What Founders Need to Know Before Selling Their Startup

The vast majority of startup exits occur via acquisition. And while the Internet is full of advice for upfront founders, remarkably little content exists to help guide them through life after the acquisition—even though they and the employees they recruited will often spend two to three years working together. toiling away with the acquirer. An acquisition is certainly an exciting opportunity, but it is hardly the happy ending that the “founder’s journey” story might suggest.

Throughout my career I have experienced 11 different acquisitions from various perspectives: as founder, investor and board member. I recently went on a listening tour to compare my experience with the post-acquisition stories of a wide range of acquired founders. While I’m not at liberty to name names or dive into specific deals (as a rule, founders don’t tell bad stories about their new employer), I can aggregate the honest perspectives I’ve heard and combine them with my own experiences to provide a comprehensive guide to the procurement process.

The psychological shift from founder to employee can be difficult, and the years that follow can pale in comparison to the beginning of life. You’ll have pixie dust on you for a while – “the founders who built X and sold it for $Y” – but you’ll soon be judged on how well you work with others and drive success for your new employer . You may also resent your new peers, who have also worked hard for 10 years and don’t have an asset to show for it. You will be tempted to feel that everything the acquirer does differently is inferior – but resist this urge. You sold for a reason. Be graceful about the differences and learn from the experience. Find something that you can only learn or achieve as part of this larger company, and then do it with purpose.

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

How much can you shape the outcome?

Much more than you think.

In acquisitions, there are two types of leverage. The first is negotiation leverage, which determines who wins on deal-breaker points. The second is knowledge leveragebased on knowing which issues you can win without jeopardizing the deal.

There is little you can do to change your negotiating leverage – you either have a competitive procurement process or you don’t. However, you can change your knowledge leverage. Contrary to what the acquirer may say, most points are not deal breakers. You just have to know what to ask for – you might be surprised at how much the acquirer will agree to, but only if you ask.

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KYA: Know your acquirer

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

Incumbent vs. Startup: Of course the bigger and older the acquirer, the more cognitive and cultural dissonance you will experience. You can’t change it, but you can lead your team with emotional intelligence. The acquirer got big for a reason. On the other hand, acquiring through a startup can feel quite natural from a cultural standpoint, and you’ll find similarities on everything from technology tools to HR policies.

Handle post-acquisition integrations: When I worked at Cisco in the early 2000s, we completed 23 acquisitions in one year. Know that some acquirers are pros; some are not. Either way, make sure you know what happens “the day after.” Force the buyer to outline their plan, as this will raise numerous issues that will matter to you, your employees and your customers.

Acquirer’s culture: You may feel like two or three years will go by quickly, but it won’t. It matters if your employees enter a culture where they feel at home. You will be swept up in the acquisition momentum, so remember to ask yourself if this is a company that reflects enough of your values. Talk to more than just the acquisition team and the deal sponsor – ask to speak to the CEO of a startup they previously acquired.

Know why you are being acquired

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

New product and new customer base: You know more than the acquirer and they can easily screw up what you’ve built, so you have to fight for business unit independence. These acquisitions fail as often as they succeed. Examples include Goldman Sachs and GreenSky, Facebook and Oculus, Amazon and One Medical, and Mastercard and RiskRecon.

New product or service, but same customer base: Most acquisitions fall under this category. Founders should give in to faster integration because it ultimately leads to more success for both sides. Integration does complicate earnings – but your first priority is to avoid earnings. Well-known examples include Adobe and Figma, Google and YouTube, and Salesforce and Slack.

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

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Same product and same customer base: The buyer wants your customer base and possibly eliminate you as a competitor. You will be fully integrated into the acquirer by function, and quickly lose your independent identity. Examples include Plaid and Quovo, Vantiv and Worldpay, and ICE/Ellie Mae and BlackKnight.

Obtain rent: You’ve built a team so well that another company is willing to buy the company to hire them en masse. Be realistic – this is a graceful exit for you, and a non-essential purchase for the acquirer. In this category there are too many examples to count.

What to ask for

During an acquisition, it is easy to focus on transaction points such as valuation, working capital adjustments, escrow and indemnification. You should get it right, but your experience over the next two to three years will depend more on how things work after acquisition. In rush deals, acquirers will tell you not to worry about these points – but you should. Here are the main non-deal points to consider:

Employee Compensation: You should adjust employee compensation before the acquisition because it will be very difficult for the acquirer to change it later. Your employees earn starting salaries, which should be higher when the equity value is removed. Be aware that the deal may still fall apart, so do the compensation benchmarking and then wait to implement until you are very sure the deal will close.

Employee titles: You will need to map your employees to the acquirer’s titles and compensation bands. As a startup, you probably focused on stocks and options, but the acquirer focuses on cash compensation and other benefits. Learn the differences between the titles before mapping, as large companies often base everything from bonus ranges and benefits access to participation in leadership meetings on them. Advocate hard for your employees – you have Knowledge Leverage over them, so use it.

Retention: Acquirers 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 because your employees must stick around to earn the extra compensation. Aim to keep that period under two years, as three will feel way too long. Rather than expanding the retention pool upfront, you should negotiate for a second discretionary retention bucket that you can use to retain key employees who may want to leave shortly after the acquisition.

Pre-agreed budgets and rental plans: You thought raising money from investors was difficult, but just wait for corporate budget. Most large companies use budgets and headcount as their control mechanisms, so negotiate both for your first year. You’ll want the freedom to execute, and you shouldn’t spend time advocating for each new hire—most likely with new stakeholders who weren’t part of the initial acquisition.

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Management: Who will you report to? Your new manager’s seniority and authority are the most important factors. You won’t escape enterprise-wide budgeting processes, but it’s better to have just one person to convince. If you are an independent business unit, negotiate for a Board of senior leaders of the acquirer. It’s a new structure for buyers, but it’s a smart way for you to match form with function. Finally, avoid matrix reporting at all costs, especially if you have an earnings.

Earnings: Buyers prefer them because they align price with performance, but your job is to avoid that. 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 will disrupt the best laid plans. You could crush it on revenue and miss gross margin, or hit all your targets, 12 months late. It will be your call, but if you have the chance to earn 25% more with an earnings or settle for 10–15% more upfront, I’d take the smaller amount upfront.

Involve your board

Most acquisitions begin with an unsolicited expression of interest, and CEOs have a duty to share this with the Board. Some are easy to dismiss, but others cause the awkward dance: Want to sell? Don’t want to go long? At what price will you sell?

This is where you will see your investors’ true personalities. Everyone understands that the Series B investors at the $125 million valuation will not enjoy a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company, taking into account founders, employees and common shareholders. This is where you will be glad you chose true partners as the investors in your boardroom, and independent Board members can provide a particularly valuable voice.

If you decide to engage with the acquirer, CEOs 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 have them 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 at least have a few board members already convinced when you come back with a letter of intent.

Selling your company is the bottom line, and the more you know about post-acquisition life before you start negotiating, the happier you and your employees will be for the next two to three years. There are enormous 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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