Full Transcript for Inside a $175M Deal: Tim McLoughlin & Joshua Hayes Live From RDU Startup Week

million through the years, most of it here in the state of North Carolina, and we're looking forward to doing it for another couple decades. 00:02:46 - Trevor Schmidt That's great. 00:02:46 - Tim McLoughlin Yeah. 00:02:47 - Trevor Schmidt So, Josh, I'm a little bit more familiar with your company, but for our listeners who maybe aren't familiar with Hutch, tell us a little bit about you and Hutchison and your practice. 00:02:56 - Joshua M. Hayes Sure. So my name is Josh Hayes. I'm a partner at Hutchison pllc. We're a business boutique law firm based in Raleigh, North Carolina. We also have offices in Chapel Hill, North Carolina, as well as Atlanta, Georgia. We're about 22 attorneys, and we all focus singularly on working with early stage entrepreneurs and the investors who invest in sustained those entrepreneurs. I like to say that as a corporate partner at Hutch, what we try to do is help companies get formed, funded, and sold and everything in between. So we try to help with all stages of the company's corporate life cycle, including commercial contracts, intellectual property tax, employment, and then, of course, helping companies get funded and financed, as well as helping guide them through a successful exit. 00:03:54 - Trevor Schmidt And so your practice focuses on the latter part? 00:03:57 - Joshua M. Hayes Yeah, so I have a really transactionally focused practice, and what that means is that I work on a lot of financing transactions, so equity financings, debt financings, and mergers and acquisitions. 00:04:10 - Trevor Schmidt Great. So, Tim, how did co founders first come to work with artists in element 451? 00:04:15 - Tim McLoughlin Yeah, I think so. We had just raised probably about a year before this $31 million fund, too. We were looking at companies at the seed stage, early stage, and I met artists, actually at another local networking event, which was the CED Venture Connect conference. So I remember he came up to me and I think in the first couple sentences, he goes, why haven't you invested in us yet? Something like that. And he had confidence about him that made me know we should follow up and continue that conversation, which we did. And we were fortunate enough to make an investment then in. I think it was. I want to say it was October of 2019. Something. September. October 2019. And, you know, it wasn't an easy process. I mean, for us. We like rolling up our sleeves and digging in. It wasn't a straightforward investment. That was something. Element was a company that was actually spun out of a consulting organization called Spark. So there were multiple owners and partners in Spark, and they wanted to spin out this technology into element 451 and spin out the IP and all that. And obviously we had great attorneys that helped us along the way to do that. So it was definitely a lot of work, a little bit of hair on it, but obviously it's been the most successful investment we've made through co founders capital.

00:05:30 - Trevor Schmidt Well, it's encouraging to know as we sit here at Raleigh Durham Startup Week that sometimes those connections that you make at these conferences really can pan out. 00:05:37 - Tim McLoughlin They certainly, they certainly can. And so it's, it's all about finding the right connection at the right time. But obviously you got to, you know, meet a lot of folks, have a big network and folks will point you in the right direction. I think this community is pretty collaborative and that's one thing you really got to take advantage of, which is it might not be the person you're talking to that is the right person, but they probably know the right person for you to talk to. And that's one thing I love about this ecosystem. 00:05:59 - Trevor Schmidt So aside from kind of artists confidence to come up, what was it about the company that kind of stood out at that point? 00:06:05 - Tim McLoughlin Well, at the beginning there was a team with the company that was spark, that had deep, deep expertise in that industry. Right. So they were all consulting for higher education, helping them recruit, retain, market to students. And so they saw the problems, they saw the other technologies that were being used by the universities, they saw the deficiencies in those technologies, they thought they could do it better and they were able to start beta testing some software and some technology with their existing customer base. And so when someone comes from an industry with that amount of experience in an industry and recognizes this big problem and big gap and wants to really go all in to solve this problem, you know, it's really encouraging and it's something that we get a lot more interested in. And you know, there was a great deal of sacrifice from artists to leave a very successful consulting practice and his partners to start a true startup technology company. And when you see somebody making that decision and pushing their chips in and saying this is what I want to do, I believe in it so much, it's infectious. And that really drew us to what he was doing. And then feedback from early customers. And I can go through the process that we do to diligence and company, but it just made us, you know, gave us even more conviction. 00:07:27 - Trevor Schmidt Well, I mean, maybe that's part of it because it sounds like, you know, the team is a big part of it. You got your leadership and the buy in of the leadership. But what are some of the other factors that can Make a company stand out. Maybe not element, but just as you're looking at them and evaluating a company. 00:07:40 - Tim McLoughlin Yeah, I would say ability for a founder specifically where we come in, there's not too many team members normally when we invest, but a founder that's there to be able to articulate the problem, the solution, the value props, and then quantify the value props. So artists was able to go in and tell some of the decision makers at these universities, hey,

here's how much we can improve your yield. Right. Here's how much we can lower your cost of student acquisition. Like these, these. He had confidence in what they were able to do and was able to articulate in a way that resonated with the customer. And then at the same time, when we talk to potential customers or we actually go on sales calls with our companies before we make an investment because they're. So we need some data points and some feedback. So we'll go on sales calls. And you could tell that he knew the challenges with the other solutions that they were using and what they were looking at. Right. There was a connection there. They wanted to follow up. And when you see the customer, the potential customer, validate what you've been told in the pitch decks or what you've been told in the pitch meetings, this snowball effect happens where the momentum keeps building towards a close. 00:08:49 - Trevor Schmidt Yeah, well, I mean, it's interesting to me because you mentioned joining sales calls, but I'm curious as to how co founders works with the company either just prior to the investment or after the investment's been made. What's that process like? 00:09:00 - Tim McLoughlin Sure, it can depend on the company and the stage of the company that we invest in. But like I said, most are seed stage. So helping recruit and vet a senior management team is a big thing that we can do. We've seen companies at a lot of stages in their growth curve, so we kind of know some of the skill sets that need to be there. So access to talent is a big way. Access to follow on investors is a big way. So, you know, one, one of the groups that we brought in a few years later was a group called Cultivation Capital. Cliff Holkamp is a partner. I was on another board call with him this morning. But, you know, we have these relationships that could be follow on capital, other good partners to bring onto the board or for the next rounds. And founders are so heads down, but we spend a lot of our time networking and looking for those connections so we can make them exactly when the time is right. So that's how we can be helpful and then, you know, bringing in maybe potential acquirers that might want to come in. We had a great banking partner who we can talk about later that helped us with that. But you know, for a lot of our companies, we do that work on our own. So. 00:09:59 - Trevor Schmidt So Tim had mentioned something about, you know, when you take on investment there's always, there's typically some hair on the company involved. 