What Founders Need to Know Before Selling Their Startup

The vast majority of startup exits happen through acquisitions. And while the Internet is full of advice for founders before they exit, there’s very little content to help guide them through life after an acquisition—even though they and the employees they hire typically spend two to three years trying to They buy. . Buying is certainly an exciting situation, but it’s hard to pin down the happy ending that the story of the “Founder’s Journey” suggests.

During my career, I have experienced 11 different acquisitions from different perspectives: as a founder, investor and board member. I recently went on a listening tour to compare my experience with the post-acquisition stories of a wide variety of acquired founders. While I’m not at liberty to mention names or specific contracts (as a rule, founders don’t tell bad stories about their new employer), I can gather the honest views I heard and relate them to experiences. I put together a general guide to the buying process

The psychological transition from founder to employee can be difficult, and the years that follow can be reductive compared to startup life. You’ll have pixie dust on you for a while—the “founders who built X and sold it for Y dollars”—but soon you’ll be judged on how well you work with others and make your new employer a success. you will be You may also face resentment from your new peers who have worked hard for 10 years and have no purchases to show for it. You’ll be tempted to feel inferior to anything the buyer does differently—but resist the urge. Be graceful about the differences for a reason and learn from the experience. Find something you can only learn or do as part of this larger enterprise, then do it with purpose.

The most common theme for these conversations was, “I wish I knew then what I know now.” Knowing your leverage, the type of buy you’re in, and the key points to push will help you maximize long-term employee success and happiness. You owe it to yourself—and the employees who followed you—to be prepared.

How much can you shape the result?

Much more than you think

There are two types of leverage in acquisitions. The first is this negotiation leverage That determines who wins the deal breaking points. The second is this Leverage knowledgebased on knowing what issues you can win without compromising the deal.

There’s little you can do to change your negotiating leverage—either you have a competitive buying process or you don’t. However, you can change the leverage of your knowledge. Contrary to what a buyer might say, most points are not deal breakers. You just have to know what to ask for – you might be surprised how much the recipient agrees, but only if you ask.

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KYA: Know your buyer

Assessing your buyer will help you and your employees prepare for what lies ahead.

Current company vs startup: Obviously, the older and older the acquisition, the more cognitive and cultural dissonance you will experience. You can’t change this, but you can lead your team with emotional intelligence. The buyer grew up for a reason. On the other hand, being acquired by a startup can be quite natural from a cultural perspective, and you’ll see similarities in everything from technology tools to HR policies.

Management of post-acquisition mergers: When I worked at Cisco in the early 2000s, we completed 23 acquisitions in one year. Be aware that some buyers are professionals. Some are not. Either way, make sure you know what happens “the next day.” Get the buyer to spell out their plan in detail, because it raises several issues that matter to you, your employees, and your customers.

Acquired culture: It may feel like two or three years go by quickly, but it doesn’t. It’s important that your employees are entering a culture where they feel at home. You will be overwhelmed by the rush of the purchase, so remember to ask yourself if this is a company that adequately reflects your values. Talk to more than just the acquisition team and the deal sponsor – ask to talk to CEOs of startups they’ve already bought.

Know why you have been acquired

There are five types of acquisitions, and understanding which model you fit will determine your approach:

New product and new customer base: You know more than the buyer and they can easily destroy what you have built, so you have to fight for the independence of the business unit. These acquisitions fail as often as they succeed. For example, we can mention Goldman Sachs and Green Sky, Facebook and Aquilos, Amazon and One Medical, and MasterCard and RiskRecon.

New product or service, but same customer base: Most purchases fall into this category. Founders should submit to faster integration, as it ultimately leads to greater success for both parties. Consolidation complicates earnings—but your first priority is to avoid earnings. Famous examples include Adobe and Figma, Google and YouTube, and Salesforce and Slack.

New customer base, but same product category: In this category, you know the customer and not the buyer. Maintaining a higher degree of independence in the short term is important to the success of this acquisition. Be ready for knowledge sharing and eventual integration. Examples include PayPal and iZettle, JPMorgan and InstaMed, and Marriott and Starwood.

