Don't Talk to Corp Dev
paulgraham.com
paulgraham.com
I can't tell you how many times in these cases founders have caved to lowball offers with horrid terms once they have gone multiple cycles with the prospective acquiring company. How does this happen? They ask for what they think they deserve and they get an offer far below that. Having concentrated their efforts on a possible exit, they sound out other channels and find there is no immediate interest. They are then high-pressured by the prospective acquirer to do the deal on a short fuse or the offer will go away. They then begin to contemplate the risks of continuing down the path of uncertainty and begin to contrast this with how nice it will be to continue the effort under the rubric of BigCo, where they will draw a steady salary and no longer have to deal with entrepreneurial risks.
By this time, they are hooked. Then the details come in. It turns out that, low as that $10M (or whatever amount) was, they as founders will have to earn all or a significant part of it all over again by having to vest their interest over xx years once they begin working with BigCo. Do they have protection from termination and the possible forfeiture of their interest? Well, no, not really - company policy forbids this. So, if they want the deal, they will just have to take their chances and, if BigCo terminates them early, that is just the risk they take.
What about elimination of risks? Well, here they must represent and warrant that certain things are true as of the date of closing on the acquisition. For example, they must warrant that their IP doesn't infringe. OK, fine. But what does this mean? In a typical blanket warranty, it means that, if you sell your company and you know you haven't done anything whatever to steal code or otherwise compromise its integrity, you still bear all the risk of financial liability if someone later comes along and asserts, say, a patent infringement claim against your IP. With a multitude of trolls infesting the world these days, this is of course possible. What does BigCo say about this? It puts on its official corporate suit and weightily intones that it expects founders to stand behind their IP and will not allow them to hedge responsibility for it. Therefore, it doesn't matter that you didn't know about the potential infringement claim - if it hits, you pay the price for any liabilities and for any attorneys' fees in defending against it. Is there a cap on this? Well, maybe, but at a high level (e.g., 50% of proceeds received on the deal). As a founder, you wind up agreeing to this once you are committed to the deal because, after all, it is not likely to happen. But as to uncertainty and risk? Well, that still belongs to you on some pretty important issues.
And this is just one issue.
The point is this: once you as a founder start to rationalize, there is no bottom. You have rationalized that you can live with the low price. You have accepted the liability risk. You have accepted the renewed vesting terms without protections. Maybe you also agree to an outsized holdback on the purchase price. And who knows what else. The point is, by this time you are fried. You have no will to fight back. You have no leverage. You are stuck with the wishful thought that it will nonetheless be great to be working for BigCo and to have a chance to continue to realize your dream, even if it does involve some serious compromises.
I have witnessed this sort of thing for years and it always comes about when founders deal with professional acquisition teams from a perspective of relative weakness. They suck you in and then you need to fight like hell to get back into a mindset where you can tell them to take a hike. Most founders in this position just can't do it. That is certainly my experience.
This essay by PG captures the perils of this process in a way that is spot on and extremely valuable as a warning to founders who might succumb to temptation. Be warned. It is exactly as PG says. A truly important essay for all founders.
Sometimes the lack of liquidity can get to you. Funneling every last cent of profit back into growth is a crucible. The offer of taking a rest at 20 miles is the perfect analogy. The level of distraction in trying to close the deal is immense. And how, after so much pain, can you really make an objective decision to walk away at the 11th hour?
This all ties right back into the liquidity discussion a few weeks back. I have no interest in taking payroll and seeing less than half after taxes. So finding a fund interesting in purchasing a fractional interest of Common Shares (no preferences) at FMV (versus investment value the VCs pay) is a really great bridge past the CorpDev route.
I'm kinda curious: Did you point that out as clearly as the line above? along with something to the effect of "If you think this number is close to the value we'd take, then we're wasting each other's time"?
