It seems that every week, AI technology has learnt to do something humans do, but faster and better. From detecting cancers and eye conditions to predicting floods or analysing the language, tone and facial expressions of candidates during recruitment processes, AI is now at the stage where it not only supports human judgment, but makes increasingly more complex and accurate decisions.

As technology further improves and we learn how to better work and collaborate with AI, interactions between humans and computers will significantly enhance creativity – of both humans and bots.

As we discuss in this recent piece on “Supercreativity”, already we’re seeing fascinating advances and possibilities in the world of art and science. AI has produced paintings, music and poetry of undeniable artistic quality. An AI painting generated by technology recently sold at Christie’s for US$432,500. Start-ups Aiva and Amper have developed deep learning methods for generating music on demand and may soon enable personalised music. In the near future, the challenging and laborious process of composing and orchestrating the accompaniment to a musical theme or song is likely to be largely taken over by AI. As we note, “Creative AI may be a next milestone towards Artificial General Intelligence that fuels engineering of multimodality and associations learning and development of effective human-AI collaboration processes”.

Meanwhile, neuroscientists and engineers recently harnessed the power of speech synthesisers and AI to develop a system that translates thought into intelligible, recognisable speech – which could lead to new ways for computers to communicate directly with the brain and, maybe more importantly, for us to better understand both human and artificial intelligence.

So, what does AI mean for your business? And, with so much happening at such a rapid pace, how can firms leverage AI to ensure value for their business?

Selecting the ideal AI solution

By learning from data at a fraction of the speed of humans, AI has the ability to accomplish activities and make forecasts with incredible accuracy. As well as significantly reducing mindless and repetitive tasks, AI provides insights that can pave the way for better business decisions in all areas: budgeting and apportioning of resources, streamlining supply chains and engaging with customers using sentiment analysis and predictive intelligence. The transformative potential of AI will magnify over the coming decade as industries and organisations adapt their processes and even business models to take advantage of its capabilities.

Today, while increasingly recognising the potential of AI, most organisations are in the early stages of implementing and committing to this largely unexplored technology. Even those with the most advanced technologies in place are still working out how to use it.

Investing in AI can require significant time, money and effort. With technology heading in so many directions, it would be easy to go for the most dramatic or the most popular technology available. However, to reap the biggest benefits, organisations need to devise a solution that suits their specific needs. They must also understand that AI is not about blindly putting in place technology that replaces human resources. It is about adding value and efficiency to operations by creating smoother, faster or more accurate processes.

When gauging the business value of an AI solution, organisations should as always keep in mind the basics: consider the technology’s benefits and cost – even if these are very often difficult to quantify. A good starting point is to look at the decisions the technology automates (e.g. investments, procurement, advertisement, hiring and screening, etc.) and compare this with the way the decision is currently being made. By putting a dollar amount to each decision, firms can estimate the potential value the technology could create, always keeping in mind that value is sometimes non-quantifiable.

Understanding the cost of implementing AI solutions is not so straightforward either. Along with the cost of the technology, there are hidden costs such as the skills that will need to be developed, the organisational changes that may be required and potentially even updates to business models.

Implementing AI technology – a holistic approach

The adage “IT plus an old organisation is an expensive old organisation” is even more relevant when investing in AI. More than any other technology, AI requires a holistic approach. It is essential for leaders to foster technological skills; IT infrastructure and governance; data literacy; an innovative culture; norms that adhere to best practices; and the ability to align the capacities of new technologies with the needs of the core business. Leaders must also consider new risks and liabilities AI can create for the business (e.g. discrimination, unfair decisions, unethical behaviour of AI, even health risks), something that may prove key for executives and boards as AI is integrated into business processes, products and services.

While machine learning has the ability to enhance the performance of organisations, it may also present ethical and legal concerns that need to be addressed at the board level.

Identifying the quality of the solution

Measuring the quality of a solution being offered is also not easy. Many vendors will promise things that sound too good to be true because they are. However, some things that sound unbelievable will actually be true. How do you evaluate that? It is unlikely firms will have the expertise to judge the technicality of AI technology. However, what they can do is judge the skills of the people who developed it and the processes they followed. Their checklist should include: sound data quality processes, careful use of machine learning methods, people with significant experience developing machine learning solutions, adequate monitoring processes designed to ensure AI continuously improves and its “behaviour” remains within acceptable quality limits – among others.

