"We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us."
Pretty sure that's why the person is posting, just a wild guess.
Hmm. Trust your gut feeling. Based on what you've written here, it doesn't seem like you or your partner are truly interested in doing this. It's a nice feather in your cap (the offer) but I would certainly avoid selling out until the cards are in your favor. Don't let yourself believe that because they're a large tech company they can put an offer down and you have to accept it.
Don't take it just because it came along, take it because you want it. You wouldn't date a girl (or guy) you weren't interested in just because it fell in your lap would you? Well... of course you might, but think about it. Also, I wouldn't get too anxious about the timeframe here. They've been courting you for 1.5 months, I can't see their offer and all that you guys have worked towards suddenly vanishing. They might have 8 figures they're willing to send your way, which gives an impression that they have the upper hand, but they're buying YOUR product, you have just as much leverage if not more. Take the time to think it through, write down the pro's and con's and compare the lists.
It sounds to me like you've sort of convinced yourself it is a bad idea, and you're putting that on the shelf at the sake of naiveté to find help from more experienced people. That's definitely a good thing, but I think that in the end this is really going to come down to how it will make the two of you feel. You'll fucking hate your guts if you walk away from selling your profitable 5 year old company if you're not completely happy with this.
You have 1 offer. You're quite likely to get a much better offer (by either the current oferee (?) or another one), with just a few weeks of work.
Shop around, for real.
"Has (without saying so) implied that they make an offer and that is it" -> standard negotiation practice.
Shop around, even if "selling" isn't your strong point.
Practically, tell them you need some time to think this through. Then, when you have another offer (either better or worse), tell them very briefly: "We've had another offer. We don't want to turn this into a bidding war. We need some more time to think about our next steps." (Of course you want to turn this into a bidding war.)
I once got an offer for a startup out of the blue, just after I decided I was tired of it (karma!). I was going to take it. My girlfriend told me to ask for 50% more, and they gave it to me with only a little pushback. I could have likely gotten double.
3x revenue in STOCK sounds like a BAD deal. 3x revenue basically means: if they pretty much abandon the whole thing and let it run out a few years, they'll still make money. If they offer you just 3x revenue, it should be cash.
Ask for 6 time revenue in cash, as your counteroffer.
If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
Just to address this, we will not receive another offer. Period. It's annoying that I can't fully explain that without blowing our cover, but you'll just have to take my word on it :)
OK, fair enough. That diminishes your bargaining position.
So the options are:
1. Take the deal as is.
2. Negotiate the deal.
3. Keep working for 3 more years (3x revenue), and make the same money - salaries you would have made at BigCo, but PLUS you still have the company and money coming in for years after.
My calculation would be around 3: how exciting is that. Also, you have plenty to negotiate around. 3x revenue can be upped. Your employment conditions can be negotiated (ie. I get to spend 2 days a week on open source software, paid). Vesting can be negotiated (4 years is a really long time).
Or calculate it like this: current annual revenue = X. If you stay alone, assuming revenue will grow a little, work for 4 years and you get (5X + the total value of the company at that point, which is likely 4X-ish) = 9X. Work for 4 years in BigCo and you get 3X + salaries. (Adjust formula to take into account multiple founders etc). If your combined salaries would be about the same as your net revenue is now, it's a rather equal deal (except for the freedom). So it depends on how your salaries compare with your income now. A lot also depends on how you estimate the longevity and growth potential of your company. If it's gonna grow and keep going for 5 years, they're cutting you a bad deal. Also consider how much you could be making at some other company, in todays job market.
It's weird that you're sure you won't get another offer.
It also kind of sounds like a talent acquisition. Do they want you, or the company? Has that been discussed?
> 3. Keep working for 3 more years (3x revenue), and make the same money -
That's three times revenue in three years, but not the same as a stock deal which vests in four years in stock that may be worth 0, also, revenues are not profits.
It would require far more insight in to the actual figures involved to say whether this is a good deal at all (or a bad one).
The offer is crap but the process may not be and some elements of the offer indicate the other party is serious, welcome to hardball. Throwing the offer 'in the garbage' will end the negotiations, the trick is to gain control of the dialogue and to push back as hard as you can without breaking off the deal to see what room there is.
While you're very likely right, if the most important thing out of this entire discussion that the OP needs to get is you cannot accept the offer as is. They seem to actually believe the offerer that they aren't going to make another. Well then, at this point then, they just really need to go 'well that's crap' and toss it in if they're unwilling to counter.
They have to get to the point of accepting that accepting it is the absolutely worse thing they could do. Ending negotiations is far far far superior to actually accepting that offer.
Once they accept that, then they can counter, confident they're not losing anything. Even if this truly is the last offer, that's a better result than acceptance.
