What They Dont Teach You At Stanford Business School

Stuff you can't learn in B-school: LARRY CHIANG

For a young startup, what’s the best way to deal with acquisition offers?

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So good!

Answer by Anonymous:

I get asked this question time and time again. Founder burn all the time!!

First time founders as first time sellers make ALWAYS make first timer mistakes. The org buying you has purchased very, very few businesses. BUT it has teased hundreds of people JUST LIKE YOU. We glean a free look at the balance sheet / income statements / tech / arbitrage / traction.

And then we walk away. Richer.

Better.

Remember, the person buying your business has been in 10, 20, 100 deals. They have the advantage.

As a young startup team, ask first for earnest money parked either in escrow or simply transferred to your account. This can be seen as earnest money. This is seen as deal insurance or a shopping fee. Whatever the outcome, the seriousness of the buyer is vetted.

By getting E-A-R-N-E-S-T money, you see if the buyer is DRINKING THE MILF FOR FREE /kicking tires or really going to buy THE COW. If no earnest money, then cease all communication.

Let me repeat, "Cease all comm if they can't get you a modest EARNEST fee". A corp dev exec has to go through little or now work to cut a small check. It is one email where they cc their boss. It is common common common practice. If they refuse, motivationally listen as to why they are simply using you.

Potential buyers majorly benefit from the process of shopping for your company. During the process, buyers get educated and get a clear look into your operations, personnel, accounts, arbitrage opportunities and revenue stream(s), goodwill and how you are engineering your business model.

When I was an analyst (because the lead guy on the deal team was too old and hammered all the time to be able to remember his laptops password. Lol, his laptop had factory wallpaper)

I digress.

When I was an analyst, I could see their business much clearer because companies we'd want to buy all had a pattern. Heck, the acquisition price even had a pattern.

By arbitrage opportunities, I mean If they pay X; now they are buying something worth X * Y. That is the ONLY way to sell future value. That is a primary reason to buy your company. If they re-coil at the thought of a shopping fee, make it ridiculously low. Like $100k. Or at least $75k. If you take $25,000, you're a retard.

If they are dragging their feet in the transfer of the earnest money, ask for $500 cash with the $24,500.oo to come. It does not matter if your are in the middle of lunch at Kokkari /Evvia. Get a credit card. Get the earnest money.

Seriously. Stand up from your lunch. Ask for their corporate card and go to the bar by the secret wine room and ask for $500 in paper gift certificates charged on their Starwood American Express. Corp dev managers are whores for miles and points and Amex Starwood is our de-facto it card.

On a parallel track, also execute this:

-1- research a vc/seasoned super angel who invested in a company that has been acquired by the company that is THINKING about acquiring you.

-2- offer the investor a simultaneous close arrangement.

The simultaneous close is where the round and the sale of your startup take place at the same moment in time.

As VCs, we are sometimes glorified business brokers. I swear half my investments exits are simultaneous closes (my round goes in two minutes before the acquisition doc). When I say "simultaneous", I mean at the same moment in time. I am a glorified business broker with one LP hanging over my head. If zero money goes into the deal, I keep the business brokerage fee as a VC, thus screwing my LP.

Yay!

-3- They, the last-min-VC-with-experience-selling, will wonder how serious??

You (the founder maybe selling your baby) say, "I have money corp dev Corp's earnest money in escrow. Parked. And THESE (two hands hold up 10, $50 paper gift Kokkari papers.)

-4- we, the VC, then think. Wow. That ball really is in play

******************************
This parallel track adds about double the work but yields about 12x the return on douchie. I say douchie because doing a deal is sooooo douchie McDouche.
******************************
-5- I would structure it, the SIMULTANEOUS CLOSE like this (verbally!! Verbally only.).

This is 7th grade algebra. If you're an MBA without an engineering degree, you might want to go annoy your two tech co-founders. Warning: distracting the engineers from doing work with this torpedo will ruin their "Makers Schedule" Maker's Schedule, Manager's Schedule

We keep 100% of it under the selling price of X.
98%-2% at level Y. Y is higher than X but less than Z
80%-20% at level Z-X with some comps if "(Z-X) > 2%(Y)"

Here X is the lowest price.
Y is a higher price.
Z is the higher than expected price.

