Professional Documents
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Mar 16th, 2011 A while ago an anonymous HN user wrote an Ask HN titled: HN: Just received an offer for our company, what now? That thread contained some of the best advice that Ive seen on HN and with the thread now deleted (for good reasons, which is why Im not linking to it here) and my promise to summarize it, I felt I should do as good a job as possible to organize the advice in that thread in a more structured form, which is why it took quite long to do the job. This post is a departure from my normal posts in that in every other post here the words are my own. This one is an exception in that both some of the words and some of the ideas in it are not mine, but belong to the writers of the comments in the HN thread. This post is probably much too long to be consumed in one sitting, either file it for the day that you will need it or take it bit-by-bit. While the original posters situation is quite specific, much of what is written here will apply to other situations in which one corporation plans on taking over another, and you could use it looking at the deal from the perspective of both the buyer, and the seller. Some of the advice here may sound like common sense, but it is surprisingly easy to get carried away in the heat of the moment, and even professionals can get caught out by forgetting one or more of those common sense elements.
4 year vesting period and there are worries about the buyers pulling stunts like firing the OP and/or his buddies the day after the deal is done. Obviously theyre excited, but theyre afraid to make a mistake that will be impossible to reverse, and theyre already thinking about what they will do with their newfound freedom post-acquisition. The purchaser is clearly the more experienced party here, and theyve pushed every button available to get the target to accept the offer as made without further conditions, the pressure has been dialed up to max. On top of that theyve had some offers from lawyers and investment bankers that want to get in on the deal, and it is hard for them to figure out what their motivations really are. They do not have a LOI (Letter Of Intent). And with that, the meat of the original post ends. Basically, they are not sure how to proceed, the next step is one large question mark. This is a situation that all first-time founders that have not yet sold a company before could very well find themselves in, and even experienced businesspeople that have had one (or more) exits would do well to pause for a second here and review their options. If you are in this position, I think that the first words should be congratulations, you have a luxury problem. Think about the odds of this happening at all. Bootstrapped, profitable, no other investors besides the founders, fair sized offer on the table from a reputable company. Most start-ups never make it that far. But there is work to be done here, and lots of it if you really want to maximize your chances of getting a deal done, and even more work still if you want to get a deal done that you will be happy with, and that is close to the maximum that you could get. Fortunately, you are not alone in having to go through this process, and those that have gone before you may be able to help make the process easier. To make this article as easy to read as possible (in spite of the length), Ive made it into a series of items. Each of those could be an entry on a checklist or a to do, or just a piece of common sense. There are two levels of items, a higher level with the big groups of items to get some overview, a lower one with much more detail.
2. The Process
Selling a company is a process, not an instant
The media might give you a different impression where you read on one fine Saturday morning that company x acquired company y Friday just after the market closed. In reality though, it is very likely that that is just a formal announcement timed very carefully to avoid regulatory troubles. The deals that Ive been a part of typically were negotiated out over a period of weeks or months, sometimes even more than a year with all the parties involved sworn to secrecy while the deal was being hammered out. And the number of people involved in those deals was quite a bit higher than the press release would make you believe. Typically there are a number of steps that such negotiations go through until the moment of the actual signing. Some of the steps can be abbreviated or even omitted based on how well the parties know each other, each others businesses and on how long they are in existence. For instance, when a start-up that is 6 months old is acquired it typically makes no sense to do a very large financial due diligence. But usually the format is adhered to quite strictly, especially if the acquiring party is a publicly traded company you can expect all the is to be dotted and ts to be crossed. The process ends when either two parties have closed a deal or all possible buyers and/or the seller have withdrawn from further negotiations. Typically the sequence of events is:
preparation
In this case the sellers seemed to be somewhat unprepared for a takeover bid, so they had to do all their preparation after negotiations had already begun. Thats late, and in my opinion too late. If you are in the un-enviable position of having but one possible buyer then you had better be ready for when they come knocking. Normally the decision to make yourself available for a buy out is something that you do long before a suitable buyer appears and keeping an information memorandum up to date is a lot easier than preparing one from scratch.