Don't be afraid to counter, make it what YOU want, plus a bit.
You should have some amount of guaranteed cash at closing, plus earn-out, plus stock, plus a clause for at least some kind of acceleration if your employment is terminated for any reason.
You need an experienced hand to help you with this. Don't do these negotiations yourself. You aren't objective. Think of it from this perspective, this is probably your biggest asset and if executed on properly an acquisition will provide for you and your family for the rest of your life. So bring in an expert. When selling a house, you use a realtor, when selling a company use a banker. My personal friend on banker is Mike Lyon with Vistapoint Advisors. But find a referral out of your own network so you are comfortable or call Mike.
Yes but what is your growth rate of you / your sector. If revenues are set to double next year, the multiple will be higher.
> the offer is low by about 20%
Don't accept the offer. "We don't go back and forth on it" is equivalent to "We think you are naive and will accept the first offer on the table." Also you are right not to value stock as highly as cash. If the offer is stock, heavily discount it, or refuse the stock and accept cash only.
If you are highly profitable, why sell at all? Use the $ to to allow you to focus on other things you want to do and keep that golden egg laying duck in house.
Unless you are truly prepared to walk away from the offer, you won't receive what you are actually worth. It's scary as hell to do it. But if you turn it down, work hard for another year they make come back with a 5x offer.
Are you strategically valuable to them?
Also, if you've worked for 5 years on it and have an actual business, you should receive at least some up front.
In the worst case, they could fire us on day #2 and we'd have only the token money we got up front to show for it.
To me, this would be enough to immediately reject the offer. I don't believe in doing deals which make my worst case worse unless I will be in a position where I can prevent the worst case from happening -- and it doesn't sound like you'd have any way to avoid getting screwed here.
they've expressed to us that involving bankers would 'change the tone' of the discussion, whatever that means
Any time someone tries to convince you to not consult your advisors, run away immediately. If they think they're offering you a good deal, they should be encouraging you to talk to everybody.
> To me, this would be enough to immediately reject the offer.
To me that would be reason enough to make sure I negotiated the deal in such a way that if the company fires us that our stock will vest instantly.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
No, get advisors anyway.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
What's good for one party may be great for the other!
There is this joke about the rights to an invention being sold for a relatively low amount, where the buyer confides after the deal to the seller 'we'd have bought it for ten times as much', whereupon the seller answers 'I'd have sold it for ten time less'.
To me that would be reason enough to make sure I negotiated the deal...
Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
> Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
Ok, in that case I would word it as 'we're taking it under consideration' to buy some time to regroup. And then respond after thinking things over with a counter-offer, not with a rejection.
> As a general rule I don't think it's good to make deals with people you don't trust.
As a general rule, I'd agree. But M&A is hardball and typically an acquisition of a 'goldfish' is not going to be done by explain patiently how they're actually worth 4 times as much and by educating them. It may come in very handy that they have not managed to attract advisors savvy enough to guide them through this.
I'm actually a bit confused about how a company could get as far as 7 figure turnover and an 8 figure buy-out offer while still being this green business-wise.
Typically by the time you get that far you've got an excellent relationship with your corporate lawyer and a tax advisor.
Well the reason we got this far is because we spent the last decade of our lives working extremely hard to make products that people in our industry want. That is all we did. No networking, no events, etc. If we needed money we either figured out a way to make do or we took pay cuts. An exit never occurred to us because we were too busy doing what we do.
We're definitely green as far as this stuff goes but that's because we've existed in our niche bubble for the last 5-10 years and never really had much reason to go speak to anyone besides our general counsel and CPA. None of us have any business training beyond what we've picked up along the way.
Wow. Ok, you'll need to 'grow up' in a hurry then, I'd hate to be in your shoes. Typically by the time you get to this state you've been through the grinder often enough to have a useful repertoire of armor and arms to deal with a situation like this.
> It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
That's an, er, interesting rule. A big part of modern financial and legal infra-structure is designed so that we can make business with people we don't trust. If you do business only with you people you can trust then you might as well live like a hermit.
If by modern financial and legal infra-structure you mean things like stocks, futures, and derivatives, then I don't think I agree. The modern infrastructure insulates two parties in any transaction with brokers and exchanges.
For example, if the "losing" party on an options trade can't pay up, the exchange pays for them. The exchanges and brokers set margin requirements to reduce the risk of non-payers.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
In most cases, you're absolutely right. With investment bankers, completely different.
Investment bankers will turn this into a process, try to pick up multiple bidders, and add to the complexity of trying to get the deal done. In general, bankers (not lawyers!) can be harmful to a deal.
They could be telling him that they're in for a simple deal, but if it gets complicated, that's not worth it to them.
