The ultimate guide to cashing out, from founders who sold their startups to Amazon, Cisco, and Macy's for billions
- There's no set way to sell a business successfully.
- We asked founders who have done it to share best practices and common pitfalls to avoid, and to provide best practices and war stories in exclusive conversations with Business Insider.
- For example, Jyoti Bansal, founder of AppDynamics and Harness, recommends selling a few shares instead of selling the whole company if you need the money but don't want to lose control.
- Click here for more BI Prime stories.
Jyoti Bansal decided to sell AppDynamics to Cisco the day before the company was set to go public.
Cisco had offered $3.7 billion for AppDynamics, which was nearly twice what the app-analytics business was pricing its IPO at.
That meant many AppDynamics employees would fare very well financially. And for Bansal, who is now the CEO of Harness, an automated software deployment platform, his team's well-being was the deciding factor.
"We had at least 400 employees who would make more than $1 million if we sold," Bansal previously told Business Insider. "You have to do the right thing for them - $1 million is life changing."
Not every entrepreneur will find themselves torn between such appealing outcomes. But deciding to sell the company you've built from the ground up, and then finding the right partner, is rarely easy.
So Business Insider asked Bansal, plus other seasoned entrepreneurs and an academic director of entrepreneurship in exclusive interviews, to share some best practices around selling a startup - and the biggest pitfalls to avoid.
Our sources include:
- Marla Beck, the founder and CEO of luxury beauty retailer Bluemercury. She sold the company to Macy's for $210 million in 2015.
- Justin Kan, the founder and CEO of Atrium, a law firm for startups. He sold Twitch, a live-streaming platform for gamers, to Amazon for $970 million in 2014.
- Jeanette Miller, director of the corporate innovation and entrepreneurship major at Penn State Smeal College of Business and associate director of the Farrell Center for Corporate Innovation and Entrepreneurship.
- Steve Martocci, the founder and CEO of music-creation platform Splice. He sold GroupMe, a group-messaging app, to Skype for $85 million in 2011.
- Marc Lore is the CEO of Walmart eCommerce US. He sold retail startup Quidsi to Amazon for over $500 million in 2011, and Jet.com to Walmart for $3 billion and stock in 2016.
Read on for a practical guide to selling your startup.
Don't build a company just to sell it
Miller, the Penn State professor, advises founders to have a potential exit strategy (like selling your company or taking it public) in place from day one.
You should keep that potential exit in mind during the fundraising process. Beck has learned through running Bluemercury that some venture capitalists want to see a return on their investment sooner rather than later, which means they may pressure you to sell or go public before you want to.
That said, building a company just to sell it can backfire.
As GroupMe and Splice founder Martocci previously told Business Insider, venture capitalists can "sniff out" founders who go in with the intention to sell. They'll be dissuaded from backing those founders, who don't seem truly committed to fulfilling the company's mission. Instead, those founders are prioritizing monetary gain.
Focus instead on making your business as successful as possible. A growing company will inevitably attract interest from potential buyers.
The right time to sell
Some founders wind up selling their company out of desperation. Maybe their company is losing money or growth is stagnant.
To be sure, it's hard to predict whether you'll wind up in those circumstances. But the best time to sell is when you don't need to.
That's according to Kan, the Twitch and Atrium founder, who wrote a blog post about selling a startup. In an interview with Business Insider, he added that you should ideally be in a position of leverage when you sell. Leverage could mean your company is growing rapidly or you have interest from other potential buyers. Twitch, for example, reportedly had acquisition offers from Google and Yahoo!.
"If you're running out of money, your company hasn't been growing, and you're desperate to sell it, then you don't have any leverage," Kan said. Partners aren't just looking for a proven record of success, they want to see the potential for continued success.
Consider alternatives to selling
Bansal sold some shares of AppDynamics when he declined an offer of $350 million, thinking he would continue to grow and try to achieve unicorn status.
He points out that any founder can do the same: sell some of your shares without giving up complete control of your company. That way, you can continue growing the business while also gaining some financial stability.
He said his wife wasn't happy that he was turning down the $350 million offer. "But selling a small amount of my stock made her very happy and supportive for continuing to do it in the longer term," he added.
Think about what you want to accomplish before you negotiate with potential buyers
"People forget that entrepreneurship is really personal," Beck said. "You need to actually understand what you want and what you're trying to do and actually take some time to reflect."
Beck recently advised a founder who was evaluating multiple offers from potential buyers. The founder realized that none of the offers were exactly what she wanted. Beck told her to take a step back and figure out what was important to her, and then push for what she wanted if she wasn't getting it.
Be realistic about your company's valuation
It's hard to be objective when calculating your company's value. As Kan points out, the potential buyer is likely valuing your startup based on where it fits in with their short- or long-term strategy - and their number is likely lower than yours.
Miller's research suggests that new founders can be especially naive. "The first business is always the most challenging because you're usually relatively unrealistic," she said. "And the opportunity that is in front of you, everybody thinks it's going to be a billion dollar company."
