered below.

Nonqualified Preferred Stock: This is stock in which the holder of the stock has the right to require the issuer to redeem or buy it back or the issuer is required to redeem or buy it back. Also, the dividend rate on such stock varies with reference to interest rates, commodity prices, or similar indices.

For a detailed definition of nonqualified preferred stock see IRC Section 351(g)(2).

General Rule Under Section 351(a)

No gain or loss shall be recognized if –

1 – Property is transferred to a corporation by one or more persons solely in exchange for stock in suchcorporation and

2 – Immediately after the exchange such person or persons are in control of the corporation (as defined in IRC Section 368(c).

Section 368(c)-Control Requirement

The second rule for getting tax-free treatment in an exchange is the extent of your control (or the control of you and others in the transferor group) after the exchange.

What is meant by control?

Section 368(c) defines control:

Control means the ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of outstanding shares of all other classes of stock of the corporation.

The control requirement applies to both tax-free and partially taxable exchanges.

Attach a statement to your tax return. Both the corporation and any person involved in a nontaxable exchange of property for stock must attach to their income tax return a complete statement of all facts pertinent to the exchange.

For more information, see section 1.351-3 of the regulations.

Partially taxable exchanges: Another section under Section 351 applies to partially taxable exchanges. It isSection 351(b).

Valuation of Property and Stock in an Exchange

When you transfer property into a corporation, there are two valuation issues:

(1) – The value assigned to the stock you receive from the corporation.

(2) – The value assigned to the property being transferred to the corporation.

1) The value assigned to the stock you receive from the corporation:

The basis in the stock you receive (also called-the exchanged basis, carryover basis or transferred basis) is the same as the adjusted basis in the property you transfer.


  • Your stock basis is also $10,000.

2) The value to assign to the property being transferred to the corporation:

The corporation‘s basis in the property it receives in an exchange for its stock is the same basis you had in the property when transferred (in other words, the corporation takes your basis).


  • The corporation’s basis in the property is also $10,000.

(Data comprised from and See more at and