Creating strong data processes

An AI solution is only as good as the data it receives. While firms can bring in data scientists and statistics experts to verify data quality and relevance when adopting AI technology, it is important to remember that the right set of data today may be wrong tomorrow. Leaders need to focus not just on quality of data at the time of implementation, but on the data quality processes that are built into their organisation. This will ensure that the quality and relevance of the data being used are of high standard today and into the future.

The exponential advancement of AI is set to trigger irreversible changes that will reshape business – and society. Early adopters, those that gain an understanding of how AI can add value to their business and face the difficulties of integration while it is still in its infancy, will position themselves to capitalise on the opportunities as they develop. It is up to leaders to understand the capabilities, opportunities and challenges of AI and reorient their business to develop the core practices, skills and processes that enable them to realise the full value the technology can bring.

Thanks to our media partner Mediaquest and our event partner AI Everything.

Theodoros Evgeniou is a Professor of Decision Sciences and Technology Management at INSEAD and the Academic Director of the INSEAD eLab.

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No matter how great your business idea is, one essential element of startup success is your ability to obtain sufficient funding to start and grow the business. While many people finance their new companies with their own capital or by borrowing money from family or friends, there are other options available. But startup founders must understand that raising startup funding is never easy, and usually takes longer than anticipated.

In this article, we review five key options to obtain startup funding for your company.

1. Angel Financing

Angel investors are typically individuals who invest in startup or early-stage companies in exchange for an equity ownership interest. Angel investing in startups has been accelerating, and high-profile success stories like Uber, WhatsApp, and Facebook have spurred angel investors to make multiple bets with the hopes of getting outsized returns.

The typical angel investment is $25,000 to $100,000 per company, but can go higher.

Here is what angels particularly care about:

• The quality, passion, commitment, and integrity of the founders
• The market opportunity being addressed and the potential for the company to become very big
• A clearly thought out business plan, and any early evidence of obtaining traction toward the plan
• Interesting technology or intellectual property
• An appropriate valuation with reasonable terms (angel investors are investing at an early stage when risk is highest, so they typically require lower valuations to compensate)
• The viability of raising additional rounds of startup funding if progress is made

There are a variety of ways to find angel investors, including through:

• Other entrepreneurs
• Lawyers and accountants
• AngelList
• Angel investor networks
• Venture capitalists and investment bankers
• Crowdfunding sites like Kickstarter and Indiegogo

The best way to find an angel investor is a solid introduction from a colleague or friend of an angel. Use LinkedIn to determine what connections you may already have. Angel investors are much more likely to invest if they know your sector well, so it often helps to start with your connections in that sector.

Serial entrepreneurs with successful past liquidity events are often some of the best angel investors—they have the cash to invest, but in addition to cash they also often bring other important benefits to a startup relationship, such as:

• Contacts to venture capitalists
• Contacts to strategic partners
• Advice and counsel
• Credibility by being associated with the investor
• Contacts to potential customers
• Contacts to potential employees
• Contacts with lawyers, banks, accountants, and investment bankers
• Knowledge of the marketplace and strategies of similar companies

2. Crowdfunding

“Crowdfunding” is the practice of raising funding through multiple funders, often via popular crowdfunding websites.

Crowdfunding gives startup entrepreneurs the opportunity to raise startup funding for their business, and can help a company promote its products or services. Setting up a crowdfunding campaign is not very difficult. You set up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are trying to raise. People who are interested in what you are trying to do can donate to your campaign, typically in exchange for some kind of reward for their donation (one of your products or services, a discount based on how much donated, or some other perk), or for some form of equity or profit share in your business.

The key to successful crowdfunding campaigns is to have a compelling story about your product, service, or company, and to offer a meaningful reward for donations. Some startups have been able to raise thousands to even millions of dollars via crowdfunding campaigns.

Rewards-based crowdfunding is a particularly attractive option for startups, as you are not giving away equity or part ownership in your company—you are just offering some of your products or services, or a discount on those products or services. And rewards-based campaigns are not burdened with interest or principal repayments the way small business loans are.

A crowdfunding campaign can also work to build a community of people interested in your company or products, and provides a sense of engagement for the donor.

