What Founders Need to Know Before Selling

Their Startup
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 11 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.

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.

Handling post-acquisition integrations: When I worked at Cisco in the early 2000s, we

completed 23 acquisitions in one year. 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.

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:

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.

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.

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.

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.

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.