The M&A Process Is Broken
atlassian.com
atlassian.com
This is the least of how M&A is broken.
The entire industry around M&A exists to play on one emotion in its clients. Fear.
Fear will be stoked in you from the first meeting with any advisors. All of the people who are supposedly on your side know, the more afraid the customer is, the higher percentage of the deal price they can extract.
Fear that you could have negotiated a higher price, fear that you are going to lose the deal, fear that you will agree to a term that will screw you in the long term.
Once you are sufficiently afraid, you will then not bat an eye about spending literally millions of dollars for the mundane services they provide and feeling good about it.
A large part of the reason for this is because many sellers are in no position to say no. Many times the seller is actually not profitable and running out of runway and seeking an acquisition as a way for the founders to cash out without having the company go bankrupt. As the old saying goes “beggars can’t be choosers.” If you look at acquisitions where the seller was actually profitable (for example WhatsApp), the sellers were able to get a good deal from the buyer.
A profitable company can continue without being acquired. A merely "desirable" but unprofitable may not have this luxury for long enough for another acquisition deal to crop up.
There are many exceptions, but it is a deep truism that those who can walk away are the only ones guaranteed to get a deal they find satisfactory. It’s almost tautological: If you can walk away, and a deal doesn’t feel good, you just walk away. So what’s left? Deals you like.
There are many ways to be able to walk away. Cash flow and profitability are the easiest. Sometimes it’s being able to put a one-person company on hold and go rock climbing while you live out of a “craggin’-shaggin’-wagon.”
That being said... Here’s some personal and contrarian advice: Don’t organize yourself around being able to walk away just because you want negotiating leverage. If that’s your only motivation for generating cash flow or profits, emotionally you will always desire a deal, and in a very real sense you will fond it hard to walk away from money.
The ideal thing is to generate profit because you are attached to the idea of a functioning business, and not just a startup designed to conduct experimental market- and technological research.
The ideal thing is to want to grow from founding to running an operating business over the long haul, so you actually don’t want a deal even if the terms are financially favourable.
When you are able to walk away for your own personal and values-based reasons, you ironically will be in the strongest negotiating position.
JM2C, YMMV, INAE, &c.
Well duh. Gravity is a bitch. What else is new.
The problem is more like: most tech companies that get acquired by “big buyers” have less than $10m in annual revenue. There is very few competent advisors in this space because most tech M&A advisors work for boutique investment banks where $1m is the minimum acceptable fee. Hence founders genuinely do not know if a 30x revenue or a 3x ebitda is a “great offer”
“2. Big buyers get more protection than they need: Many of these terms are unnecessarily one-sided. For instance, buyers hold back a much higher portion of the purchase price to cover potential liabilities than they need.”
Self serving crap. This smells like “we won’t make you make scary sounding reps and warranties so we can pay under market” (see above re: very few founders can tell what a great offer is, which is exactly what Atlassian would prefer).
For whatever reason, escrow funds are mostly just used for little things like paying bills that came in after the documents closed. When the whole startup is rotten, the acquirer doesn't usually try hard to claw back money because management don't want to admit to themselves or their board that they were suckers.
Also, it's very hard to tell whether a startup was about to collapse before the acquisition, or collapsed as a result of the acquirer making the new employees work in beige cubicles.
Something like half of acquisitions destroy value. The worst case is when the acquired company colonizes and destroys the parent company by filling its management ranks with stooges.
NeXT did quite well for Apple's shareholders by colonizing.
> Each Party hereby irrevocably waives all rights to trial by jury in any action or proceeding arising out of or relating to the provisions of this Term Sheet.
Assuming they're not lying in that these are more seller-favourable terms than any they've seen, you've appare to decided that "better" isn't good enough, we have to burn these people to the ground unless they go all the way to "perfect", whatever that is. If you have experience selling or buying contracts and these terms are comparably bad, then maybe you should include that context.
If these are the reactions companies are going to get, maybe next time they'll think twice about opening stuff like this up to the public.
I'm not sure I like it even so, but it would prevent Atlassian from financially pressuring founders in a litigation by insisting on a jury trial.
Option A: sell company for $25 million and waive right to trial
Option B: sell company for $20 million and don't waive right to trial
Term sheets are negotiable, if you actually care that much about retaining the right to a jury trial. Just tell your lawyer to strike out the term and accept less money in exchange.
“Admire the spirit, but I have many follow-up questions: In how many of the deals was the non-compete clause agreed to? How long was the non-compete? How many employees were forced to waive accelerated vesting, agreed to severance, or change-in-control provisions?”
Short thread: https://mobile.twitter.com/bcantrill/status/1140661238705225...
Here: alpha is Atlassian, foobar is this new M&A term sheet
Also: alpha is Y Combinator, foobar is the SAFE
Also: alpha is Y Combinator, foobar is startup school
...
With the largest whales increasingly using OSS rather than M&A ("buy" the OSS by inserting senior engineers to in effect lead it), I fear there will be less demand, increasing the leverage imbalance.
Any other macro factors which may help the small startup either live independently, gain M&A leverage, or forge more paths to IPO or other capital?