Equity crowdfunding, a scenario in which you are selling stock or some other interest in your company in exchange for cash, requires strict compliance with federal and state securities laws, and you should not attempt to do this without help from a lawyer with relevant experience.

Each crowdfunding site charges some kind of fee to list your campaign, either a processing fee or a percentage of the funds raised. Some of the most popular sites include:

• Kickstarter
• Indiegogo
• Crowd Supply
• Crowdfunder
• SeedInvest
• Crowdcube
• Fundly
• GoFundMe
• iFundWomen

3. Small Business Credit Cards

A number of credit card issuers specifically cater to the small business market, and many come with special benefits: cash back rewards, airline mileage points, and other perks.

Some issuers require that the card be tied to the owner’s personal credit score and credit history and a guarantee from the owner. This would mean, of course, that any defaults or late payments on the business credit card would affect your personal credit rating.

Interest on unpaid balances on the credit card can be quite high, ranging from 5% to 19.9%. Some issuers offer a low or no interest introductory charge for a few months.

Applying for a small business credit card can be made through your bank or online. The main traditional small business lenders include Capital One, Wells Fargo, Chase, Bank of America, and American Express.

There has also been a new wave of credit card issuers that focus on the small business market and do not require personal guarantees, which means use of the card will not impact your personal credit score. One example is Brex, which offers a small business card for early-stage technology companies with professional funding. The credit limits of these types of cards can be substantially higher than traditional credit cards, and they often provide valuable rewards.

4. Venture Capital

Startups seeking financing often turn to venture capital (VC) firms. These firms can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more.

Venture capital financings are not easy to obtain. Venture capitalists typically want to invest in startups that are pursuing big opportunities with high growth potential, and that have already shown some traction; for example, they have a working product prototype, early customer adoption, etc.

It is important to know that venture capitalists typically focus their investment efforts using one or more of the following criteria:

• Specific industry sectors (software, digital media, semiconductor, mobile, SaaS, biotech, mobile devices, consumer, etc.)
• Stage of company (early-stage seed or Series A rounds, or later stage rounds with companies that have achieved meaningful revenues and traction)
• Geography (e.g., San Francisco/Silicon Valley, New York, etc.)

Before approaching a venture capitalist, try to learn whether his or her focus aligns with your company and its stage of development.

The second key point to understand is that VCs get inundated with investment opportunities, many through unsolicited emails. Almost all of those unsolicited emails are ignored. The best way to get the attention of a VC is to have a warm introduction through one of their trusted colleagues, or another professional acquaintance of the VC, such as a lawyer or fellow entrepreneur.

A startup must have a good “elevator pitch” and a strong investor pitch deck to attract the interest of a VC. For more detailed advice on this (as well as a sample pitch deck), see How to Create a Great Investor Pitch Deck for Startups Seeking Financing.

Startups should also understand that the venture process can be very time consuming—just getting a meeting with a principal of a VC firm can take weeks; followed up with more meetings and conversations; followed by a presentation to all of the partners of the venture capital fund; followed by the issuance and negotiation of a term sheet, with continued due diligence; and finally the drafting and negotiation by lawyers on both sides of numerous legal documents to evidence the investment.

The key terms negotiated in a venture financing deal include:

• Valuation of the company
• Amount of the investment
• Form of the investment (typically through convertible preferred stock)
• Liquidation preference of the equity investment (the right to be paid back first on sale of the business or its liquidation)
• Board of Directors composition and any Board observer rights
• Approval or “veto” rights of the investors, covering items such as future equity financings, sale of the company, or changes to charter documents
• Rights to participate in future financings (“preemptive rights”)
• Rights to receive periodic financial reports and other information
• Vesting requirements for any founder stock
• Anti-dilution protection, protecting the investment from dilution if future rounds of financing occur at a reduced valuation (there are different types of formulas for this)
• Redemption rights (if any)
• Rights of first refusal or co-sale/tag-along rights on sales of any founder shares
• Drag-along rights (giving the company the right to force all shareholders to vote for a sale of the company if the sale has been approved by a specified percentage of shareholders)
• Registration rights (giving the investor the right to require the company to register their shares with the SEC in a public offering)

5. Small Business Loans

Small business loans are available from a large number of traditional and alternative lenders. These types of loans can help your business grow, fund new research and development, help you expand into new territories, enhance sales and marketing efforts, allow you to hire new people, and much more.

