Mechanics of a Small Acquisition
Jason Chen is the founder of a YCombinator backed startup called Stypi. It was recently acquired by Salesforce.com, where Jason continues to work on Stypi. Quotidian Ventures participated in their seed round funding.
When a startup successfully exits, chances are it was an acquisition. Unfortunately for the founders, that acquisition was likely their first, while the acquirer has probably gone through many. This was the case with Stypi. Fortunately, my cofounder and I were lucky enough to have had access to several other acquired founders who helped us ultimately navigate our first multimillion-dollar exit for a company barely a year old. Hopefully by sharing what we learned and encountered, you can be slightly less lost, should you be faced with an acquisition of your own.
DISCLAIMER: Every startup and founder group is unique so the data provided here may not apply in all cases. In particular, it is skewed towards < $25m acquisitions made by much larger companies. An acquisition is important enough that you should always do your own research. Reach out to acquired founders in your space, company size range, and/or acquired by the same company that may acquire your company. If any of these apply to me feel free to contact me at jason [at] stypi [dot] com.
Potentials acquirers are a lot like the opposite sex: their intentions are confusing but the prospects are exciting. It will likely be a founder or the Corporate Development department of a larger company, acting on behalf of an interested internal team, that first approaches you. Either way, get comfortable with this person, as he/she will be setting up and facilitating your meetings, and will likely be the one you eventually haggle with over terms.
Before moving forward, it is worth noting that the cost of pursuing an acquisition is nonzero—in fact, it’s quite high. You and your cofounder(s) will be consumed by the process for weeks and divulge a lot of otherwise private information to potential competitors. But more importantly, rejection hurts. Believing that the finish line is just yards away and finding that it is actually miles is not going to be good for your company’s morale.
Assuming the decision is to open your company’s kimono and pursue an acquisition, you and your cofounder(s) will end up going on a series of meetings with the potential acquiring company (except at the pace of trying to decide if you want to get married by the end of the week). For larger companies, Mutual NDAs will likely be signed by the first meeting. Decisions to continue the relationship are made very quickly after each meeting. This of course goes both ways—we decided to end the relationship early with more than half of interested potential acquirers.
If feelings are positive on both sides, arrangements would be made to meet again, probably with different people. Regardless of who we were meeting with, they were usually available the next or following day, which seem to suggest the priority for acquisition meetings are reasonably high. One founder, we discovered, cancelled racing Audi R8 to meet with us.
The Term Sheet
We averaged three to four of these dates before we were invited into bed with a term sheet. The relationship is not exclusive so it is kosher and advisable to be pursued by multiple potential acquirers in parallel. Ideally they would be lined up such that multiple terms sheets would come at roughly the same time. Different companies prefer to have varying amounts of information or certainty before putting together a term sheet. In general, the time spent or saved here will be made up for during due diligence. But, for your purpose of timing the term sheets, it is not unreasonable to ask about the potential acquirer’s timeline and form expectations.
Once you get your first term sheet, it’s time to celebrate with your cofounder(s). If the offer is interesting enough, then it’s also time to get a lawyer. Ideally other offers will soon be coming in and you can use them to get better terms from each company. While you will be negotiating the key terms, your lawyers will be taking care of less familiar ones like escrow, indemnification, etc. They’ll explain what this means, the consequences, and for significant ones, ask how hard you want to push for more favorable terms. For these, we usually just asked them to push for market terms.
It took us roughly a week to agree on the terms and decide which company Stypi would join.
Due Diligence and Closing
Now it’s time for monogamy. When you sign a term sheet there will also be a separate exclusivity agreement that requires you to reject any other outstanding offers and for a period of 45 days, remain faithful and not solicit other offers. There will be more meetings and every document your company has ever signed will be scrutinized (which your lawyers will want to screen before sharing) to make sure you did not misrepresent your company’s position. This process should be taken seriously as either party can still back out of the deal. But the default outcome is that the deal will close and unless you are hiding something big, like a lawsuit or stealing code, there shouldn’t be anything to lose sleep over.
In parallel with due diligence, weighted towards the tail end, preparations will begin for closing. Mechanically this means filling out and signing a lot of forms. A lot of time will be spent chasing down information from people connected to your company, for example your advisors’ addresses or investors’ wire instructions. Many will need signatures so there might actually be some physical chasing down.
The complexity of the deal or parties involved will dictate the time frame but for small companies, this process will take roughly 3-4 weeks.
What happens after exit is entirely up to up to you. Life can be as different or as similar to what it was before. Some founders take time off, some throw massive parties, and others buy and crash brand new Lamborghinis. For Stypi, life has not changed very much and we went straight to work the day after closing. We still have a long way to go before Stypi becomes what we envisioned and we chose an acquirer that shares and wants us to pursue that vision unencumbered.