An “exit” or “Liquidity Event” is generally when the investors and shareholders start to get paid. The two most common types of exits are (1) acquisitions, and (2) IPOs.
The Founder’s Guide To Selling Your Company. Justin Kan, 2014. A more detailed guide from the Y Combinator partner.
M&A Case Studies: WhatCounts Sale Process. Fred Wilson and David Geller 2011. Do your diligence on the buyer. Only deal with a buyer who shares your values. Get the deal worked out in the Letter of Intent (LOI) stage. “For a relatively small company to be acquired it’s safe to estimate something between $50-$100K in legal fees.”
The Economic Logic Behind Tech and Talent Acquisitions. By Chris Dixon, 2012. A big company can build a competing product in-house, but then they run the risk of delays, cost-overruns, and failure. After adjusting for these risks, it’s often cheaper for a big company to just buy the team and product from a startup.
M&A: Talking to Corp Dev
Don’t Talk to Corp Dev. By Paul Graham, 2015. “Corporate Development is the group within companies that buys other companies. If you’re talking to someone from corp dev, that’s why, whether you realize it yet or not. It’s usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you’re sufficiently likely to get an offer at an acceptable price.” But see Actually, Founders Should Engage Corporate Development from Jamie McGurk at A16Z.
A Classic Startup Horror Story: the M&A Bait and Switch. Venture Beat, 2012. Paul Graham comments, “This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you’re focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, probably decreases the chances of things going wrong. M&A guys can smell it when you really want a deal, and that makes them want it less.”
Acquihire is the purchase of a company mainly for the value of its employees, not its product or technology. It’s often a way to provide a “soft landing” to startups that would otherwise fail and go bankrupt.
Acquihires can result in misaligned incentives between investors and the acquiring company.
Acqui-Hiring. By John Coyle and Gregg Polsky in the Duke Law Journal, 2013. The research article is discussed and summarized at Yahoo’s ‘Acqui-Hiring’ and Its Tax Implications. Victor Fleischer, NY Times, 2013.
Letter of Intent
Brad Feld’s “Letter of Intent” series provides several useful lessons on the M&A process. These posts were written by Feld in 2005-2006.
- Structure of a Deal.
- Form of Consideration.
- Representations, Warranties, and Indemnification.
- Confidentiality / Non-Disclosure Agreement.
- Assumption of Stock Options.
- Conditions to Close.
- Structure – Asset vs. Stock.
- Employee Matters.
Between the acquirer’s letter of intent (“LOI”) and closing the deal, there will be several weeks of due diligence.
Initial Public Offerings
What’s in an IPO? My Experiences Through Grubhub’s Offering from Start to Finish. By Mike Evans, 2015.