There are multiple types of small business loans available, and options vary depending on your business needs, the length of the loan, and the specific terms of the loan:

• Small business line of credit. Under a small business line of credit, your business can access funds from the lender as needed. There will be a cap on the amount of funds accessible (e.g., $100,000) but a line of credit is useful for managing a company’s cash flow and unexpected expenses. There will typically be a fee for setting up the line of credit, but you don’t get charged interest until you actually draw down the funds. Interest is typically paid monthly and the principal drawn down on the line is often amortized over years. However, most lines of credit require annual renewal, which may require an additional fee. If the line is not renewed, you will be required to pay it in full at that time.
• Accounts receivable financing. An accounts receivable line of credit is a credit facility secured by the company’s accounts receivable (AR). The AR line allows you to get cash immediately depending on the level of your accounts receivable, and the interest rate is variable. The AR line is paid down as the accounts receivable are paid by your customers.
• Working capital loans. A working capital loan is a debt borrowing vehicle used by the company to finance its daily operations. Companies use such loans to manage fluctuations in revenues and expenses due to seasonality or other circumstances in their business. Some working capital loans are unsecured, but companies that have little or no credit history will typically have to pledge collateral for the loan or provide a personal guarantee. Working capital loans tend to be short-term loans of 30 days to 1 year. Such loans typically vary from $5,000 to $100,000 for small businesses.
• Small business term loans. Term loans are typically for a set dollar amount (e.g., $250,000) and are used for business operations, capital expenditures, or expansion. Interest is paid monthly and the principal is usually repayable within 6 months to 3 years (which can be amortized over the term of the loan or have a balloon payment at the end). Term loans can be secured or unsecured, and the interest can be variable or fixed. These loans are good for small businesses that need capital for growth or for large, onetime expenditures.
• SBA small business loans. Some banks offer attractive low-interest-rate loans for small businesses, backed and guaranteed by the U.S. Small Business Administration (SBA). Because of the SBA guarantee, the interest rate and repayment terms are more favorable than most loans. Loan amounts range from $30,000 to as high as $5 million. However, the loan process is time consuming with strict requirements for eligible small businesses. Visit the SBA website to see a list of the 100 most active SBA lenders.
• Equipment loans. Small businesses can buy equipment through an equipment loan. This typically requires a down payment of 20% of the purchase price of the equipment, and the loan is secured by the equipment itself. Interest on the loan is typically paid monthly and the principal is usually amortized over a two- to four-year period. In addition to equipment, these loans can also be used to buy things such as vehicles and software. Loan amounts normally range from $5,000 to $500,000, and can accrue interest at either a fixed or variable rate. Equipment loans can also sometimes be structured as equipment leases.

There are more lenders than ever before willing to lend to small businesses, and many of the lenders can be found from a simple online search. Here are the main types of lenders:

• Direct online lenders. There are a number of online lenders that make small business loans through a relatively easy online process. Reputable companies provide very fast small business cash advances, working capital loans, and short-term loans in amounts from $5,000 to $500,000. Sites such as Fundera and LendingTree offer you access to multiple lenders, acting as a lead generation service for lenders.
• Large commercial banks. The traditional lenders to the small business market are banks such as Wells Fargo, JP Morgan, and Citibank. These lenders tend to be slower with more rigorous loan underwriting criteria.
• Local community banks. Many community banks are eager to make small business loans to local businesses.
• Peer-to-peer lending sites. There are a number of sites that act as middlemen between individual and institutional lenders and small borrowers, including Prosper, LendingClub, and Funding Circle. These lenders can make decisions relatively quickly.
• Bank lenders backed by SBA guarantees. A number of bank lenders issue loans backed by the SBA, and, as noted above, this backing allows the lenders to offer more attractive terms.