The idea of vesting is to prove that founders can build value before getting rewarded with their stock. When founders start, they usually need to build in some form of vesting to prevent one of them from just walking away with a windfall while the others continue to work hard to build value in the venture. Even then, however, if founders have already build some value before the formal structure is put in place, they will take their restricted stock grants with some portions immediately vested (usually 20% or so, maybe up to 33%). At Series A, the investors might insist that founders restructure their stock positions so that they have to vest at least a significant part over some period. This can vary but usually means that the founders get cut back so that only, say, one-third of their stock is vested, with the balance subject to vesting over a few years. This ensures that the investors will not get screwed and that the founders will earn out their positions as they use the investors' money to continue to build value. Finally, at the M&A stage, the purchase price is sometimes divided between a cash/stock portion that is given outright to the stockholders and another portion (usually an option grant) that needs to be earned out. The basic idea behind such a division is that x amount rewards them for the value they have built and the balance will reward them for continuing to add value in the future. Usually, the x part is by far the largest part of the consideration, with the balance (the part that needs to be earned going forward) amounting to, say, 10 or 20% of the total purchase price.
The consistent theme in all such cases is to make sure that those who have built value get non-forfeitable equity as a reward while those who need to prove themselves going forward get equity that can be forfeited.
If you have built true value, then, of $10M and you take your payment in stock that is 100% forfeitable, you set it up where you can be cheated out of all the value you have built with little or no legal recourse.
This is a HUGE red flag. I have seen founders do such deals and have begged and implored them, at the very least, to insist on 100% acceleration clauses in their employment arrangements should they be terminated without good cause. In the one case where the founders went through anyway without such protection, the company (a prominent public company) wound up terminating one of the main founders within months and all he got was a few crumbs for years worth of effort.
Check with a good M&A lawyer on this and then use your best judgment. It is ultimately your call, whatever the legal risks. But do it with open eyes and that means getting good help in assessing what those risks are.
I only have limited experience with things like this, but my advice would be to not let them pressure you into anything.
As a rule of thumb though, you probably won't be able negotiate a good deal unless you're willing to walk away from it. They will have way more leverage over you if they know you are desperate to sell.
When negotiating, I find it very helpful to switch positions and think about it from the opposing perspective. What are their motivations for acquiring your company? What is it worth to them? How much do they want your company? Could they easily acquire someone else or duplicate the same functionality. Knowing the answers to these questions and gathering as much relevant information from them can help you gain more bargaining power. Ideally, you want to sell your company at what it is worth to them, and not you, because there could be a gap in your favor.
Step 1: Be sure you and your fellow founders are on the same page. United we stand, divided we... Key areas for agreement are (a) decision to sell, and (b) minimum price you'd accept. Nothing will expose cracks in your team's facade like M&A discussions.
Step 2: Tell the buyer the price they've offered is too low, and offer to explain why. The first offer is just the beginning of the negotiation process. A buyer who is not willing to discuss an offer is not the sort of partner you want to work with. At it's best the negotiation process is a mutual education process, with you explaining your value and them explaining why your value isn't what you thought it was. At the end you'll either agree to disagree or you'll agree. If you agree, you'll do so for the right reasons (i.e., you are both roughly on the same page). While outside advisors can help here, the real work must be done by you, as no one will understand your business and its prospects better than you.
Step 3: Ensure that the deal you've struck is a real deal. If the deal pushes a lot of the pay into the back-end, it is not a real deal. It is an option. Earn-outs and other back-end payment structures can help bridge a disagreement in valuation, so they have their use, but a seller who isn't desperate to sell should ensure that he is happy with the deal even if none of the back-end targets are satisfied. Otherwise he's traded his business for a dodgy option. Rarely a good trade. Here again advisors can be helpful, particularly for tax issues, but usually a good deal is clear enough that you can understand it without the help of advisors.
A good lawyer is essential. A banker less so.
Fred Wilson's blog has had some good posts on M&A recently.
Always assume the counter party will try to stick you with the worst case scenario and ensure your agreements and contracts guard you against that.
HIRE A LAWYER and incentivize them correctly. If they 'work against' you, they work against themselves, and they will be investigated and disbarred.
It's not about the people you're dealing with - the entire upper management of the acquiring company can change within months, and boot you with 3 years of equity that isn't vested, or dilute you to worthlessness, or any number of things that will short change you.
> we've received a low 8 figure verbal offer over the phone today.
Try to get something on paper.
> they could fire us on day #2 and we'd have only the token money we got up front to show for it.
That's something you should take care of contractually.
> the offer is low by about 20% from what would make us "happy" to sell for.
20% is not a whole lot to be off for an opening offer, but keep in mind that if you go for broke you might end with nothing.