00:10:05 - Joshua M. Hayes Yeah. 00:10:05 - Trevor Schmidt How do you think about that from the legal perspective? How do you help either a company prepare for taking on that investment to reduce that hair? And how much can companies kind of navigate that through the process? 00:10:16 - Joshua M. Hayes Yeah, so it's a great question. I think the only company that is spotless is the company that you just formed yesterday. Every, every other company has something that needs a little bit of, kind of a touch up when going into the diligence process for an investment. You know, most of the time these are things that are in the noise. They're things that are fairly typical basic stuff, right. Like making sure that your founder documentation is signed, fully signed up, making sure that your cap table is solid, that you know there aren't people out there who think they own a part of your company but don't. Making sure that your intellectual property is properly assigned to the company. That's both intellectual property that's generated from the founders as well as from your consultants. So that's a big thing that comes up a lot on the tech side, right. Is you have a consultant developer who's helping you develop your mvp. And maybe you didn't take a close look at the contract. Maybe there wasn't a contract because you found them through, you know, sort of an online service. And so just making sure that those, those items are taken care of, that somebody's taking a look at those. And that's something that, that I think council can really help with. You know, we try to match the level of diligence that we do on the company side to the scope of the investment. Right. So we try to right size that diligence because it is a different process when you're going through sort of an early stage financing than when you're going through kind of sort of a full exit event. Right. There's, there's sort of a different order of magnitude as far as the scope and the depths of that diligence. And so we do try to right size that process. But there's always something, and I would say nine times out of 10, it's something that can be worked through relatively easily because we've seen it before and. 00:12:23 - Tim McLoughlin Just adding on to that, I would say that, you know, most founders look at diligence as like this nightmare scenario that they got to gather all this information. It's going to be combed through, but it's also an opportunity for them to clean stuff up. And they have the leverage and backing of an investor coming in, putting in money that they can use as an excuse to go clean some of this stuff up, which is, hey, co founders capital. We're going through this right now. Actually, Hutch is helping us with something, but we're going through something right now where the founder just realized that they don't own some of the development work that was coming because they didn't have the right IP assignment when they did an initial outsourced development job. Right. And so through diligence now that founder is able to go to that contractor and say, hey, listen, we're not going to be able to raise money unless we get this cleaned up. This has to get cleaned up now. And maybe there's some transaction that needs to happen or whatever, but gets us on the right footing. And the CEO, founder of that company doesn't have to be the bad guy. Right. We are. Right. The investor is, they're

not going to do this deal unless. And so sometimes it works out and it's just a good opportunity for the founder. 00:13:25 - Joshua M. Hayes Yeah, that's a great answer to the question, why are you coming to me with this 12 page contract now? When I did the work 8 months ago, it's like, well, because we need to scale this company and we can't do that without the investment and we can't get the investment unless you sign this agreement. 00:13:39 - Tim McLoughlin Totally. 00:13:40 - Joshua M. Hayes So. 00:13:40 - Trevor Schmidt And I imagine a situation too where you're essentially spinning out a company from an existing company. Some of these challenges are a little bit harder just because there are additional kind of considerations. Can you talk through that just on a general level? 00:13:52 - Joshua M. Hayes Yeah. So I could speak to it at a general level because I actually wasn't involved in the, in the initial spin out. But at a general level, when you're spinning out a company from a company that's existing, you have to really be thoughtful in allocating the assets between the company that's staying and the company that's being spun off. Right. And so there really does need to be a lot of thought and time by the founders, I would say, with the assistance of council thinking through which assets, including hard assets, intellectual property, things like trademarks and the like, what's going and what's staying. And if there are Assets that are staying with the mothership. How does the spinoff company access and utilize those assets? Does there need to be a license in place for you to be able to use that? Is it more of a, you know, we need to be able to have a services agreement because they're going to actually be doing some of the work at the outset while we kind of build out our team and our infrastructure here. So there's a lot of additional complications, usually in the form of some sort of license or services agreement while the spin out is sort of getting on its feet that are really critical in those early stages. And those do need to be addressed kind of at the time of the spin out because. 00:15:16 - Tim McLoughlin Yeah, and that's how we did it at Element. Right. So we had, we had a bunch of customers for Element for the technology company that was spinning out that were clients and being serviced through the consulting group, through Spark. And so we had an agreement between Spark and Element as to what the revenue share was going to look like, who got credit for that account, who owned that account, and, and then ultimately, you know, potentially spinning them off into one company or another. But you got to clean that up at the time. The other thing I was going to say that that's hard and challenging with that is people have put a lot of time and money and resources into things like this. So it's not as simple as, hey, we're just going to spin off this technology. Well, who should own the majority of that technology? How

does that work? What do you do in exchange for, okay, one of the partners at a consulting group just spent a year developing this technology. Should they own it 100%? No, they were still getting paid by the consulting group. It can get messy, but what you got to do is sit down at that moment and make sure you align everyone's goals. Everyone gets on the same pa. It's not something you're going to be able to do two years later because somebody's going to feel like they made the wrong decision one way or another. So you got to everybody get on the same page at the beginning. Right. 00:16:24 - Trevor Schmidt So now I understand co founders initial investment was somewhere around 2019, right? 00:16:29 - Tim McLoughlin 2019, yeah, yeah. 00:16:30 - Trevor Schmidt And so as we all know, in 2020, the world changed quite a bit. And for element 451, which provides software to higher education campus shutdowns, the move to remote learning, that had to hit especially hard. So I'm just wondering, kind of from your perspective, what do you recall from that time and kind of the conversations around the company? 