The vast majority of startups happen through acquisition. And while the internet is full of advice for pre-exit founders, there’s very little content to help guide them through post-acquisition life – even though they and the employees they recruited they often two or three years working with the recipient. . The acquisition is an exciting event, sure, but it’s hardly the happy ending that the “founder’s journey” story might suggest.
During my career, I have experienced 11 different acquisitions from multiple perspectives: as a founder, as an investor, and as a Board member. I recently went on a listening tour to compare my experiences with the post-acquisition stories of a wide variety of acquired founders. While I’m not allowed to name names or dive into specific markets (as a rule, founders don’t tell bad stories about their new employer), I can aggregate the honest perspectives I’ve heard and combine them with my own experiences to give the complete guide for the acquisition process.
The psychological transition from founder to employee can be difficult, and the years that follow can be deflationary compared to startup life. You’ll get pixie dust for a while — “the founders built X and sold it for $Y” — but you’ll soon be judged on how well you work with others and drive success for your new employer . You may also be resented by your new colleagues, who have also worked hard for 10 years and have no acquisition to show for it. You will be tempted to feel that everything the recipient does differently is inferior – but resist this urge. You sold for a reason. Be graceful about the differences and learn from the experience. Find something you can only learn or accomplish as part of this great company, then do it with purpose.
The most common theme for these conversations was simply: “I wish I knew now what I know.” Knowing your leverage, the type of acquisition you’re in, and the points important things to push you will help you maximize employee success and happiness in the long run.You owe it to yourself – and the employees you’ve followed – to be prepared.
How Much Can You Shape the Outcome?
Much more than you think.
In acquisitions, there are two types of leverage. It is the first transaction leverage, which determines who wins on points deducted. It is the second knowledge leveragebased on knowing what issues you can win without risking the market.
There is little you can do to change your negotiating leverage – either you have a competitive acquisition process or you don’t. However, you can change your knowledge leverage. Contrary to what the recipient might say, most points do not resolve. All you have to do is know what to ask for — you might be surprised at what the recipient will agree to, unless you ask.
KYA: Know Your Recipient
Assessing your recipient will help you and your employees prepare for what lies ahead.
Holder vs. Started: Of course the bigger and older the recipient, the more cognitive and cultural dissonance you will have. You can’t change this, but you can lead your team with emotional intelligence. The recipient became great for a reason. On the other hand, finding a startup can feel like a natural cultural fit, and you’ll find similarities in everything from technology tools to HR policies.
Post-acquisition integration handling: When I worked at Cisco in the early 2000s, we completed 23 acquisitions in one year. Be aware that some recipients are pros; some are not. Either way, make sure you know what happens “the day after.” Force the buyer to detail their plan, as it 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 go by quickly, but it won’t. It is important if your employees are entering a culture where they feel at home. You will get swept up in the acquisition momentum, so remember to ask yourself if this is a company that reflects many of your values. Talk to more than just the acquisition team and market sponsor – ask to speak to the CEO of a startup they’ve previously acquired.
Know Why You’re Getting It
There are five types of acquisitions, and understanding which model you fit in will inform your approach:
New product and new customer base: You know more than the recipient and they could easily mess up what you have built, so you should fight for the independence of business units. 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 embrace faster integration, because it leads to more success for both sides in the end. Integration makes earnings more complicated – 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 the buyer does not. Maintaining a higher level of independence in the short term is important to the success of this achievement. Get ready to share knowledge and finally integrate. 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 possibly eliminate you as a competitor. You will be completely integrated into the recipient by function, and you will quickly lose your independent identity. Examples include Plaid and Quovo, Vantiv and Worldpay, and ICE/Ellie Mae and BlackKnight.
Acqui-hires: You have built such a good team that another company is willing to buy the company to hire them en masse. Be realistic – this is an elegant exit for you, and an unnecessary purchase for the recipient. In this category, there are too many examples to count.
What is his request
During an acquisition, it’s easy to focus on transaction points such as valuation, working capital adjustments, escrow and foreclosure. You need to get those right, but your experience in the next two or three years will depend more on how things work out after the acquisition. In rush transactions, the recipients will tell you not to worry about these points – but you should. Here are the main non-marketing points you should consider:
Compensation for Employees: You should adjust your employee compensation before the acquisition because it will be very difficult for the acquirer to change them later. Your employees earn a starting salary, which should be higher when the original cost of equity is deducted. Be aware that the transaction may still fall apart, so do the compensation benchmarking work and then wait to implement it until you are absolutely certain that the transaction will close.
Employee Titles: You will need to map your employees to the recipient’s titles and compensation bands. As a startup, you probably focused on equity and options, but the acquirer focuses on cash compensation and other benefits. Learn the differences between the titles before the mapping, as large companies often base everything from bonus ranges and perks to access to participation in leadership meetings on them. Advocate hard for your employees – you have Knowledge Leverage about them, so use it.
Keeping: Recipients want to retain key startup employees, and you have the power to decide who is in the retention bucket. However, it is a double-edged sword because your employees must comply to earn the additional compensation. Try to keep that period under two years, because three will feel too long. Rather than increasing the retention pool up front, you should negotiate for a second discretionary retention bucket that you can use to retain key employees who may want to leave soon after the acquisition.
Pre-Agreed Budgets and Employee Plans: You thought raising money from investors was difficult, but wait for corporate budgeting. Most large companies use budgets and headcount as control mechanisms, so negotiate both for the first year. You’ll need the freedom of execution, and you shouldn’t have to spend time supporting every new hire—probably with new stakeholders who weren’t part of the initial acquisition.
Governance: Who will you report to? Seniority and authority of your new manager are the most important factors. You won’t escape the company’s budget processes, but it’s better to convince just one person. If you are an independent business unit, negotiate for a Board of senior leaders from the recipient. It’s a fresh structure for buyers, but it’s a smart way for you to match form with function. Finally, avoid matrix reporting at all costs, especially if you have cash earnings.
Earnings: Buyers prefer them because they align price with performance, but it’s your job to avoid them. This is easier said than done, but you won’t be as free to make a post-acquisition as you were before the acquisition, and unforeseen forces will disrupt the best laid plans. You could push it on revenue and miss out on gross margin, or hit all your goals, 12 months late. It will be your call, but if you have the opportunity to earn 25% more with earnings or settle for 10-15% more upfront, I would take the smaller amount upfront.
Involvement of Your Board
Most acquisitions start with an unsolicited expression of interest, which CEOs are required to share with the Board. Some are easy to dismiss, but others cause the awkward dance: Do you want to sell? Don’t you want to go far? What price would you sell?
This is where you will see the real personalities of your investors. Everyone understands that the Series B investors at the $125 million valuation will not be happy with a $200 million sale. However, the real task is to find the best risk-adjusted result for the company, considering founders, employees and common shareholders. This is where you will be happy that you have chosen real partners as investors in your boardroom, and independent Board members can provide a very valuable voice.
If you decide to approach the acquirer, CEOs with M&A experience can take it from there. If you’re not that CEO, get help. You don’t want the whole Board involved, so ask them to appoint one or two members to an M&A Committee and put them on speed dial. You’ll avoid a lot of small mistakes — and at least a few Board members will already be convinced when you return with a Letter of Intent.
Selling your company is the tip of the iceberg, and the more you know about post-acquisition life before you start negotiations, the happier you and your employees will be for the next two or three years . Huge psychological and operational changes lie ahead, many of which you can influence by using this model to know when and where to negotiate.