AppDynamics
AppDynamics founder Jyoti Bansal.
- Startup acquisitions aren't a black-and-white issue.
- Jyoti Bansal, the founder of AppDynamics, recommends selling some stock in your company if you need cash now, but want to retain control over your business.
- That's what Bansal did years before he sold AppDynamics to Cisco for $3.7 billion.
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Jyoti Bansal had recently launched his app-analytics startup, AppDynamics, when he was offered $350 million in exchange for the entire company.
AppDynamics was still small, and for Bansal and his wife, the prospect of receiving even part of a $350 million sum was tantalizing.
But Bansal turned down the offer.
Instead, he sold a small amount of stock in his company to another investor. (For privacy reasons, Bansal declined to name the organization that made the $350 million offer or the investor that purchased the small number of shares.)
Fast-forward to 2017: AppDynamics was acquired by Cisco for $3.7 billion. Bansal is now the founder and CEO of the automated software deployment platform Harness, which was valued at $500 million as of April 2019.
Other startup founders may find themselves in the same boat. Research suggests companies today wait longer to go public than they did in years past. Meanwhile, fewer startup executives in 2019 predicted an acquisition in their future compared to 2018, and more were uncertain about their plans for an exit.
When Bansal talks to founders who are considering selling their company in order to get some liquidity, he shares with them his personal experience. Selling your startup "doesn't have to be binary," Bansal tells them -either someone else holds complete control over the business or you do.
If you're in need of cash, you can alleviate the pressure by selling some of your company's stock now and holding onto the rest until the business achieves its full potential - and a buyer like Cisco comes along.
You can run a successful startup and still be strapped for cash
It's typical for startup founders to hold equity in their company, meaning they own a portion of it. But until a liquidity event - which happens when the company goes public or gets acquired - the founders don't actually make money from that equity. So it's possible for a founder to be running a successful business and to still be strapped for cash.
Turning down the $350 million offer was "one of the hardest decisions I ever made as a founder," Bansal said. "I had really nothing in the bank." But he could see that his business was growing quickly. In a few years, he remembered thinking, his business would be worth three to five times that amount.
This scenario may be more common today than it was in years past, since companies are waiting longer to go public. A 2019 survey by the venture-capital firm First Round found that, of 950 founders, roughly 30% plan to wait five to seven years to IPO. Another 30% said they don't intend to IPO at all.
Bansal said he speaks with some founders who are considering selling their business because they're exhausted, and eager to see the fruits of their labor. "They've worked hard for five years or 10 years to get there," Bansal said. "They want that cash." In other cases, investors might be pushing a founder to sell the company, Bansal said, especially if the VC firm is relatively new and "hungry to show an exit" in its portfolio.
There's a middle ground between selling your company and retaining total control
Selling the company you built from the ground up comes with its own set of challenges. Some founding CEOs have said they regretted handing over the reins and letting someone else determine their company's trajectory.
Knowing that founders may regret selling their company, either because they missed out on a giant payday or because the acquiring organization didn't have the same long-term vision, Bansal reminds entrepreneurs that there's an alternative. He often counsels these founders to consider selling between 5% and 10% of their shares in the startup - even if the company is doing well and there aren't any obvious risks to the business.
Harness, Bansal's latest startup, uses artificial intelligence to help software engineers undo changes that negatively affect site performance. It's raised a total of $80 million from investors including Alphabet's GV.
Bansal still thinks selling some of his AppDynamics shares was a good move. As a founder, he said, "You don't have to be like, 'Either I sell and get all my financial security, or I don't have anything in the bank.'"
Ultimately, deciding how much of your company to sell and when is an individual choice. "It really becomes a bit of a personal-situation question for a lot of entrepreneurs," Bansal said. "It's a life-impacting decision."