00:16:47 - Tim McLoughlin Well, in 2020, we looked at our portfolio and it was like, it was so hard to tell. You couldn't predict which companies. Well, at the time, after you knew what was going to happen, you could tell. But like, you know, some companies that were in healthcare, right, okay. Hospital systems are like completely overwhelmed and shut down. They couldn't sell anything. We had a Fund 2 portfolio company called Relay One trying to sell into it, right into healthcare systems. Nobody's taking that phone call. They were to optimize surgeries. Nobody's having surgeries, right. Like elective surgeries during that period. Right. So that was one. We had another company in fund, one called MapMyCustomers. What MapMyCustomers does is they have a CRM and a CRM companion for mobile sales reps. People that are going and shaking hands and walking into offices and trying to sell. Guess what didn't happen in 2020. There were no mobile sales reps. It didn't exist anymore. So nobody needed a CRM. So you look at all these different things. Now, to get back to Element specifically, you have 500, 600 universities that completely shut down and are now only remote doing all remote learning. But these schools still needed that revenue stream, still needed to recruit students so that the Element was able to become a thought leader in how these schools could navigate this situation. And that ultimately turned into their Engage Summit, where their buyers, their customers were gathering, sharing thoughts, best practices. And Element was kind of at the core of that, which helped them grow their user base to over 250 universities and ultimately become what they became. But they became a thought leader, they leaned in, they said, our customers are having this problem. How can we help them solve it? Which I think was, was great. I know that they had several, like, meetings of the minds for everybody on how they were going to navigate this, this new world. But universities still needed revenue, they still needed students. They have budgets too. Right. And so Element leaned in and really helped them through that time. 00:18:35 - Trevor Schmidt Now, how do you think about your role as an investor or as a board member for a company that's, you know, maybe it's not Covid, but in these uncertain times or when there's an unprecedented happening that all of a sudden is presented to the company, what do you view as your role for that company? 00:18:51 - Tim McLoughlin Well, you know, it's really hard to make a decision in the unknown, but you got to make the best decision with the data you have available at the time. Right. And what I've often been saying is there are certain companies, I would say, hey, I think we can accelerate through this period. I think this period becomes an opportunity for us. We have some more financial backing. We can make it through. Let's accelerate through. And maybe whatever service we're providing, whatever technology we're offering helps companies in a time like that. For example, productivity software, if there's massive layoffs in an agency, right? In a company, they need to be more productive, they need to do more with less. Maybe our solution helps in that situation. We want to go through other ones. Matt, my customers was an example that I mentioned, or other companies. It's like, hey, how do we survive through this time? Let's make a decisive action one time, make sure that we have enough Runway to get through this, this weather, and then try and get everyone on the same page as everyone, agree that's the right way to go. The where we got in trouble with several investments. Let's not act like all the investments work out. Where you get in trouble is you get caught in the middle, right? We're kind of accelerating through, but then we need to slow down a little bit and then we need to reserve a little bit. And those are the companies that they're not accelerating fast enough to demand a high valuation, but their burn's high enough that they're going to run out of money and they just can't outlive it. So what's my job as a board member? Let's try to be decisive on what we're going to do. What's the plan? Stick to the plan, right? Measure what by, what, do what by when, have these data points in place, and let's all get on the same page and come to agreement on what that budget and plan should look like. 00:20:23 - Trevor Schmidt How about you, Josh? Do you have any thoughts on that? Kind of like, as you know, outside legal counsel, what our role is primarily. 00:20:30 - Joshua M. Hayes It'S to help mitigate risk. I think that's our role as counsel is to identify and help companies mitigate and manage risk. And so particularly with something like Covid, it's to identify what are the contracts where we know we can't fulfill our obligations and we're sort of

anticipating a breach. And let's try to get out in front of those conversations, let's try to get out in front of those counterparties to see if there's a way where we can actually, if not, amend the agreement formally, but come to some sort of arrangement within the four corners of what's written that works for both of the parties. Unfortunately, in those times, there's often a number of Rifs reductions In force employee layoffs. And that's a really difficult thing for a founder to manage. Right. It's obviously difficult for the employee, but it's also difficult for the founder and the organization. And it's also critical to do that, right. To make sure that you're complying with law when you have to go through one of those unfortunate periods of reducing your workforce. And then it also becomes critical to help, as Tim was mentioning, guide boards through that process to make sure that those tough decisions that Tim's talking about are properly documented in the minutes. That of course, the company has, you know, proper insurance in place to help, to help mitigate any, any unforeseen risks that may come up as well. So, you know, a lot of it is context dependent, but some of those are some of the things that tend to be recurring themes in these, you know, kind of shocks to the system. 00:22:11 - Tim McLoughlin A lot of those, A lot of founders are going through this stuff for the first time, right. And, and so the, the board member hopefully has been through a situation like that and can be empathetic to the founder situation. And one thing, I put co founders in a little bit separate bucket than a lot of other VCs because we worked so closely with our portfolio companies and literally had an office where all of our portfolio companies worked out of. So these weren't just numbers on a spreadsheet. They were people that we worked with every day. So going through a we have to lay this person off or we have to lay this team off, or we got to do a rif of a significant amount. It's like we knew that person. We remember when they brought their wife into the office to show them where they were working out of. And, you know, you have to take that human element and stand alongside the CEO, whoever is making these decisions and say, hey, I know we didn't just go into a board meeting and say, you got to cut five people and you got to reduce $600,000 in expenses. Go do it. It's. We feel for you. We know the people. We can be there and help you however we can. You need us with you. You need us offering them other employment opportunities. Like, you know, there's a human element to all that stuff. 00:23:17 - Trevor Schmidt So I understand co co founders participated in a subsequent $3 million round for the company, I think in 2022. 00:23:24 - Tim McLoughlin Yeah, we actually, so we actually invested, I want to say we probably invested a total of five or six different times throughout the company's life. So you asked, what can co founders do and what value can we provide. Well, having a larger seed fund, you can also help companies bridge the gap for if there's any sort of hiccups. Right. I want to act like element. All the other ones were up and to the right and on plan the entire time, but it just isn't the case. And so, you know, if there's a delay in sales cycle, let's say sales cycles, 15 months instead of 12 months. Right. Well, guess what, you're three months behind on your plan. Who's going to help bridge that gap? Do you have investors that have reserve capital and can stand behind you? And so that's one of the things we were able to bring to the table. But anyway, back to your question. We did invest probably five times through the life of the company, and we gave Artists and the team some flexibility. There was a couple times, especially during COVID where when the valuations were going down and towards the end of COVID Right. But we had had this real drought and lack of available capital. We said, hey, you can go out and, and raise money, but we want you to know collectively around the table, we got 3 or 4 million bucks for you in case you aren't going to go raise outside capital. Right. And Artists did an amazing job and got multiple term sheets and like, we were able to raise a larger round, but, you know, around the table, we had groups that were supporting him along the way. So. 00:24:43 - Trevor Schmidt And do you typically think of that as trying to continue to build a company to try to bridge a gap, as you mentioned, or like different investments at different times, serve different purposes? 