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M&As and Fundraising
12 min read

The Growing Role of Legal Tech in M&As and Fundraising

Things are not quite business as usual in the venture capital world these days (or in most industries, for that matter). Year-over-year global VC funding dropped 53 percent in the first quarter of 2023 from the same period last year. Entering this year, the venture investments were at very low levels, and the recent collapse of Silicon Valley Bank has stunted a potential rebound anytime soon. With uncertainty across the economic landscape, it's not just VCs who are executing caution; global mergers and acquisitions have also dropped compared to recent years. 

Companies considering significant financial investments are leaning on their attorneys more than ever, and rightfully so. Unstable economic conditions can highlight potential issues that may have been overlooked as less important in more predictable growth economy conditions. For venture financings, you may see more structured deals to go along with low multiples in these unpredictable economic environments. In the case of M&A activity, extra attention should be paid to closing conditions, MACs, and anything else that may delay or prevent an expedient close.  

These types of transactions are hectic during the best of times. If a company is either disorganized or going through the process for the first time, its legal team can quickly become overwhelmed. Legal’s role in shaping and maintaining an organized and thorough process enables the organization to successfully and efficiently manage the due diligence process and tees up the strongest negotiating position possible. 

Running a tight ship

During due diligence, potential investors or buyers want to turn over every stone to determine whether a company is worth the investment. Understanding the company's financial standing, revenue/growth stability and risk profile is critical to the investor/purchaser even during good economic times, and given today's economic environment, investor caution is at an all-time high. Any interested parties will want a comprehensive look into your customer base and revenue performance, as well as any other risk factors that may impact the long-term viability of your business.

As a critical part of securing funding or closing a strategic transaction, all of the company’s critical contracts and other documents must be organized in a central location that is easy to access and navigate. When contracts are scattered and filled with inconsistencies, due diligence can become an enormous, and sometimes an impossible, pain, and ultimately reflects poorly not just on the legal function, but on the business as a whole. Legal teams must maintain an organized contract portfolio, and be able to summarize key contract data and provide fully executed versions in response to due diligence requests. 

More than ever, legal technology, such as Contract Lifecycle Management (CLM) software, is an essential tool that legal teams must embrace. Contracts must be maintained in an organized fashion, and the legal team must be able to quickly provide the necessary insights that paint an accurate picture of the business. In the context of a financing or any strategic transaction, CLM can help the legal team provide clear insights into the company’s contractual position. CLM provides a handful of key components, including the following: 

  • Building your data room 

When your business is in the middle of fundraising or a strategic transaction, the data room becomes an essential part of the transaction. When due diligence requests come in, the legal team must be able to respond quickly, providing all material contracts and organizational documents. These documents typically include corporate formation documents, board of directors information and communications, all material contracts (real property, third-party IP license, standard form agreements, terms of use, employee confidentiality and PIIA docs), customer lists, financial (audited and unaudited), and other pertinent vendor information.

Building and organizing your data room can take weeks and materially set back the timing to close for the transaction. Implementing and maintaining a strong legal tech stack will help establish and maintain all material contracts and other documents in a consistent manner in a centralized database, which will make organizing and populating the data room as efficient and painless as possible. Every day counts when engaging investors, and if you use CLM properly, you have the opportunity to demonstrate top-tier professionalism and organization from the legal department at the outset of the relationship. 

  • Understanding provisions and consent

Many contracts have provisions that allow for termination in the event of a change of control. Technology can track these provisions in your agreements and identify where you might lose revenue in the event of an acquisition. The CLM can aggregate the exposure of your portfolio as a result of these types of provisions, and can highlight key customers to proactively retain to ensure the transaction does not result in material losses sustained from customers terminating due to the close of the transaction.  

Similarly, in an M&A context, you may have to chase down certain consents from vendors and customers. For example, if your company is purchased in an asset sale, all of the contracts will need to be assigned to the new (purchasing) entity. This is likely to result in the need to get consent to assign agreements from the vendor, particularly in the case of third party IP licenses. A CLM helps you identify all the agreements with these types of restrictions on assignment, and helps identify which third party approvals you may need as a condition to close the transaction. 

  • Measuring sales and revenue

While in many cases M&A transactions trigger provisions relating to assignment and change of control, many fundraising transactions will not meet thresholds triggering these provisions (although some may). That said, the due diligence process is similar for financing and M&A transactions, and as such a strong CLM will help you through the process. Being able to quickly and easily run reports on the general health of your contract portfolio allows you (and your investors) to understand critical components of your business, from revenue streams to operational advantages and risks. 

Investors place heavy focus on the company’s revenue projections, deal velocity, and go-to-market efficiency. Providing reports that outline closed deals and transaction volume can provide key context into how well the company operates to bring in and retain customers. The financial information only tells part of the story of the company’s likelihood of future success, so layering in additional data from the contract portfolio can bring a more well-rounded understanding of the health of the revenue streams and go-to-market motion, and provide confidence that your company can continue strong, sustainable growth following the investment.

  • Increasing departmental efficiency, visibility, and impact reporting

Many businesses today struggle with the contracting process (or even lack any meaningful process at all). This results in many problems, including wasted time chasing the correct version to edit, centralizing storage, ensuring full execution of contracts, setting standards for clauses and provisions, and other similar problems. This not only makes the legal team less efficient resulting in a reputation of being unorganized and incompetent, but not having a strong process and tracking system meaningfully increases the company’s risk profile. Contract management tools allow for a consistent repeatable contracting process, the ability to provide enhanced visibility as to the contract status for the stakeholders, and the ability of the legal team to provide quantitative data around how the legal team’s efforts contribute to the company’s bottom line.   

The key to streamlining due diligence

A good due diligence process (and a smooth, expedient deal process) starts with preparation and maintenance of an organized, searchable, reportable contracts database. A full-suite CLM will help establish a process from contract formation through execution and beyond that standardizes key provisions, highlights anomalies in the contract portfolio, and provides the ability to report on aggregated aspects of the portfolio. Having a high level of organization and a strong contracting process will help ease some of the pain of the due diligence process, and will demonstrate to the company and any potential investors or acquirers that the legal function is operating at the highest level and truly acting as a business driver.  

Tim Parilla is the Chief Legal Officer at LinkSquares.