Going public via SPAC has been trending in recent years, with several unicorns (like DraftKings and Dave) choosing to go public via this method. The benefits of the SPAC approach have attracted investors and operators alike: it significantly reduces the regulatory burden of going public, avoids underwriting fees, and generally can be a much quicker and smoother process than a traditional IPO.
While those benefits can certainly be advantageous, going public via a SPAC has drawbacks too. Weighing these pros and cons is, of course, the responsibility of the acquired company’s senior management team and board of directors; approaching this decision-making process with as much information as possible is critical for the transaction’s success. As a board member who has gone through a SPAC process, I’m here to offer a few considerations that are not often discussed when approaching a merger of this type.
Prioritize legal counsel.
The SPAC process is intricate; only some law firms have the experience to shepherd a company through the transaction. It may be tempting to save a couple hundred thousand dollars by selecting a legal team with less SPAC experience. Still, this decision could end up in litigation, turning “cost savings” into something much worse if elements of the acquisition are neglected, or the financial disclosures are too optimistic for the market. Specialized law firms who have led SPAC mergers often charge a premium, but their expert counsel is worth it.
And, of course, anyone involved in the SPAC transaction should carefully review documents thoroughly before signature. I recommend that each board member and company executive engage their own legal counsel, ideally with SPAC experience, in addition to the merger’s legal team; taking the time for thorough review from outside counsel and/or experienced peers helps de-risk a process with very high stakes.
Obtain Directors and Officers (D&O) insurance.
This consideration is crucial if you are a private company board member. Any private company with its affairs in order should indemnify its board of directors – especially if it plans to go public in the next few years. SPAC transactions frequently go through litigation, and board members may be on the hook for millions in fees if they are not properly insured.
A D&O insurance policy should cover a minimum of $10 million across the board of directors. But if your company is nearing a SPAC transaction, the policy should be increased to $20 million. As an aside – should you serve on a private board that elects not to indemnify its officers, it is possible to carry your own directors’ and officers’ (D&O) insurance policy; the insurer will request a list of companies you sit on the board of, and you will be required to pay the annual premium within 30 days.
Negotiate for an extended lock-up period.
An aspect of SPAC transactions that have had little discussion is the length of the lock-up period. If you’ve paid attention to any SPAC transactions over the last several years, most of them have featured a 90-180 day share lock-up period. However, a short lock-up period can have meaningful drawbacks for the new company. Many of the SPAC disasters of recent years (where the acquired company tanked within a few months of the transaction) were caused by a short 90- to 180-day lock-up period that gave both sides of the table a chance to cash out too quickly.
I strongly advise negotiating a more extended lock-up period to ensure that the newco can meet its financial projections with enough capital to fulfill growth plans after the de-SPAC. A minimum of four quarters offers more breathing room, but an even more extended lock-up period of up to eight quarters is optimal.
Consider board structure following the merger.
There needs to be more information out there concerning the board selection process for the entity formed following a SPAC merger. Unfortunately, the confusion around this process creates an opening for any bad actors (whether managers within the acquired company, managers from the SPAC, or any other advising entities) to restructure the new board in ways that may not be favorable for existing board members or the future of the business.
Before the LOI and business acquisition agreement are signed, ensure that the board structure of the new entity is clearly defined – for instance, that the current board won’t lose seats. The presence of experienced, impartial board members is even more critical for a public company than a private one, so the new entity must be helmed by officers who are fully committed to the company’s long-term growth.
Valuation
I advise against voting on an unrealistic valuation for the sake of having a high valuation. Build the valuation on company projections and other factors; if a company is valued too high at listing, the market will correct it. Sometimes harshly (example: Getaround). As a board member, one of your fiduciary duties is to protect stakeholders; overvaluing a company serves no one. Do not let the board you serve on live in an echo chamber. Set ego aside and vote on a realistic valuation to help the company succeed post-de-SPAC.
If you have the opportunity to take part in a SPAC transaction, I encourage you to keep responsibility and financial transparency at the forefront during every stage of the process. If you are thinking of a SPAC transaction at any point in a board meeting, set up your financial department for that point regardless of follow-through. Board members and company executives often stand to gain a great deal from SPAC transactions, emotions can be high, and stakeholders may be inclined to look out for their best interests rather than those of the company and its shareholders. Paying attention to elements like top-tier legal counsel, the lock-up period, and the post-merger board structure can ensure that the SPAC transaction is successful for the sake of the growth of the company.