marketing
Marketing means to literally market the sale of the company to various parties. The IM can be sent to multiple possible buyers (for instance, strategic buyers, parties that operate in the same field but not in the same geographic region, competitors or parties that simply see the target as a great investment). Each of those will have their own motivations why they might like to own the target and each of those will look at the IM through different tinted glasses.
negotiation(s)
Negotiations is the phase where the deal structure and price between the seller and potential buyers is determined, and, presumably weighed against each other and the possible alternatives. In the end only one party (or none!) will be left over to enter the next phase. During the negotiations you aim to maximize your price and to minimize your risk. Up front cash carries a lower risk than proceeds based on earn-outs or equity in the buyer.
Just like a buyer has the duty to do due diligence, the seller has the obligation to inform. All of the professionals doing due diligence will operate on the assumption that you are telling the truth, you are in immediate hot water if you are caught doing anything but that. Also, typically lawyers, CPAs and others will state explicitly in their reporting that they are operating on information that you supplied. Hiding things that can be of material impact to the deal can come back to haunt you later on, usually the long form contracts will contain clauses that stipulate quite clearly what the penalties are for false representation or omissions, full disclosure and transparency are key here. If youve been operating for several years your books will need to have the seal of approval of a registered accountant, you will need to conform to all business regulations, HR laws, permits and so on. The harder you pushed during the negotiation phase the harder due diligence will be used to push back.
Closing
On closing the signatures of the parties executing the contract are placed and the deal is done, the only thing remaining then is the payment of the agreed upon amount and the transfer of any other stock or assets according to the contractually agreed upon terms. Because the process of selling a business can take anywhere from days to more than a year it is very important to realize that you have to continue to run your business in the meantime and to remember that that is still your first priority, and not the sales process. Selling your company is very important but if the company should stop running smoothly, stop growing or even fail whilst you are trying to sell because you spent too much time on the sales process you end up back where you started or worse. So there is an immediate opportunity cost to the process of selling your company (reduced time available to concentrate on the business) and if youre not careful that cost might become very large.
Take Charge
When youre selling a company you are likely doing something that will happen at most several times in your lifetime and you absolutely need to make the most of it. Taking charge means that you take control of the process of the sale. Of course it is much easier to become passive and let others take care of things (for instance, the buyer!), but that way lies misery. Nobody but you has your interests 100% at heart and if you really care about your company, your co-founders, yourself and if you have them your users you will take charge now. If there was a time when you were needed then now is it, this sort of thing is where the men are separated from the boys (or the women from the girls), and this is what running a company is all about. Anybody can click together a website or an app, but not everybody is able to step up to the plate when the pressure increases and failure is not on the menu. Do this well and you will look back from
well deserved comfort, mess it up and you will be kicking yourself in the rear for a long long time. If you think that sounds overly dramatic have a word or two with people that did either the wrong deal or that let a done deal slip through their hands.
such an undertaking. Like that you have time to build up trust, possibly to replace parties that do not perform to your liking and to make sure that you and your co-founders are all on the same page. If you need to do any or all of that after an offer has been made you have very little time to do all of that right. While doing all this you may find that one particular party looks like theyre the ideal partner for a merger or an acquisition, it may well be that initiating talks with them will lead to exactly that but be careful here, the one that approaches technically is at a small disadvantage.
Dont kill the process until youre sure that there is no way to get a good deal
But kill it swiftly as soon as you come to that conclusion. There is absolutely no point in pursuing a deal that will not make you happy, so once you realize that the negotiations with a party are not going anywhere any time you put in to it is simply lost. But before you reach that point, if you kill the process and there was a chance to make it work youll be scratching your head about that for the rest of time. So better make sure! Its easy to kill a process, next to impossible to revive it after youve done so.
