How to Survive Your Startup Acquisition

September 26, 2016

10:08 am

Your hard work, financial and emotional sacrifices to get the company up and running have finally paid off. A larger company has offered you a hefty check, which you are likely to accept. Yet, the burning question is – how do you get the most of your exit? And no, the numbers on the check shouldn't be your primary concern.

Here are the essential considerations each founder should assess before signing off the paperwork and changing their company ownership.

How Will You Merge?

As Jeff Erramouspe, CEO of Spanning, mentioned in his interview on Inc:

“One of the most important steps you can take–before you close the deal–is to truly understand why you're being acquired. This will guide your priorities during the integration process”

It’s important to understand different types of acquisitions and the reasons behind them. Is it a growth buy-out, also known as a horizontal merge, meaning that the acquiring company is interested in your product market share and user base? In that case, you should keep working hard on showing good numbers.

Are they buying you because of your tech stack? In that case, keeping the key developers on board should be your top priority. Or do they just want to eliminate the possible competition early on? In this case, you may want to carefully review and negotiate all the buyout terms.

Craig Walker has sold two startups to Google and Yahoo, and his experience with the latter didn’t go quite as expected. After the acquisition, the search engine announced a sudden change of  their course:  

“[Yahoo's] important partner…hated the idea of us doing really low-cost [voice over Internet] phone calls. So Yahoo never really promoted [Dialpad] in North America or did the amazing things we hoped they would with our technology,” – said Walker.  

While acquisitions by industry giants certainly offer plenty of opportunities for startups, you should always think of how you can leverage this opportunity beyond the paycheck.

Get Prepared for the Due Diligence Process

You've received the preliminary price quote for your company, however, the number is not rock solid up until your startup passes the due diligence screening.

Here are some of the key details the acquiring company will likely look into:

  • Annual and quarterly financial information for the past three years, which should also include numbers on the planned vs. actual results and a detailed breakdown of sales and gross profits by product type, channel, geography.
  • Quarterly financial projections for the next 1-3 years.
  • Current capital structure.
  • Your company’s articles of incorporation, bylaws and other standard legal documents for startups.
  • Your intellectual property assets including your trademark, patents and patent applications, copyrighted materials, and all the licensing in regards to your intellectual property.

Usually, all of the documents listed above are added to a secure virtual data room, where all the involved parties can securely review and collaborate on those during the acquisition process.

Also, it’s worth discussing in advance how you will conduct the financial aspects of the acquisition, especially if your company currently operates in another country. First, make sure you do know the imposed taxes you’ll have to pay post-acquisition. Additionally, settle on how the funds will be transferred and how will handle the processing fees, which obviously can go pretty high in this case. Lastly, your contract should clearly state the terms and conditions of the final payment.

Negotiate the Best Terms for Your Team

You should clearly understand how the acquiring company will handle your personnel. After all, these are the people who’ve taken your project from nothing all the way to the top.

The most common scenarios are the following:

  • The acquiring company keeps all the original staff (at least during the transition period).
  • The buyer retains only the key personnel – founders, engineers etc. – and dismisses everyone else.

Typically, the key product team members are retained with additional perks like RSUs, salary raises and various other retention packages designed to keep them on board for at least 2-4 years.

It’s worth talking to your staff about their further career goals and brainstorm together the best deal options.  There’s always some room for negotiation in this case.

Keeping your entire original team on board post-buyout can be a bit more challenging. If the acquiring company has certain HR policies in place e.g. they require background checks and do not accept people with misdemeanor convictions on the record, you may be forced to fire some of your peeps.

Yet, it’s always worth asking the buyer about referrals or recommendations for your former staff. When a big industry player buys you, high chances are they may have some open positions either within their company or other subdivisions.

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Dianna is a former ESL teacher and World Teach volunteer, currently living in France. She's slightly addicted to apps and viral media trends and helps different companies with product localization and content strategies. You can tweet her at @dilabrien