Looking for recommendation for deal structure for an IT company

February 23, 2024

by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in St Paul, MN, USA

I am considering acquiring a stake in an IT company specializing in Managed Services and Cybersecurity, a company I am well-acquainted with. The current CEO and CIO are also interested in purchasing the company. The owner has proposed that I join as one of five owners. I'm inclined to accept this offer, especially since I have a positive view of the two operators who would become my co-owners.

However, I've never been in a position of holding a minority stake in a company before. Therefore, I'm seeking guidance on several key aspects of structuring such a deal. These include determining the equity stake and investment terms, navigating the board composition, especially in scenarios where I might not secure a board seat, managing operational control and establishing a clear chain of command, ensuring operational transparency, and formulating exit strategies.

I would greatly appreciate any advice on how to approach these elements to safeguard my investment and contribute effectively to the company's success.

Reply by a searcher
in New York, NY, USA

Ultimately, this will require you to make decisions about your personal risk tolerance and what your vision and impetus for becoming involved is. Owning a minority stake as a non-operator is a lot different than being an operator. How important is control to you? Giving that up will require being paid for losing that control premium in the economics. You should also hire an attorney who is able to represent your interests in negotiating the governance of the company, because that will be key. You mention not having a board seat -- does that mean not having a vote but you can be a spectator? Will you have access to board materials to review?

Just as importantly, you should think about the financial implications. Who will set dividends and how will they be allocated? What rights of refusal are there for existing investors when a shareholder wants to sell? If not everything goes well financially for the company, what rights do you have if the majority holders want to sell the company at a valuation lower than you agree with?

There are minority shareholders everywhere -- in search, in the stock market, in private equity. But each has a different reason for being in the position, and that is why I think the most important thing you can do is to introspect a bit and figure out what's important to you emotionally, financially, and professionally. Your professional advisors will be much better equipped to be your advocates if they have those answers.

Reply by a professional
from Villanova University in West Chester, PA, USA

^redacted‌ Absolutely. Deal structure for a minority stake requires careful consideration with respect to the terms of the investment and governance documents to protect your interests, ensure operational efficacy and enable you to successfully exit the investment. With our clients, we discuss board representation, operational roles, transparency and reporting mechanisms, voting rights, distribution rights, buy/sell provisions and exit strategies to align with short term and long term goals, the needs of you and co-owners, as well as the realities of the business. There isn't enough information in your post to be able to provide meaningful guidance, but I'd be happy to discuss this further. Feel free to DM me or schedule a consultation through the link in my bio.‌

+2 more replies.

Join the discussion