> We're very excited (indescribably so) at the prospect, we love the company and really want to make a deal and start working on the million ideas we have for the future - but at the same time we are afraid of cutting a deal now that we'll be second guessing ourself on for 4 years.
How long before the next offer comes along?
Will it be a better one?
Will this offer stand?
Are you the next twitter or are you operating in a space with competition? This matters a lot in your risk assessment.
> The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it.
I would say that :) That doesn't mean it's true. But it does mean that they want to pressure you a bit and apparently that is working.
Keep your head cool.
Don't sign anything on the spot ever, always think it over, always have it reviewed. Be as cool as you can be and don't allow yourself to be pressured.
> We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us. They basically have all told us it's ridiculous we've come this far without getting an LOI already, and the purchaser has basically said they don't issue LOIs until the terms are agreed on in principle.
That makes good sense but even a letter of intent is essentially meaningless. Even a term sheet is meaningless. The only document that really matter is the final contract, and only then when it has been signed.
> So anyhow, what next?
Get a really good lawyer! An experienced one and one that will not blink on doing a deal like this (as in, that has done multiple deals like this and comes with very solid references). Deals like this happen only a few times in a lifetime, don't be cheap, that might come back to bite you big time.
> They are waiting on our go-ahead to put together an LOI.
Get a lawyer.
> Counter immediately?
Get a lawyer.
> Is it stupid to be afraid of "ruining" a deal?
No, not at all, that actually happens. Don't ruin it!
> Should we involve our attorney?
YES!
If you end up with a deal on the table after negotiations are finished and you don't like it walk away.
Treat it as a learning experience up to that point and only sign if you are 100% sure that it's a good deal for you and your buddies.
A lawyer you can typically hire on an hourly basis, and on reasonably short notice, an investment banker will likely want to become a part of the deal. A (good) lawyer will likely also have a considerable network of contacts one of which might be suitable as a lead negotiator.
> Get an investment banker who has M&A experience
That's a possibility but a far more complicated one and it will take quite a bit of time to find a decent one. But it would be a good choice if they have a good rep and can be easily found, my personal experience with investment bankers is an extremely mixed bag.
> alternately management consultant who can argue with the acquirer about the valuation.
That would be useful anyway, but there will be time enough for that, after all if a deal this size goes through there will be up to a month of hammering out the details of the deal as well as due diligence.
If they're 'in the ballpark' then you could simply respond with a counter off offer a bit higher than what is acceptable to you to build in some room.
Then use your own cut off value to guide a walk-away decision.
I've done a deal like this. You need a team. First you need a consultant who specialises in this sort of transaction. Interview a bunch of them and be willing to pay a few percent of the proceeds as a success fee.
You will also need a lawyer, a specialist tax accountant, personal accountant, etc.
Right now you are at the non-binding offer stage. This is when you shape the deal and negotiate the overall price. Your aim is to not only maximise the sale price but also manage risk by maximising up front cash and minimising proceeds which are dependent on future performance (earn-out). Others have commented on this stage. My advice is to create a formal process - step back and spend a couple of months creating an 'information memorandum' and get it to a bunch of prospective buyers. The only way to get the best deal is to get multiple offers.
Now here is the most important thing I have to say. Negotiating the deal is the easy bit. I repeat - the easy bit. You have to do due diligence and negotiate the long-form contracts. If you get this wrong, the deal rapidly become much less attractive. This is where both your sale consultant and lawyer are critical, but you'll have plenty of work to do too!
Start thinking about due diligence right now. Will your business stand microscopic scrutiny? Do you meet all accounting standards, relevant business regulations, etc. The better the deal you negotiate, the harder you'll be pressed in due diligence. And remember you need to be 100% truthful because the contracts will contain clauses that you won't want invoked if you provide any incorrect information.
The only really important advice you should take from an online forum is to hire great consultants now. Only deal with genuine experts who have real experience with similar transactions. Be prepared to pay high fees, the right people will be worth it!
Sounds like a horrible deal. If you want some cash out, talk to VCs and negotiate taking some investment for growth and some for the founders to take home.
IANAL, and you should get one (see #1) ASAP. But a few observations:
1. Get a startup attorney (you probably already have one, who incorporated you, if you don't - use one of the bigger names (wilson sonsoni, gunderson, cooley))
2. Figure out what your perfect offer would be, and counter
3. Rule #1 of any negotiation is to be willing to walk the fuck away if you're not happy. As soon as you become a little desperate, you've lost leverage.
4. I'm not quite sure how double trigger acceleration works but if you're getting options that vest, you could potentially figure out a way to get all (or some) of your options accelerate if you do get terminated. Usually this applies only on change of control, but I'm sure your attorneys could cook up something.
