I received this email a few moments ago and, having just left my job in the past 24 hours, I had the head space to respond in a way that I hope was helpful.
Hello, I saw your post on y combinator to a founder who was being acquihired and wanted advice. I am currently at the point where we are starting serious heads of terms for an acquihire of my 4 man business to a major XYZ company and could use a little advice. In particular, the terms they are offering for the deal seem a bit worse than my last time I was in a startup that was acquired, but in that instance I was not a founder. We are considering hiring a 3rd party tax expert with lots of m&a experience to handle the negotiation for about $30k. Does that make sense? The deal is around 4 to 4.6 million, and due to the large equity stake and potential for leadership it sounds good, but they are framing the retention as a minimum bonus which sounds a bit off. Thank you for taking the time to read this rather out of the blue email - any tips would really help me out! Thanks, Some Person On the Internet
Here was my response:
- Terms being worse. Well the world is kind of in free fall right now so, honestly, that doesn't surprise me.
- Are you profitable? Do you have any revenues?
- Why do they want to buy you? Understanding this may give you better negotiation leverage.
- Are you US based or International? I understand little about taxes in general and less so outside the U.S.
- Is the compensation stock, options, cash or something else?
- Is there any cash component to the deal? If not then I'd strongly argue for getting some damn cash. Equity can amount to funny money and there are lots of ways that you can be screwed over via equity (example; dilution). Personally I'd look for an amount of cash which is meaningful to you personally and represents some percentage of the deal. If the deal is for 2 million and you have 2 founders then $200,000 is only 10% and represents $100,000 each. Usually a $100,000 makes some bit of difference in your life (down payment on a house, pay off debt, new car free and clear). Get something that is absolutely concrete out of the deal. When I was pushed out of Feedster, my blog search startup, I walked away with $30,000 which was damn little for the work I put in but gave my wife and I a nice down payment on a house I lived in for the next 10 years. Again get something absolutely concrete from the deal and cash is concrete; no one can cheat you out of it once it is in your hands.
- Is the company buying you public or private? If they aren't public then that equity may not ever matter.
- Is the compensation up front or earned over time? If so, how long?
- Do you like the people buying you? How much time have you spent with them? You are contemplating what amounts to a long term marriage and my guess is that you've barely dated (strongly consider this analogy).
- In my experience there is a STRONG likelihood you won't last (most founders tend not to). If you walk out do you stay compensated? i.e. options go the hell away when you walk; stock doesn't. I was forced out of the first company I sold to (an acquihire in today's vernacular) and I had 72,000 odd stock options at a low strike price. Over the course of the next year that stock when up $10 a share and I've always regarded that event as something that cost me almost a million dollars. These things really do happen.
- Get references on the tax expert. 30K is, 1.5% of the deal? That seems pretty reasonable. You can easily lose more than that in a tax bill. Make sure the expert is loyal to you and not the acquirer,
- Find another founder they bought out – NOT a reference they gave you – and talk to them.