To make sure the proposed business loan makes sense for your business, you will need to analyze the key terms proposed by a lender and compare them with terms available from alternative lenders. Here are the key terms to review:

• What is the interest rate on the loan and how can it vary over time? Many loans vary over time depending on the prevailing “prime rate” or some other index.
• How often is the interest payable (monthly or quarterly)?
• When is the principal due or how is it amortized over the life of the loan? You need to be comfortable with the combined interest and principal payments from a cash flow perspective.
• What is the loan origination fee?
• What other costs or fees are imposed (such as underwriting fees, administration fees, loan processing fees, etc.)?
• What operating covenants are imposed on your business (such as maximum debt-to-equity ratio or minimum cash amount required to be held by the company)?
• What are the circumstances when the lender can call a default on the loan?
• Is there any security or collateral required?
• What periodic reports or financial statements is the company required to provide to the lender?
• Are there limits on how the loan proceeds can be used?
• Can the loan be prepaid early without a penalty? And if there is a penalty, is the penalty reasonable?

Imagine you were fortunate enough to have bought 100 shares of Apple stock in 1999. If you had then reinvested any dividends and sold your shares 20 years later, you would have made an annualised return of 27 percent, well above the market average of 6 percent. This is surely a healthy return, but hardly as spectacular as one would expect. In fact, in terms of total shareholder returns (TSR), Apple’s performance ranks 3,175^th amongst companies worldwide. Does this mean that Apple’s success hasn’t been as exceptional as is often claimed?

No, the problem isn’t the performance, it’s the tool used to measure information. What the TSR ranking example shows is that current measures of corporate performance do not capture long-term value accurately. Even though the list of performance measures seems almost endless – ROA, ROC, EBIT, EBITDA, CAR, EPS, quarterly earnings growth and so on – none of them precisely captures what is most important to many executives and investors: creating long-term shareholder value. Therefore, in a recently published paper in the Strategic Management Journal, we introduce a new performance measure that does exactly that, Long-term Investor Value Appropriation (LIVA).

The idea behind LIVA is simple: Use share price data to calculate the value a company has either created or destroyed for its entire investor base. Our measure is closely related to net present value (NPV), which estimates the value of a project based on expected future cash flow. NPV has been the gold standard for CFOs to decide in which projects to invest. LIVA, on the other hand, uses historical data to estimate how much value a company actually created for its investors.

Expanding on the Apple example: If in 1999 you had bought the entire company at its then-market price, accounted for any cash received through dividends or share buybacks, and went on to sell the company 20 years later at its (much improved) market price, you would have been over a trillion dollars richer than if you had invested the same amount of money in an index fund. In other words, Apple’s LIVA over this period was more than US$1,000,000,000,000. This number shows the truly exceptional performance of Apple. It is the number one company in our global database, with a LIVA 57 percent higher than number two (Amazon) in our rankings.

This example shows the power of LIVA: Unlike other metrics, it measures long-term value creation for the entire shareholder base.

The global top 10 and bottom 10

To help managers and researchers identify the best and worst performing companies in the world, or a region, or an industry, we have created a database of more than 45,000 companies with LIVA data over the past 20 years. The figure below shows the global top 10 and bottom 10 over the period 1999 to 2018.

The top five consists of tech companies which have created more than US$2.6 trillion in shareholder value. Interestingly, the bottom list includes several tech companies as well: Lucent, MCI/WorldCom and AOL/Time Warner (which over this period destroyed a remarkable amount of value). In fact, the Technology Hardware & Equipment companies in our database had a LIVA of negative US$2.2 trillion in aggregate – the second-most value destroying industry (after Telecommunication Services). The extreme distribution of long-term performance in tech is a consequence of network effects. Only those companies that dominate their respective sectors are able to create enormous shareholder value, while the majority of tech companies actually destroy investor value.

Limiting one’s view to the top-performing companies is dangerous. A look at the top 10 might lead to the conclusion that tech is the place to be to create value. However, the overall picture leads to a very different conclusion: Only companies that were able to exploit a unique competitive advantage have been successful.

Short-termism doesn’t improve society

Of course, creating shareholder value should not be executives’ sole focus. Recently many American CEOs redrafted their vision of the corporation to encompass the importance of all stakeholders. We believe that using LIVA can be a step towards a focus on broader society.  Companies that prioritise their long-term performance cannot ignore their stakeholders. Managers concerned mainly with short-term metrics such as quarterly earnings growth will be tempted to make quick cash at the expense of suppliers, customers and broader society. However, in the long run these actions will likely backfire due to customer protests or stricter regulations, ultimately destroying value as measured by LIVA.