5. Why do you need to get acquired to work on the million ideas for the future? Have you thought about raising capital to do that (you know, the choice that Foursquare took when it turned down acquisition offers) - raising capital when there's already acquisition interest should be easier if that's the route you want to take and you can take money off the table if you need the cash and still build a potentially massive company. Talk to VCs anyway. This goes back to what you think the size of your opportunity is and how tired you are of going after it.
6. If you do "verbally" accept the offer, make sure you and your attorneys go over the LoI and terms with a fine tooth and comb, you could still get screwed. There's a million ways that could happen and that's where good attorneys will help.
#5 is a point here I haven't seen mentioned in the rest of the thread, so take notice! This might be very good advice, depending on your situation: this offer could provide excellent leverage to raise capital at a good valuation right now. Also, I don't think it would risk poisioning the well if you were to talk to VCs the way it might if you were shopping for other buyers.
re point 2 - don't make a counter offer, get an offer from another bidder. That is the only way to push your price to the actual market value rather than just find the lowest offer you will accept.
Never rush into any decision because the buyer told you that they are not going to negotiate ... they all put on a poker face playing the game. Your business is highly profitable while on paper their offer isn't really that exciting. I think there is plenty room for negotiation.
All other advice aside, any vesting stock should accelerate upon termination. ie. You only lose stock if you walk away. They fire you, you vest 100%. Anything less is an invitation to be robbed.
Get a lawyer. Go check out the list of suggested good start-up lawyers on http://venturehacks.com
You do NOT want to sell without a negotiated contract for your (all of you) ongoing employment. You need a lawyer for that, DON'T do it yourself.
Some of what the other side is telling you is clearly manipulative (no surprise). If they want to buy you, insist that they do it properly. You owe it to yourselves, and the other side will respect you for it - guaranteed.
I can't recommend him personally but I'm always stunned by grellas' comments on HN regarding legal stuff (he's a Sillicon Valley business lawyer)[1]. Maybe you could get in touch...
Lawyers/bankers/third-parties people can and do very frequently kill deals. Do not hand the discussions off to them. Yes, in some cases a third party negotiator can help a lot. In this case though it's probably too likely they'd piss off the buyer and make them walk.
Just tell the buyer you want a deal that you won't regret, and what that means. It's really that simple. Once you get to the point where you're happy stop pushing for more unless you're truly okay with the buyer walking away.
I don't have any experience involving bankers in a M&A deal but it's important that you monitor the work your lawyer(s) are doing pretty closely. Even good lawyers will have a tendency to want to refine the contract past the point of diminishing returns or go off and do random tasks in order to pad their hourly fees.
You can potentially get them to agree to a fee cap for the deal, but unless there's other reasons for them to want to do a thorough job (like future business with your acquirer, etc.) it'll probably do more harm than good.
All that said, you'd be absolutely mad to not have good lawyers on a deal like this. All it takes is one booby trap in your contract for all your hard work to get flushed down the toilet.
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[ 4.8 ms ] story [ 207 ms ] threadPretty sure that's why the person is posting, just a wild guess.
Don't take it just because it came along, take it because you want it. You wouldn't date a girl (or guy) you weren't interested in just because it fell in your lap would you? Well... of course you might, but think about it. Also, I wouldn't get too anxious about the timeframe here. They've been courting you for 1.5 months, I can't see their offer and all that you guys have worked towards suddenly vanishing. They might have 8 figures they're willing to send your way, which gives an impression that they have the upper hand, but they're buying YOUR product, you have just as much leverage if not more. Take the time to think it through, write down the pro's and con's and compare the lists.
It sounds to me like you've sort of convinced yourself it is a bad idea, and you're putting that on the shelf at the sake of naiveté to find help from more experienced people. That's definitely a good thing, but I think that in the end this is really going to come down to how it will make the two of you feel. You'll fucking hate your guts if you walk away from selling your profitable 5 year old company if you're not completely happy with this.
-Always counter-offer. People actually expect that you do so and that's probably why they put the offer low initially.
-Get a lawyer and a tax-specialist to make sure you are doing everything right and keeping as much as you can.
Also, since you guys are profitable and doing well, don't get too desperate to sell...
You have 1 offer. You're quite likely to get a much better offer (by either the current oferee (?) or another one), with just a few weeks of work.
Shop around, for real.
"Has (without saying so) implied that they make an offer and that is it" -> standard negotiation practice.
Shop around, even if "selling" isn't your strong point.
Practically, tell them you need some time to think this through. Then, when you have another offer (either better or worse), tell them very briefly: "We've had another offer. We don't want to turn this into a bidding war. We need some more time to think about our next steps." (Of course you want to turn this into a bidding war.)
