The Founder’s Guide To Selling Your Company (2014)
justinkan.com
justinkan.com
I recently started a new company, Atrium, aiming to make legal services (such as M&A) for startups and tech companies easier as well.
I do occasionally post Q&As on Instagram stories now: @justinkan
Are you asking what I would do differently if I started a new company today?
The best time to sell your startup is when you have many options.
It needs to be really emphasized that this is a very rare place for the vast majority of startups. That means this advice isn't generally applicable.
Which brings up the implicit question, why would you decide to sell your startup if you are clearly winning and growing at the pace that you can build a sellers market?
There are a lot of really good reasons you would, but I think all of them come down to: At some point you won't be able to be competitive in the market without the resources of a larger company. Whether that means you'll never be able get to an IPO, or you'll get out competed between now and then.
I've never read a good rundown of WHY they decided to sell, Twitch or otherwise.
So it's really a question of when, not if. Opportunities to sell will come in waves over time so how do you know which one you should take because it's possible to overshoot and then the whole thing goes bust (Digg, Foursquare etc...).
What I'd be interested in is the Founders guide to selling your company when it has relatively few options. That's the more common case, and one that where I think the opportunities there are missed by most founders. I never read stories about that, I've only read "we were on track to a billion in revenue and sold."
The "Startup Podcast" episodes on Twitch is worth a listen:
Re: why sell? 970 million reasons. Biggest one was that it seemed like good value for what we had.
Another reason: from my perspective (it may be different for other people involved) we were also at an inflection point where there was a steep power law distribution of people who owned content (game studios) and therefore a relatively small number of people had a lot of power over Twitch. Similar to Netflix pre-Netflix originals. That's not a good long term position to be in (hence Netflix originals). I think that's changed now for Twitch.
Well exactly, which is why it's really valuable for founders in that position to lean on - much more applicable to the bulk of founders.
I hope you do this someday. It would be highly valuable to many founders.
Think of a job, Say after 10-20 years of very hard work. You probably either want a promotion or have changed companies. Just done something different. Sometimes for an owner the only way to do something different is to sell.
Another common reason is to get some skin out of the game. As an analogy do you invest all your stocks into one company? As an owner often all your finances are directly tied to the company’s success. It can be wise to diversify from just your company.
There are a number of reasons but these are just two common ones unrelated to how the company is doing, good or bad.
I sold my company in 2014 and the biggest surprise to me was how long and time consuming the process was. It really impaired my ability to run the company as efficiently as I would have liked during the transition process. And the stress of having to meet with buyers, but not being able to fully communicate the scope of the meetings to the team until the appropriate time was significant.
Taking $970mm seemed like a good deal given the level of risk. So from an expected value perspective it was a fair trade. Twitch has grown much since then, but you can't have regrets when it comes to trades.
Back in the dot com days I had a friend who sold his options early. He made enough to pay off his house cash. The price kept going up and he could’ve been a millionaire. But then as we all know the bottom fell out and his company crashed hard, almost overnight. He was happy he sold out. Had he waited he may have gotten nothing. He may not have cashed out st the peak but he definitely got a good deal for his options. And every time some tells him he should’ve waited to get millions he tried to remind them he probably wouldn’t gotten zero if he waited. Most people still don’t get that, they just focus on what the highest value could’ve been, even if that’s the least likely price he would’ve gotten in reality.
I’m not sure just how true that is today. In my YC batch probably 30%? of companies were profitable or at least eying profitability.
I’d actually be very curious to know what those numbers are.
The vast majority are startups you'd never hear anything about. They're started by a small team or one person, they build something on the cheap, try to market it, fail, then try to sell it. Or a non-technical person pays a coder to build a site but then it doesn't take off or the coder bails, so the non-technical person tries to sell it because they put money in so it must have value.
I have personally done that 3 times (even got real customers on one). I can name 5 new startups that I've head about in the last month just in my mid-sized city. I can't imagine how many are already out there slowly dying that I just never heard about.
At Cisco, I operate at a roughly 20% profit margin on a roughly $50,000,000,000 annual business. Most acquisitions are immaterial from a profitability standpoint.
Other closing costs -- usually there will be an escrow service for any holdbacks. That usually is only tens of thousands of dollars - not expensive relative to deal size.
- Bankers (and/or other advisors)
- Lawyers
- Accountants (if you don't have dedicated resources)
- Your time
I can't stress this enough - the last one ends up being your biggest cost (although not direct). I've seen more than enough company's execs struggle with transaction fatigue because you're trying to sell a company while still running one. This is where good bankers/advisors come in.
Example - http://www.simplefocus.com/
I've written up a HN thread about this subject a long time ago:
Where does this 10x multiplier come from? I thought the prevailing multiplier (for small SaaS) was 3x net.
Also: for less than 10x net, if is growing steadily just hold on to it for a little while longer, but do continue to talk to interested parties, you will meet your goal sooner or later. Patience is the big secret to successful negotiation.