00:24:51 - Tim McLoughlin Different purposes. But I would say there's some main themes. I don't want a founder wasting time going out and fundraising for six or nine months if they don't need to. Right. So if we have conviction on increasing our position in the company, we have available capital, it's on terms that are acceptable to the entire group. Why wouldn't we put the money in, keep the cap table tight. And then the other theme that I would say is keeping a cap table tight like that with the same stakeholders throughout the journey increases optionality. And by optionality, I mean if an investor comes in and puts in $10 million on $100 million valuation, they're not interested in exiting that company until it gets to 500, 600, $700 million. Right. But if you had somebody that's been there along the way for the entire journey, now all of a sudden, if you raise that 100 million, okay, well, they can double that investment if it sells for 200. Right. It's not like this. Reset the clock, reset the goalpost. So anyway, the theme is save the founder time, keep the cap table tight, keep optionality open and you trust everybody that's around on the cap table. 00:25:58 - Trevor Schmidt Now Josh, I understand you started working with the company back around 2023. 00:26:02 - Joshua M. Hayes That's right. 00:26:02 - Trevor Schmidt So what were some of the first projects you were

doing with the company? 00:26:05 - Joshua M. Hayes Yeah, so I came in pretty, I would say pretty late to the company's life cycle. Around 20. I helped out with follow on to their series B investment. There was also some secondary transactions as well as sort of the day to day brushing and flossing, kind of the corporate minutes, board minutes, stockholder minutes, managing the company's cap table and the plan and sort of as a general matter. I think one of the things that was really helpful for me was to get to know the company before the sale. I think that's something that's really helpful in transactions generally is to understand who the stakeholders are, understand what the company's cap table looks like, what the company's contracts look like, who the company's customers are. All that is really helpful to understand before you actually get into a sales scenario because when you're actually running a sales process, everything gets accelerated. Everything kind of gets into a little bit of a pressure cooker mindset. And so having the time to work on some of those smaller projects that led up to the sale gave me an opportunity to familiarize myself with the company, how they operate, how artists likes to operate, his sort of communication style, the things that he really cares about as a CEO and founder. That was I think the most beneficial aspect of getting to work on those early stage projects back in 2023. 00:27:45 - Tim McLoughlin And I mean just to elaborate like an anecdote on that is the more the morning of the that we're trying to finalize this transaction, we're all on the phone emails to get like we're calling each other because we all, we all know each other and have a relationship where we could get the things done pretty quick. We didn't have to do the like, hey, how's everything going? It's like, hey listen, we need to figure this out like right now, let's go. And so we were able to do it pretty quickly. 00:28:11 - Joshua M. Hayes Yeah, having those relationships in place really helps, particularly in those scenarios where every second counts, where it's like if we don't get this done immediately, then we're not going to close today. And if we don't close today, we might not close at all. And so building that Relationship capital through working with a company over a period of months is really critical. I know that some companies have a tendency to want to work with their friend or family member who's a lawyer. Maybe they're a divorced lawyer, but they do some moonlighting with some corporate work on the side and then it comes time to sell and they have to get a deal attorney who's actually familiar with this kind of stuff. We can do that, but I think it's a much smoother process. It's easier sledding if you do have those relationships in place for a time. 00:29:07 - Trevor Schmidt At some point in 2024, elements started to entertain the possibility of a major transaction. How did this come about? 00:29:15 - Tim McLoughlin I think open and honest communication at the board level is a good start. Which is what is everybody's goals here, right? And it's not just the investor goals, but what are the founders goals? Founders goals can come in a number of different forms, right? It can be, maybe it's time based, which is, hey, I got another year to maximize this valuation, then I'm out. Right? It could be a number based, hey, I need to exit for. I need to put this much in my pocket and that's my number and I'll work as hard as I can until I get to that number or whatever I'm going to do. Investor timing. Where is an investor in the life of their fund? When do they need to get out? Is what's going on in their portfolio what is considered a good outcome for them? Is everybody aligned? Like, and it's not always going to align, but you kind of, you know, you have a couple data points, you triangulate and you say, all right, if we can get to this, it makes sense for everybody. And I think there was open communication and alignment on the board relative to what the founder wanted to do. That would be a good outcome for the investors as well. And everybody was on the same page. So that's how it kind of starts. And then you have a couple of decisions to make. Do you bring that company out on your own? Do you try to run your own process internally? Do you hire somebody to come in? Do you run a process to select an investment bank, which is what we did in this case. And then once you do that, you kind of have a timeline on your expectations towards getting to an offer. And then you also have kind of a feeling in a sense of what that offer would need to be in order to make a transaction happen. 00:30:44 - Trevor Schmidt Tell me a little bit about that, about the investment banker. Specifically, what, how do you view Their role, what are they doing as it relates to the transaction and how do you view it from the investor board side? 00:30:54 - Tim McLoughlin Well, a couple. So a couple things you have to, most likely you have to be at a certain stage, a certain size in order to attract an investment banker that's worth investment bank, that's worth what you're going to pay them. And by that I mean it's all about their time and other options that they have and deals that they can work on. Right. So they're not going to. If you got a company that's doing a couple hundred thousand in revenue and might sell for a million bucks, like there's not enough money going around where a banker is going to spend six months on that project and opportunity. Right. And so the first thing I would say is, are you a business that's able to get an investment bank? Because don't go. If you, if you don't think you are, don't go down that path. Right. Then it comes to the process is all right, which is going to be the best one for us, for this business. So who has access to the buyers, the strategic buyers and the financial buyers? Do they have access and relationships with those groups?