I once got an offer for a startup out of the blue, just after I decided I was tired of it (karma!). I was going to take it. My girlfriend told me to ask for 50% more, and they gave it to me with only a little pushback. I could have likely gotten double.
3x revenue in STOCK sounds like a BAD deal. 3x revenue basically means: if they pretty much abandon the whole thing and let it run out a few years, they'll still make money. If they offer you just 3x revenue, it should be cash.
Ask for 6 time revenue in cash, as your counteroffer.
If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
>> If you're really doing well and in a growing market, I'll offer you 3x revenue in cash myself, that'd be a steal.
You just did.
So the options are: 1. Take the deal as is. 2. Negotiate the deal. 3. Keep working for 3 more years (3x revenue), and make the same money - salaries you would have made at BigCo, but PLUS you still have the company and money coming in for years after.
My calculation would be around 3: how exciting is that. Also, you have plenty to negotiate around. 3x revenue can be upped. Your employment conditions can be negotiated (ie. I get to spend 2 days a week on open source software, paid). Vesting can be negotiated (4 years is a really long time).
Or calculate it like this: current annual revenue = X. If you stay alone, assuming revenue will grow a little, work for 4 years and you get (5X + the total value of the company at that point, which is likely 4X-ish) = 9X. Work for 4 years in BigCo and you get 3X + salaries. (Adjust formula to take into account multiple founders etc). If your combined salaries would be about the same as your net revenue is now, it's a rather equal deal (except for the freedom). So it depends on how your salaries compare with your income now. A lot also depends on how you estimate the longevity and growth potential of your company. If it's gonna grow and keep going for 5 years, they're cutting you a bad deal. Also consider how much you could be making at some other company, in todays job market.
It's weird that you're sure you won't get another offer.
It also kind of sounds like a talent acquisition. Do they want you, or the company? Has that been discussed?
That's three times revenue in three years, but not the same as a stock deal which vests in four years in stock that may be worth 0, also, revenues are not profits.
It would require far more insight in to the actual figures involved to say whether this is a good deal at all (or a bad one).
They have to get to the point of accepting that accepting it is the absolutely worse thing they could do. Ending negotiations is far far far superior to actually accepting that offer.
Once they accept that, then they can counter, confident they're not losing anything. Even if this truly is the last offer, that's a better result than acceptance.
You should have some amount of guaranteed cash at closing, plus earn-out, plus stock, plus a clause for at least some kind of acceleration if your employment is terminated for any reason.
Yes but what is your growth rate of you / your sector. If revenues are set to double next year, the multiple will be higher.
> the offer is low by about 20%
Don't accept the offer. "We don't go back and forth on it" is equivalent to "We think you are naive and will accept the first offer on the table." Also you are right not to value stock as highly as cash. If the offer is stock, heavily discount it, or refuse the stock and accept cash only.
Are you strategically valuable to them?
Also, if you've worked for 5 years on it and have an actual business, you should receive at least some up front.
To me, this would be enough to immediately reject the offer. I don't believe in doing deals which make my worst case worse unless I will be in a position where I can prevent the worst case from happening -- and it doesn't sound like you'd have any way to avoid getting screwed here.
they've expressed to us that involving bankers would 'change the tone' of the discussion, whatever that means
Any time someone tries to convince you to not consult your advisors, run away immediately. If they think they're offering you a good deal, they should be encouraging you to talk to everybody.
To me that would be reason enough to make sure I negotiated the deal in such a way that if the company fires us that our stock will vest instantly.
> Any time someone tries to convince you to not consult your advisors, run away immediately.
No, get advisors anyway.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
What's good for one party may be great for the other!
There is this joke about the rights to an invention being sold for a relatively low amount, where the buyer confides after the deal to the seller 'we'd have bought it for ten times as much', whereupon the seller answers 'I'd have sold it for ten time less'.
Sure. By "reject the offer" I mean to reject that offer, not that the offer couldn't be revised to become acceptable.
If the deal is good they might be lowballing them anyway and they're scared the other party finds out by how much.
It might be a good deal, but trying to convince someone to not consult advisors indicates to me a certain lack of ethics. As a general rule I don't think it's good to make deals with people you don't trust.
Ok, in that case I would word it as 'we're taking it under consideration' to buy some time to regroup. And then respond after thinking things over with a counter-offer, not with a rejection.
> As a general rule I don't think it's good to make deals with people you don't trust.
As a general rule, I'd agree. But M&A is hardball and typically an acquisition of a 'goldfish' is not going to be done by explain patiently how they're actually worth 4 times as much and by educating them. It may come in very handy that they have not managed to attract advisors savvy enough to guide them through this.
I'm actually a bit confused about how a company could get as far as 7 figure turnover and an 8 figure buy-out offer while still being this green business-wise.
