M&A: Convincing someone (and their major investors) to sell

There are two sorts of founders: those that want or need to sell and those that don’t. In general, founders sell either due to fear and exhaustion (because they are tired, have run out of money, or are about to get crushed by a competitor) or conversely due to ambition and excitement (because they are excited about the impact they and their team will have, or about the financial payday).

Convincing people to sell: Team & product buys

For team and product buys, you need to convince both the entrepreneurs and the investors 1 that selling to your company is a good idea. There is a different strategy to getting each on board.

Convincing entrepreneurs.

If a founder is burned out or running out of money, not much convincing is needed—they will even try to sell you on the sale. If the entrepreneur does not need to sell, your main levers are:

Compensation. There are different “levels” of wealth in people’s minds. They might include, for example, the ability to pay off school debt, the ability to buy a house, and the ability to never work again. In general, founders will react differently to $1 million in stock (“Wow, that’s a lot of money! I can work for your company for a few years and then try again at a startup”), $5 million (“I can afford real estate in the Bay Area and not worry as much in life!”), and $10 million (“I probably do not need to work ever again”).

Depending on the entrepreneur, her financial status to date, and her personal history, different levels of wealth may be sufficient to convince some founders to sell irrespective of other factors. In general, stock and even cash payments will vest over one to four years, and in some cases stock the entrepreneur already earned will be re-vested.

Impact. What impact will the founders and their company or product have on your product and direction? Since you are starting to buy other companies, you are probably reaching millions or even hundreds of millions of people with your product. Can their product or vision overlap with yours so that they can influence the lives of millions of people?

Role. What role can you offer the founders and/or CEO? Will they have a larger team or even more influence than they did at their startup?

Threats. While I am not a big fan of this approach, some companies are famous for threatening startups they want to buy. They may file a lawsuit claiming IP infringement, or mention casually that they plan to enter the market, so the two companies may as well join forces. In most cases these are idle threats.

Convincing investors.

In a team or product buy, you will also need to convince investors to allow the sale to go through (assuming they can block it). Most investors want to see at least a 3X return on their investments on average. Of course, that means they need to do better than 3X on the “winners” to offset companies that shut down or return nothing to the investors. If your offer returns less than 3X their investment, investors may fight against the acquisition.

Things to mention to investors:

  • “You are trading low-appreciation stock for high-appreciation stock.” The basic argument is that the company you are buying is not on a high-growth or breakout trajectory—but your company is. By selling now, the company you acquire (assuming you are using stock to do so) will have a multiple on this outcome, as your own stock should appreciate dramatically. In contrast, even if the startup doubles in value over the same time period, selling to you is a much better return. For example, my startup Mixer Labs sold to Twitter in 2009, when Twitter was worth about $1 billion. This means we’ve seen at least a 10X return, on top of what we were acquired for, since that time.
  • “We plan to buy someone in this market. If it is not this company, it will be someone else.” This means the door may close on the opportunity for the company to exit to you in the future. It’s now or never.
  • “Our relationships are important to us, and you are in our ecosystem.” You see certain VCs involved in exits to the same set of companies over and over (e.g., Google, Facebook, Twitter, etc.). These VCs will want to maintain a good relationship with your company so that if they need to help sell one of their portfolio companies, they will have a direct line of access to your corporate development team. This is another way of saying that Silicon Valley is a long game, not a short one.

Convincing founders to sell: Strategic buys

Assets that are truly strategic and breaking out themselves are much harder to acquire. This means longer-term relationship building will make a big difference in the likelihood that you will be able to purchase the next hot company in your market.

Once your company hits a certain scale, you should start meeting with the CEOs of companies you may want to buy every quarter or two. This relationship-building may eventually pay off in a competitive strategic situation. Mark Zuckerberg at Facebook was notoriously focused on building relationships with the founders of WhatsApp and Instagram, leading to pole position for them to acquire both companies over time.

When convincing people to sell a strategic asset, there tend to be a few large levers:

Autonomy. Many founders started companies so that they could drive things themselves. They do not want a lot of overhead and bureaucracy. A promise that you will leave them alone to run their company, while providing financial and Sales, General & Administrative (SG&A) resources to help support scaling, can be attractive to founders. For example, Android and YouTube both ran autonomously, with their own hiring processes and criteria, for years post-Google purchase. In parallel, Google supported these acquisitions financially, and provided headcount and resources for the messy business areas (operations, sales, etc.) that product-centric founders often don’t want to deal with.

Support. Some founders just don’t want to do the extra work of building a standalone public company. They want to focus on product and design, not building out a sales team. Or they hate sitting in meetings to discuss employee ladders and accounting. Pitching autonomy plus the support to focus on the stuff they care about can convince founders to join you.

Impact and role. In some cases an incoming founder will be given a larger role than she had in her own stand-alone company. You often see startup founders take on broader divisions of the acquiring company or key strategic roles. For example, John Hanke from Keyhole (which developed the software behind Google Earth) ended up running all of Google Maps.

Competitive dynamic and/or fear. YouTube exited to Google in part due to the threat of lawsuits from the media industry. Some founders/CEOs can be convinced that they are about to get crushed by third-party forces, lawsuits, or other external threats.

“One of the biggest causes of early exits are founders’ spouses, who are typically less risk-seeking”

– Elad Gil

Money. Financial outcome can cut both ways—i.e., if a company is going to do well no matter what, founders may think a certain amount of money is a high enough baseline and not be tempted by the immediate exit. However, in some cases you can convince a founder that the safe road is to sell now and never have to worry again. One of the biggest causes of early exits are founders’ spouses, who are typically less risk-seeking. Often they push for the safe exit so that they and their children are set for life.

  1. Some investors (especially large VCs) may have the ability to block any acquisitions of the company. This means you will need to convince them to go with your offer. Some investors may behave poorly when you are getting acquired. One of my investors at Mixer Labs, while we were being acquired by Twitter, was an enormous pain in the butt and kept trying to negotiate more deal value for himself.