Atlassian’s public term sheet - What should you take from it?

Let’s take a more detailed look at the business and its decision, as well as examining some of the responses from third parties, in order to ask - what does this mean for those looking to buy tech businesses?

Some background on Atlassian

Atlassian is an Australian company that is most well-known for developing content management systems, software for project managers and products for software developers. It has over 135,000 customers around the world and has made 20 acquisitions in recent years with a total value of over AUS$1 billion.

The business was launched back in 2002 by a pair of fellow University of South Wales alumni, who used credit cards to bootstrap the business through its first few years. It now has offices all over the world and employs some 3,000 people. It listed on NASDAQ in 2015, following a run of successful acquisitions, beginning in 2010 with the purchase of Bitbucket.

It has now decided to make its proprietary term sheet public. A term sheet is a set of clauses issued when an investment is to be made. The clauses are intended to protect the interests of the investing businesses, but also the interests of what is created as a result of the investment.

Some of the terms within the document are binding and some are non-binding. The term sheet is issued before an acquisition deal is signed between Atlassian and a potential target.

Why has it made its term sheet public?
Not only has Atlassian published its term sheet for the world to see, it has also published a blog explaining in detail why it has decided to do so. It claims the M&A process is “outdated, inefficient, and unnecessarily combative, with too much time and energy spent negotiating deal terms and not enough on what matters most: building great products together and delivering more customer value.”

Atlassian’s senior managers claim their approach to M&A is more seller-friendly than the typical term sheet issued within the tech industry. They assert that deal terms are too often skewed in favour of the buyer and include over-cautious elements that cost sellers money in the name of protecting buyers against future liabilities that are rarely actually an issue post-deal. These terms are often referred to as standard practice, by big buyers, further un-levelling the playing field for buyers and sellers and resulting in drawn-out negotiations and breakdowns in good will taking up precious time, energy and money.

What’s different about Atlassian’s term sheet?
Atlassian claims that its term sheet is “more favourable to selling companies than any we’ve seen among strategic acquirers in technology.” It adds that it also aims to provide more by way of explanatory material in order to make the whole thing more transparent for sellers.

Regarding Escrow, Atlassian terms are: either provide a five per cent escrow for 15 months or pay for a buy-side rep and warranty insurance policy and provide a one per cent escrow for 15 months, with insurance covering the remaining four per cent. The 15-month period is shorter than the market median, which means sellers aren’t tied into the threat of a claim for too long.

The term sheet is also different by not naming IP and privacy as ‘special reps’, which stand outside the general escrow cap. Instead, they sit inside the cap, which Atlassian claims is another favourable aspect of its term sheet from the seller’s perspective.

What do legal experts and other advisory firms make of the term sheet?
Corporate lawyers specialising in the tech industry have been keen to pass comment on Atlassian’s decision to make its term sheet public. For many, this is a seismic moment in M&A law, the repercussions of which are yet to be seen. The tone seems to be one of mixed feelings, as many welcome the notion of increased transparency, but some cautioning the motives and details behind and within the term sheet and its publication.

New Zealand-based legal firm, Simmons Stuart, which advises tech businesses, said Atlassian’s decision to publish may be about positioning Atlassian “as a seller-friendly buyer in the hyper-competitive tech M&A marketplace.”

Simmonds Stuart’s team went on to list the aspects of the term sheet it felt were worthy of praise, such as favourable escrow terms and a more ‘practical approach to general warranties’. However, it was keen to point out that not all elements of the term sheet were favourable to sellers, with some terms being actively unfavourable.

US corporate lawyers Orrick echoed these feelings with their response to the news. They also claimed that the term sheet might not give enough assurances for buyers in many scenarios. They stated: “we question whether the Atlassian term sheet will provide the necessary comfort to the corporate buyer, particularly given facts and circumstances of individual companies and specific deals.”

What can prospective buyers take away from Atlassian’s decision?
When it comes to doing tech deals, it pays to be cautious. As a buyer, you need to be confident that your deal terms protect you in a range of circumstances, such as:

  • If you find the seller was not the sole owner of IP, software or other assets

  • If the sellers didn’t have the correct licenses in place

  • If your use of the tech you have purchased infringes others’ rights

  • The seller has committed any infringements, knowingly or unknowingly.

  • Having adequate indemnity terms and escrow arrangements in place is a no-brainer to ensure you are protected. However, if the making public of the Atlassian term sheet should teach you anything, it’s that you don’t need to start out with escrow terms of 20 per cent of the purchase price only to be involved in a long and painful negotiation with the seller in order to come to a more suitable agreement that works for both parties.

    As Atlassian suggests, bullying tactics from larger firms buying smaller businesses will only lead to a breakdown in goodwill. It could also damage the prospect of a successful integration and merging of cultures in order to create value for everyone involved.

    In conclusion, protecting your interests when embarking on a purchase is important in any sector, but tech comes with certain practical risks that need to be acknowledged and minimised by both buyers and sellers. However, as we have discussed before, creating a positive culture and putting emphasis on the integration process following a deal is vital to deal success. Therefore, reducing the negotiation process and conflicts in favour of working together to create value, as per Atlassian’s approach, could well be the way forward for dealmakers of the future.

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