Flip through any technology magazine and you'll find headlines touting teenage sensations who built businesses from their bedrooms, only to sell them X months later for Y million dollars. These types of stories will make you think that selling is the ultimate goal of any startup entrepreneur, but there are multiple realities when it comes to acquisition agreements.
Acquisitions are everywhere. While the big name players make the news, largely due to eye-watering numbers in their transactions, there are plenty of smaller acquisitions taking place under the radar. Startups will look to buy out others in an effort to gain immediate user traction or add niche technology to increase their reach.
Any startup entrepreneur worth their weight in bitcoins know who the major players are and would undoubtedly experience that first-date knot in the stomach were their number to appear on the caller ID. This anxiety and excitement would be for good reason. If a startup has come up on the radar of the likes of Google or Twitter, they've already 'made it,' to some degree.
But regardless of what the fantasy of being acquired would have you believe, it isn't all paydays and early retirements. The devil is in the details, and if you're not prepared, the deal may not match the cover story you imagine.
Here are some things to keep in mind before signing your name on the dotted line:
1. Take a breath and look beyond the number
When an acquisition company comes knocking, it's always prudent to maintain a healthy dose of cynicism. Acquisition propositions are undoubtedly flattering; for a startup, it's complete validation of the business model they set out with. But knowing why a particular company is approaching you is key. Generally, their interests go beyond simply wanting to merge your technology with theirs.
2. Understand your position
There are generally two situations a startup will find itself in acquisition talks. Things are either going well for the company and their popularity, mixed with their product, is driving negotiations, or the company is dealing from a position of necessity through pressure from the board, or entrepreneurs looking to move on. Whatever the driving force, it's important to understand your own company dynamics and how they are perceived by the acquiring company.
3. Understand their position
In the majority of cases, it's in the best interest of the acquirer to keep the essential technologists involved in the company for as long as possible. An acquisition is never simply a case of signing, collecting and walking away. Often there are time restrictions, non-compete clauses and far reaching goal targets that need to be hit to ensure the acquired get what they sign on the bottom line for.
If entrepreneurs are looking to cut ties as quickly as possible, these types of restrictions may not be feasible. Alternatively, entrepreneurs may wish to have an ongoing relationship with their organization which, in reality, is untenable for the acquiring party.
Other factors which could play a part in the sway of negotiations could be a startup holding a particularly valuable, niche client base or possessing a key add-on feature to the acquirer's product suite which isn't readily available elsewhere. These types of differentiators within a startup can play a major part in negotiating the most desirable deal. That is, unless you fail to understand their significance until after the acquisition has taken place.
4. Aim to be the smartest guy at the table
When a startup is acutely aware of the position they are dealing from and, wherever possible, where the acquirer is dealing from, they are able to either adjust specific restrictions or leverage power to get the best, most workable deal possible. It's unlikely that either party will get exactly what they want, but understanding both party's needs and motives can pay large dividends.
Other important things to look out for:
- Understand the terms: What is the mandated work term after acquisition, what are the goals that need to be met?
- Most private acquisitions will be Asset or Share acquisitions. An Asset acquisition can leave the entrepreneur with the remaining liabilities of the old company.
- Align expectations: Know what the acquiring company is looking for, what is in your best interest and what you are willing to compromise on.
- Establish a roadmap: Knowing what is in the fine print is a great idea, but both sides should openly come to terms with where the acquired company fits into the acquirer’s growth strategy and future timeline.
- Does the culture mix? Exiting your startup into a company with a completely different corporate culture can be a severe shock. Take time to understand the culture of the acquiring company and make sure you’re satisfied that yours and theirs will be able to find common ground. If being acquired means the startup loses its ability to perform, hitting those mandatory targets outlined in the acquisition agreement might become increasingly difficult.
Cameron Chell is the co-founder and CEO of Podium Ventures, a venture creation firm in Calgary that finances and builds high-tech startups.