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Comment by ericb | Hacker News Reader

Pretty cool that they shared the process. A couple things that seem interesting to me:

* Giving the acquirer the cap table early on seems to go against the advice I've seen.

* This is a ton of time investment for a company that has no idea if an offer will be forthcoming, or if it would be in a ballpark where a deal would happen?

The acquiree is supposed to go through 12 stages of diligence a code review, detailed financials, employee review, give out their roadmap, customers, vendors, cap table, source code, financial assets all before seeing any hint of what the offer will be or whether there will be one?

Is that right? Wouldn't getting an idea of whether you're in the same neighborhood be sensible before demanding so much?

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> Giving the acquirer the cap table early on seems to go against the advice I've seen

The cap table tells a story about the company. For starters it identifies the decisionmakers. More importantly, a hairy complex cap table says an acquisition process may be difficult and unpredictable. A straightforward cap table is like a well maintained roof on a house. It doesn't prove that the rest of the company is in order, but its highly correlated

Start by sending a summary cap table of major holders with the breakdown among classes of stock

> This is a ton of time investment for a company that has no idea if an offer will be forthcoming, or if it would be in a ballpark where a deal would happen?

But the work can be reused for other candidates, and... this is about multi-million deals, the work will pay itself off.

I heard about a financial guy working his ass off (nights, weekends) for weeks if not months on end on getting part of the company acquired or sold off; in the end the deal was worth €100M, and I'm confident he owned a significant chunk of the part sold. I wouldn't mind working weekends / evenings for a while if it was for a "you can retire" sum of money.

> Giving the acquirer the cap table early on seems to go against the advice I've seen.

Why?

Captables are for the most part just process documents, you need to know who has which quantity of shares to be able to put a proposal for a deal on the table. If you don't know who holds the shares you may not even be able to make a proposal at all, and you may not be able to verify that the person that makes the offer to sell has the right to do so.

I think the reasoning is something like, when I buy a car, I don't base the price I'll pay on the cost of the raw materials.

It also lets them craft a minimal price deal, and do things like split out different shareholders based on what they'll likely accept.

Not particular to the cap table, but the same with the financials here. If gitlab sees they have only one month's runway, why wouldn't they lowball?

Generally speaking, if gitlab sees 40 million in revenue potential, shouldn't that be how they craft what they offer?

There's probably a distinction here between "selling" your business, and "being acquired."

Sure, but it helps if you can show who actually owns the car. And a captable is pretty much just that: a division of who owns which chunk of the company. No need to disclose what they paid for it, that's not the acquirers' business anyway.

Seems like they could just steal a lot of info and then build their own version through this process

Does seem odd to expect to share code early and a risk to share it with any interested party.

I mean, it's someone else's code, your engineers are going to say it's rubbish, it needs a full rewrite and throwing away, warn us up front before you even think about acquiring such terrible code, etc. But if it's a built a company to the point of raising sufficient revenue/profit it's surely good enough.

It is. Normally you only do that after you agree on the terms and that means there is a deal unless something horrible is found during DD. And if your code is terrible simply disclose it then likely the requirement will go away. But if you claim it is super good but you only have juniors on staff you can expect to be quizzed.

Yes, this happens. So be very much on your guard about this and make sure that you trust whoever you talk to and if you can't trust them then you can ask a trusted party to do the review for you and pass that to whoever claims to be interested.

There are many variations to this kind of 'vendor dd', you can prepare it beforehand or you can push to have the process modified until it is to your liking depending on how desirable you are.

Not that that never happens, but engineering time is not cheap even at Gitlab scale. Even if you manage to recreate the product based on the insider info it's still a risky process; new products fail all the time, especially if they are new entries in an already filled market.

It's much quicker and often not that much more expensive (after you tally up all the engineering and marketing costs and adjust for the risk of failure) to acquire a company that already has a working product, customers, marketing, documentation and usually you get a team of domain experts included in the purchase.

If there’s one thing you learn quickly about doing M&A it’s everyone does a lot of work that might not result in a transaction.

That gets expensive. A typical VC that does a bunch of these without being able to follow through will rapidly find their management fees exhausted (because that's where quite a few of them fund failed DDs from, a typical DD budget is anywhere from 150K to 500K depending on the deal size, that includes legal, financial, technical, commercial, possibly an evaluation of the founders and whatever else is deemed necessary).

I think this is more of a technical/operational process, and less about the financial/legal one. Typically there is a "LOI" (Letter of Intent) that kicks off the DD process. That stipulates the acquisition price, any key terms (cash vs stock), etc.

I agree. It seems like they are trying to be transparent and detailed, though, and I don't see that in their list, and the negotiations only appear around step 13?

Wouldn't a start-up that is considering being acquired (or raising) already have most of this available?

Depends on who starts the process. If the acquirer starts it then there may well be nothing at all.

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