FinTech

16 FinTechs have commanded significantly higher valuation multiples in recent years, as compared to traditional financial institutions. There has been a thirst for market share, aided by the perception that certain types of FinTech firms, unburdened by regulation and not dependent on outdated legacy systems, will be dominant players in the future financial landscape. Early stage FinTech firms present unique valuation challenges, especially those perceived to be valuable for reasons other than established revenue history. These firms have limited operating histories, nascent compliance cultures, and generally do not operate under the highly complex and operationally burdensome regulatory constraints applicable to banks or other financial institutions. Valuation necessitates a highly sophisticated due diligence process. Traditional financial diligence must be accompanied by legal and strategic regulatory reviews of the target's existing business model to assess how it may be fundamentally impacted by expected industry and regulatory changes. In addition, an effective due diligence process must involve specialized inquiries into other key areas—from intellectual property ownership to data security—that are critical to effectively valuing a target. A critical consideration in many FinTech acquisitions will be how to incentivize and retain founders and key personnel. The real value is often the talent that built the business. Founders and other employees, especially those with technological and design know-how, can be central to capturing innovation-led growth and unlocking deal value. In structuring deals, acquirers should identify those individuals who are critical to the overall objective of the transaction. Incentivizing founders and other key personnel may entail the granting of equity compensation and using "earn-outs," which make additional consideration contingent on the acquired company achieving certain financial or other performance metrics within an agreed-upon period (such as three years from closing). In addition, acquirers should consider the use of non-competes and non- solicits for founders and key personnel. Because the enforceability of these restrictive covenants varies by jurisdiction, it is important that they are drafted narrowly to protect legitimate business interests and contain appropriate time and geographic restrictions. FOUNDERS AND OTHER KEY PERSONNEL NEED TO BE INCENTIVIZED VALUATION MAY BE MORE DIFFICULT FOR CERTAIN FINTECH TARGETS

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