Monday, August 29, 2011

What Is Your Startup Acquisition Offer Really Worth?

I have helped more than a dozen entrepreneurs think through their exits.  There are a large number of non-financial issues to consider when selling your company (your role, manager, network, impact to your employees, etc.).  This post focuses solely on how to go about making a financial assessment for the entrepreneur.  

In particular, I focus on items that impact the *real* versus perceived value of the deal.

1. How Long Will You Really Stick Around?
How long is your vesting period?  E.g. suppose you have 2 offers:

Offer 1: $10 million vesting over 4 years.
Offer 2: $3 million vesting over 1 year.

Offer 2 is actually much better for the entrepreneur who only plans to stick around for 1 year, even though Offer 1 is much higher in total value over time.  

This suggests as an entrepreneur you should never go somewhere you think you will be miserable, even if it seems to pay more over multiple years.  Entrepreneurial people tend to quit more often and more easily, so don't mislead yourself on how long you can stick out working for someone else.

2. How Much Upside Does the Acquirer's Stock Have?
If you are getting stock offers, how much is the stock likely to be worth?  Does it still have 10X in it?  Selling to Google or Facebook when it was valued internally at $10 billion is much different from selling to Google or Facebook today.  A $50 million acquisition can suddenly become a $500 million acquisition if the acquirer's stock appreciates dramatically.

3. Are You Getting Options Or Stock?
You need to exercise options, which means you pay money to convert the option into stock.  For a later stage company this can be e.g. 1/3 the price of the common stock.  In other words, $30 million in options may be worth $20 million in stock (assuming it costs you $10 million to exercise the stock).

Ask the acquirer what their strike price is, if they are largely compensating you with options.

4. Taxes.
How tax efficient is the acquisition?  Will your acquisition be treated as long term capital gains versus e.g. cash compensation?  This can change the value of the deal dramatically.

5. Is the Offer Net Cash?
Suppose you have $1 million in the bank and you are acquired for $10 million.  Who gets to keep the cash?   If the acquirer keeps it, you just subsidized the deal to the tune of $1 million.  I.e. the real value of the deal is only really $9 million and the acquisition is worth 10% less.  You should ask for the cash to be dividended out to your shareholders or use this point as part of the negotiation.

6. Other Intangibles (these matter most if the acquisition price is low):
a. Vacation Transfer.  You have not taken a vacation over the last 4 years and on your company's vacation policy have accrued 6 weeks of vacation.  This should either transfer over or get paid out.  (6 weeks of vacation is either an extra 1.5 months of free vesting for you, or if you cash it out could be a reasonable sum depending on your salary)
b. Vacation Accrual.  Some companies have seniority tied to vacation policy - e.g. if you have worked at the company for 4 years you get an extra week or two of vacation.  Negotiate the transfer of this seniority for you and your employees.

Anything else you think makes a big impact?  Let me know what you think in the comments!

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