The vast majority of startup exits are through acquisitions. While the Internet is full of pre-exit advice for founders, there is very little content to help guide them through life after an acquisition—even though they and their hires will often spend two to three years with the acquirer. . The acquisition is certainly an exciting event, but hardly the happily-ever-after ending that the “founder’s journey” story might suggest.
Over the course of my career, I have experienced 11 different acquisitions from multiple 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 range of acquired founders. While I’m not at liberty to name names or dive into specific deals (founders typically don’t tell bad stories about their new hires), I can combine the honest perspectives I’ve heard and combine them with my own experience. a general guide to the procurement process.
The psychological transition from founder to employee can be difficult, and the later years can be exhausting compared to startup life. You’ll have pixie dust on you for a while — “Founders who built Xi and sold it for $Y” — but soon you’ll be judged on how well you work with others and bring success to your new employer. You may also face the resentment of your new peers who have worked hard for 10 years and have had no payoff for it. It will be tempting to feel that everything the buyer does differently is inferior—but resist the urge. You sold it for a reason. Be subtle about the differences and learn from experience. Just find something you can learn or do as part of this larger company, then do it purposefully.
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 critical points for moving forward will help you maximize long-term success and employee happiness. You owe it to yourself and the staff following you to be prepared.
How much can you shape the result?
More than you think.
There are two types of leverage in purchases. First negotiating leverage, determines who wins the bargaining points. Secondly levers of knowledgeit’s built on knowing which issues you can win without jeopardizing 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 your knowledge leverage. Contrary to what the buyer says, most points are not deal breakers. You just have to know what to ask for – you might be surprised how satisfied the buyer will be, if only you ask.
KYA: Know your buyer
Evaluating your buyer will help you and your staff prepare for what lies ahead.
Current and Starting: Obviously, the older and older the recipient, the more cognitive and cultural dissonance you will experience. You can’t change it, but you can lead your team with emotional intelligence. The buyer was great for a reason. On the other hand, being acquired by a startup can feel quite culturally natural, and you’ll find similarities in everything from tech tools to HR policies.
Managing post-purchase integrations: When I was 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.” Force the buyer to explain their plan in detail, as this will raise many issues that are important to you, your employees and your customers.
Buyer’s culture: You may feel like two or three years will go by quickly, but it won’t. It’s important that your employees are included in a culture where they feel at home. You will be swept up in the buying spree, so be sure to ask yourself if this is a company that reflects your values. Talk to more than just the acquisition team and the deal sponsor – ask to speak to the CEO of the startup they previously acquired.
Know why you are being acquired
There are five types of purchases, and understanding which model you fit into will inform your approach:
New product and new customer base: You know more than the buyer, and they can easily break what you’ve built, so you have to fight for the independence of the business unit. These acquisitions fail as often as they succeed. Examples include Goldman Sachs and GreenSky, Facebook and Oculus, Amazon and One Medical, Mastercard and RiskRecon.
New product or service but same customer base: Most purchases fall into this category. Founders should commit to faster integration because it ultimately leads to greater success for both parties. Integration makes gains difficult – but your first priority is to avoid gains. Popular examples include Adobe and Figma, Google and YouTube, Salesforce and Slack.
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 critical to the success of this acquisition. Be willing to share knowledge and eventually integrate. Examples include PayPal and iZettle, JPMorgan and InstaMed, 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 fully integrated into the acquirer by function and will quickly lose your independent identity. Examples include Plaid and Guovo, Vantiv and Worldpay, ICE/Ellie Mae and BlackKnight.
He hires: You’ve built such a good team that another company is willing to buy the company to hire them en masse. Be realistic – this is an elegant exit for you and a non-essential purchase for the buyer. There are too many examples in this category to count.
What to ask
It is easy to focus on operational points such as valuation, working capital adjustments, escrow and compensation during procurement. You need to get these things right, but your experience over the next two to three years will depend more on how things work once you get them. In rush transactions, acquirers will tell you not to worry about these points, but you should. Here are the main non-deal points you should consider:
Worker’s Compensation: You should arrange workers’ compensation before the acquisition, as it will be very difficult for the buyer to change them later. Your employees earn starting salaries, which should be higher when capital gains are eliminated. Note that the transaction may still be pending, so perform a compensation comparison and then wait to commit until you are absolutely certain that the transaction will close.
Names of employees: You must associate your employees with buyer names and compensation groups. As a startup, you likely focused on equity and options, but the buyer focuses on cash compensation and other benefits. Before you map out, learn the differences between the titles, as large companies often base everything from bonus ranks to participation in leadership meetings. Strongly advocate for your employees – you have leverage of knowledge about them, so use it.
Storage: 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 additional compensation. Try to keep this period under two years, because three will feel too long. Instead of expanding the retention pool upfront, you should negotiate for a second discretionary retention bucket that you can use to hold key employees who may want to leave immediately after the purchase.
Pre-agreed budgets and recruitment plans: You thought it was difficult to raise money from investors, but wait for the corporate budget. Most large companies use budgets and headcount as control mechanisms, so discuss both for the first year. You’ll want the freedom to execute and not have to spend time defending every new hire – most likely with new stakeholders who weren’t part of the original purchase.
Management: Who will you report to? The seniority and authority of your new manager are the most important factors. You won’t be able to avoid budgeting processes within the company, but it’s better to have just one person to convince. If you are an independent business unit, negotiate for a senior management board from the buyer. It’s a novel 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 earnings.
Earnings: Buyers prefer them because they match 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 after the acquisition as you were before you acquired it, and unforeseen forces will disrupt the best-laid plans. You could crush it on revenue and miss gross margin, or hit all your goals 12 months late. It will be your call, but if you have the chance to earn 25% more in profit or pay 10-15% more upfront, I would take the smaller amount upfront.
Engaging your Board of Directors
Most acquisitions start with unsolicited expressions of interest, and CEOs have a duty to share them with the Board. Some are easy to dismiss, but others trigger an awkward dance: Do you want to sell? Don’t want to go too far? What price would you sell it for?
Here you will see the real personalities of your investors. Everyone understands that $125 million Series B investors will not enjoy a $200 million sale. However, the real challenge is to find the best risk-adjusted outcome for the company, taking into account the founders, employees and general shareholders. You’ll be glad to have real partners as investors in your boardroom, and independent Board members can provide a particularly valuable voice.
If you decide to engage with an 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 to be involved, so appoint one or two members to the M&A Committee and put them on speed dial. You’ll avoid many minor mistakes – and at least a few Board members will already be convinced when you return with your Letter of Intent.
Selling your company is only the tip of the iceberg, and the more you know about life after a buyout before you start negotiations, the happier you and your employees will be over the next two to three years. There are big psychological and operational changes ahead, and you can influence many of them by using this model to know when and where to negotiate.