It probably won't be.
One potential solution is to get an external party (i.e., a banker or a lawyer) to come in and value your company for you. "When you have a banker and someone you really trust or believe in," Beck said, "they're able to talk to all the parties and figure out what the right terms are and what's important to each party, so you come to an agreement."
Before selling Bluemercury to Macy's, Beck interviewed five different bankers before settling on one she trusted. She said too many founders make the mistake of hiring the first banker they meet and rushing to sign a contract, only to realize that the person or the terms aren't a good fit.
Set expectations with your partner upfront
Before you sign a term sheet, be clear with the acquiring company about your vision for the partnership.
When Beck was in conversation with Macy's about selling Bluemercury, she was clear that she wanted to continue scaling while still maintaining the company culture. She set those expectations with Macy's upfront.
Beck recommends getting into the nitty-gritty as much as possible. For example, she said, you should decide how often you're going to meet with leadership at your parent company.
Beck, for her part, wanted to stay focused on growth and didn't want to be distracted by having to prepare for a weekly or monthly meeting with Macy's. "It was really important for me to have the mind space to continue to be a creator as well as a CEO scaling a company," she said.
Know whether an offer is legitimate
In his blog post, Kan shares a few ways to tell if an offer is "bulls---":
- It doesn't come with an expiration date or the promise of a term sheet to be delivered within 24 to 48 hours.
- The acquiring company isn't doggedly pursuing you to prevent you from looking elsewhere.
- They're offering to pay you $10 million and your startup already has a term sheet for a $15 million Series A round. (These are hypothetical numbers, but the point is to clarify valuation expectations as soon as possible.)
Do some research upfront to make sure you don't waste your time on subpar offers.
Don't be afraid to negotiate or to see what else is out there
Kan urges founders not to be afraid to say no.
"A potential acquirer's first offer is rarely its best offer," he writes. "The potential acquirer isn't going anywhere." In fact, Kan writes that being willing to walk away gives you some leverage in the negotiation.
Another key negotiation strategy is initiating some competition, Kan writes. It's similar to the way a job candidate wants interest from multiple companies, to incentivize each firm to bump up their salary offer.
Bansal agreed. Once you've gotten an offer that piques your interest, he said, ask around and find out from other potential buyers what their terms would be.
Bansal admitted he didn't shop around after Cisco offered to buy AppDynamics. But, he said, "that's a common thing that a lot of companies should do." That way, you'll be more educated as to how appealing the first offer really is, and you'll be able to make the right decision for all your shareholders.
Consider important factors beyond money
Money may be the most readily quantifiable piece of an offer. But it's not the only important one.
Bansal outlines three questions to think about when evaluating offers.
- Does the buyer's mission align with your company's? "You want to solve a particular problem," Bansal said. "How much does the acquiring company believe in that, and how much are they aligned with your mission and the vision that you had as a startup?"
- Does the buyer's culture align with your company's? "As a founder, you are responsible for your employees, your team," Bansal said. "You don't want them to get into a culture where they would not enjoy it, or they would hate it, or they would say something like, 'This is not what I signed up for.'"
- Will the buyer's offer allow you to accelerate your company's mission? Maybe the most compelling thing is their sales force, or their capital. Focus on what your potential partner is bringing you.
Considering these factors will save you potential regret after an acquisition by making sure that the company you've built retains its mission and culture.
Read more: Founders and investors reveal the ultimate guide to scaling a startup - and common pitfalls to avoid
Be prepared to experience some regret or confusion
Some entrepreneurs who have sold their companies have expressed regret. Lore, for example, remembered selling Quidsi to Amazon as something of a let-down. "It was this really depressing sort of moment where we didn't even want to go out for a drink," he previously told Business Insider's Alyson Shontell. "It wasn't a celebration. It was sort of like mourning."
Even founders who are pleased with their decision should anticipate some feelings of confusion.
"It probably would've been good to raise more money and keep going," Kan said. "But I can't really regret that."
Explain to your employees why the acquisition is a good thing
Whether or not they're losing their jobs, employees may find the acquisition news jarring. It's your job to help them understand why you made this decision and what their future looks like.
Entrepreneur and angel investor Brad Flora remembers telling the staff at his startup, Perfect Audience, that he'd sold the company.
In a Slate article, Flora writes, "When I shared the news, the team stared blankly at me, unsure if it was a good thing or a bad thing." He and his cofounder spent an hour answering employees' questions. Eventually, they realized it was a positive development, since most of the proceeds from the deal would go to employees.
Flora was able to tell his employees, who took risks to join the fledgling company, that they had earned "a big chunk" of cash and stock. He considered that the best part of the process.
Keep your employees' best interests in mind
Your employees' careers are just as important as yours.
In periods of organizational change, Miller says there's a "huge uncertainty" among employees about what's going to happen to them. It's important to consider their perspective as well.
That's why Bansal accepted Cisco's offer and declined to go public as planned. After all, how often can you deliver $1 million to 400 employees?