The Acquisition Headline Number Tells You Almost Nothing - 10/22

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📰 Today's Edition: The Acquisition Headline Number Tells You Almost Nothing

Say you've decided to go down the acquisition path. Somebody wants to buy your company, the number they floated sounds good, and you're already doing the mental math on what your slice looks like.

Slow down. The number is the least interesting part of the deal.

How the acquisition is structured decides what you actually walk away with, how long you're stuck there, and whether your investors and employees see a cent. Two deals with identical headline prices can produce wildly different outcomes for everyone involved.

Here's what you should be thinking about.

What is actually getting acquired?

When you read on TechCrunch that a company got acquired, that's often not technically correct.

The entity itself might be shutting down while the people or the assets get bought. There are a few flavors of this and they matter enormously.

An acquirer may not want to buy your entity outright. There could be liabilities sitting in there they don't want to assume. It might not be tax-beneficial. Or it might simply be cheaper to buy the two or three things they actually want.

If a buyer just wants your talent, they may hand out lucrative employment offers to the team, throw some consideration at prior investors, and let the entity wind down.

If a buyer wants your technology, they may draw up a contract covering the specific assets they're purchasing. Once that transfers, the startup shuts down.

Same press release, but very different deals.

Are you getting paid in cash or stock?

Consideration typically comes as acquirer stock, cash, or a mix of both. This is negotiable, and the right answer changes depending on who's buying.

Watch out for all-stock offers from large private startups. A lot of them raised at very high valuations, which means they need to hand over fewer shares to hit your number on paper. That offer might look great in the term sheet and be worth half of it, or less, by the time you can do anything with it.

Public company stock you can eventually sell. Private company stock is a bet on somebody else's fundraising history. Price it accordingly.

How long are you handcuffed to the acquirer?

If the acquirer wants your team to come along, there will be handcuffs. These usually run anywhere from one to four years.

Handcuffs mean you don't receive your full share of the acquisition unless you stay the entire duration. Leave early and you leave money behind.

Ask yourself honestly how long you're willing to work inside somebody else's company. Founders regularly underestimate this. The deal closes, the excitement fades in about six weeks, and then you have three and a half years left on a vest schedule inside an org with eleven layers of approval.

Your investors usually aren't tied to handcuffs, since they're not day-to-day operators. I've seen it structured both ways, but that's the more common setup.

What happens when the milestones are the payout?

Sometimes the compensation isn't just time-based, it's milestone-based. Hit the targets post-acquisition and your team gets paid. Miss them and you don't.

This is brutally hard to negotiate well, because you're agreeing to numbers before you know what it's like to operate inside the acquirer. You lose control of your roadmap, your hiring, your budget, and your priorities, then you're held to goals you set when you still had all four.

I have watched a lot of acquired teams miss their milestones and collect a fraction of what the headline number promised.

If milestones are on the table, negotiate them like they're the whole deal, because for you they might be.

Who gets the money?

Most people assume the acquisition amount gets divided across shareholders based on ownership. That's typically what happens when the startup is bought outright, or when the acquirer wants essentially everything in the company.

But if the acquirer mostly wants the founding team, the compensation can skew heavily toward employment packages for the founders, with handcuffs attached, and very light consideration for investors and everyone else.

So a company can go well, the price can look respectable, and you can still do poorly as an employee or an investor. It depends entirely on how the thing is structured.

This is the part founders find out too late. Read the distribution waterfall before you celebrate.

What happens after you leave?

Startups are a multi-turn game. Think past this deal.

Where will you be able to work once you leave the acquirer? Do you want to start another company someday?

Beyond negotiating your role, your comp, and your projects, check the non-compete carefully. I've seen non-competes written so aggressively that a founder couldn't work at any software company for a year after leaving. That's a year of your career signed away in a clause you skimmed at 1am.

Get a lawyer on that specific paragraph. It's cheaper than the alternative.

How should you treat your investors and employees here?

You have enormous say as a founder in which offer you take. Use it thoughtfully.

This doesn't mean handcuffing and sacrificing yourself to an acquirer for your investors' sake. It means asking whether you've thought through what seems most fair for everybody in the cap table and on the team. If you have, your investors will back you again on the next company.

The practical move is to loop them in early. Get their feedback while the deal is still taking shape, and prepare them for what's coming.

Even if you end up doing something different from what your investors hoped for, that's usually fine. What they don't want is to find out from a press release. People can live with an outcome they disagree with. They can't live with being blindsided.

So before you sign anything, walk through it: what's being bought, in what currency, with how many years attached, against which milestones, and who gets paid what at the end.

Then decide if the number still sounds as good as it did on the first call.

Until next time,

Dunky, the "acquisition" hippocorn

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