INSUBCONTINENT EXCLUSIVE:
I’ve been fortunate to have been part of half a dozen exits this year, and have seen the process work smoothly, and, other times, like a
roller coaster, with only the most tenuous connection to the track
Here are 10 bits of advice I’ve distilled from these experiences in the event someone makes you an offer for your startup.1
Understand the motivations of your acquirer.The first thing you need to understand is why the acquiring company wants your startup
Do you have a strategic product or technology, a unique team or a sizable revenue run rate Strategic acquirers, like Google and Facebook,
likely want you for your tech, team or sometimes even your user traction
Financial acquirers, like PE firms, care a great deal more about revenue and growth
The motivations of the buyers will likely be the single-biggest influencer of the multiple offered.It’s also essential to talk price early
It can be somewhat awkward for less experienced founders to propose a rich valuation for their company, but it’s a critical step toward
assessing the seriousness of the discussion
Otherwise, it’s far too easy for an acquirer to put your company through a distracting process for what amounts to an underwhelming offer,
or worse, a ploy to learn more about your strategy and product roadmap.2
Don’t “Test the waters.” Pass, or fully commit.Going through an MA process is the single most distracting thing a founder can do to
If executed poorly, the process can terminally damage the company
I’d strongly advise founders to consider these three points before making a decision:Is now the right time The decision to sell can be a
tough choice for first-time founders
Often the opportunity to sell the company comes just as the process of running it becomes enjoyable
Serial entrepreneurship is a low-percentage game, and this may be the most influential platform a founder will ever have
But the reflex to sell is understandable
Most founders have never had a chance to add millions to their bank accounts overnight
Moreover, there is a team to consider; usually all with mortgages to pay, college funds to shore up and myriad other expenses; their needs
should factor into the decision.Is it actually your choice to make Most investors look at MA as a sign your company could be even bigger and
as an opportunity to put more capital to work
However, when VCs have lost confidence and see a fair offer come in, or they hear a larger competitor is looking at entering your space,
they may push you to sell
Of course, the best position to be in is one where you can control your destiny and use profitability as the ultimate BATNA (“best
alternative to a negotiated agreement”).How long do you have to stay In the case of competing offers, you may have limited ability to
negotiate price, but other deal terms could be negotiable
One of the most important is the amount of time you have to stay at the company, and how much of the sale price is held in escrow, or
As soon as you attract interest from an acquirer, start socializing the idea that most MA deals fall apart — because they do
This is important for two reasons.First, your executive team will likely start counting their potential gains, and they just may let KPIs
key to running the business slip
If the deal fails to close, the senior team will be dejected, demotivated and you may start to hear some mutinous noises
This attitude quickly percolates through the team and can be deadly for the culture
What was supposed to be your moment of triumph can quickly turn into a catastrophe for team morale.This is typically the toughest part of
You need the exec team to execute to close a deal, but you’re running into some of the deepest recesses of human nature, too
Recognize the fact that managing internal expectations is as important as managing the external process.4
Raise enough money to stay flush for a year.Assuming you’re selling your company from a position of strength, make sure you have enough
capital so that you don’t lose leverage due to a balance sheet lacking cash
I’ve seen too many companies start MA discussions and take their foot off the gas in the business, only to see the metrics drop and runway
shorten, allowing the acquirer to play hardball
In an ideal scenario, you want at least nine months of cash in the bank.5
Hire a banker.If you get serious inbound interest, or if you’re at the point where you want to sell your company, hire a banker
Your VCs should be able to introduce you to a few strong firms
Acquisition negotiations are high stakes, and while bankers are expensive, they can help avoid costly rookie mistakes
They also can classically and plausibly play the bad cop to your good cop, which also can contribute positively to your post-merger
relations.My only caveat is that bankers have a playbook and tend not to get creative enough
You can still be additive in helping fill the funnel of potential acquirers, especially if you’ve had communication with unlikely
Find a second bidder… and a third… and a fourth.The hardest bit of advice is also the most valuable
It’s Negotiation 101, but without a credible threat of a competitive bid, it is all too easy to be dragged along.Hopefully, you’ve been
talking with other companies in your space as you’ve been building your startup
Now is the time to call your point of contact and warn them that a deal is going down, and if they want in, they need to move quickly.Until
you’re in a position of formal exclusivity, keep talking with potential acquirers
Don’t be afraid to add new suitors late in the game
You’d be amazed at how much info spreads through MA back channels and you may not even be aware of rivalries that can be extremely useful
to your pursuit.Even when you’re far down the road with an acquirer, if they know you have a fallback plan in mind it can provide valuable
leverage as you negotiate key terms
The valuation may be set, but the amount paid upfront versus earnouts, the lock-up period for employees and a multitude of other details can
be negotiated more favorably if you have a real alternative
Of course, nothing provides a better alternative than your simply having a growing and profitable business!7
Start building your data room
Founders can raise shockingly large sums of money with pitch decks and spreadsheets, but when it comes time to sell your startup for a large
sum, the buyer is going to want to get access to documentation, sometimes down to engineering meeting minutes
Financial records, forward-looking models, audit records and any other spreadsheet will be scrutinized
Large acquirers will even want to look at information like HR policies, pay scales and other human resources minutiae
As negotiations progress, you’ll be expected to share almost every detail with the buyer, so start pulling this information together
sooner rather than later.One CEO said that during the peak of diligence, there were more people from the acquirer in his office than
Remember to treat your CFO and General Counsel well — chances are high that they get very little rest during this process.8
Keep your board close, your tiny investors far away.Founders are in a tough situation in that they’re starving for advice, but they should
avoid the temptation to share info about negotiations with those who don’t have alignment
For instance, a small shareholder on the cap table is more likely to blab to the press than a board member whose incentives are the same as
We’ve seen deals scuttled because word leaked and the acquirer got cold feet.Loose lips sink startups.9
Use leaks when they inevitably happen.Leaks are annoying and preventable, but if they do happen, try using them as leverage
If the press reports that you’ve been acquired, and you haven’t been, and also haven’t entered a period of exclusivity, try to ensure
that other potential bidders take notice
If you’ve been having trouble drumming up interest with potential bidders, a report from Bloomberg, The Wall Street Journal or TechCrunch
can spark interest in the way a simple email won’t.10
Expect sudden radio silence.There’s a disconnect between how founders perceive a $500 million acquisition and how a giant like Google does
For the founder, this is a life-changing moment, the fruition of a decade of work, a testament to their team’s efforts
For the corp dev person at Google, it’s Tuesday.This reality means that your deal may get dropped as all hands rush to get a
higher-priority, multi-billion dollar transaction over the finish line
It can be terrifying for founders to have what were productive talks go radio silent, but it happens more often than you think
A good banker should be able to back channel and read the tea leaves better than you can
It’s their day job, not yours.No amount of advice can prepare you for the MA process, but remember that this could be one of the
highest-quality problems you’re likely to experience as a founder
Focus on execution, but feel good about achieving a milestone many entrepreneurs will never experience!
