The vast majority of startup exits are through acquisitions. And while the Internet is full of advice for pre-exit founders, remarkably little material exists to help guide them through life post-acquisition—even though they and the staff they hire often spend two to three years working with the acquirer. . An acquisition is an exciting opportunity, to be sure, but it’s not as happy-ever-after as the “founder’s journey” narrative might suggest.
In my career, I have experienced 11 different acquisitions from multiple perspectives: as a founder, an investor, and a board member. I recently went on a listening tour to compare my experience with the post-acquisition stories of a wide range of acquired founders. While I’m not at liberty to name names or dive into specific deals (as a rule, founders don’t tell bad stories about their new employer), I can gather the honest perspectives I’ve heard and combine them with my own experiences. A comprehensive guide to the acquisition process.
The psychological transition from founder to employee can be difficult, and the years that follow can be bleak compared to startup life. You’ll have pixie dust for a while — “the founder who built X and sold it for $Y” — but you’ll soon be judged on how well you work with others and achieve success for your new employer. You may also face resentment from your new friends, who have worked hard for 10 years and have no acquisitions to show for it. You may be tempted to feel that everything the recipient does differently is less—but resist this urge. You sold for a reason. Be positive about differences and learn from experience. Find something that only you can learn or accomplish as part of this larger company, then do it with purpose.
The most common theme for these conversations was simple: “I wish I knew now.” Knowing your benefits, your acquisition type, and the key points to push will help you maximize success and employee happiness in the long run. You need to prepare yourself – and the employees who follow you.
How much can you shape the outcome?
A lot more than you think.
In acquisitions, there are two types of leverage. be the first negotiation advantage, Which determines who wins on deal breaker points. The second is knowledge gainPredictions are made about which cases you can win without jeopardizing the deal.
You can do anything to change your negotiating leverage – you either have a competitive acquisition process or you don’t. However, you can change the benefits of your knowledge. Contrary to what the acquirer might say, many points are not deal breakers. You need to know what to ask for – you might be surprised how much the recipient will agree to, but only if you ask.
KYA: Know your recipient
Assessing your recipient will help you and your staff prepare for what lies ahead.
Current vs Startup: Obviously the older and older the recipient, the more cognitive and cultural dissonance you will experience. You can’t change it, but you can lead your team with emotional intelligence. The acquirer got big for a reason. On the other hand, being acquired by a startup can feel very natural from a cultural perspective, and you’ll find similarities in everything from technical tools to HR policies.
Handling post-acquisition integrations: When I worked at Cisco in the early 2000s, we completed 23 acquisitions in one year. Know that some recipients are professionals; There are none. Either way, make sure you know what happens “the day after”. Force the buyer to detail their plans, as this will raise many issues that will be important to you, your employees and your customers.
Recipient’s culture: You may feel that two or three years will pass quickly, but it won’t. It makes all the difference if your employees are entering a culture where they feel at home. You will be immersed in acquisition momentum, so don’t forget to ask yourself if this is a company that adequately reflects your values. Just talk to the acquisition team and the deal sponsor – ask to speak to the CEO of a startup they previously acquired.
Find out why you’re getting it
There are five types of acquisitions, and which model you fit with will inform your approach:
New products and new customer base: You know more than the recipient and can easily mess up what you’ve built, so you should fight for business unit independence. These acquisitions fail as often as they succeed. Examples include Goldman Sachs and GreenSky, Facebook and Oculus, Amazon and One Medical, and Mastercard and RiskRecon.
New product or service, but same customer base: Most acquisitions fall under this category. Founders should give in to integration faster, because it ultimately leads to more success for both parties. Consolidation complicates earnings — but your first priority is to avoid earnings. Famous examples include Adobe and Figma, Google and YouTube, and Salesforce and Slack.
New customer base, but same product category: In this category, you know the customer and not the buyer. Maintaining a high level of independence in the short term is critical to the success of this acquisition. Be prepared to share knowledge and final integration. Examples include PayPal and iZettle, JPMorgan and InstaMed, and Marriott and Starwood.
