This story was originally published as GuestPost on AdEspresso, Feb 21st 2017.
Yes, we joined forces with Hootsuite: you can find our announcement here. Exciting times!
We also wanted to give some visibility to the actual mechanics. M&As (Mergers and Acquisitions) are so rare and there’s always a high confidentiality/pressure involved. So much so that they are by far *the* most obscure processes of the startup industry.
Still, as our CTO wisely said: “startups either are acquired, or they go IPO, or they die”. That’s really it. (an IPO — initial public offering — is the first time that the stock of a private company is offered to the public)
A few minutes after having signed on the dotted line, there was only one thing in my mind. Four words. “Ok, that was terrifying”.
And I don’t mean it in a nice catchy and hyperbolic way. I mean “terrifying” in the most literal way possible. What follows is the insider’s story of how it all went down.
The mechanics — Initial Partnership
The first contact with Hootsuite happened last year during SaaStr Annual (I’m sure Jason Lemkin will love this BTW). The proposal came from their Senior Corp Dev and was pretty straightforward: “We’re looking to partner or potentially buy… are you guys interested?”
This is a first useful piece of data for you:
Pro tip #1: Usually this type of conversation, when real, comes form Corp Dev Depts, not Biz Dev Depts.
Our answer: “of course. We know and love you guys, we clearly see the potential, and we’re definitely interested in exploring if there are the conditions to make an M&A happen, but 100% down to partner up regardless.”
Which is a second useful piece of information for you as an entrepreneur:
Pro tip #2: Partnering up is an awesome way to start knowing each other and working together, on both sides.
And yes, partnerships between smaller and bigger companies turn in full-blown M&As more often than you’d think. We quickly explored terms of a potential M&A to discover that there weren’t the conditions to make it happen just yet, so we started working on the partnership.
This could take an entirely different post on its own, so let’s just fast forward to July 2016 when we closed the Partnership Agreement, after which we started working on a first integration, which we launched publicly on October 25, 2016.
This is the illustration we created to share the news of the partnership with Hootsuite!
Here’s the third useful piece of information for you:
Pro tip #3: These are looooong conversations, as a founder the more you can avoid feeling the time pressure, the better.
The interesting thing is that the Corp Dev Dept comes back saying: “the partnership is great, but we’d really love to see if there is a way to make things work on the M&A side as well. Would you guys be interested in considering resuming that?”.
Result: we ended up with an actual LOI in our hands.
The Mechanics — LOI back and forth
LOI stands for “Letter of Intent”, it’s not binding in any way but it’s meant to draft the business terms (not the legal ones) that will be the cornerstones of the M&A. It also has a very short expiration date, and you’re expected to turn it over within a few days. Kinda like playing ping pong 🙂
Pro tip #4: The true turning point on when an M&A conversation becomes real is when you have an LOI.
In our case, we exchanged 5 of them, one per week. And the general idea there is that they propose you what would work for them, you propose them what would work for you, and then you negotiate terms until you meet somewhere in the middle.
I won’t go into the details as to what ours contained, but a Letter Of Intent includes things like how much cash versus stock proceeds, how much retention versus earn-out (if any), who’s considered a key employee and who’s not, how long is the exclusivity period, and how do the major indemnities work.
We exchanged a few Letters Of Intent for around five weeks
If you’re thinking: “well, that sounds like an exhausting process”, yeah it definitely is. But… it’s nowhere as exhausting as the part that follows.
Before moving forward, there is another useful piece of information for you, which everybody will advise you to explore to some degree:
Pro tip #5: It’s your fiduciary responsibility to verify whether there may be better offers in the market for you.
The vast majority of the companies do this by engaging with an M&A advisor, whose job is basically to “shop” the LOI to see if they can get a better one. They’re expensive, though. It’s not uncommon for them to charge $500k as a baseline -if the M&A goes through because of their involvement.
We tested the waters with a few of them but ended up not hiring anyone. We had other offers on the table already, plus we felt we had a good understanding of the market. But more importantly, we had no pressure to sell and the Hootsuite’s conversation was really the most exciting one to us.
