Answer by Jason M. Lemkin, partner @ Storm Ventures; ceo/co-founder @ EchoSign (acq'd by Adobe), on Quora,

A few thoughts.

First, understand that the acquirer almost certainly already has a strong sense of what they want to do (right or wrong). Even if they haven't told you yet.

Second, understand there are both carrots and sticks that acquirers can employ, and that the retention may involve a combination of both.

Third, know it may be that negotiating the sticks is both more lucrative on a net basis, and also easier (because it's not new/additional money).

What are the sticks?

  • Revesting. This can be called different things, like a holdback, etc. But it accomplishes the same thing. A portion of the $$$ you would have received the day the deal closes is help back, typically in tranches, for 12-24-36 months. You leave, you don't get it. You're fired other than for cause, usually you do.
  • Escrow. An escrow doesn't sound like a stick, but sometimes it is. Sometimes, acquirers don't really make founders pay out anything from the escrow if they are still employed at the company and there's an escrow claim. This can be material.
  • Options granted from the existing pool (between signing and close). New options that come from the old pool are sort of a stick-meets-carrot. They dilute the existing shareholders and others, and if the founders own enough, dilute them too so it's not such a great deal. But it does create an incentive if large enough to stay.

Typical carrots:

  • Stay Bonus. You stay 12-24-36 months, we pay you $X. Time based.
  • New Options. New options that vest over lots of years.
  • Earn-Outs 2.0. Extra payments if your business hits $YYm in revenues. Not really part of the deal consideration like an old earn-out, more a large bonus tied to performance, that if you don't get it, the world doesn't end, but if you do, it's enough to be motivating.

The thing is, the sticks are harder to negotiate up than the carrots down. Because the carrots, they come from the departmental budget of the SVP sponsoring the deal. The SVP has to pay for the carrots. But the sticks come out of the purchase price. The SVP doesn't have to pay for the sticks. And corp dev is the main negotiator here, and their #1 incentive is to close the deal, so at some point, they'll give on the sticks to an extent, up to point at which they are allowed to.

So try to get the carrots up/better. Absolutely, try. But at some point, you can only take this so far. The budget is the budget.

So negotiate hardest on the sticks. Cash is cash. Get all of it that you can. If you don't make it 36 months post-deal (and you probably won't, statistically speaking) ... you don't want to leave any cash behind that you don't have to. You earned it.

M&A is zero sum. There's no reason to leave any money on the table you don't have to. Because your team won't get it, no one will thank you, or appreciate it. It will just disappear.

More questions on Quora:

Published on: Aug 12, 2014