M&A Readiness — Consents & Gates

Review Your Customer Contracts Way Before an Acquisition

When founders think about getting acquired, they think about one number: the price. But some of the things that actually kill deals have nothing to do with valuation.

Take your customer contracts — many include change-of-control or anti-assignment clauses, meaning your biggest customers may need to consent before your company can be sold. If your top five accounts each hold that kind of veto, a buyer isn't acquiring your revenue — they're acquiring an option on it, and that turns into discounts, delays, or a dead deal.

The second landmine is internal: your drag-along rights, the provision that lets a majority of shareholders bring everyone else along in a sale. Miscalculate that voting threshold at formation, and a single small shareholder can plant their feet and hold a nine-figure exit hostage.

The fix is cheap and boring when you do it early — using standard NVCA financing documents, calculating thresholds on an as-converted basis, and making sure every stockholder, including later employees on the stock plan, actually signed.

Do it at closing instead, and it's a five- or six-figure crisis.

The lesson: acquisition-readiness isn't a Series C problem — it starts with how you paper your first round.

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Transcript:

Lindsey S. Mignano:

Hi everyone, this is Lindsey Mignano here. So happy to have Phil join us again today.

We're talking about something pretty popular, especially in 2026 and definitely in 2025: Early stage startups getting acquired. And that's been more popular in the past couple of years and what we tend to hear most about is price, price, price, valuation from our clients. But there's also other things that are really important in a startup acquisition and certain things that maybe even startup founders don't know about that can completely kill a deal.

So I've got Phil here to talk about that today. Phil, I'll turn it over to you.

Phil Omorogbe:

Yeah, thanks, Lindsey. And and you're right, you know, a lot of the times it's not the price. It's, you know, it's it's the governance things between signing and closing.

So let's start with your customer contracts. When you sell your company, there's a lot of questions. Does the other side get to do something about it? You know, many contracts have a change of control or anti-assignment clause. Sometimes it's a consent right the customer has to approve, sometimes it's If your top five customers each have a change of control consent right, the buyer isn't acquiring your revenue, right? They're acquiring your revenue if the other companies agree to it. So that's a discount, that's a delay, can really kill a deal. And you know, the change of control analysis is the first line of defense that we want to do to make sure that you're ready and also revenue concentration is what makes this really dangerous as well.

So the second gate is internal. Your drag along rights. That's the provision that lets the majority bring the minority along in a sale. So the classic drafting mistake is calculating the voting threshold the wrong way. So a a single small common shareholder can plant their feet and hold a a nine figure exit hostage. So a badly drafted drag-along lets one disgruntled minority holder hold your entire exit hostage.

And that's a fifty dollar fix at formation or a crisis at closing. And this is why We always tell our founders to use NVCA documents when we're any financing round. And you want these threshold calculated on an as converted basis. And you want every signature actually papered, including employees who joined later under a stock plan.

Section 382 Analysis by Tax Counsel

Section 382 of the Internal Revenue Code is one of the most overlooked tax traps in startup M&A — and one of the most consequential. It limits the amount of a corporation's pre-existing net operating loss carryforwards (NOLs) that can be used to offset taxable income after an "ownership change," which is triggered when "5-percent shareholders" (including aggregated groups of smaller under-5% investors) increase their collective ownership by more than 50 percentage points over a rolling three-year testing period — a threshold that many startups cross quietly through ordinary venture financing rounds, long before any acquisition is on the table.

For a founder considering a sale, this matters because a significant portion of the company's NOLs — often built up over years of pre-revenue burn — may be severely limited or effectively wiped out post-closing, reducing the tax shield the acquirer was counting on and potentially affecting deal valuation or structure.

The analysis is genuinely complex: it requires tracing ownership through multiple financing rounds, calculating the Section 382 limitation based on the company's equity value immediately preceding the ownership change and the applicable federal long-term tax-exempt rate, and identifying whether any built-in gain or loss rules under Section 382(h) apply — none of which can be done accurately without a qualified CPA or tax attorney who has access to the company's full capitalization history.

Founders should engage that tax lawyer or CPA advisor early in any sale process, not after a term sheet is signed, because the findings can affect how the deal is structured, what representations and warranties the company can make, and ultimately how much of the company's tax attributes survive to benefit anyone.

Read more about this from Jason here.

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Transcript:

Lindsey S. Mignano:

Hi, Lindsey Mignano here with Mignano Law Group. I'm so happy to have Jason Galek, our tax lawyer, with us.

One of the things that we do here at the firm is M&A, and we usually are sell side, although sometimes we are buy side. The majority of times that we are sell side, we represent small businesses or technology companies that are selling to either big tech, big co, or in some combination of a private equity funded big tech, big co sort of transaction.

And the founders, they could be first-time founders who have never had an exit before. Sometimes they don't know to reach out to us in advance of receiving the acquisition term sheet. They might be having conversations with their venture investors about getting acquired. They may be having conversations with their friends and family about getting acquired, but they don't always reach out to lawyers right away.

And they usually come to us when they're like about 99.9% sure that they are going to get acquired and there's a term sheet on the horizon for us to review. That can be a mistake, because there's quite a lot of tax planning that can be done on the individual and corporate end beforehand to maximize tax efficiency. And while I am not the tax lawyer at our firm, we send folks to Jason Galek because he helps both individuals and companies approach those sorts of events.

So Jason, we talked earlier, just the two of us, about section 382. Can you tell the audience more about what that's like?

Jason Galek:

Yes, thank you, Lindsey. 382 is a limiting statute for net operating losses. And how this impacts startups in particular is generally — not always, but most of the time — startups are going to have financing, money, cash flow problems, and those generally will turn into operating losses.

The problem is if you don't plan for this, and you later sell or are acquired by another company. If you don't take steps before that point, you could severely reduce or limit the amount of the net operating loss that you're able to use going after that point.

