Exit Right by Mark Achler & Mert Iseri
How to sell your startup, maximize your return & build your legacy
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The FAIR framework
Fit
Fit is the connection between parallel company cultures
Cultural fit stems from developing long term relationships
Alignment
Alignment means there is agreement among the key people involved in the decision
Integration
Integration means there is a clear plan to integrate all elements of the business post-acquisition
M&A teams appreciate founders who ask questions about what success looks like post-integration
Once you start discussing a term sheet, it is completely standard to ask questions to clarify plans around integration
Rationale
Rationale is the plan to create new value as a result of the combined capabilities
Trust is created through a credible team, robust technology, and real customers
FAIR deals make more money for the founder at the sale, but they ensure long-term growth and success for everyone as the company becomes even more successful under the parent organization
Cap table lesson: this will take longer than you expected
Every dollar you take and every share you give away matters
Six principles for fundraising
1. Know thyself: what kind of business do you want to build?
Venture-backed business or a lifestyle business
2. A change in ownership is a change in expectations for timing of a liquidity event
3. Understand how much common shares are worth at what exit price
What will the common shares be worth?
4. You should conduct due diligence on your investors
You are interviewing them to see if you want to take their money
Ask for their full list of CEO’s and phone numbers. Talk to their co-investors who serve on mutual boards. Talk to the companies that have exited in their portfolio
Watch out for zero-sum people
5. Every share counts, so avoid “dead equity” on the cap table
6. The amount of the raise, source of capital, and valuation/terms determine the waterfall: the distribution of the proceeds
Start a conversation about selling too early, and the shareholders will doubt the long-term commitment of the leadership
A transaction can only happen when an acquirer is willing to pay a premium on the current value of a business
The company must be performing in order to have a successful exit
Take the floor value of any range they offer for the final price
You must hire a specialist law firm with experience in startup m&a
The goal of diligence is to answer three questions:
1. Is the IP yours?
Checking employee agreements for ownership
Evaluating your code for potential IP infringement or cybersecurity flaws
2. Can your team reach the goals the acquirer has for their future?
Get a read on culture fit
3. Will your customers stick around?
Corporations are well-oiled machines with long-term horizon planning. They aren’t looking to steal your thing
An introductory data room:
All up to date financial reports including audited statements and future projections
A product deck, overview of IP, and any issued patents
Make sure all employees have signed employment agreements with IP assignments to the company, including all patent and trademark filings, and make sure that all outside contractors have signed clear waivers of IP ownership
The full and complete history of all corporate documentation, legal agreements, and board minutes
What is the decision-making process? Who has to approve?
Trust is the currency that makes it work
It takes time to build trust and it can be squandered in an instant with the perception of a lie or a misleading or exaggerated statement. Never lie. Never make a claim that you can’t back up. In the end, they will find out, and it will always come back to bite you
The only true value of a technology company is what an acquirer is willing to pay for it
The price they are willing to pay comes down to the potential future value of the acquired company within the larger corporation
Listening is the single biggest superpower you have during a negotiation
Good questions to ask during a negotiation:
What is the long-term objective?
What amount of funding will be made available after the acquisition? What will this accomplish?
What will integration look like?
When will your finance and HR teams enter the conversation?
What does success look like for you?
What is the cost of not doing a deal today?
Company assets are made up of: team, leadership, market, growth, technology, and profitability
The code base isn’t worth much of anything without the team as well
Ask for an NDA and a ballpark on the acquisition via email and the likely cash/stock split
Founders should never sign a term sheet they don’t intend to finalize with closing documents
Don’t sign anything until you are confident you understand and agree with each part of the term sheet. This is your future and the future of your company
Personal relationships is not something you can outsource
It’s up to the CEO up manage the bankers, the process, and the final negotiating points
Hire the best M&A attorney you can find
Get your ducks in a row. You need to have an explicit conversation with your board, your investors, and your key employees on what they can and cannot communicate or say
You must learn everything you possibly can about the other company and help build the rationale for why this investment makes sense
You have to be in constant communication every single day. Schedule a daily 5-minute check-in meeting with the other founder
I’m the absence of information, human nature is to fill in the blanks and sometimes assume the worst
The golden rule applies. How would you like to be treated? What would you like to know if you were in their position?
Pleading to get the deal done sooner will most likely have the opposite effect
Your job as a leader is to stay calm. You must project confidence
The 24-hour rule: if you think something you are going to write or say might be controversial, give yourself 24-hours and the night to sleep on it
Be curious. Ask a ton of questions, and remember the answers you are given
“Founders should always get their own counsel. Company counsel does not work for the founders but for the company.” — Brad Feld
“The point of the game is to keep on playing, not for the game to end.” — Collin Wallace
Perception is reality
If issues arise, overcommunicate. Deals die because of intercommunication
No surprises for both sides should be the motto in the last two weeks before signatures
If the issue has not been brought up until the signature process, you will have to live with it. No side should hold the deal hostage over already-negotiated terms
It is your responsibility to proactively work with the HR department of the acquiring company and understand how they level and grade each job. Then, on an individual basis, you need to work in partnership with their HR team to make sure each member of your team is appropriately graded and leveled
A reasonable non-compete is twelve or eighteen months. Depending upon the deal, it can even go up to two years
Start with the assumption of good intent. If someone is acting in a way that is not helpful or is counterproductive, pause and take a moment to ask yourself why they are acting like they are, and assume they have good intentions — unless proven otherwise
Think in a longer time horizon, and invest the most in your reputation and your relationships
Be a “mensch.” Treat people with kindness and respect. Honor your promises. Build relationships that go deep; avoid transactional ones. Always have a no-assholes rule. Life is too short to deal with people you don’t share values with
Be the person your children would be proud of
Don’t make any serious financial commitments for at least six months after the close
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