A deal is not done until the contract is signed and the money is in the bank
So until then dont get too happy. It is not at all uncommon for deals to fall through at the last possible moment. It is also not uncommon for you to not even be told why the deal fell through. Nobody has any real obligations to the other party until the contract (and not the LOI, nor a termsheet) has been signed. Of course, the further you are long the path to completion the smaller the chance, but the chance does not reach 0 until then. If you have a signed LOI you have not yet sold your company, if you have a termsheet that both parties agree on then you have not yet sold your company. All that matters is the final contract and any pieces of paper that go with it (side letters, employment contracts and so on) and the payment in whatever form it takes. Until then, there is no deal.
3. Alternatives
When youre thinking about selling a company and enter in to negotiations with one or more parties make sure you realize that there are always alternatives to selling, and that the best deals are made by the people that were the most aware of what their possible alternatives where (and realistically so, not daydreaming). For a negotiator the way to approach the problem without an alternative is like being a pilot on their last chance to approach because theyre out of fuel. You need to know your alternatives and you need to know the ups and downs of those alternatives. There is no point in negotiating from a fantasy fallback position against an experienced party, youll get clobbered. And to negotiate without knowing
what (roughly) continuing to run your business independently for the next couple of years will bring you is just as silly. Do your homework, know your fall-back positions, their order of priority and the ups and downs of all of them so you can make meaningful comparisons.
Variations on a theme
One way to create an alternative is to diversify, either find different niches that the same kind of product can be adapted to. Or, alternatively see if you can enter geographic regions that you currently have no customers in. It usually is a lot easier to create growth by varying the theme than it is to start from scratch so consider that in your list of possible alternatives.
Just because this offer came along you are not in any way obliged to accept it. In fact, if there is one thing youve learned it is that some party wants to acquire you, and if they have a direct competitor (or more) chances are they too might be in the market. Consider pitching other parties that you identify as possible buyers.
being cheated being stuck in a job that you dont like working for a company that does not share your vision finding out there were other options after the fact
Each of those (and the untold numbers of items you might regret that are not in that list) can be weighed and to some extent mitigated.
4. Deal Structure
A million dollars in cash is not the same as a million dollars in stock
That seems like a pretty obvious statement to make but lots of people are unable to see the distinction. Stock that you get in a buy-out typically comes with strings attached. The usual clauses will limit your ability to liquidate that stock based on time, performance and all kinds of other criteria that need to be met. Stock has an inherent risk. Even if you are allowed to sell, you may find that the stock is no longer worth what it was worth when you were bought out. All stock deals are great for the buyer, not so good for the seller. If you want to mitigate some or all of this risk you will have to negotiate a deal where part or all of the deal is in cash. Typically buyers do not like all cash deals in high tech companies because they would like the team to stick around post-acquisition. And typically sellers love all cash deals because it gives them the freedom to walk away. Parties that are serious will usually decide on a bit of both, where the risk factor becomes mitigated by doing a part of the deal in cash, for instance to guard against the parent company going South or a stock market collapse. This cash portion of the deal will likely not be done at the same ratio as the stock part, the fact that the risk is mitigated will translate in to a lower amount of cash. Risk has a value and cash has relatively little risk compared to stock, the mission here is to find a number that all parties agree on represents the value that was built to date and to pay that out in cash, and a staggered reward based on the future performance. Typically value that is there today should be reflected in the cash portion and value that is still to be built in the stock portion. In the words of George Grellas: The idea of vesting is to prove that founders can build value before getting rewarded with their stock. When founders start, they usually need to build in some form of vesting to prevent one of them from just walking away with a windfall while the others continue to work hard to build value in the venture. Even then, however, if founders have already build some value before the formal structure is put in place, they will take their restricted stock grants with some portions immediately vested (usually 20% or so, maybe up to 33%). At Series A, the investors might insist that founders restructure their stock positions so that they have to vest at least a significant part over some period. This can vary but usually means that the founders get cut back so that only, say, one-third of their stock is vested, with the balance subject to vesting over a few years. This ensures that the investors will not get screwed and that the founders will earn out their positions as they use the investors money to continue to build value. Finally, at the M&A stage, the purchase price is sometimes divided between a cash/stock portion that is given outright to the stockholders and another portion (usually an option grant) that needs to be earned out. The basic idea behind such a division is that x amount rewards them for the value they have built and the balance will reward them for continuing to add value in the future. Usually, the x part is by far the largest part of the consideration, with the balance (the part that needs to be earned going forward) amounting to, say, 10 or 20% of the total purchase price. The consistent theme in all such cases is to make sure that those who have built value get nonforfeitable equity as a reward while those who need to prove themselves going forward get equity that can be forfeited.
