The vast majority of startups graduate Speak by acquisition. And while the Internet is full of advice for pre-exit founders, there’s remarkably little content to help guide them through the post-acquisition period—even though they and the staff they hire will often spend two to three years toiling with the buyer. An acquisition is certainly an exciting occasion, but it’s not always the happy ending that the “Founder’s Journey” story might suggest.
Over the course of my career, I have experienced 11 different acquisitions from multiple perspectives: as a 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 acquiring founders. While I’m not keen on naming names or diving into specific deals (as a rule, founders don’t tell bad stories about their new employer), I can compile the honest views I’ve heard and combine them with my own experiences to produce the comprehensive guide to the acquisition process.
The psychological transition from founder to employee can be difficult, and the following years can be dwarfing compared to the life of a startup. You’ll have messy dust on you 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 bring success to your new employer. You may also experience resentment from your new colleagues, who have also worked hard for 10 years and have no acquisition to show for it. You will tend to feel that everything Jupiter does differently is inferior – but resist that urge. I sold for a reason. Be agile about differences and learn from experience. Find something you can only learn or accomplish as part of this larger company, and then do it with intent.
The most common topic of these conversations was simply: “I wish I knew what I know now.” Knowing the leverage, the type of acquisition you’re in, and the important points to move forward will help you maximize success and employee happiness in the long run. You owe it to yourself—and the employees who followed you—to be prepared.
How well can you shape the score?
Much more than you think.
In acquisitions, there are two types of leverage. The first is negotiating leverage, Which determines who wins the deal break-up points. The second is Cognitive influencebased on knowing which issues you can win without jeopardizing the deal.
There’s not much you can do to change your negotiating leverage — either you have a competitive takeover or you don’t. However, you can change your cognitive leverage. Contrary to what the acquirer might say, most points aren’t a deal breaker. You just need to know what to ask for – you might be surprised at how agreeable the buyer is, but only if you ask.
KYA: Know your acquirer
Evaluating the acquirer will help you and your employees prepare for what lies ahead.
Incumbent Vs Startup: Obviously, the older and older the buyer, the more cognitive and cultural dissonance you will experience. You can’t change this, but you can lead your team with emotional intelligence. The acquirer is getting big for a reason. On the other hand, acquiring a startup might seem completely 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 his plan, because it will raise many issues that concern you, your employees, and your customers.
Acquirer culture: You may feel that two or three years will pass quickly, but it won’t. It is important if your employees are entering a culture where they feel at home. You will be swept up in the momentum of acquisition, so remember to ask yourself if this is a company that reflects enough of your values. Talk to more than just the acquisition team and deal sponsor – ask to speak to the CEO of a startup they previously acquired.
Know why you are being taken over
There are five types of acquisitions, and understanding which model works best for you will guide your approach:
New product and new customer base: You know more than the acquirer and they can easily spoil 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 Green SkyAnd the Facebook and OculusAnd the Amazon One MedicalAnd the MasterCard and Recon Recon.
A new product or service, but the same customer baseMost acquisitions fall into this category. Founders should resign themselves to faster integration, because it ultimately leads to more success for both sides. Integration complicates the gains – but your first priority is avoiding the gains. Famous examples include Adobe and FigmaAnd the Google and YouTubeAnd the Salesforce and Slack.
New customer base, but same product category: In this category, you know the customer and the buyer does not know. Maintaining a higher degree of autonomy in the short term is critical to the success of this acquisition. Be ready for knowledge sharing and ultimate integration. Examples include PayPal and iZettleAnd the JPMorgan and InstaMedAnd the Marriott and Starwood.
Same product, same customer baseThe buyer wants your customer base and may eliminate you as a competitor. You will fully integrate into the buyer by function, and quickly lose your independent identity. Examples include plaid and kofuAnd the Vantiv and WorldpayAnd the Ice / Ellie May and Black Knight.
appointments: 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 a good exit for you, and an unnecessary purchase for the buyer. In this category there are too many examples to count.
What do you order?
During the acquisition process, it’s easy to focus on transactional points such as valuation, working capital adjustments, warranty, and compensation. You need to get it right, but your experience over the next two to three years will depend more on how things work post-acquisition. In hasty transactions, acquirers will tell you not to worry about these points – but you should. Here are the key non-transactional points to consider:
Employee compensation: You must adjust employee compensation prior to acquisition because it will be very difficult for the buyer to change them later. Your employees earn startup salaries, which should be higher when the capital upside is removed. Be aware that the transaction may collapse, so do a compensation measure and then wait for execution until you are absolutely sure the transaction is closed.
Employee titles: You will need to assign your employees buyer titles and compensation ranges. As a startup, you probably focused on stocks and options, but an acquirer focused on cash compensation and other benefits. Learn the differences between titles before you map out, as big companies often build everything from bonuses and benefits ranges to participation in leadership meetings on them. Strongly advocate for your employees – you have a cognitive impact on them, so use it.
save: Acquirers want to retain key employees of the startup, and you have the power to decide who is in the retention pool. However, it is a double-edged sword because your employees must commit to earning additional compensation. Make sure to keep this period under two years, as three times it will feel too long. Instead of expanding the retention pool upfront, you should negotiate for a second discretionary retention bucket that you can use to retain key employees who may want to leave shortly after the acquisition.
Pre-agreed budgets and staffing plans: You thought raising money from investors was tough, but just wait for the company’s budget. Most large companies use budgets and headcount as control mechanisms, so negotiate for both in your first year. You’ll need freedom to execute, and you shouldn’t spend time advocating for every new employee – most likely with new stakeholders who weren’t part of the initial acquisition.
Verdict: 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 best to have only one person to impress. If you are a stand-alone business unit, negotiate for a board of senior leaders from the buyer. It’s a new build 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 a profit.
Earnings: Buyers prefer them because they match price with performance, but your job is to avoid them. This is easier said than done, but you will never be as free to execute post-acquisition as you are in pre-acquisition, and unforeseen forces will disrupt even the best laid plans. You could crush it on revenue and miss out on gross margin, or meet all of your goals, after 12 months. It would be your call, but if you have a chance to earn 25% more by earning or settle 10-15% more up front, I will accept the smaller amount upfront.
Involve your board of directors
Most acquisitions start with an unsolicited expression of interest, and CEOs have to share it with the board. Some are easy to dismiss, but others kick off the awkward jig: Do you want to sell? Don’t you want to go away? At what price will you sell?
This is where you will see the real personalities of the investors. Everyone understands that Series B investors at a $125 million valuation wouldn’t enjoy a $200 million sale. However, the real task is to find the best risk-adjusted outcome for the company, taking into account the founders, employees, and common shareholders. This is where you’ll be happy to have real partners selected as board room investors, and independent board members can provide a particularly valuable voice.
If you decide to go with the buyer, executives with M&A experience can take it from there. If you’re not that CEO, get help. You don’t want the entire board involved, so ask them to name one or two members of the M&A committee and put them on speed dial. You’ll avoid many small mistakes – and you’ll have at least two 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 life after an acquisition before you start negotiating, the happier you and your employees will be over the next two to three years. There are massive psychological and operational changes ahead, and you can influence many of them using this model for when and where to negotiate.