What to Expect When You Exit Your Startup
Picture by Kev Seto
Too many startup owners simply don’t know enough about the process of exiting their company to navigate the process simply.
What’s more, many of the established players in the M&A space in Silicon Valley and Wall Street aren’t always as forthcoming with the information startup owners need to make certain decisions, as such middleman are dependent on high fees.
As an active participant in the M&A space for more than a decade, I have seen a lot of deals.
It is quite tragic for the startup owner first and foremost who is often squeezed out by the big fish and settles for less than original price due to the costly process. Also, Mergers and acquisitions deals can take years and years to finish.
The acquirer – think the Googles and Microsofts of the world – have enough funds on hand to wait out the process. Here at LEXIT, we don’t want you to be the next bitten by the snakes.
A large percentage of M&As in Silicon Valley are asset purchases. These entail intellectual property purchases, but no equity in the company.
Liabilities and customers and left to the founders, and the acquirer gets the IP. An equity purchase sees the acquirer also taking company stock and liabilities.
Then there is the popular acqui-hire. This takes place when perhaps a startup’s IP is not seen as a likely money-maker for the acquirer. Acqui-hiring arises out of the need for great engineers.
The founders receive a fair price, a decent salary, and perhaps a bit on the exit itself in exchange for their employees. This doesn’t always work out, as founders often feel like they’ve lost some of their freedom and prefer to remain entrepreneurs.
In the modern acqui-hire, the talent being bought generally has experience in the field of the purchasing entity. In the past, simply having a more general talent. – like coding React – might mean you’re. in demand.
Like so many other facets of the M&A market, acqui-hires are murky waters.
Talent deals are not an inexpensive way to get talent either. But, with such high demand for engineering talent, they are a necessity.
In a buy side acquisition, a company must be attractive to various potential acquirers in its own unique manner. A closed-bid process begins once interested on the part of a potential acquirer is established.
A value range is decided upon to discover whether or not the buyer and seller are on the same page in terms of price.
Once it is determined a deal could potentially be made, sensitive details can then be made available. Milestones are then agreed upon. Potential buyers often have about two weeks to submit a firm bid.
A startup is listed as in a “no shop” state when two bids are placed. The founders of the startup being sold cannot contact nor be contacted by anyone for 60 days.
During this period, acquirers to further their due diligence by, for instance, interviewing key employees so as to better understand a startup’s culture. During the “no shop” period, the acquirer can still decide against the acquisition.
A common phenomenon in the Mergers and Acquisition space sees formulaic/cookie cutter acquisitions restricted by specific valuations and payment terms. Such companies depend on strict parameters around size and value.
Patient and methodical preparation. That is the name of the game when it comes to someone buying your startup. An exit process requires significant amounts of leadership time, money and organizational focus towards an M&A strategy.
Acquirers come prepared. We believe startup owners should have the same luxury. Thanks to blockchain’s transparent and immutable nature, now startup owners have the opportunity to be in the know about current M&A trends and where their own startup stands in the global M&A market.
Learn about LEXIT at LEXIT.co.