If you have built true value, then, of $10M and you take your payment in stock that is 100% forfeitable, you set it up where you can be cheated out of all the value you have built with little or no legal recourse. This is a HUGE red flag. I have seen founders do such deals and have begged and implored them, at the very least, to insist on 100% acceleration clauses in their employment arrangements should they be terminated without good cause. In the one case where the founders went through anyway without such protection, the company (a prominent public company) wound up terminating one of the main founders within months and all he got was a few crumbs for years worth of effort. Check with a good M&A lawyer on this and then use your best judgment. It is ultimately your call, whatever the legal risks. But do it with open eyes and that means getting good help in assessing what those risks are. For the buyer stock is a lot more equivalent than to you though, they can simply sell some of their stock to their current investors and use the cash raised like that to buy you out. They also have a much better way of estimating what they think the effect of acquiring you has on their stockprice and in an ideal world the acquisition will boost their stockprice up by the exact amount it takes to acquire you.
Negotiate to remove elements you do not like or that you are uncomfortable with
In the OPs example for instance there was no protection against the buyer firing the OP and his cofounder three days after the acquisition, and with a vesting clause of four years this would have caused them to get nothing at all for their hard work. The worst possible moment for that would be a week before the stock vests rather than on day #2! Of course this would be in bad faith and you might be able to sue to correct it but it is much better to resolve such issues by preventing them from being possible in the first place. In this case the solution for that (and any M&A lawyer worth their salt would include something to this effect) would be to do part of the deal in cash and an acceleration clause that states that if the buyer terminates one of the original founders before the stock vests that their stock vests immediately. That way the problem simply goes away. If the buyer would not accept a clause like that then thats an excellent reason to suspect that they actually will fire you on day #3, and if they have no problem with such a clause that will increase the goodwill between both parties. A contract should show consideration for all parties that sign it and that will be affected by it. And a contract that you are not happy with should simply not be signed and any such offer can be safely rejected.
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What to negotiate?
Making an exhaustive list of what you should negotiate is a difficult - if not impossible - task, for every deal the list would be different. But some elements are common across all deals and here is a list of suggestions of things that you should at least have in the terms sheet: amount of cash up front amount of stock + vesting schedule employment (yes, no, terms, salary, work location) If there is no employment then there should be no vesting. acceleration conditions for the vesting of stock anti-dilution measures price guarantees (a minimum value for the stock for instance) transfer of assets explicit exclusions (for instance, of some side project that is currently part of the company being acquired that you have great future plans for) Any other terms that you think are material
5. Advisors
Advisors are people that have experience in fields that you yourself do not. Typically advisors will be older than you, usually by a generation or more and theyll have some gray hair to go with it in memory of the hard lessons theyve learned and paid for. Advisors can be friends in business or people that you hire with a specific job in mind. Typically their roles are to bring their collective experience to bear on the task at hand and some of that experience will be yours to keep when the job is done. Some of it will be so specialist that even after being explained all the ins and outs youll be happy to hire them again for a similar job. Advisors are there to advise you, not to do your job for you so be sure that you realize that youre hiring for experience and field-specific knowledge, not legwork.