Let me repeat that under X, you are not 'paying' a nickel VERBALLY. Lol, you do not sign a VC agreement with participating preferred and all of a sudden the VC has and gets the first 'Z' amount. DO YOU UNDERSTAND THIS COMMON EFFEN MISTAKE.

Re-read at the point of Point #5… I will wait.

Negotiate to set "X". It is ok to put that in writing. For example on a piece of Evvia cocktail napkin, put $11mm. 11,000,000 is my X Re: bit. ly / vc022-2su (it links to For a young startup, what's the best way to deal with acquisition offers? which is this page "bit ly vc0222-su"

You really don't get to actually set a Z price. You simply negotiate the X price with your investor-now-acting-as-deal-insurance. The idea is that at level Y price, the investor-now-acting-as-deal-insurance gets paid a hefty 2%. You and your existing investor team get 98%.

If the price gets crazy at the Z level, then youre potentially paying investor-now-acting-as-deal-insurance 20% of the Z minus the negotiated X price. Remember, you negotiated the X price. There is an over lap area where compensation to investor-now-acting-as-deal-insurance is murkie if "(Z-X) > 2%(Y)". This makes sense right?!

Dual track executing the sale of your business is incredibly street smart.
Do not be a newbie and tackle selling a company without this secondary track. You do not scan and cherry pick what to execute. You must must. If I were your friend, I would add ten more deets but I am 32 minutes in and my 30k nappie nap is calling me–

I would get another mentor to advise. Someone you trust that is ideally uber rich already. This is what pros do. Pros triple track execute and have their backup plan have a back-up. Delegate decision making to them because thinking clearly with a acquisition offer coming down the pipeline is one of the most heady disorienting things no one can prep you for.

Remember, the person buying your business has been in 10, 20, 100 deals. They have the advantage. They hit every curve ball you can dream to throw at them.

Unless.

If you are at the point in selling your company where the butterflies in your stomach are causing literal vomit, there is a human Pepto Bismol for what ails…There is this marketing Merlin that coats and soothes, adding another layer: Larry Chiang.

One time, he even sold a company after the founders had quit, the VCs had left it for dead and the BK lawyers had a pre-pack ABC cued. An ABC is 'assignment for the benefit of creditors'. Its a sexier bankruptcy that compartmentalizes liabilty and shelves it in case of a re-org or turn-around expert to acquire. Pre-Pack ABC. As an entrepreneur, spend ten min

Larry Chiang knows, literally, everyone, memorizes cell phone numbers, texts anyone at all hours of the night and most of the time speaks like he is literally high on cocaine and qualudes. He conducts a deal closing like a maestro in the orchestra pit. He sits at the Evvia bar like he's the owner. He knows everyone on every table and the bus staff

In the aforementioned sale, he decided to obnoxiously have a large branded party to announce news. At that moment, the founders were inking their Pre-pack ABC's. It is his act to seem rash, young and foolish but he's a typical ex-banker w/ deep love of arbitrage and hack the M&A game.

Triple track execution track, explanation completed.

For goodness sake, add a clawback clause. Very, very often, founders generate wealth buying back their old company at nickels on the dollar. If the sale is part cash, part equity or/and part earn-outs… Know that the cash is the only part of the deal that is real. The earn-out part usually does not parlay. Once the cash transfers, the other terms of equity tiers and vesting schedules wiggle, alter and morph. Plus, you're "swapping your cat for their dog" (i.e. trading stock to speculate on their pre-IPO stock. I scanned the answers and I believe this colloquialism was reiterated. Deal language has patterns that play over and over just like the end stories.

A clawback clause especially helps where a tranche is "set to performance". If the buyer massively cheats you by making the performance impossible, your only countermeasure is clawback. Founders get this wrong time and time again.

See the below Quora answer by my friend "Anonymous #13" about taking the purchase price all as stock. Laugh out loud, founders actually will sell for all stock STILL.  Deal language has patterns that play over-and-over just like the exit stories.

Please go back and re-read this. Do not be a cautionary tale. It has taken almost an hour to write this. I've seen dozens upon dozens of founders fucking fuck this up. Doooooooooooo not be a cautionary tale.

For a young startup, what's the best way to deal with acquisition offers?

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Written by Larry Chiang

November 9, 2014 at 10:39 pm

Posted in Uncategorized

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