BTW receiving the first LOI is also where you should start to actively engage your Board (if you have one) in the conversation… to understand what they’re looking for and what’s important for them. Having that internal conversation is as important as having the external LOI discussion.
Pro tip #6: Keep building optionality… as a founder that’s your number one job, never ever lose sight of that.
This as well could be a post on its own, but maximizing optionality is really the single most important thing founders can do. Some examples of things that reduce optionality? Not being profitable, raising a big round of funding, not growing fast enough. Your optionality really is your main leverage.
Maximizing optionality brought us to this point.
Except that: your optionality goes away when you decide to sign-off the LOI, because of the exclusivity clause that binds you to only talk to them and no one else. At that point, things start to be really serious because you’re essentially saying: it’s them or no one at all. That’s a *huge* decision.
The Mechanics — Due Diligence kickoff
It’s also useful to mention another not-so-well-known data point, here. Up to now, your engagement with your corporate lawyers has been a little bit higher than usual, but still nothing crazy. From the moment in which you sign the LOI and go to the Due Diligence, legal fees start to pile up.
Pro tip #7: It’s not uncommon for an M&A process to cost you $200–350k in legal fees when it’s all said and done.
Many founders experience the Due Diligence process when doing a priced round, either at the Seed or at the Series A stage. Well, forget about that: the Due Diligence of an M&A is 10X more thorough. Literally, no stone will be left unturned, no dollar processed will be left unchecked.
Which is also another good point worth mentioning: generally speaking, consider yourself accountable not only to your customers, team, investors and Board (and -of course- the law), but also in front of any potential future acquirer. Because, as a matter of fact, you are.
Pro tip #8: Is how you’re spending money going to be easy to explain? If it’s not, you should ask yourself why.
In our case, the Due Diligence went through the first half of the exclusivity period of the LOI (it’s fairly common for it to be 2 months) which we extended for a couple weeks more after its expiration date by another few weeks.
Many things change as you go through that:
- In the LOI phase, you want to completely insulate your team: you don’t know whether things will move forward or not, and an M&A is a *huge* distraction for anyone. As you go through the Due Diligence, talking to your team will be one of the key steps… so you’ll need to explain what’s happening. How you frame that conversation with your team is one of the most critical things you’ll need to do.
- Your travel schedule and your overall routine will be ripped apart. We flew to their Vancouver and London headquarters, they flew to our Milan and San Francisco headquarters. Your whole job becomes coordinating with people, on your side *and* on the other side, not to mention various consultants. It would not be an exaggeration to say that 50-ish people were directly involved in making this deal happen. (!)
- While the LOI discussion is meant to agree on the business terms, the Due Diligence is meant to make sure that there are no surprises on the legal sides. And while you’re sharing tons of things with them (our DD spreadsheet tracker had 250 rows, each one with a document to provide) you should also do your own (reverse) Due Diligence, to understand as much as possible about the company you’re thinking of joining.
- Every new piece of data you share with them, and they share with you, essentially brings both sides one step closer to making the M&A actually happen. And the more you think about it, the more you’ll start to include that scenario in your planning and in your management conversations. The delicate balance here is to be able to entertain that thought without going completely off-track of the day-to-day operations of the company.
The Mechanics — Paperwork Craziness
The second half of the exclusivity period of the LOI is mostly dedicated to the actual paperwork. While Due Diligence is mostly about organizing existing documents and sharing them with the counterpart, this phase is about creating the actual documents that will materialize the M&A. And yes, in case you were wondering, there’s a sh#t-ton of them.