Typically by the time you get that far you've got an excellent relationship with your corporate lawyer and a tax advisor.
We're definitely green as far as this stuff goes but that's because we've existed in our niche bubble for the last 5-10 years and never really had much reason to go speak to anyone besides our general counsel and CPA. None of us have any business training beyond what we've picked up along the way.
Play it careful!
I was in a very similar situation to you recently. Is there any way we can have a chat ?
That's an, er, interesting rule. A big part of modern financial and legal infra-structure is designed so that we can make business with people we don't trust. If you do business only with you people you can trust then you might as well live like a hermit.
For example, if the "losing" party on an options trade can't pay up, the exchange pays for them. The exchanges and brokers set margin requirements to reduce the risk of non-payers.
In most cases, you're absolutely right. With investment bankers, completely different.
Investment bankers will turn this into a process, try to pick up multiple bidders, and add to the complexity of trying to get the deal done. In general, bankers (not lawyers!) can be harmful to a deal.
They could be telling him that they're in for a simple deal, but if it gets complicated, that's not worth it to them.
The consistent theme in all such cases is to make sure that those who have built value get non-forfeitable equity as a reward while those who need to prove themselves going forward get equity that can be forfeited.
If you have built true value, then, of $10M and you take your payment in stock that is 100% forfeitable, you set it up where you can be cheated out of all the value you have built with little or no legal recourse.
This is a HUGE red flag. I have seen founders do such deals and have begged and implored them, at the very least, to insist on 100% acceleration clauses in their employment arrangements should they be terminated without good cause. In the one case where the founders went through anyway without such protection, the company (a prominent public company) wound up terminating one of the main founders within months and all he got was a few crumbs for years worth of effort.
Check with a good M&A lawyer on this and then use your best judgment. It is ultimately your call, whatever the legal risks. But do it with open eyes and that means getting good help in assessing what those risks are.
As a rule of thumb though, you probably won't be able negotiate a good deal unless you're willing to walk away from it. They will have way more leverage over you if they know you are desperate to sell.
When negotiating, I find it very helpful to switch positions and think about it from the opposing perspective. What are their motivations for acquiring your company? What is it worth to them? How much do they want your company? Could they easily acquire someone else or duplicate the same functionality. Knowing the answers to these questions and gathering as much relevant information from them can help you gain more bargaining power. Ideally, you want to sell your company at what it is worth to them, and not you, because there could be a gap in your favor.
Always assume the counter party will try to stick you with the worst case scenario and ensure your agreements and contracts guard you against that.
HIRE A LAWYER and incentivize them correctly. If they 'work against' you, they work against themselves, and they will be investigated and disbarred.
It's not about the people you're dealing with - the entire upper management of the acquiring company can change within months, and boot you with 3 years of equity that isn't vested, or dilute you to worthlessness, or any number of things that will short change you.
Cash is king.
Try to get something on paper.
> they could fire us on day #2 and we'd have only the token money we got up front to show for it.
That's something you should take care of contractually.
> the offer is low by about 20% from what would make us "happy" to sell for.
20% is not a whole lot to be off for an opening offer, but keep in mind that if you go for broke you might end with nothing.
> We're very excited (indescribably so) at the prospect, we love the company and really want to make a deal and start working on the million ideas we have for the future - but at the same time we are afraid of cutting a deal now that we'll be second guessing ourself on for 4 years.
How long before the next offer comes along?
Will it be a better one?
Will this offer stand?
Are you the next twitter or are you operating in a space with competition? This matters a lot in your risk assessment.
> The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it.
I would say that :) That doesn't mean it's true. But it does mean that they want to pressure you a bit and apparently that is working.
Keep your head cool.
Don't sign anything on the spot ever, always think it over, always have it reviewed. Be as cool as you can be and don't allow yourself to be pressured.
> We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us. They basically have all told us it's ridiculous we've come this far without getting an LOI already, and the purchaser has basically said they don't issue LOIs until the terms are agreed on in principle.
That makes good sense but even a letter of intent is essentially meaningless. Even a term sheet is meaningless. The only document that really matter is the final contract, and only then when it has been signed.
> So anyhow, what next?
Get a really good lawyer! An experienced one and one that will not blink on doing a deal like this (as in, that has done multiple deals like this and comes with very solid references). Deals like this happen only a few times in a lifetime, don't be cheap, that might come back to bite you big time.
> They are waiting on our go-ahead to put together an LOI.
Get a lawyer.
> Counter immediately?
Get a lawyer.
> Is it stupid to be afraid of "ruining" a deal?
No, not at all, that actually happens. Don't ruin it!
> Should we involve our attorney?
YES!
