7 tips for start-up founders who are thinking about selling out--and becoming someone else's employee
Not every start-up grows quickly. Sometimes there isn't a market for your product, the cash reserves are dwindling, and you can't raise more funding. For those of you who are absolutely determined to make your start-up work down to the last dollar, I salute you. But if you’ve lost the determination, for whatever reason, and you’re starting to think about your options, this post is for you. The best reason to seriously consider giving up is if you yourself have lost your passion for this start-up idea. Long before start-ups run out of money there is usually a moment where they run out of hope. It’s a sad time--I’ve been there myself. That's when I turned to the acquihire. An acquihire is a combination of acquisition and hire. It’s when your company gets purchased just for the team. Flightcaster, my second start-up, was acquihired in 2010. The whole team joined the acquiring company and we stopped actively working on our product. There were a lot of mixed feelings. In one sense, we were incredibly proud that we found a home for what we built and kept our team together. But we also had a profound sense of loss that our vision would never be realized. That’s the nature of an acquihire--it's failure with a silver lining.
Here are my suggestions for founders considering being acquihired:
1. Be transparent with your team. Your co-founders and employees signed on to be part of something. You will find that there are people within your team that don’t look favorably upon an acquihire. There will be people who would rather work at a start-up than join the acquiring company. It’s good to get that stuff out in the open. At our current start-up, 42Floors, we’ve promised our engineers that we won’t pursue acquihires.
2. Be transparent with your investors. Every experienced investor has been through the acquihire process countless times. You are not the first. The single biggest mistake you can make is being dishonest with your investors. Being less than forthcoming is just as bad. There will certainly be some disappointment that you’re no longer swinging for the fences, but your investors may be your single greatest opportunity of finding an acquihire deal. So, if you can get them working on your behalf, that amazing acquihire may actually find you.
3. Consider the inevitable ethical challenges. With every acquihire, there's some give and take on how the proceeds of the acquisition are divided. On one side, you have your investors who would like to get their capital back. They typically want the total price of the acquisition to be entirely based on the purchase of common stock. On the other side, both you and your acquirer want the founders and employees to receive the vast majority of the proceeds. The last thing an acquirer wants is to be shelling out money or stock in some attempt to make your investors whole. Acquirers often want to put the proceeds of the acquisition into stock retention bonuses or inflated salaries. Consider giving your investors a right of approval, even if your voting structure doesn’t require it. This ethical choice absolutely will come up, and you will absolutely have to deal with it. So make sure you and your co-founders have talked about it candidly. In the end, you should find a compromise that leaves everyone feeling OK. Probably not great, but OK.
4. Have a Plan B. Acquihires can be the hardest deals to close because in most cases the acquirer can afford to wait and you can’t. They may not do it maliciously, but their lack of expediency can cause the deal to collapse. Your biggest tool, like any other negotiation, is to have a reasonable alternative with a set time you have to act on it. That alternative can be another acquirer, or a pending investment round, but it’s up to you to create a reasonable deadline.
5. Make preparations for your users. Customers, particularly early adopters, have a tough time with acquihires. These people have grown dependent on your service, and it’s crushing to be left out in the cold as you move on. If you do get acquihired, assume that from that day forward, you will have almost zero time to take care of your product or your existing users. So if you’re thinking about going down this route, make preparations now. That may mean making deals with competing services or simply shoring up your code so that service can stay alive longer. We’re still incredibly proud that FlightCaster continues to run two years after we were acquihired. For sure, some day it will crash and there will be no one left to fix it, but at least it has stayed around this long.
6. Take a much bigger swing next time. The single most important outcome of FlightCaster’s acquisition was that it motivated me to build a much bigger company next time around. Having now been through the process, we have set much larger goals for 42Floors. I can’t say how this will end, but I know that our one and only goal is to forever change how people search for commercial real estate. And we’re not going to accept anything less.
7. Get some help with the paperwork. In most situations, an acquihire won’t be a complete purchase of the company in a cash-for-stock or stock-for-stock merger. Most acquihires will be an asset purchase in which substantially all of the assets of the company are purchased and the team hired, but the existing corporate structure is left alone. Acquirers do this so that they don’t inherit any potential liabilities from a start-up. What that means for you as the entrepreneur is that you have to shut it down. It’s a horribly, laborious process made much worse if you don’t have any cash left to do it. The last thing in the world you will want to do as you move onto the next phase of your career is continue to deal with the bureaucracy of shutting down a company correctly. If you can set aside $15,000, you can have your lawyer and accountant do it for you and save yourself a world of pain.
One last comment: If you do go down this road, make sure you actually want to work at the company that acquihires you. As entrepreneurs, we are used to work situations that invigorate us. Most of us have very little tolerance for the normal jobs that occupy the rest of the world. So before you accept a deal that is going to lock you in as someone's employee for one, two, or three years, be absolute certain that you actually want to work. If not, all you’re doing is engaging in self-imposed indentured servitude, and it won’t feel good. And regardless of the money, it won’t be worth it.