What I learned selling my company

At my first company, I internalized the standard advice to never think about M&A. The consensus was, and is, to just keep growing the business and good things will come. I did that, and I was lucky that good things did come in the form of a $130M acquisition that was mostly good news for the founders and employees, and pretty-solid-given-the-reality news for our investors.

Having lived it, and having close friends who’ve lived it, I think the usual advice does founders a disservice. People often get into startups because of the chance for a pot of gold at the end of the rainbow. M&A is one of two ways a pot of gold happens. So rather than ignoring it, I think it’s worth understanding how it happens, and avoiding the dumb mistakes that make it not happen when you need it.

To be clear, this post is not about acqui-hires, which are usually about saving face and don’t usually include a pot of gold for anyone. It’s also not about multi-billion-dollar mergers of public or could-be-public-if-they-wanted companies. 

This is about the bread-and-butter, $50M-$500M acquisitions of mid/late-stage startups who probably took the offers because they had serious doubts about whether they could go the distance. 

Many such companies don’t get offers. This is about what to do to keep the doors open to an offer in case you need one — and minimize the chances of screwing it up if you get one — while maintaining focus on the main thing, which is growing your business.

Build 3-4 key relationships with large potential acquirers. You can’t bootstrap a relationship all the way to the level of trust required for a real M&A offer all in one process. When offers come, they’ll come from key decision-makers who already know, trust and/or admire you. Work early to build relationships with key deciders at big likely acquirers. Ideally build go-to-market partnerships with them.

Deciders on M&A are top business leaders. This includes VPs/SVPs of business units at bigtech. It also includes the CEO and maybe chief product officer of pre/post-IPO tech companies. It does not include the VP corp dev or the corp dev managers. Those are good relationships to have, but they don’t initiate large offers. 

Don’t raise ahead of your fundamentals. Your post-money valuation is a hard floor on your sale price. If your business is strong and growing fast, do not hesitate to take down that larger round. If it’s not, but you’re being offered a big round anyway, stop and think about whether you really want to raise your hard floor right now. At Periscope Data, after a failed Series C process, we ended up selling at our Series B price. It’s tempting to think a Series C would have helped us get a better outcome. The opposite is true: In fact, we’re lucky the Series C investors all passed, so that a well-priced acquisition was still possible.

Offers come infrequently. This is especially misunderstood by employees. I get asked frequently why some founder of a late-stage, seemingly stalled business won’t sell. The answer is there are no buyers. This doesn’t mean the business has no value! It means no one wants to buy it this year. Maybe not next year either. Offers come when they come. When they don’t come (almost always), the only thing to do is keep going.

You cannot generate an offer. Offers are generated by events at the acquirer that will be mysterious to you, like splashy launches by a competitor, missed sales numbers, or internal reorgs. The adage that tech companies are bought, not sold, is true. If you’ve been building relationships (see point 1), then one day, a key decider will call you out of the blue and ask you to get lunch.

The real reason for an offer is often optical. Often, events at the acquirer have created a narrative that the decider feels they must reverse. Maybe consecutive misses have created a narrative that the acquirer is in decline. Maybe the relentless pace of launches from a competitor have created a narrative that the acquirer isn’t innovating like they used to. The key decider needs a big, splashy move to reset the narrative. Understanding this real reason is key to successfully negotiating the price.

Offers have a small chance of closing. At some point, to make an offer official, the acquirer gives you a LOI with high-level terms. I was advised that 50% of signed LOIs actually close. I bet it’s less. You will see the LOI and dream of trading stress for riches. Remember: Less than 50% chance of closing.

Once you get an offer, try to generate competing offers from your key relationships. This didn’t work especially well for me, because I did not do a good job of building these key relationships at Periscope Data, but I’ve seen it work well for others. Even if you don’t get any hard offers, the perception of shopping the offer will create some competitive pressure.

Negotiate everything you can in the LOI itself. The LOI gives the acquirer exclusivity, thus eliminating all your leverage. To a first approximation, you will lose every battle after the LOI is signed. If you care about it, get it in writing in the LOI before signing. This for sure includes price, re-vesting, exclusivity period, fundamental reps & warranties, and escrow. If you don’t know what some of these things are — I sure didn’t — it’s time to call your lawyer.

If you don’t understand the tax implications of the deal, you don’t understand the deal. OK, this one’s aspirational, at least for me. But David Lee said it to me in a key moment, and it banged around my head throughout the deal. These things are complicated. No one but you is responsible for making sure it ends well. The best CEOs understand their deals so well they understand how they’re taxed. Just know that’s where the bar of excellence is.

Minimize who knows about the process. It is massively distracting. The process will make large and increasing demands on your time. More perniciously, a sense can creep in that the business doesn’t matter any more outside of this transaction. You cannot allow that feeling to take hold. Personally, before signing an LOI, I would tell only the founders and the board. If and when I was ready to sign one, I might tell the exec team to get their buy-in. That’s it.

You must keep running the business until close day. Offers can and do blow up all the time. I have seen offers blow up the day before they were supposed to close. I have seen companies stop working and just watch movies all day while the deal is negotiated. These businesses did not recover from their failed M&A processes. Wall off a few people in finance to work on the deal, and demand that everyone else hit their targets per usual.

Picture them running your business into the ground and alienating your team. Now decide if you still want to do this. Most M&A fails. Your buyer will believe they are the exception. They have to. They are going all-in on this move. You might be doing this because you agree with them that they’re the exception, and they could be! But you should also, in a quiet moment, understand that there’s a very good chance this ends in a failed integration, a ton of employee churn, and/or a series of missed targets. If that outcome is worse than just staying the course, then maybe stay the course.

How you conduct yourself during the process has a large impact on your reputation. With a good offer, and a good process, everyone should get what it says in the cap table. The acquirer will not want to pay your investors or your ex-employees. It is your job to hold the line, keep everything above-board, and keep it fair. You may have to walk away to demonstrate to the acquirer that you are serious about this. If they don’t come back, they were never going to be fair with all your people.

On announcement day, some people celebrate and some people cry. Some people celebrate because it’s a perceived career win or pot of gold. Some people cry because they’re losing their jobs as part of the deal. Some cry because they know it’s the death of something special. I don’t know if there are wrong answers here, but I made sure to kick off and validate the celebration as priority 1, and then spend time with those who were crying. (Punctuated by fielding calls from confused angel investors.) I don’t regret it.

You are signing up for a couple hard years to get everyone an outcome. Running your company is incredibly stressful. You may think that a silver lining of this process is you will lighten the load. Bad news: Watching your acquirer take your baby from you and have their way with it, sometimes for better and sometimes for worse, will be a new kind of stress and pain. Remember: You did this, on purpose, in order to get everyone a win. You took the money. So now you put on a brave face and suck it up for a couple years.

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