If you end up with a deal on the table after negotiations are finished and you don't like it walk away.
Treat it as a learning experience up to that point and only sign if you are 100% sure that it's a good deal for you and your buddies.
Good luck!
Get an investment banker who has M&A experience, or alternately management consultant who can argue with the acquirer about the valuation.
> Get an investment banker who has M&A experience
That's a possibility but a far more complicated one and it will take quite a bit of time to find a decent one. But it would be a good choice if they have a good rep and can be easily found, my personal experience with investment bankers is an extremely mixed bag.
> alternately management consultant who can argue with the acquirer about the valuation.
That would be useful anyway, but there will be time enough for that, after all if a deal this size goes through there will be up to a month of hammering out the details of the deal as well as due diligence.
If they're 'in the ballpark' then you could simply respond with a counter off offer a bit higher than what is acceptable to you to build in some room.
Then use your own cut off value to guide a walk-away decision.
You will also need a lawyer, a specialist tax accountant, personal accountant, etc.
Right now you are at the non-binding offer stage. This is when you shape the deal and negotiate the overall price. Your aim is to not only maximise the sale price but also manage risk by maximising up front cash and minimising proceeds which are dependent on future performance (earn-out). Others have commented on this stage. My advice is to create a formal process - step back and spend a couple of months creating an 'information memorandum' and get it to a bunch of prospective buyers. The only way to get the best deal is to get multiple offers.
Now here is the most important thing I have to say. Negotiating the deal is the easy bit. I repeat - the easy bit. You have to do due diligence and negotiate the long-form contracts. If you get this wrong, the deal rapidly become much less attractive. This is where both your sale consultant and lawyer are critical, but you'll have plenty of work to do too!
Start thinking about due diligence right now. Will your business stand microscopic scrutiny? Do you meet all accounting standards, relevant business regulations, etc. The better the deal you negotiate, the harder you'll be pressed in due diligence. And remember you need to be 100% truthful because the contracts will contain clauses that you won't want invoked if you provide any incorrect information.
The only really important advice you should take from an online forum is to hire great consultants now. Only deal with genuine experts who have real experience with similar transactions. Be prepared to pay high fees, the right people will be worth it!
If you don't need the cash... then why bother?
1. Get a startup attorney (you probably already have one, who incorporated you, if you don't - use one of the bigger names (wilson sonsoni, gunderson, cooley))
2. Figure out what your perfect offer would be, and counter
3. Rule #1 of any negotiation is to be willing to walk the fuck away if you're not happy. As soon as you become a little desperate, you've lost leverage.
4. I'm not quite sure how double trigger acceleration works but if you're getting options that vest, you could potentially figure out a way to get all (or some) of your options accelerate if you do get terminated. Usually this applies only on change of control, but I'm sure your attorneys could cook up something.
5. Why do you need to get acquired to work on the million ideas for the future? Have you thought about raising capital to do that (you know, the choice that Foursquare took when it turned down acquisition offers) - raising capital when there's already acquisition interest should be easier if that's the route you want to take and you can take money off the table if you need the cash and still build a potentially massive company. Talk to VCs anyway. This goes back to what you think the size of your opportunity is and how tired you are of going after it.
6. If you do "verbally" accept the offer, make sure you and your attorneys go over the LoI and terms with a fine tooth and comb, you could still get screwed. There's a million ways that could happen and that's where good attorneys will help.
7. Don't panic.
8. Best of luck!
#5 is a point here I haven't seen mentioned in the rest of the thread, so take notice! This might be very good advice, depending on your situation: this offer could provide excellent leverage to raise capital at a good valuation right now. Also, I don't think it would risk poisioning the well if you were to talk to VCs the way it might if you were shopping for other buyers.
You do NOT want to sell without a negotiated contract for your (all of you) ongoing employment. You need a lawyer for that, DON'T do it yourself.
Some of what the other side is telling you is clearly manipulative (no surprise). If they want to buy you, insist that they do it properly. You owe it to yourselves, and the other side will respect you for it - guaranteed.
[1] http://news.ycombinator.com/user?id=grellas
http://news.ycombinator.com/item?id=2154332
Just tell the buyer you want a deal that you won't regret, and what that means. It's really that simple. Once you get to the point where you're happy stop pushing for more unless you're truly okay with the buyer walking away.
Agreed on the bankers, they can and do kill deals, I've seen that happen up close. Oh, and they did get paid.
You can potentially get them to agree to a fee cap for the deal, but unless there's other reasons for them to want to do a thorough job (like future business with your acquirer, etc.) it'll probably do more harm than good.
All that said, you'd be absolutely mad to not have good lawyers on a deal like this. All it takes is one booby trap in your contract for all your hard work to get flushed down the toilet.