The second half of the exclusivity period of the LOI is an overload of paperwork
Below you can find the *actual* list we used to be 10,000% sure we had everything we needed to move forward to the last phase of the M&A (signing and closing, which are surprisingly two separate things):
- Merger Agreement
- Disclosure Schedules
- Form of Joinder
- Founder Employment Agreements
- Retention Agreement
- Certificate of Merger
- Founder Side Letter
- Non-Competition/Non-Solicitation Agreement
- Italian Employment Side Letter
- Italian Employment Settlement
- Form of Release
- Information Statement
- Letter of Transmittal
- Obtain signed Merger Agreement Joinders from all Founders
- Same as above for more than 50% of the Preferred Shareholders
A couple things worth noting here:
a) the closer you get to the signing and closing, the more the focus on the M&A process becomes all-encompassing and all-consuming, so to speak. You’ll struggle to find any meaningful time to do anything else, really.
b) the scary thing is that you try and read the paperwork produced, keeping up with the edits and revisions and the remaining items from the Due Diligence, but the reality is that you’ll barely be able to do so and you’ll rely heavily on your legal team to advise you on the material items.
c) at the same time you’ll need to balance that with the need to keep up the communication channel with the other side. On more than one occasion, the M&A risked blowing up because both sides talked to their lawyers too much, leaving lawyers to argue too much between the both of them.
Pro tip #9: the amount of trust that goes in a successful M&A process is the highest I have ever seen. Full stop.
That’s because everyone has tons of questions, and everybody is kinda wary and kinda concerned about not being screwed over: the founders, the team, the investors, the acquirer… and it’s a totally legit position because at the end of the day everyone has a responsibility toward someone else. So, the more you will have built that trust and comfort, the easier this phase will be. Things can get pretty nasty pretty fast, if that’s not the case. But regardless, communicating what’s happening will be a *huge* part of how you will be spending your time at this point.
On this note, it’s always better to engage in person… like 100X better. When we were together (in Vancouver, London, Milan, San Francisco) things always sped up dramatically. When we were engaging via phone/email, that’s where the vast majorities of the disconnects happened.
The Hootsuite Team flies in to get to know the vast majority of the AdEspresso Team, and it’s pizza and cake time!
And, make no mistake, disconnects *will* happen. They’ll either kill the M&A or not, it depends on your ability to communicate, and your willingness to work through issues together. In case you’re wondering, yeah: our M&A was dead in the water too, at least twice.
Finally, this is also where you’ll start talking about “future state”. Key employees roles and compensations, organizational chart, joint goals, among other things. Essentially how the two organizations will work together one month, one quarter and one year after the closing.
The Mechanics — Signing and Closing
The first surprise here was that signing and closing actually are two entirely separate milestones. Signing is a condition to closing, but there are lots of other conditions that need to be met for the closing to be finalized. And it may actually happen that signing materializes but closing does not.
The other surprise on this is how strict and carefully planned the timeline is. There are several deadlines every day, detailed down to the hour, that need to happen for things to move forward, toward which everyone needs to come together and give maximum effort. The closest comparison to this in my mind is a Formula One pit stop.
Italian Formula One Grand Prix 2012, the Ferrari of Felipe Massa at Pit stops (photo by Francesco Crippa)
Signing is particularly tricky, because you need to reach a certain threshold in terms of preferred and common shareholders approval (kinda like an election): 50% of the preferred and 90% overall in our case. And generally speaking, every investor is *very* busy.
To simplify things (not) usually you’re barely keeping up with the timeline, so you send out the Information Statement to investors with just a few days left for them to read through a simplified version of the paperwork prepared from your lawyers and sign off on the deal. Again, communication is key.
The special t-shirt that was given to those who participated in making the M&A happen.
Another critical piece of the closing, among others, is the Closing Statement, which aggregates two essential set of information:
- a) how are the proceeds going to be distributed among shareholders
- b) the final balance sheet at the moment of closing, representing assets and liabilities of the company.
When all the closing conditions are met, both sides need to fulfill their side of the deal at the same time, so signatures are collected ahead of that, but also the wire with the cash consideration and the issuance of the shares are made in advance. That’s where the “Escrow Agents” come into play.
They are third parties that keep on hold signatures, cash and stocks until all the parties sign-off on the green-light to execute the closing. In our case, we jumped on a call all together on the last day of closing and a few minutes later, AdEspresso had officially joined forces with Hootsuite.
One more thing: we want to celebrate this important news together! In that spirit, we’re launchingPixel Caffeine, a new a 100% free WordPress plugin to manage all your Facebook Pixel needs in one place. Discover more here!