Moreover, to meet rising pension demands in an ageing society, the world badly needs more companies that create long-term returns. Such firms can play an instrumental role in energy transition and feeding the world more sustainably. LIVA provides managers with a metric that can help them gauge long-term value creation and consider which strategic decisions can allow their firms to flourish in society.

Get started using LIVA with the tools on www.liva-measure.com, including interactive access to the full global LIVA database of more than 45,000 companies.

Phebo Wibbens is an Assistant Professor of Strategy at INSEAD.

Nicolaj Siggelkow is the David M. Knott Professor at the Wharton School, where he is also a Professor of Management. He is the co-director of the Mack Institute for Innovation Management.

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In any merger and acquisition (M&A) transaction, the seller’s senior management team is charged with maximizing the price and terms available to the shareholders of the selling company. Taking their direction from the Board of Directors—and with the assistance of the selling company’s legal and financial advisors—the senior management team is instrumental in landing and negotiating a deal that’s in the best interests of the company and its shareholders.

The management team should be aware of the key issues that will arise in attempting to get to a successful completion of an M&A deal.

If they are to continue on with the buyer, the members of the management team will also naturally have a number of questions as to how the buyer will treat the team post-closing with respect to compensation and employment incentive arrangements. Some of these questions will vary if the buyer is a private equity fund versus a strategic buyer. However, in order to avoid a potential conflict of interest claim, members of the management should be sensitive to the issue of when to ask some of their questions.

The following is a list of the key questions that the management team of a seller should consider in connection with a sale of their company.

1. Business Continuation and Strategic Plan Issues

The management team will want to understand the strategic plans the buyer is envisioning for the company, including:

• What is your overall strategic reason for the acquisition?
• How do you plan to support and grow the business?
• How do you plan to integrate the business with your other businesses?
• Do you envision any acquisitions to grow the business?
• What synergies do you see with your existing lines of business?
• How do you like to work with your management teams?
• What existing or new lines of the business do you see as ripe for growth?
• What areas of the business do you envision cutting back or eliminating?
• How long do you plan to hold the business before contemplating reselling it or taking it public?
• What layoffs do you envision, if any?
• What additions to the management team do you envision?
• Will you allow us to speak with the management teams of companies you previously acquired?

2. M&A Deal Issues

Senior members of management teams of selling companies want to obtain an early understanding of the deal dynamics and key issues involved in a potential acquisition. Some of the key questions that management will likely be interested in include:

• What acquisition structure are you contemplating? (Stock acquisition, merger, asset purchase? There will be differing tax consequences)
• What is the range of acquisition price you are considering?
• How do you determine valuation for your acquisitions?
• Are you envisioning any working capital or other adjustments to the purchase price? Debt-free/cash-free deal?
• What will be the consideration? (Cash, stock, note, or earnout?)
• Are you envisioning any escrow or holdback from the purchase price, or will you instead rely on M&A Representations and Warranties Insurance?
• What are the key due diligence steps you will need to undertake?
• How long will you need to complete your due diligence?
• What are the key conditions to closing that you envision?
• What employee interviews do you envision?
• Do you envision any customer calls?
• When do you anticipate issuing a letter of intent?
• How long do you expect it to take between signing a definitive acquisition agreement and closing?
• Will there be any particularly sensitive provisions to our shareholders in your acquisition agreement?
• What will be the key steps for integration post-closing?
• How will our employee workforce be treated? Will comparable compensation and benefits be available to them post-closing?
• Do you have any key intellectual property or technology issues you will be focusing on?

3. Equity Incentive Arrangements

Smart strategic or private equity buyers know they have to put in place equity incentive arrangements for the management team and employees. The key questions management teams will have in this regard include:

• What kind of equity incentive plans do you envision? Stock options? RSUs? Stock appreciation rights? Profits interests? Or something else? How will the plan work?
• If the acquirer is a private equity fund, will the acquirer require a management rollover investment of a portion or all of the equity the management team holds in the selling company? Will the rollover be tax free? Will any of the rolled-over equity be subject to forfeiture?
• In such a rollover, how will the new investment vehicle be governed? What type of rights will the rollover holders have with respect to important actions and transactions which affect their interests in the new investment vehicle?
• If the equity grant consists of stock options, what will be the exercise price? How can this be as low as possible to give more upside to the option holder?
• If there will be stock options, will the holder be able to exercise the options pursuant to a “cashless exercise” and avoid the need to come up with cash to exercise the option?
• What percentage of the fully diluted capitalization of the company will be available for the equity incentive plan? (10% to 15% is typical)
• What specific percentages of the equity incentive plan do you envision being allocated to individual key team members? Which key team members will be allocated equity?
• How will vesting of the equity work? Over what period of time? (Three- or four-year vesting is typical, but performance vesting for a portion may also be built in).
• Will the vesting be accelerated partially or in full on a change of control of the business?
• Will the vesting be accelerated for some or all of the grant on termination of employment of an executive without cause?
• What dilution to the team’s equity could occur over time?
• What tax treatment will be expected for the management team of the equity grant upon a sale? Can it be structured to get capital gains treatment, such as via a profits interest in an LLC?
• How long does the executive have to exercise options after termination of employment? (The typical period is 90 days, but this is negotiable and can vary depending on whether the termination is for cause, not for cause, or voluntary quitting by the executive to accept another job.)
• Are the shares obtained upon exercise of an option subject to repurchase on termination of employment? If so, at what price?
• Are the shares obtained upon exercise of an option subject to a right of first refusal? If so, on what terms?
• How can the executive get liquidity on the equity in the future, without necessarily waiting for an M&A exit? Will the executive have a right to “put” his or her shares at fair market value to the company for purchase, and, if so, when? How will the fair market value purchase price be determined? (The fair market value is often determined by an outside appraiser who is required to ignore any discount on fair market value because of lack of control, liquidity, or transferability for the shares.)
• Will there be “drag-along” provisions forcing the executive to sell his or her shares in a subsequent M&A event? Will those shares be treated fairly along with other shares being sold?

4. Employment Agreement Issues

The buyer may want to put in place an employment agreement for the CEO and some members of the senior management team. From the perspective of such an executive, here are the key issues to be addressed. (It’s beneficial for these executives to request to see the form of employment agreement early, and then have experienced employment counsel review and negotiate the agreement on their behalf.):

Scope of employment provisions

The scope of the employment and responsibilities raise a number of issues:

• What is the title of the executive’s job?
• What are the executive’s responsibilities?
• Can the executive be demoted? Can the executive’s responsibilities be substantially modified, decreased, or increased?
• Is the executive guaranteed a seat on the Board of Directors while an executive? (Typically, this only applies to the CEO.)
• Where is the place of employment?
• Can the executive be relocated unilaterally to another city more than 25 miles away, or only with the executive’s consent?
• Is the executive allowed to be involved in other activities (e.g., a directorship on other Boards, involvement in community activities or non-profits)?

Compensation issues

• What is the base salary?
• Does the base salary increase each year of the contract?
• What quarterly or annual bonus is available? Is the bonus guaranteed, dependent on achievement of milestones, or wholly discretionary with the Board of Directors?
• Under what circumstances, if any, can the executive’s base salary be reduced?

Benefits issues

The various employee benefits available to an executive can raise a number of issues, including:

• Will the executive participate in all of the benefit plans of the company?
• Which of these plans should be in place for the executive? Are all of the payments for the benefits the responsibility of the company?

(a) Health and medical (including spouse and dependent coverage)

(b) Disability

(c) 401(k)

(d) Pension

(e) Cafeteria Plan

(f) Life insurance

(g) Stock option/stock grant

(h) Vision

(i) Dental

(j) Executive financial counseling

• How much vacation per year is the executive entitled to? Does unused vacation continue to accrue for the benefit of the executive and is payable on termination of employment?
• How much accrued vacation can carry over to subsequent years?
• Are there any special loans or forgiveness arrangements?
• Are some of the benefits taxable to the executive? Should the executive be reimbursed for the tax? 

