When you build a startup, the best shot you have at seeing a big payday is becoming an acquisition. Sure, a handful of startups end up going to IPO. But the likelihood of acquisition beats your chances of going public by a ratio of 10 to one.
Unfortunately, the exciting possibility of an acquisition leads new founders to make all kinds of mistakes. They end up losing out on much better deals, huge sums of money and even years of their lives stuck in post-acquisition work that they can’t stand.
I know this from experience. In my early days as an entrepreneur, I ran into some of these pitfalls. In my work advising founders over the years, I’ve had many founders come to me too late, after they’d already fallen for some investors’ unethical practices.
And since my company, Awesome Motive, has acquired numerous small businesses in ways aimed at helping them grow, I’ve seen that founders can take steps to ensure ethical acquisitions with founder-friendly terms. When they do, everyone comes out ahead — including the acquiring company.
Here are some tips to watch out for when considering an acquisition, and how to protect yourself.
Keep proprietary data hidden
One of the most unethical things some investors do, oftentimes in private equity, is sensitive information mining. They convince you that they’re so excited about the possibility of acquiring your startup for a big figure, but first need to “learn more” about how you operate. At the same time, they may secretly have another company in their portfolio that’s considering offering similar solutions to yours, so they bait you into giving up your intellectual property and proprietary trade secrets.
An acquiring company should be able to look at your revenue, costs, and other basics to offer a fair valuation without needing access to any of your secret sauce.
Yes, you can have them sign an NDA and guarantee that they will delete any information and not share it with others. But they can’t delete it from their own brains. They can take what they learn from you and apply it elsewhere. I fell for this. I was a new founder and didn’t know any better.
An acquiring company or group should be able to look at your revenue, costs, and other basics to offer a fair valuation without needing access to any of your secret sauce. Don’t let them see internal processes and other proprietary information until the sale has gone through.
Keep deals simple — especially the terms
One of my mentors told me, “You name the price, I name the terms, and I will always win.” I’ve seen this truth play out for founders all too often. They request a big price for an acquisition, which the other party seems to accept. That figure then goes high up in the contract, which makes it feel real.
But the terms that follow change everything. One founder thought he was selling his business for $50 million. But under the long list of terms the acquiring company put in the contract, he got $10 million upfront. The rest of the money relied on KPIs after the sale that were virtually impossible for him to meet.
To avoid this, always keep your deal structure very simple. When my team buys a startup, we offer a two-page contract. Warren Buffett famously keeps his contracts very short as well. A good contract will also provide cash upfront to the founders and avoid all sorts of complex KPI contingencies. The acquirers should be able to value your company as is, with no future hoops of fire that you have to jump through.
Limit your time, including post-acquisition
Sometimes, potential buyers will give you an LOI (letter of intent) and then string you along for months. They waste your time and energy, even though they’re secretly not ready to make a move. They’re just taking your startup off the market for as long as they can. During that time, you could have received multiple offers that were legitimate and much better.
Unless the deal you’re discussing is worth billions of dollars, the process should never take that long. I tell founders to insist that the whole process is done within 60 days tops after an LOI is in place. I recently purchased a company that had been under an LOI for nine months, before the founders finally walked away. My total time from LOI to acquiring their startup was just a few weeks.
The same goes for founders’ time after the acquisition. No one should be required to work for years at a company that they’re ready to leave. It increases burnout and “presenteeism.” It’s okay for the acquiring company to expect founders to stick around for a transition period, but that should be within reason — ideally six to nine months or less, if feasible.
Avoid mass layoffs
Sometimes, acquiring companies act like corporate raiders after a purchase goes through. To maximize their profits, they cut the majority of your staff. In their calculations, this makes sense. They don’t mind if your business declines, as long as they are squeezing out profits.
But a business should serve the people in and around it, especially team members and customers, not just owners. I always advise founders to do due diligence on the acquiring company or group to ensure they don’t have the reputation of being corporate raiders. It’s a good idea to talk with other founders who have exited to them in order to ensure that you’re doing the right thing for your team and your customers.
When founders follow these steps, they get much better deals. And ultimately, those who acquire the startups come out ahead as well. Relationships and reputation matter. When people make a habit of mistreating or tricking founders in acquisitions, it hurts them. Fewer founders are willing to work with them, or consider their offers, in the future.
By making fair deals that benefit everyone, I’ve been able to attract talented founders who prefer to exit their companies to my team. This goodwill is the main reason why we have been able to expand our portfolio.