Yes or no? Have they sold companies like this before? Do they know what SaaS companies in the edtech space, what kind of multiples they've been getting so that they have credibility when they go out to market and have real comps. So based on all those things, the investment banks will pitch to the board, the board will select a bank to take the company out, and then there will be a timeline and a process that ultimately leads to multiple bids at the same time coming in and then a selection of which ones they want to negotiate to try to get the best deal for the company. And so typically that is the process and what you would go through and the bank's role in it. One, access to buyers. So they're going to have a better network of potential buyers than you're going to have. And you're going to feel more confident that you turned over every stone than if you did it by yourself. Right. So I'd say that. And then the second thing is they're the negotiating piece these management teams have to do. There's a brutal negotiation that's going on through this process, and then the management team's got to go work with the buyer. Right. And so if there's a buffer in there that is managing that process, that is a real role of the investment bank. And then just keeping everything organized, do we follow up, do we send all the requests, information? Do we package everything up in a way that is, is going to be appealing to a buyer? So that's really the roles. And, and some of them are worth every penny. And some of them, it's like, I'm pretty sure I could have done that and saved a couple million bucks, but. But yeah, you just got to find the right one. 00:33:13 - Trevor Schmidt Now talk about that a little bit from the legal side, Josh. So, like, when you're working, how do you work with an investment banker? And what does it look like from the legal side if there is an auction process? 00:33:22 - Joshua M. Hayes Yeah, I mean, just to, just to add on to some of the things that Tim was saying. I think some of the other areas where they can, they can really add value is if a founder, you know, isn't as familiar with sort of the financial side of their business, like, you know, they kind of rely more on accountants and external service providers, then I think that bankers can be really helpful in helping founders understand things like the right exit multiple, the networking capital target that eventually works its way into the deal. So I think they can be helpful on some of those financial metrics. And then the other thing I'd just add, I think you kind of touched on it. 00:34:02 - Joshua M. Hayes Tim was helping to maintain that deal timeline and that deal momentum because usually they're the ones kind of leaning into making sure that everything gets done sort of at a good tempo, good cadence, you know, sometimes to the chagrin of, of legal teams. But yeah, I think, I think there is, there is certainly a range of, you know, of styles within, within the investment banking world, I guess from the legal side, just kind of thinking about some of the risks. Like what, what are you giving up if you, if you go with a banker? You know, you're giving up some control over the process. Right? This would be a process that you, as the founder would be managing and in the driver's seat. 00:34:50 - Joshua M. Hayes And you're basically bringing in somebody who's going to be handling a lot of the things that you would be handling now. On balance, I think it, it usually works out because you, you do want that buffer kind of doing the hard negotiations on price because often that will help maximize the deal value for your team. Some of the other, just thinking about kind of the flip side of the coin of kind of the access to the different buyers, right? Like if you do go out to market with a banker and you come up, you don't come up with a deal value or a transaction type that is favorable to you. 00:35:26 - Joshua M. Hayes You've already Turned over most of the most likely folks who are willing to and able to buy your business. And so it's not just a matter of, well, who else can I talk to today? It's, well, I need to go back to the well, and I need to demonstrate some sort of material inflection point in my sales pipeline, in my revenues, in order to be able to go back out to market. 00:35:51 - Joshua M. Hayes Now, I think, on balance, most folks who can get a banker do get a banker because the benefits outrage outweigh those risks. But it's worth sort of pausing and thinking about that, you know, before you sign the engagement letter. And then sort of from the legal side, I think that's probably where we first get engaged is typically you're going to enter into an engagement letter with the investment banker. And there are some, I'd say fairly common terms that get pretty heavily negotiated, one of which is what's called the tail period. So you're generally engaging a banker for a period of time and then call it 12 months. And then there's usually a period of time, say 12 to 18 months after that relationship winds down where the banker is still eligible to get their fee. 00:36:41 - Joshua M. Hayes Right. Because the idea is that while a transaction maybe didn't close during that period of relationship, the sort of groundwork that they laid, the relationships that they helped form during that time were instrumental for you making the sale. And so it's important to be really thoughtful around that tale because you really want the tale to apply to folks where they have provided that real value and made those introductions, but not necessarily somebody for whom the founder went out and met two to three months after the banking relationship was over. 00:37:14 - Joshua M. Hayes So there's a number of kind of terms like that that do get negotiated, and then from there it really is going into the auction process. Like Tim mentioned, in many cases, we'll put together what's called an auction draft. So in most

M and A transactions, the buyer is the one giving the seller the draft of the purchase agreement. And it's going to be in a form that the buyer likes, right? Like it's going to have really full reps and warranties. It's going to have really strong indemnification protections for a buyer. But with an auction process, you can kind of flip that on its head and you can actually go out with a version of your purchase agreement that's very seller favorable. 00:38:01 - Joshua M. Hayes It has all the bells and whistles that the company would want. And so that helps give companies a lot more leverage because it's buyers reacting to the Company as opposed to the other way around. That was something that we did in the element transaction. It also, by the way, helps to accelerate deal timelines because you don't have to sign a loi, sign a term sheet and then get to work on the purchase agreement. You can have those work streams working in parallel. 