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should not consult with their advisors. In fact, an honorable counterpart would encourage you to find advice where ever you can and would never see this as a negative. Keep in mind too that the party that draws up the contracts is automatically granted an advantage so if you let the other party draft the contract make sure that you and your lawyers go over it with a magnifying glass or have your lawyer draft the contracts.
(Investment) Bankers
While Im somewhat positive about bringing lawyers in on a deal like this (theyre literally on your side, and they get paid by the hour so you know what you get is what you pay for) bringing in investment bankers can complicate the situation and can cost you the deal. It may work out for the better but this is by no means guaranteed. Bankers do not work for you (even though they may charge you a success fee, or a base fee) they work for themselves. Typically theyll set you up with some VP, then delegate the legwork to people lower in the organization. They will try to maximize their take based on the success fee, and if there is a base fee their downside is capped, so your goals are no longer aligned. My personal experience (me, Jacques) with this sort of thing is a mixed bag and if you can do without it then I strongly suggest you do so. If the buyer is introduced to you through the investment banker treat them as working for the other side, dont agree to fees and dont sign any exclusive representation agreements.
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In an ideal situation you will have started to cultivate the connection to the people that will assist you with a deal like this long before such a deal is on the table. That way you have all the time in the world to build trust and to verify that they are the real deal. It also means that youll have a lot less to explain by the time a possible deal rolls around and you can hit the ground running instead of spending precious time with educating your advisors on the particulars of your situation.
6. Valuation
Valuation is the art of sticking a price on a company that all parties agree is reasonable. For a fast growing company with relatively little turnover but huge potential this is a black art. For an established company in a mature market where the cards have all been dealt it is much easier. Usually youll find yourself somewhere in between those two extremes. A rule of thumb is that the more data youve got to work with (years in existence, market information, competitive arena) the easier it gets. Typical elements that make it in to a valuation calculation are the turnover, profit margin, growth rate of the company, growth rate of the industry, industry averages, efficiencies of scale, cost of acquisition of new customers and so on. All of those can help narrow down the range within which the value of the company lies.
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should simply not do the deal. After all, when youre profitable, for instance, getting paid 3x revenues might be interesting if the margin on your product is very low. But if the margin is very high then you could simply wait 4 to 5 years and youd have the exact same money in your pocket and youd still have your company. Nobody can tell you what is a good deal for you, and one of the most important things to remember is that all that counts is whether you will feel good about the deal in every aspect. If you and your partners feel the deal is fair then you can safely sign. If you have reservations now and not later is the time to do something about it, when its done, its done and you will not be able to correct any mistakes.
Shop around!
If youve received an offer it would be a good thing to shop around. This will have several effects. For one youll have a better idea how hot the market is, if another offer is right around the corner (and how high it is) or if this is the only one youre going to get. Another thing you will learn is that there in fact may be other parties willing to make an offer right now. In that case your single buyer process will turn in to something that resembles an auction, which will significantly improve your negotiation position. Having an experienced negotiator in such a case is important, it is very easy to handle this in such a way that you suddenly find yourself with no options at all instead of multiple possible buyers if you handle it wrong. More (real) potential buyers will drive up the value.
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7. Negotiation Tactics
Ignore Pressure
Experienced negotiators will use all the tricks in the book (and whatever new tricks they can think of) to put you under pressure, especially if they believe that you are inexperienced. Theyll try to get you to agree to terms that are unfavorable to you, theyll try to get you to accept their word as the word of the most experienced party even though this might be against common practice. You are not in a hurry, you do not need to sign anything today. Do not allow yourself to be rushed, ever. Never ever sign anything before thinking it over and talking it over with your advisors. Any document you are given should never be signed that day without a review. Only agree to signing a document that has been thoroughly reviewed and that you are 100% in agreement with, any regrets after you put that signature are with you to stay. There is no such thing as a bad deal that was not done but there are plenty of examples of bad deals that were done. Better no deal than a bad one! If you have been drafting an agreement make sure that the one that you are about to sign is actually exactly the same as the final draft if you were not the one to print it! (if you think that sounds overly paranoid, this exact scenario where a draft was amended after the last review round and the person signing it (not me, fortunately!) did not notice until it was too late and the change was small but with significant effects). M&A is hardball, be prepared to slow down the proceedings to the point where you can follow them and simply refuse to be pushed to go faster than you are comfortable with. If a deal is good, it will still be good 48 hours from now, and if it is not good 48 hours from now you are probably (but not always!) better off without it. So, take your time (thats probably redundant by now, but just in case), read absolutely everything until you completely understand the implications of what youre signing. One common beginners mistake in stuff like this is to gloss over terms that you dont understand only to come back much later to them (well after signing) to realize the full implications of what youve agreed to. Signatures are binding, ignorance of the terms is no excuse.