Same product and same customer base: The buyer wants to eliminate your customer base and possibly you as a competitor. You will be completely merged with the receiver through performance and will quickly lose your independent identity. Examples include Plaid and Quovo, Vantiv and Worldpay, and ICE/Ellie Mae and BlackKnight.

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Acqui-hires: You have built such a good team that another company is willing to buy the company to hire them en masse. Be realistic – this is a pleasant departure for you and an unnecessary purchase for the buyer. In this category, there are too many examples to count.

what do you want

During an acquisition, it is easy to focus on transaction points such as valuation, working capital adjustments, deposits and compensation. You need to get these things right, but your experience over the next two to three years will largely depend on how things work after the purchase. In rush deals, buyers will tell you not to worry about these points – but you should. Here are some key non-trade points to consider:

Employee bonus: You should set employee compensation before recruiting because it will be very difficult for the buyer to change them later. Your employees receive a startup salary that should be higher when the stock value is removed. Note that the transaction may still break, so perform a compensation evaluation and then wait until you are absolutely certain that the transaction will be closed.

Staff titles: You should map your employees on buyer titles and bonus bands. As a startup, you’re likely focused on stock and options, but the buyer is focused on cash compensation and other benefits. Before you map out, learn the differences between titles, as large companies often base everything from compensation ranges and access to benefits to attendance at leadership meetings based on them. Advocate hard for your employees – you have the leverage of knowledge about them, so use it.

save: Buyers want to retain key startup employees, and you have the power to decide who is in the retention bucket. However, this is a double-edged sword, as your employees must stick together to receive additional compensation. Try to keep that period under two years, because three years would be too long. Instead of expanding the existing retention pool, you should negotiate for a second optional retention bucket that you can use to retain key employees who may want to leave soon after the acquisition.

Pre-agreed budget and recruitment plans: You thought it would be hard to raise money from investors, but just wait for the company to budget. Most large companies use budget and headcount as their control mechanisms, so negotiate both for your first year. You want the freedom to execute, and you don’t have to spend time on every new hire – most likely with new shareholders who weren’t part of the original acquisition.

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Government: Who will you report to? The seniority and authority of your new manager are the most important factors. You won’t escape company-wide budget processes, but it’s better to convince just one person. If you are an independent business entity, negotiate for a board of senior leaders on behalf of the buyer. It’s a new structure for buyers, but it’s a clever way to match form with function. Finally, avoid matrix reporting at all costs, especially if you have income.

Incomes: Buyers prefer them because they match price with performance, but it’s your job to avoid them. It’s easier said than done, but you’ll never be as free to execute post-acquisition as you were pre-acquisition, and unforeseen forces disrupt the best-laid plans. You can crush it in revenue and lose gross margin, or hit all your targets 12 months late. It will be your call, but if you have the chance to make 25% more on an income or settle for 10-15% more, I would take less up front.

Engage your board

Most acquisitions start with unsolicited expressions of interest, and CEOs are tasked with sharing them with the board. Some are easily dismissed, but others begin this awkward dance: Do you want to sell? Don’t you want to go long? At what price do you sell?

This is where you will see the true character of your investors. Everyone knows that $125 million Series B investors won’t enjoy a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company, taking into account the founders, employees and joint shareholders. This is where you’ll be glad to have real partners as investors in your boardroom, and where independent board members can provide a very valuable voice.

If you decide to engage with a buyer, executives with M&A experience can take it from there. If you’re not that CEO, get help. You don’t want the entire board involved, so get them to appoint one or two members to an M&A committee and put them on speed dial. You’ll avoid a lot of small mistakes—and you’ll have at least a few board members already convinced you came back with a letter of intent.

Selling your company is the tip of the iceberg, and the more you know about life after the sale before you start negotiating, the happier you and your employees will be for the next two to three years. There are huge psychological and operational changes ahead, and you can influence many of them by using this model to know when and where to negotiate.

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