00:38:34 - Trevor Schmidt So how did the engagement with the investment banker proceed in this case? Or how did the auction process, what stands out from that process here? 00:38:41 - Tim McLoughlin In this particular case, I would say it's been the strongest by far. On the demand side, from the buyer side that we've seen in the portfolio, there were more private equity groups and strategics that were interested in buying this company than any company we've sold before or has been bought before, I would say. So that certainly stands out. I would say artists ability to accurately communicate with confidence to the investors and the board. What was actually going to happen was quite impressive. Like some of the numbers and the amount of Lois, it seemed like unrealistic that he, what he was presenting to us. But he did a phenomenal job of bringing all that together alongside of the investment bank to deliver on what he said he was going to. Another couple of things to stand up was we were close to a transaction that ultimately didn't happen. I mean, there's, there are, there are retrades. There are things that goes on in the private equity world that you kind of expect to come, and then when they do, it's like just devastating. But how founders react to that is really interesting. And ours went back to work and was like, we're gonna, we're gonna relaunch this process in a few months. And they just absolutely crushed it for the months in between. And then I would say that the time, like the timeline, the Lois, the ability to negotiate, and then the speed of the transaction, which, without getting into too much detail, is probably the fastest transaction that we've ever worked on, for sure. And if you look at it being the fastest transaction we've ever had, and by far the largest, those are two things that are pretty rare to happen at the same time. Right. 00:40:16 - Trevor Schmidt So what are some of the challenges with such a condensed process? I mean, because like you talked about, just in general, a deal moves quickly, has a lot of moving parts, and is stressful. But now you combine all of that into an incredibly short period of time. 00:40:29 - Joshua M. Hayes Yeah, it's a ton of fun. Seriously, it is a ton of work. And I mean that first and foremost from the founder's perspective. Right. Because with an auction process, you have more than one suitor and that's kind of the whole point, right? Like you want to generate competition, you want one bidder bidding against the other bidder so that you get a little bit of a price war going on. That's what you want. But then you actually have to deal with what you say you wanted. You have to have the diligence call with team A where they're digging, you know, they have a team of 10 lawyers from some white shoe law firm in New York or Silicon Valley or whatever it is, and they're going through your company with a fine tooth comb. And then you have to do that again with team B. 00:41:17 - Tim McLoughlin On the same day. 00:41:18 - Joshua M. Hayes On the same day. And then team C and team D. And so it's just back to back meetings. It's kind of this relentless pace. And then, oh, by the way, you actually have to run your business. Right. Like you have to run a business at the same time that you're running this sale process. And so it's at least two, if not more full time jobs for a founder. You know, from our side, it was a challenge, you know, to kind of work through a transaction of this scope and complexity on the timeline that, that the parties had wanted. Again, without, without getting into all the gritty details. You know, we were working through the LOI process, I think in early November and we had in our, in our heads sort of an end of year closing timeline. Right. And so, you know, that's, that's the better part of two months, which is brisk. It's a nice brisk pace for a, for a transaction. You know, you're going to be working on that every day. As the transaction evolved, it became clear that around, call it mid November, you know, we're not, we're not closing at the end of the year, we're closing before Thanksgiving. 00:42:31 - Tim McLoughlin Yep. 00:42:32 - Joshua M. Hayes And so, you know, there was a period of time where we were waiting to see if, if that particular deal with that particular buyer was a go. And I, I still remember artists saying like, yeah, we're going to see where this goes. And so we said, okay. And we, we spun up the team, we got going on, you know, all the different work streams that, that need to be done on the deal. From the legal side, all the fun stuff like negotiating deal documents, negotiating the rollover documents, negotiating disclosure schedules, diligence, things like that. I would say fortunately in our case, we had done a lot of the prep work in advance of that. I think that's also one of the benefits of the auction process is that you're basically proposing a particular Deal structure. So you're able to work under the assumption that that's going

to be the structure and lay a lot of the foundational work in advance, notwithstanding that you are typically thinking around a sort of four to six week deal timeline, even for, I would say, deals that are a lot smaller and less complex. And so to get it done in a week's time was a challenge. We were ultimately able to accomplish the client and the investor's objective of getting it done before Thanksgiving, which I think is a huge credit to artists first and foremost, a credit to our team as well, and frankly, a credit to PSG and their legal team as well. 00:44:07 - Tim McLoughlin David was kind enough to hand over. David Gardner was kind enough to hand over the managing partner title to me before having to make the biggest, some of the biggest decisions in the history of the firm. And we had to do those in hours, I mean, minutes, hours. I mean, it was, it was quick. It was quick. And there was a lot of back and forth phone calls and communication with artists and, and trying to get everybody on the same page to get it done. And ultimately we were able to, but it was a tense day before Thanksgiving. 00:44:34 - Trevor Schmidt So, Tim, how do you think about the board's role during this transaction? Because you've got the investment banker, you got council kind of working through it. What are you guys doing? 00:44:41 - Tim McLoughlin Well, hopefully everyone has communicated multiple times and reiterates, said it, say it again and then say it a third time, and then make sure everybody confirms that they heard it three times. Right. Like what everyone's goals were and expectations. And if we got to a certain point in a certain kind of offer, everyone was going to be prepared to move forward on it. Right. If you have any ambiguity in that process, that's a big problem. And, and so one of the things that we had talked about when we were considering an earlier offer was what if this offer changes, get everybody on. On the same page before an offer changes, which it, you know, one case did. And everybody was in this, on the same page of what we needed to do. But that's a much harder conversation to have after the fact. Right. And it takes a lot more time and a lot more discussion. And so the board's job is get aligned, understand what everybody's objectives are so that when something comes together, you can move quickly on it and all feel good about it. 00:45:41 - Trevor Schmidt Yeah. Just kind of speaking generally, like, what are some of the key issues in a deal like this that could lead a deal to fall apart? And then how do you help a company navigate through those Issues and think about them. I'd be interested to hear both of you guys view. 00:45:53 - Tim McLoughlin Well, you hear like, time kills all deals, right? Like, so what could happen? You lose a major customer, right? There's somebody comes out of the woodwork and says, hey, I heard that this company might be selling and I'm not on the cap table, but I probably should be, right? Like, okay, if I'm a buyer, I'm not dealing with that. I'm gonna just pencils down, I'm gonna pause. So you got, you know, the business risk, something