Frederick Startup Attorneys & Lawyers

Poison Pill: What Is It?

A poison pill is a defense tactic companies use to deter or prevent hostile takeovers. These "shareholders rights plans" often threaten to dilute the price of stock enough to give the target company time to find alternative bids. It creates a cost that the purchasing company will have to pay after they've taken over. It also dilutes the value of the acquiring company's stock, to make taking over less appealing.

One company tries to wage a hostile takeover of another company by buying a large percentage of those shares. The company being taken over is called the target. The company or wealthy individual trying to take over is often called a corporate raider. The term poison pill does not refer to the target company harming their own interests. Instead, they're harming the corporate raider's interests.

Typically, corporate raiders try to increase a company's stock price when they acquire the company because

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What Is a Pass-Through Entity?

Pass-through entities are structured entities that offer business owners a more favorable tax rate while still protecting the owner or members from personal liability. For federal income tax purposes, types of pass-through entities include sole proprietorships, partnerships, LLCs, and S Corporations.

Because pass-through entities do not pay income taxes on a corporate level, they can provide an alternative to the double taxation that occurs in a Corporation

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What is Liquidation Preference?

Liquidation preference determines the payout process or the distribution of stocks if the company pays dividends, enters into a merger, or liquidates the company. Liquidation preference means the company's investors or the preferred stockholders receive their investment back first in case the company liquidates.

Liquidation preference determines who gets first and how much when the company is liquidated, sold, or declares bankruptcy. Liquidation preference is associated with the preferred convertible stock. It explains how the proceeds are divided and shared.

For example, a holder of preferred stock has a liquidation preference equal to $30 million and the company is sold. Then the holder will get the first $30 million before the

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In financial terms, pro-rata rights allow an investor to maintain their portion of ownership in a company when the company takes on new investors.

Company Valuation and Pro-Rata Rights

It is important to understand the role that the valuation of your business has on pro-rata rights for other investors. This is important because the angel or venture capital investor dilutes the shares of other owners. Other owners in early-stage businesses are typically the owner (or owners) and friends and family members. Initially your company may look like this:

• Owners/Founders - 50 percent equity each
• Friend and family investors – each owner/founder surrenders 5 percent and 10 percent is given to friends and family (founders/co-owners now have 45 percent each)

At this point, you will typically have registered your company with stock to ensure you can actually issue stock to family or fr

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