Inside the Acquisition: 3 Start-up Follies
Cashing out of your start-up: It's often seen as the light at the end of the tunnel. Only it rarely looks like heaven.
So say Svpply co-founder Greg Leppert, OMGPop founder Charles Forman, and LinkShare co-founder Stephen Messer, who spoke at the fifth annual Northside Festival in Brooklyn Thursday.
Leppert, who sold Svpply, an online retail curation company, to eBay in September, says there are plenty of misconceptions about how a big-price-tag deal goes down. He mocked a typical over-simplification of the process as: "You're running a business and one day someone says, 'How about a billion dollars?' and you say 'That's great!'...and suddenly you're buying a Ferrari."
If only. It's more like a long negotiation over creating a life-partnership, Leppert said.
In the case of Svpply, when interest from a potential "partner" started heating up, the company's board advised Leppert to explore--and amass a portfolio of--other options.
"That's when you start to run a process, and you go out and talk to all the other companies that have expressed interest in working with you, as well as companies you'd be interested in working with," Leppert says. "So when you sit down at the table you have not just one offer, but multiple offers. And that gives you good 'leverage,' which is a word board members like to use a lot."
Forman, whose company was behind the uber-popular game Draw Something, which sold to Zynga for $210 million last year, says his "leverage" came from not other acquisition offers, but rather from collecting term sheets from three venture capital firms that affirmed the valuation he wanted.
The acquisition process for a start-up usually takes between three weeks and nine months. But for Draw Something, "the house was on fire" already when the game was the most popular in the iTunes store, Forman says. So its acquisition to Zynga was a lightning-quick 10 days, start-to-finish. "Which is the fastest a deal of that size has gotten done," Forman says.
While that timeline is certainly atypical, and founders usually have weeks or months to digest a deal, start-up employees are usually in the dark until a deal is inked--and news of an acquisition can be earth-shaking for them. Messer, who started LinkShare with his sister, and sold it for $425 million in 2005 to Rakuten (a company he calls "the eBay of Japan"), says his employees didn't adjust well to the news of the acquisition.
"The thing about a start-up is, it does become the dreams and aspirations of everyone who is in it," he says. So, when you reach the moment where a big deal is about to happen, "everyone starts to splinter," Messer says.
One point of contention and confusion for employees affected by the OMGPop acquisition was that stock options varied a lot based on employee tenure and salary. "Some people thought that whatever the sale price was, it would be evenly distributed among the employees," Forman says, getting a laugh from the crowd. But there are more subtle seeds of ill-will that can grow among start-up employees during, and after, an acquisition.
"As a team, you are conditioned to hate that company that acquired you," Forman says, because that company is often a larger competitor. "But all of a sudden you are part of that company." And that can become a cancerous situation--one that contributes, Forman says, to start-ups being shut down by their buyer.
Leppert says he had the same experience: "One day you're trying to take down the giant; the next day you're holding hands," and that was jarring to his small staff of fewer than 10 employees.
Sure, a big payoff is the reward for the founding team. But it's not always easier after the deal is signed, Messer says. "There are companies that come in the day after signing and paint. They paint over your logo, they burn your old stuff...That's scary."
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