The vast majority of start outputs occur through acquisition. And while the internet is full of pre-exit advice for founders, very little content exists to help guide them through post-acquisition life, even though they and the employees they recruited will often go from two to one. three years working hard with the acquirer. . An acquisition is an exciting occasion, to be sure, but it’s not the happily ever after that the “founder’s journey” story might suggest.
Throughout my career, I have experienced 11 different acquisitions from multiple perspectives: as founder, investor, and Board member. I recently went on a listening tour to compare my experience with the post-acquisition stories of a wide range of acquired founders. While I’m not free to name names or dive into specific deals (founders generally don’t tell bad stories about their new employer), I can add the honest perspectives I’ve heard and combine them with my own experiences to produce a general guide for the procurement process.
The psychological shift from founder to employee can be difficult, and the years that follow can be daunting compared to the life of a startup. You’ll have pixie dust on you for a while, “the founders who built X and sold it for $Y,” but soon you’ll be judged on how well you work with others and how you drive your new employer’s success. You may also face resentment from your new colleagues, who have also worked hard for 10 years and don’t have an acquisition to show for it. You’ll be tempted to feel that anything the acquirer does differently is inferior, but resist this impulse. You sold for a reason. Be kind to differences and learn from experience. Find something that you can only learn or achieve as part of this larger undertaking, then do it with a purpose.
The most common theme of these conversations was simply: “I wish I had known then what I know now.” Knowing your leverage, the type of acquisition you’re in, and the important points to push will help you maximize success and employee happiness in the long run. You owe it to yourself, and to the employees who followed you, to be prepared.
How much can you shape the result?
Much more than you think.
In acquisitions, there are two types of leverage. The first is trading leverage, that determines who wins at decisive points. the second is knowledge leveragebased on knowing what issues you can win without jeopardizing the deal.
There is little you can do to change your bargaining leverage: either you have a competitive procurement process or you don’t. However, you can change the leverage of your knowledge. Contrary to what the acquirer might say, most points are not a deal breaker. He just needs to know what to ask for; you may be surprised at how much the acquirer will accept, but only if he asks for it.
KYA: Know your acquirer
Evaluating your acquirer will help you and your employees prepare for what lies ahead.
owner vs. startup: Obviously, the bigger and older the acquirer, the more cognitive and cultural dissonance they will experience. You can’t change this, but you can lead your team with emotional intelligence. The acquirer got big for a reason. On the other hand, getting acquired by a startup can seem quite natural from a cultural perspective, and you’ll find similarities in everything from tech tools to HR policies.
Handling post-acquisition integrations: When I worked at Cisco in the early 2000s, we completed 23 acquisitions in one year. Know that some acquirers are professionals; some are not. Either way, make sure you know what happens “the next day.” Force the buyer to detail your plan, as it will raise many issues that will be important to you, your employees, and your customers.
Acquirer Culture: You may feel that two or three years will go by quickly, but it is not. It matters if your employees are entering a culture where they feel at home. You will be carried away by the acquisition drive, so remember to ask yourself if this is a company that is sufficiently reflective of your values. Talk to more than just the acquisitions team and the deal sponsor – ask to speak to the CEO of a startup they previously acquired.
Know why you are being acquired
There are five types of acquisitions, and understanding which model you fit with will inform your approach:
New product and new customer base.: You know more than the acquirer and could easily screw up what you have built, so you must fight for the independence of the business unit. These acquisitions fail as often as they succeed. Examples include Goldman Sachs and GreenSky, Facebook and Oculus, Amazon and One MedicalY Mastercard and RiskRecon.
New product or service, but the same customer base: Most acquisitions fall into this category. Founders should give in to faster integration, because it ultimately leads to greater success for both parties. Integration complicates profit, but your first priority is to avoid profit. Famous examples include adobe and figma, Google and YoutubeY Salesforce and Slack.
New customer base, but same product category: In this category, you know the customer and the buyer doesn’t. Maintaining a greater degree of independence in the short term is important to the success of this acquisition. Be prepared for knowledge sharing and eventual integration. Examples include PayPal and iZettle, JPMorgan and InstagramY marriott and starwood.