happens there. You have the, the investor, employee risk, something comes up, right, that isn't assigned or doesn't work that. That could kill a deal. You have market conditions. Like, you know how many stories I've heard about people that were about to close and sell their business in March of 2020, right. Or June of 2020 that still haven't been able to because of what happened with the pandemic? And I know that that's like the pandemic, but, okay, look at what's going on right now. If you're, if you're in a company that exports goods, well, you probably should have sold six months ago. And so there's macro trends, there's business risk that's associated, and then there's people risk. People fall out with each other investors fall out with each other investors that aren't aligned with the founder. A founder wants to get a deal. We had one offer. We had one offer where we thought the company could be worth 15 or 20 million bucks, and the buyer offered us 4, but was going to pay the founding team millions of dollars a year, right, in salary. So now you have risk with people, right? We're not aligned, right? And so all those risks can come up. And so when I say time kills all deals, you got macro risk, you got business risk, you have people risk. So some combination of all those things. 00:47:26 - Trevor Schmidt So just close in a week then. You don't have to close in a. 00:47:28 - Tim McLoughlin Week, just close in a week. Here's the bank account information. Send it. We're good. 00:47:32 - Trevor Schmidt So how about you, Josh? What are some of the deals that you see, just in general? I mean, some issues and deals that you see that cause it to fall apart? 00:47:37 - Joshua M. Hayes Yeah, no, I mean, I think the ones that Tim mentioned, I mean, those are kind of the, the big dial things that can really cause a deal to go off the rails, right? Like if, if a major stockholder is not supportive of. Of a deal, you need to know that at the outset and not when you're going to them for sign off, right, to get their signature, because then they have, they have maximum leverage at that point, right. And they can really jam you up. They can hold up the deal, they can hold it hostage for whatever kind of wish list of things that they might want. You know, a lot of things that may not be deal killers, but can certainly cause a lot of turbulence going through a deal process would be things that come up in diligence. You know, if there's sort of a tax issue. So on the tech side, if you're at like an online marketplace, you may run into a sales tax issue if there's, you know, something related to your intellectual property that comes up in diligence, some sort of influence infringement on your ip. These are things that again, can usually get worked out. There's usually a solution to them. But it can add

time, it can add cost, it can add expense to the deal. If the team's already fatigued, it becomes a question of is that the straw that ultimately causes the deal to crumble? 00:48:55 - Tim McLoughlin Right. 00:48:55 - Joshua M. Hayes To mix some inconsistent metaphors, but yeah, I mean, I think having a team that's aligned, having counsel, who has sort of been in these same trenches before is really instrumental in helping to navigate some of those things that, that ultimately do come up. Because what, what I like to tell founders is the deal that you sign at the LOI stage, that's the best deal you're going to get because buyers are going to get their legal teams in there, they're going to overturn every rock, big and small, and they're going to find something that they're going to leverage to kind of chip away at. Whether it's valuation or putting something into an escrow, they're going to find something. And so you just have to be ready for that. And you have to make sure that you know what your areas of risk are so that you have a plan to mitigate those, so that you're not surprised when a buyer comes to you with this issue, you're able to respond to them almost immediately and say, yeah, I knew that that was a problem. Here's how I'm fixing it. I should have this resolved by, you know, next 24 hours. Like that's the response. You want to be able to give. 00:50:02 - Tim McLoughlin One other thought that was coming up that we've had to deal with a lot is employment agreements. Like, your team has been probably working for below market salaries for a long time. Maybe they make some money in the exit, maybe they don't. Depending on the size of the transaction and then you got to tell your team, hey, by the way, now there's no like big, you know this, this is all the money you're going to get in the transaction. But in order to do this deal we need our team moving forward and signing up for the next two years. Right. And so you see that and how do you get all the team members aligned that say okay, here's going to be your salary and your, your benefits and your whatever earn out you're going to have at the, for the transaction or rev share moving. Like there's a lot that can go on in that and if you don't, you know, you lose the team, you lose like the company. Right. You're acquiring a company you want to acquire. In good cases you typically acquire the team. If you don't have a team, like that becomes a big problem. 00:50:58 - Joshua M. Hayes So stockholders also typically love to see those five year non competes that show up 72 hours before the deal closes. 00:51:06 - Tim McLoughlin Well, and for, for us like as investors, there's been times where we're supposed to sign a non compete right. In a certain industry. Well that's our entire life. Like I can't invest in a ed tech company, I can't invest in a prop tech company and I can't invest in a healthcare IT company. We sold ones in all those verticals, we signed nine non competes. All

of a sudden we can't invest in anything. 00:51:25 - Joshua M. Hayes Right? Yeah, you're kind of dead in the water. 00:51:28 - Tim McLoughlin And so yeah. 00:51:30 - Trevor Schmidt So what do you recall about closing this deal? Did you do anything to celebrate? Just eat some turkey and move on to the next deal. What was it? 00:51:37 - Tim McLoughlin So I have two funny stories. The first one was it was right around Thanksgiving that it happened and it was kind of closed but money hadn't fully been transferred and everything. But I had some family members that are also investors in our fund over at Thanksgiving and so they're like, so what's the status? And I'm like I think it's good. But I can't tell you for sure that everything's finalized and closed because I don't have any money to send out. Right. So that was one thing. But then we went and this was our first major distribution that we had ever made into our from our fund too. So we had been in the fund too for five years and now we're going to have this massive distribution and we're sitting here and I'm like, I don't know if everybody's wiring instructions are correct. We have over 90 investors in our fund. So on my birthday, December 6th, I'm calling every single one of our LPs, I'm getting them on the phone, and I'm going through their wiring instructions to make sure they're correct. And the funny thing was, I remember a couple of them were like, didn't I see it was your birthday today? Like, why are you doing this? I said, this is exactly what I want to be doing on my birthday. Like, this is as happy as I could possibly be calling you to tell you that we're about to send some money and, you know, for. And thanks for the patience and, you know, sticking with us and believing in us. So that was. Those are two very distinct memories that I will not forget. 