Even if a company explicitly says that their first offer is the only offer that youre going to get, and even if they mean it, in practice a first offer is never final. Saying that it is is just another way to put pressure on you: take this or nothing. An inexperienced negotiator might fall for that and think: This is a shitty deal but I wont bet getting a better one, so Ill take it. If an offer is not to your liking make a counter offer or walk.
If you want to get the absolute maximum out of the deal you might end up with nothing!
Its fairly easy to just keep on pushing for more, no matter what. Do realize though that there is a significant risk that if you keep on pushing for more that the other party will at some point simply break off negotiations. Set a goal before you start to negotiate, be prepared to walk if you cant reach it but dont try to push for more in several rounds once you reach your goal. The goal should be based not only on what you think it is worth but on what you perceive the company to be worth in the market. If you achieve something >> your value and ~your estimated market value (assuming that one is the higher one) then you should probably do the deal, not push for more. A large part of negotiations is psychology and if you set a lower boundary (with your response to an offer) and the other party accepts then increasing your demands is simply bad form. In that case you should have built in more negotiation room.
Dont bluff
Dont threaten to end the negotiations or say final offer unless you mean it. If your final offer isnt final the other party will realize that you are bluffing and you have just strengthened their hand. If you use strong words be sure to be willing to back them up with deeds. If youre a very experienced negotiator you may use bluff as a strategy but if you are then you probably dont need this guide to begin with. If youre not an experienced negotiator sticking to the facts and keeping things as simple and to the point as possible are an excellent way of staying in control of the proceedings.
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One beginners mistake that rookie negotiators often make is to go in to specifics of why they feel things are a certain way. Doing that gives the other side of the table an excellent reason to use the current position as a ratchet point. They can basically freeze the value and other parameters of the deal and try to shoot holes in your position in order to reduce the value or strip out features. Being specific is great, but reserve it for those things that you are not going to yield on and that are 100% rock solid. Its very easy to fall in to this trap and all it takes is to say why you believe you are worth x and why you believe you need feature y in the contract. Why you want stuff in there is your business, you dont gain anything by motivating all your choices and you stand to lose a lot. Be specific if you have to, not to give the other side a lever to be used against you. The other deal was such a stupid lowball, we couldnt even take it seriously. We simply replied, this is not a good deal. Make us another offer. We felt it would be ridiculous for us to counter offer such a stupid deal that rejecting it out of hand and making them negotiate against themselves was a better option. Needless to say, they didnt make a better deal. Good riddance.
Anchoring
Anchoring is a psychological effect, any number - even if it has no bearing on the situation at all - can be used to get someone to reason differently about an unknown quantity. For instance, by offering you $50 for your car, you might think that if we settle for $500 your got a deal that is 10 times as good as the initial offer. But in reality the $50 had no relation to the true value of your car so it should not have been part of the equation to begin with and it definitely should not give you a good feeling about the still bad - price that we eventually settled on. Lowballing an initial offer by a substantial amount is the M&A equivalent of this trick and you have to be aware of it and on guard against it. Dont let the initial offer set the range you wish to negotiate in, set your own range and stick to it. The only valid reason that there is to go out of your initial range is new information that you were not aware of at the time that you set your range. So, there need be absolutely no relation between an initial offer and the offer that is reached through negotiation.