Same product and same customer base: The buyer wants your customer base and possibly eliminate you as a competitor. It will be fully integrated into the acquirer by function and will quickly lose its separate identity. Examples include Frames and Quovo, Vantiv and WorldpayY ICE/Ellie Mae and Black Knight.
acquire-hire: You have built such a good team that another company is willing to buy the company to recruit them en masse. Be realistic: this is a fancy outlet for you and a non-essential purchase for the acquirer. In this category, there are too many examples to count.
What to ask for
During an acquisition, it’s easy to focus on transaction items such as valuation, working capital adjustments, escrow, and indemnity. You should get it right, but your experience over the next two or three years will depend more on how things work out after the acquisition. In rushed transactions, acquirers will tell you not to worry about these points, but you should. Here are the key non-commercial points to consider:
Employee Compensation: You should adjust the compensation of the employees before the acquisition because it will be very difficult for the acquirer to change them later. Your employees earn starting salaries, which should be higher when the equity advantage is removed. Note that the transaction may still fail, so do the trade-off benchmarking work, and then wait to deploy until you’re absolutely sure the transaction will close.
Employee titles: You will need to map your employees to the acquirer’s titles and compensation bands. As a start-up, you may have focused on stocks and options, but the acquirer is focused on cash compensation and other benefits. Learn the differences between titles before mapping, as large companies often base everything from bonus ranks and access to benefits to leadership meeting participation on them. Stand up for your employees hard: You have Knowledge Leverage on them, so use it.
Retention: Acquirers want to retain key start-up employees, and you have the power to decide who is in the retention pool. However, it is a double-edged sword because your employees must stay to earn the additional compensation. Strive to keep that period under two years, as three will feel too long. Instead of expanding the retention pool up front, you should negotiate a second discretionary retention pool that you can use to retain key employees who might want to leave soon after the acquisition.
Pre-agreed Budgets and Hiring Plans: He thought raising money from investors was hard, but wait for the corporate budget. Most large companies use budgets and personnel as control mechanisms, so negotiate both during your first year. You’ll want the freedom to execute, and you shouldn’t waste time advocating for each new hire, most likely with new interested parties who weren’t part of the initial acquisition.
Governance: Who will you report to? The seniority and authority of your new manager are the most important factors. You won’t escape company-wide budgeting processes, but it’s better to have just one person to convince. If you are an independent business unit, negotiate an Acquirer Senior Leadership Board. It’s a novel structure for buyers, but it’s a clever way to match form with function. Finally, avoid matrix reports at all costs, especially if you have a profit.
Profits: Buyers prefer them because they align price with performance, but their job is to avoid them. Easier said than done, but you will never be as free to execute the post-acquisition as you were before the acquisition, and unforeseen forces will disrupt the best-laid plans. You could crush revenue and lose gross margin, or hit all of your goals, 12 months late. It will be your decision, but if you have a chance to earn 25% more on a win or settle for 10-15% more up front, I would take the smaller amount up front.
Involve your board
Most acquisitions start with an unsolicited expression of interest and CEOs have a duty to share it with the Board. Some are easy to dismiss, but others trigger the awkward dance: want to sell? Don’t you want to lengthen? At what price would you sell?
This is where you will see the true personalities of your investors. Everyone understands that Series B investors at the $125 million valuation will not enjoy a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company, considering the founders, employees, and common shareholders. This is where you’ll be glad you selected genuine partners as investors in your boardroom, and independent Board members can provide an especially valuable voice.
If you decide to engage with the acquirer, then CEOs with M&A experience can do it from there. If you are not that CEO, seek help. You don’t want the entire board involved, so ask them to nominate one or two members to an M&A committee and put them on speed dial. You’ll avoid a lot of small mistakes, and you’ll have at least a couple of Board members already convinced when you come back 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 negotiating, the happier you and your employees will be for the next two to three years. Huge psychological and operational changes are coming your way, and you can influence many of them by using this model to know when and where to trade.