00:52:55 - Trevor Schmidt That's great. 00:52:57 - Joshua M. Hayes So vague memories. 00:53:01 - Tim McLoughlin You were a little sleepy. 00:53:02 - Joshua M. Hayes I was a little sleepy. Our team was up for, I would say, most of that night. There was maybe hour or two period in the early morning hours where email traffic slowed down, but it was sort of fast and furious from the kind of legal perspective, making sure every loop was closed. T was crossed. I was dotted in the hours leading up to the closing. I think one thing that really stands out to me is just how great our team was on the deal because, I mean, I remember there were periods where there was an email hitting my inbox every 30 to 45 seconds, and there was just no way that I could get to all of those. But fortunately, each member of our team had kind of their role to play and they were able to respond to things that were just. Just kind of flying across my consciousness. And so, yeah, just huge kudos to the team for helping to push that to closing. Yeah, I remember we were going to a friend's house for dinner that Wednesday night, kind of a pre Thanksgiving dinner. And I remember they were wondering if I was going to make it. Right. Because I had told them that I'd had this thing going on. And I was like, no, I'm going to make this dinner. This is going to happen. And they're like, okay, but you're going to be late. And I was like, probably. But I remember making it roughly on time. And that was also something that was a little special about the deal is because usually you're kind of going down to the wire. I think the closing call on this one was at 3pm and we were pretty much there. And so that was also kind of a little feather in the cap for artists and his team to kind of get it done, not seconds before the wire deadline, but, you know, with a little bit of room to spare. 00:55:09 - Trevor Schmidt So what are some lessons you'll take away from this deal and that you think about kind of going forward? 00:55:14 - Tim McLoughlin Well, you got to. I think one thing, you got to be there to support entrepreneurs. I mean. Yeah. Were the investors there? Yeah. Was the board maybe helpful and communicative and on the same page? And were the attorneys there to back it up? But, I mean, the entrepreneurs have put everything. Like, thinking back, and I just looked at. I was looking at the element451 website artists was talking about in 2019, how scary it was to spin out this tech company from the successful consulting group and putting all those eggs in one basket. So when I think back to the transactions, think about the risk these founders put in. Think about the jobs they create through this entire thing, Think about what they do and give back to the entire ecosystem, like creating wealth and a flywheel for our entire ecosystem. Speaking of Raleigh Durham Startup Week. And then think about the entrepreneur in that moment. That moment is so special for what they've been able to build and create and do. And not all of them work out like that. And that's okay. We know it. But when they do, it inspires a lot of people. And so just kudos to artists and the Element Team for building what they built. 00:56:21 - Joshua M. Hayes Yeah, no, I mean, I would just echo that. I mean, it really is a credit to, you know, to artists individually, to the entrepreneurial community here in the Triangle, to the team that he was able to build out around him, to the investors who came in and were able to fund and support the company over the years. You know, to the legal teams and other service providers who kind of provided their support over the years. It really is a team sport. You know, entrepreneurialism is a team sport. And, you know, the founders are the captains. They're the ones who really. Who really demonstrate their leadership, and they make it happen. And so, you know, that was something that was really inspiring to see because, like you said, Tim, it doesn't always work out that way, but when it does, I mean, there is a real magic there. 00:57:14 - Tim McLoughlin Well, and a lot of it was, like, almost all

of it was local, right? Yeah, it was local talent, it was local. A lot of local investors, it was local legal teams. And it's pretty cool that you have all those resources in one area. 00:57:27 - Trevor Schmidt That's great. Well, so this may be a bit of a related question, but we are the Founder Shares podcast. And so I'd like to ask all of our guests if you could give one piece of advice to someone who's thinking about starting a company. What would it be? And Josh, I'll start with you. 00:57:39 - Joshua M. Hayes Yeah. Just to kind of build on what we were talking about. I mean, I think entrepreneurship is in no small part about relationships. You know, the relationships that you build with your co founders, with your investors, with your lawyers, with your accountants, and with the people in your broader ecosystem. And if you're able to go in with that mindset, then you're always going to have somebody to turn to during the hard times, and you're always going to have somebody to celebrate with during your victories. And so I think going into it with that mindset of here's the impossibly difficult problem that I'm looking to solve, I'm going to be the tip of the spear and I'm going to build some incredible relationships behind me to support me is, in my view, the right mindset going into it. 00:58:34 - Trevor Schmidt How about you, Tim? 00:58:35 - Tim McLoughlin Mine would be, and I'm just more recently having this answer to this type of question, which is, whatever you're doing, make sure it's worth your time. And that can mean a lot of things. Make sure it's worth your time financially. Make sure it's worth your time from an impact perspective. Whatever you value. Right. I don't want to say monetarily, because for a teacher, it might be, how many children's lives did I impact? Is that worth your time? For a founder, it might be financial, it could be. It could be number of jobs that you create. But I would also say put it on a spectrum, which is don't make it worth your time. Like now, in the short run, in two years and three years. But when you're actually accomplishing what you want to accomplish 10 years out, is that still a big enough goal and worth your time? For example, when we came out of college and somebody would offer you $75,000, you're like, oh, my God, this is worth it. But 20 years from now, is that still going to be your goal? Or 15 years? And so what are you trying to accomplish in the long run? And is what you're doing between now and then worth your time? However you define it, that's great. 00:59:40 - Trevor Schmidt I appreciate you taking that time with us and sharing it here today. Josh, thank you as well. This has been the Founder Shares Podcast live from Raleigh Durham Startup Week. Thanks so much. Thanks for listening to this episode of the Founder Shares Podcast. If you're a founder or business owner and need legal advice, be sure to check out our team@hutchlaw.com that's hutchlaw.com we have the capacity to help you out with just about any legal need your company may be facing. We're passionate about the innovation economy and ready to help you on your entrepreneurial journey. The show was edited and produced by Earfluence. I'm Trevor Schmidt, and thanks for listening to the Founder Shares podcast.