Selling a startup

Selling your company is the tip of the iceberg, 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.

In acquisitions, there are two types of leverage. The first is negotiating leverage, which determines who wins on deal-breaker points. The second is knowledge leverage, predicated on knowing what issues you can win on without jeopardizing the deal. There’s little you can do to change your negotiating leverage — you either have a competitive acquisition process or you don’t. However, you can change your knowledge leverage. Contrary to what the acquirer might say, most points are not deal breakers. You just need to know what to ask for — you might be surprised at how much the acquirer will agree to, but only if you ask.

The vast majority of startup exits occur via acquisition. And while the internet is full of advice for pre-exit founders, remarkably little content exists to help guide them through post-acquisition life — even though they and the employees they recruited will often spend two-to-three years toiling away with the acquirer. An acquisition is an exciting occasion, to be sure, but it is hardly the happily-ever-after ending that the “founder’s journey” story might suggest.

Throughout my career, I have experienced 10 different acquisitions from multiple perspectives: as a founder, an investor, and a 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 do not tell bad stories about their new employer), I can aggregate the honest perspectives I heard and combine them with my own experiences to produce an overall guide to the acquisitions process.

The psychological shift from founder to employee can be difficult, and the years that follow can be deflating compared to startup life. You will have pixie dust on you for a while — “the founders that 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 might also face resentment from your new peers, who have also worked hard for 10 years and don’t have an acquisition to show for it. You’ll 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 accomplish as part of this bigger company, then do it with purpose.

The most common theme for these conversations was simply: “I wish I had known then what I know now.” Knowing your leverage, the type of acquisition you’re in, and the important points to push on will help you maximize success and employee happiness in the long run. You owe it to yourself — and the employees who followed you — to be prepared.

How Much Can You Shape the Outcome?

Far more than you think.

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

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

KYA: Know Your Acquirer

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

1. Incumbent vs. Startup: Obviously the bigger and older the acquirer, the more cognitive and cultural dissonance you will experience. You cannot change this, but you can lead your team with emotional intelligence. The acquirer got big for a reason. On the other hand, being acquired by a startup can feel quite natural from a cultural perspective, and you’ll find similarities on everything from tech tools to HR policies.
2. Handling post-acquisition integrations: we supported clients in more than 20 acquisitions. Know that some acquirers are pros; some are not. Either way, make sure you know what happens “the day after.” Force the buyer to detail their plan, because it will raise numerous issues that will matter to you, your employees, and your customers.
3. Acquirer’s culture: You might feel that two or three years will go by quickly, but it won’t. It matters if your employees are entering a culture where they feel at home. You will get swept up in the acquisition momentum, so remember to ask yourself whether 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’ve previously acquired.

Know Why You’re Being Acquired

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

1. New product and new customer base: You know more than the acquirer and they could easily mess up what you have built, so you should 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.
2. 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 earnouts — but your first priority is to avoid earnouts. Famous examples include Adobe and Figma, Google and YouTube, and Salesforce and Slack.
3. New customer base, but same product category: In this category, you know the customer and the buyer does not. 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.
4. Same product and same customer base: The buyer wants your customer base and possibly to 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.
5. Acqui-hires: You’ve built a team so good 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’s easy to focus on transaction points like valuation, working capital adjustments, escrow, and indemnification. You need to get those right, but your experience through the next two-to-three years will depend more on how things operate post-acquisition. In rushed transactions, acquirers will tell you not to worry about these points — but you should. Here are the key non-deal points you should consider:

• Employee Compensation: You should adjust employee compensation ahead of the acquisition because it will be very hard for the acquirer to change them later. Your employees earn startup salaries, which should be higher when the equity upside is removed. Be aware that the transaction may yet fall apart, so do the compensation benchmarking work and then wait to implement until you are highly certain the transaction will close.
• Employee Titles: You will need to map your employees onto the acquirer’s titles and compensation bands. As a startup, you likely focused on equity and options, but the acquirer focuses on cash compensation and other benefits. Learn the differences among the titles before mapping, as big companies often base everything from bonus ranges and benefits access to participation in leadership meetings on them. Advocate hard for your employees — you have the Knowledge Leverage about 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, it’s a double-edged sword because your employees must stick around to earn the extra compensation. Strive to keep that period under two years, as three will feel way too long. Rather than expand the retention pool up front, you should negotiate for a second discretionary retention bucket which you can use to retain key employees who might want to leave soon after the acquisition.
• Pre-agreed Budgets and Hiring Plans: You thought raising money from investors was tough, but just wait for corporate budgeting. Most large companies use budgets and headcount as their control mechanisms, so negotiate both for your first year. You will want the freedom to execute, and you shouldn’t spend time advocating for every new hire — most likely with new stakeholders who weren’t part of the initial acquisition.
• Governance: Who will you report to? Your new manager’s seniority and authority are the most important factors. You won’t escape company-wide budget processes, but it’s better to only have one person to convince. If you’re a standalone business unit, negotiate for a Board of senior leaders from the acquirer. It’s a novel 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 earnout.
• Earnouts: Buyers prefer them because they align price with performance, but your job is to avoid them. This is easier said than done, but you’ll never be as free to execute post-acquisition as you were pre-acquisition, and unanticipated 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 earnout or settle for 10–15% more upfront, I would take the smaller amount up front.

Engaging Your Board

Most acquisitions start with an unsolicited expression of interest, and CEOs have a duty to share them with the Board. Some are easy to dismiss, but others trigger the awkward dance: Do you want to sell? Don’t you want to go long? At what price would 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 relish a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company, considering founders, employees, and common shareholders. This is where you will be glad that you selected genuine partners as the investors in your boardroom, and independent Board members can provide an especially valuable voice.

If you decide to engage with the acquirer, then 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 get them to appoint one or two members to an M&A Committee and put them on speed dial. You will avoid many small mistakes — and have at least a couple of Board members already convinced when you return with a Letter of Intent.

Selling your company is the tip of the iceberg, 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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Alessio De Filippis, Founder and Chief Executive Officer @ Libentium.

Founder and Partner of Libentium, developing projects mainly focused on Marketing and Sales innovations for a different types of organizations (Multinationals, SMEs, startups).

Cross-industry experience: Media, TLC, Oil & Gas, Leisure & Travel, Biotech, ICT.