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business with people that you do not trust is not only possible, it is daily fare. It is safe to say that even though you may trust the other party it does not hurt at all to be looking out for #1 on the basic assumption that they are doing so as well. Anybody that ignores that rule will sooner or later pay for it, and the tuition fees are high and non-refundable. The basic tools in the toolchest of a snappy rabbit are: Lawyers, Contracts, standardized protection clauses, best practices, banks and courts. To avoid visiting the latter you should do your best to use the former as good as you can. A contract is something that you make up to avoid having to go to court, a sloppy contract or a contract that contains things that are to your disadvantage can really hurt. Society has been built on the fictional construct that a signature under a document binds all parties to the terms of that contract. Some of your rights are inalienable (and you cant sign them away, even if you want to), some of your rights you have simply by being alive, but on the whole contracts allow for great flexibility in changing your rights position and you should only sign those contracts that you fully understand and that represent your desire for your rights and obligations in a fair way. So you dont need to trust the other party beyond the fact that they too will be bound by the contract, which - one can hope - is an unambiguous representation of the situation. Where there is ambiguity there is trouble. Trust your gut feeling. If you dont feel comfortable with a party then its perfectly ok to just back out. Someone here derided the idea of declining to do business with people you dont trust: modern financial and legal infra-structure is designed so that we can make business with people we dont trust. Since the beginning of mankind the world has been full of people who will take advantage of others who are not as smart or experienced or powerful as they are. Its not always easy to discern these kinds of people. Some are very smooth and skilled manipulators. You describe yourselves as young founders. I suggest you seek out someone old (over 50) who you know well and whose judgement you trust, and ask them for counsel. Im not necessarily referring to business or legal counsel, Im talking about someone whos been around the mountain enough times that they can discern when someone is trying to blow smoke up your dress. It should be someone who has your best interest at heart. Maybe your own father or grandfather might be a good choice. I am not being condescending about you being young and inexperienced. Nobody is born knowing everything. Im old now, but I was young once, and I remember how it was. Get someone with the long fangs of many years who is on your side. Bring him to meetings with this companys people, introduce him simply as one of your advisors. He doesnt need to say anything in the meetings, he may just observe and listen, and perhaps ask a few questions which unmask any propaganda. Ive been doing consulting for 30 years. When contemplating a job, if I dont have enough trust in the clients integrity (and he in me) that I feel we could do the deal on nothing more than a handshake, Ill walk away. For most jobs I do have a paper contract, because having things written down is good, but I dont expect any contract to turn a snake into a good guy. If someone is intent on cheating you, all the contracts in the world arent going to make much difference. Over the years Ive ignored my snake radar a few times, and in each case I regretted it. Any contract must be equitable. What youve described so far sounds rather inequitable. Consider what that might indicate about the integrity and good faith of your potential purchasers. The first time it was a similar low-ball offer with 50% paid up front and remainder over 4 years as an earn-out. The total deal was for roughly 4x revenues, and was all cash. We actually didnt think it was such a great deal at the time, but we ended up going all the way to closing. Lo and behold, they actually tried to change one of the material terms of the deal AT CLOSING. These folks were not to be trusted at all. We immediately said GOOD BYE! and hung up the phone (we were in Switzerland at the time working for a client and actually tried to do the closing virtually). I dont think they expected that we would just walk away if the deal went sour, but they had nickled-and-dimed us so much along the way
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that the trust was already frayed. By the time we were done, there was no trust left. Without trust, you cant do any deal.
Assume the worst case scenario is the one that will play out
Whatever deal you agree to, always assume that the worst case scenario possible under that deal from your perspective is the one that will play out and make sure that you are 100% ok with it if it does. If that sounds pessimistic look at it this way: If thats the case things can only get better. If you assume a higher level of performance and it does not come true you might end up regretting the deal after all.
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