Same product and same customer base: The buyer wants your customer base and likely wants to eliminate you as a competitor. You will be completely integrated into the recipient by action, and will quickly lose your independent identity. Examples include Plaid and Quovo, Vantiv and Worldpay, and ICE/Ellie Mae and BlackKnight.
Acqui-hires: You’ve built a team so good that another company is willing to buy the company to hire them en masse. Be realistic – this is an attractive exit for you, and a non-essential purchase for the recipient. In this category, there are too many examples to count.
What should you ask for?
During an acquisition, it is easy to focus on transactional points such as valuation, working capital adjustments, escrow, and compensation. You need to get those rights, but your experience for the next two-three years will depend more on how things operate after the acquisition. In rush transactions, acquirers will tell you not to worry about these points – but you should. Here are the key non-compromise points you should consider:
Employee Compensation: You should adjust employee compensation before the acquisition because it will be very difficult for the acquirer to change it later. Your employees earn startup salaries, which should be higher when equity upside is removed. Be aware that the transaction may still break, so perform a compensatory benchmarking task and then wait to execute until the transaction is certain to close.
Staff Titles: You need to map your employees to the acquirer’s titles and compensation bands. As a startup, you likely focus on equity and options, but an acquirer focuses on cash compensation and other benefits. Learn the differences between titles before mapping out, as large companies often base everything from bonus ranges and benefits of access to participation in leadership meetings on them. Advocate strongly for your employees – you have the benefit of knowledge about them, so use it.
Retention: Acquirers want to retain key startup employees, and you have the power to decide who is in the retention bucket. However, this is a double-edged sword because your employees must stick around to earn additional compensation. Try to keep that period under two years, as three will feel too long. Instead of expanding the retention pool further, you should negotiate for a second discretionary retention bucket that you can use to retain key employees who want to leave soon after the acquisition.
Pre-agreed budget and recruitment plans: You thought raising money from investors was difficult, but just wait for the corporate budget. Most large companies use budgets and headcount as their control mechanisms, so negotiate both for your first year. You want the freedom to execute, and you don’t have to spend time advocating for each new hire—perhaps with new stakeholders who weren’t part of the initial acquisition.
Good governance: Who do you report to? The seniority and authority of your new manager are the most important factors. You can’t avoid company-wide budgeting processes, but it’s better to convince just one person. If you are a standalone business unit, negotiate for a board of senior leaders from the acquirer. It’s a novel structure for buyers, but it’s a smart way to match form with function. Finally, avoid matrix reporting at all costs, especially if you have earnings.
Earnings: Buyers prefer them because they align price with performance, but your job is to avoid them. It’s easier said than done, but you’ll never be as free to execute post-acquisition as you were pre-acquisition, and unforeseen forces will disrupt the best-laid plans. You can crush it in revenue and lose gross margin, or hit all your goals 12 months late. It will be your call, but if you have a chance to earn 25% more with earnings or settle for 10-15% more upfront, I would take a smaller amount upfront.
Attach your board
Many acquisitions begin with unsolicited expressions of interest, and CEOs have a duty to share them with the board. Some are easy to dismiss, but others trigger an awkward dance: Do you want to sell? You don’t want to go long? At what price do you sell?
Here you will see the real personality of your investor. Everyone understands that Series B investors at a $125 million valuation will not relish a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company while considering founders, employees and common shareholders. This is where you’ll be glad you choose true partners as investors in your boardroom, and independent board members can provide an especially valuable voice.
If you decide to engage with an acquirer, CEOs with M&A experience can take over from there. If you’re not that CEO, get help. You don’t want to involve the entire board, so have them appoint one or two members to the M&A committee and put them on speed dial. You’ll avoid a lot of small mistakes — and at least two board members will already be convinced when you return with a letter of intent.
Selling your company is only the tip of the iceberg, and the more you know about life after the acquisition before starting negotiations, the happier you and your employees will be for the next two to three years. There are many psychological and operational changes ahead, and you can influence many of them by using this model of when and where to negotiate.