And just just to kind of back up a little bit, net operating loss is when you have more expenses than income for any given year. And that is a loss that is deductible, and it carries forward until you use it. And one of the things that 382 does is it limits it to an extent where you won't be able to use most of it potentially.

So if you have a very large NOL, the limitation, if it applies, you're going to have a limited use of that net operating loss going forward.

And that might not seem like a lot, but in the in the future when you're actually profitable, it's going to make a big impact potentially, and it could really interrupt your bottom line, because it's tax savings that you generated while you were developing and growing, and once you're profitable and established, you essentially lose that if you're not careful.

So that's really the important part of 382, among many others, but this is one that I think in particular affects startups and businesses that are just starting, across the board.

Lindsey S. Mignano:

And here's the question that everyone's going to wonder: when do I talk to you about this? Is that before the term sheet? And if so, when — 6 months before, 12 months before? If I'm a startup that's just anticipating possibly getting acquired as opposed to going to my next round, what's the best time to loop someone like you in?

Jason Galek:

Generally as soon as possible. If you don't have tax counsel available, if you have a CPA, a CPA could even offer some guidance, but you really need to involve your tax counsel or professionals as well as your corporate counsel. It's really a team effort.

Lindsey S. Mignano:

Well, that's always the mantra at our firm: “Do it once, do it right.” Thanks so much, Jason.

Analyze, When Does the QSBS Clock Start?

For pre-seed and seed venture firms and early-stage founders, the question of when a SAFE note actually triggers Qualified Small Business Stock (QSBS) tax treatment is quickly becoming a critical exit topic.

As Mignano Law Group's Senior Tax Counsel Jason Galek highlights, the IRS and Treasury have not issued specific guidance on whether the QSBS holding clock starts upon the initial execution of the SAFE or only when it converts into equity. Because startups are being acquired earlier in their lifecycles—often right at or shortly after a Series A—knowing if your investors qualify for the QSBS capital gains tax exclusion can significantly impact transaction dynamics.

The stakes here recently got higher: the One Big Beautiful Bill Act replaced the old all-or-nothing 5-year holding requirement with a tiered schedule for stock issued after July 4, 2025—50% exclusion at 3 years, 75% at 4 years, and 100% at 5 years—and raised the per-issuer exclusion cap from $10 million to $15 million. This means founders and investors now need to know not just whether the pre-conversion period counts toward their holding period, but which tax regime applies to their stock in the first place.

According to Galek, the standard, conservative tax position treats stock as QSBS-eligible strictly upon conversion at the priced round, since a SAFE isn't "stock" for Section 1202 purposes until it actually converts into equity. Claiming QSBS eligibility starting at the date of SAFE execution is a genuinely aggressive minority position that requires careful tax planning and robust contemporaneous documentation to defend.

While taking the execution-date position isn't impossible, investors should go in clear-eyed that it departs from prevailing practitioner consensus and carries real audit risk given the absence of direct IRS guidance on point. Rather than reacting in the middle of deal diligence, early-stage investors and founders should proactively evaluate their SAFE note structures with qualified tax counsel.

Ultimately, anticipating these unsettled tax questions early—and knowing which side of the July 2025 dividing line your stock falls on—strengthens your positioning and protects your future returns long before an exit is on the table.

For more information, review Jason's recent tax note in TAX NOTES FEDERAL, VOLUME 192, JULY 27, 2026.

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Transcript:

Lindsey S. Mignano:

I'm Lindsey Mignano. Thanks so much for joining us today. I have my senior tax counsel Jason Galek here. Jason represents both startups, individuals, and investors here at the firm.

I've got a question to bring up on behalf of our investor clients. Here at the firm, some of our council have clients who are pre-seed or seed-stage venture firms. They're usually micro venture firms, and they invest really early on in a company's life cycle.

But as you may know, in the past couple of years, companies have been getting acquired earlier than ever — sometimes even at series A being a very common inflection point.

So these pre-seed and seedinvestors, their questions are whether their safe note, which they used to invest in this company before series A, which is not more than a few years old sometimes, sometimes it may be over five or six years old, depending on whether they invested at pre-seed or seed, when does it trigger QPBS? Is it at the time we enter into that safe note with the startup, or is it at the time that it converts at series A? Because now with these companies getting acquired earlier than ever, figuring out whether or not I, as the micro venture capital firm investor in this company get QPBS tax treatment upon the sale of my shares, is now becoming more important. It's becoming a question that comes up more often.

So Jason, I know you wrote a wonderful scholarly treatise on this. I'm wondering if you can go ahead and give us the quick and dirty TL;DR on what investors should be considering.

Jason Galek:

Sure. Thank you, Lindsey. So the safe notes themselves are not really characterized or they haven't really been determined by the IRS and the Treasury to be valid for QPBS purposes on issuance or on conversion. And that really is the tension here. And so the conservative interpretation based on just existing authorities is that there's no question that on conversion it it's QPBS. But if you were to make an argument that it’s QPBS eligible on execution, then that is a more aggressive position.

It's not to say that it's unjustified, but it does require more careful documentation and a more careful planning, and assuming and accepting the risk that you in the near future the IRS could determine that these are QSBS is eligible only on actual conversion.

So, it's it's an unsettled area of tax law, and it's it's on the IRS's radar. They're really going to in the next few years start fine-tuning QPBS because it's so prevalent for safe to be used in in for investors. So it's bound to be addressed at some point — it’s just a matter of when. And it's better to be in front of that and planning ahead rather than too late and then trying to react and respond.

So it's really an opportunity to bolster your own position, to strengthen your own position and really plan for the future as much as you can, and there are some strategies that you can do to minimize the risk. But really it is an unsettled area of tax law.