Key Issues in De-SPAC Negotiations: Insights from the Target’s Perspective

During the SPAC boom, the market saw an overabundance of SPAC vehicles actively seeking targets. As a result, high-quality private companies began engaging with multiple SPACs in parallel, eventually choosing the one offering the most favorable terms. 

We had the opportunity to represent the target in several of these negotiations, and we identified several key issues that frequently became sticking points. Ultimately, any successful de-SPAC requires reaching a practical balance between the commercial expectations of both sides. 

1. Valuation of the Target Company

The valuation of the private company is the single most critical issue. It directly determines the post-combination share allocation and equity split. In most cases, the higher the target’s valuation, the better it is perceived—provided that the target can substantiate the valuation with real financials, forecasts, or comparables.

Unlike traditional M&A, the valuation in a de-SPAC is less correlated to the SPAC’s “market value,” which was largely realized during the IPO. The SPAC's economic interest remains relatively fixed by that point. Although, in theory, a lower valuation should be favorable to the sponsor (i.e., securing more value for the same shares), this rarely works in practice.

Why? Because post-de-SPAC trading is typically weak. Many investors short the stock ahead of the merger and then repurchase at a lower price post-closing. To mitigate the expected price drop, sponsors often push for a higher pre-merger valuation—ironically—to help offset anticipated market losses. This results in a valuation dynamic that is both defensive and detached from fundamentals.

2. Cash in Trust and Redemption Risk

The capital raised from the SPAC IPO is held in a trust account. Traditionally, a compelling target with a strong narrative could convince investors to retain their shares and not redeem. However, the market has changed: because of the expected post-combination price drop, it has become more rational for investors to redeem first, and then buy back shares at a discount after the merger closes.

Some target companies now demand that the SPAC sponsor guarantee a minimum cash balance post-redemption. However, such a clause is practically unenforceable. Even if included in the business combination agreement, there is often no recourse or consequence if the minimum isn’t met. Once redemptions are known, the merger is typically already consummated, and the IPO proceeds are committed. Unless the sponsor agrees to cover the shortfall—which is rare—such “minimum cash” terms are largely symbolic.

Ultimately, the combined company must absorb all the remaining costs and consequences, even when redemptions leave little or no capital in trust.

3. Net Cash vs. Transaction Costs

Another major challenge is the total cash burn required to complete the de-SPAC transaction. In many cases, the remaining cash in trust after redemptions is significantly lower than the total cost of completing the merger. These costs include deferred underwriting fees from the SPAC IPO, legal and advisory expenses, registration fees, and D&O insurance. The largest component is often the deferred underwriting fee, which typically amounts to several million dollars.

Increasingly, underwriters are agreeing to convert this fee into shares valued at $10 each. However, if the underwriter refuses to convert, the deal is likely to collapse, as it may be more financially sensible for the target company to walk away.

The most difficult negotiation typically centers around how much the target company must contribute from its own operating account to finalize the transaction. If the target lacks sufficient liquidity, financial advisors must raise an additional PIPE round—which results in significant dilution to both the sponsor and the original shareholders.

This situation directly undermines the original rationale for using a SPAC: to raise growth capital through a faster, more flexible IPO process. In many cases, a significant portion of that capital is now redirected to cover transaction expenses.