Term and termination issues

The circumstances in which the executive’s employment can be terminated and the resulting consequences will raise the following issues:

• How long is the employment term or is the employment “at will”?
• What are the grounds on which the company can terminate the executive?
• What are the circumstances that the executive can be fired “for cause,” and how is “cause” defined? It is in the executive’s best interest to have a narrow definition of “cause,” such as:

– Felony conviction or any act involving moral turpitude;

– Material breach of the employment agreement after an opportunity to cure has been given

• Is the executive entitled to severance pay on termination without cause? How much? Is it a lump sum or payable over time? (The typical arrangement for a senior executive is at least one year of severance, payable in a lump sum upon termination.)
• If terminated without cause, is the company required to continue paying for benefits or COBRA benefits for some period of time?
• May the executive terminate his or her employment (and receive severance payments) for “good reason,” such as change in responsibilities, compensation, or location of employment?
• If the executive is to receive a severance payment, the executive will typically be required to sign a release of liability for the benefit of the company, but the executive will want to negotiate this to be a mutual release.

Reimbursement of expenses

The issues regarding the right of the executive getting reimbursement of expenses include:

• Will the executive’s business expenses be reimbursed within a set time period?
• Is there a car or car allowance, cell phone provided, or other such amenities?
• Is there a relocation package available for the executive should relocation be necessary?
• Will the executive be reimbursed for any attorney’s fees incurred in negotiating the employment agreement, or will the company pay those fees directly?

Liability protection for the executive

The executive may want to negotiate certain liability protection mechanisms, covering the executive performing services within the scope of employment:

• Will the company have Directors’ and Officers’ (“D&O”) insurance coverage?
• Will the company Bylaws provide for indemnification protection for officers and executives?
• Will the company’s corporate charter limit the liability of officers and directors to the maximum extent permitted by law?
• Will there be an Indemnification Agreement that protects the executive, covering:

(a) Indemnification protection for claims

(b) Automatic advancement of legal expenses

(c) Protection even if the executive is no longer employed by the company? (Note statutory limitations on indemnification.)

Confidentiality restrictions

The employer will want confidentiality provisions in the Employment Agreement:

• Many companies have a separate form of employer Confidentiality and Invention Assignment Agreement that can be incorporated by reference.
• The executive must be careful not to use or divulge confidential information of a prior employer—the new employer will often want a covenant from the executive prohibiting such use or disclosure.
• If there are confidentiality restrictions on the executive, are the following excluded from the definition of “confidential information”?:

(a) Information that is or was publicly known, or which becomes publicly known through no fault of executive

(b) Information that is or was obtained from a third party who had the right to disclose the information without restriction

(c) Information independently derived by the executive without reference to the confidential information

(d) Information that was already lawfully in executive’s possession or knowledge prior to the disclosure of the confidential information

Invention Assignment issues

Companies expect that any inventions or business ideas developed by the executive related to the company’s business during the employment period will be owned by the company:

• What is the scope of the company’s rights to the executive’s development of new inventions, trade secrets, and ideas?
• Do the invention assignment provisions comply with applicable laws? 

Disability and death issues

Various issues arise on the death or disability of the executive:

• What is defined as a disability event?
• What happens on disability? Does the executive continue to receive salary and benefits for some period of time?
• What happens on death? Can medical and other benefits continue for some period for any spouse or children?

Post-employment limitations

The Employment Agreement can address various limitations on the executive after termination of employment:

• Are there limitations on the executive soliciting company executives? For what period?
• Is there a covenant not to compete after termination of employment? Many executives will strongly object to such a provision, on the theory that it adversely affects their future livelihood. If there is such an agreement, the terms are key, and executives should attempt to narrow the terms on the following issues:

(a) For what geographic regions?

(b) For what period?

(c) What is the scope of the covenant?

(d) Are the restrictions enforceable under applicable law? (Generally not permitted in California, but usually enforceable to the extent reasonable under the laws of certain other states such as New York and Delaware.)

Tax issues

Tax issues can materially impact the compensation and benefits available to an executive. Key questions to ask include:

• How can tax consequences be minimized?
• How can IRS 280G golden parachute issues be minimized?
• Is there some appropriate tax-deferred compensation scheme that can be implemented?

Dispute resolution

Most Employment Agreements have provisions dealing with disputes between the company and the executive:

• How are disputes resolved?
• Should confidential binding arbitration be the exclusive way to resolve disputes? (This is the preferred mechanism from the executive’s standpoint.)
• In what city must disputes be brought if litigated or arbitrated?
• What is the governing law?