Perhaps part of the problem is that it was the wrong partner who didn't value the technology nearly enough, and was too focused on discounted cash flows with an absurd discount rate, and too conservative a growth allowance. They passed that off as "their model" which couldn't be touched. Add in the fact they weren't even paying up-front but where much of the value was earn-outs with lofty targets, including a minimum 20% net operating profit... somehow they didn't see we could earn just as much, if not more, by keeping all the equity and just keep working for ourselves. It would have been this weird "half-exit" where all the upside was still in front of us. No thanks!
Yes, that was exactly the message that I was hoping you delivered with a sledgehammer, because I would have guessed that their reaction would be telling.
Anyway, kudos to you and your team for making (imho) the right call.
One additional thing to note is that the diligence process can be an intelligence-gathering bonanza for a larger acquiror. The information they glean can be either harmless to you (data points on employee shares/salaries allows them to build knowledge of early-stage compensation, which is very useful when poaching engineers from other companies) or harmful to you (they see your private information and act on it in a way that damages your business).
For what it's worth, I would advise people approached by Corp Dev types to not only say no as PG suggested, but do so in 10 words or less. The email response should be "No, not interested. Sorry" -- no greeting, no pleasantries, no signature. You won't hurt their feelings and a longer email is just an invitation to them to start a conversation that is going to suck up your time and energy.
If you are interested I would demand a break-up fee as others here have noted, as well as an aggressively worded NDA and a non-hire agreement that stops them from poaching your employees.
Finally, I would also consider the effects that knowledge of an explored-but-abandoned acquisition would have on your employees' motivation if they found out. Generally not good for culture and/or long-term goal orientation.
Isn't that similar to what Google/Apple/etc were doing recently, and were rightfully lambasted for?
My employer does not own me, they should have absolutely no say over what company can offer me a new position.
In any case, non-hire agreements aren't forever.
I don't think I see how this would not hurt the employees. Seems like a classic startup management move that screws over the employees who are already taking pay cuts and huge life risks to make the startup successful.
For a startup, losing a key employee is a big deal and a big risk. A non solicitation agreement doesn't prevent the employee from applying for a job at the bigger company, but merely allow the startup to be more open t o a potential competitor.
Sounds like a merit-based scenario to me.
Simply reading through HN for several years, it seems pretty obvious to me that many startups view employees and "theirs". There is no scenario where I would hurt my future opportunities simply so I don't hurt my (sinking) company's.
I owe nothing more than the agreed-upon work for money to my current company, and watching out for #1 is what has been so successful for me these past several years.
A smart developer would stay at current company if she truly believed there was a successful acquisition on the horizon. If she leaves with someone else, that's just the free market talking.
Let's say you're selling, I'm buying, and we reach a tentative agreement for $100M. While you're winding down your other options I talk to five of your key people and hire them each for $2M. The next morning I start in fresh: Without those people our new offer is $50M. By the way that's a generous offer, part of the team works for us so you're worth even less to other acquirers. And hey, what if the press got wind that you were trying to sell and your key people were leaving. Sounds like a company in trouble.
You might say that's an asshole thing that nobody would actually do but there's a reason the poster up top suggested covering it.
In a hypothetical situation where you have two companies, lets call them Company A and Company B, who are in talks for an acquisition. If Company A is huge and is potentially an acquirer then Company B would be it's acquisition target. Company A is going to learn a lot about Company B to consider purchasing them. Company A could walk away at any time with all the salary information of Company B's employees.
Company B should have the right for protection in such a high risk situation. A non-solicit agreement that covers employees would prevent Company A from approaching, with the intention of hiring, Company B employees for a period of time that both firms agree upon.
Employees of Company B are more than welcome to approach Company A about jobs. Company B employees may even get a raise since Company A would know how much they are earning. However, Company A would want documented proof to show that the employee of Company B came to them. As they cannot approach the employees of Company B during the previously agreed upon period.
The system needs to protect employers like it protects employees. Not everyone runs a high margin billion dollar company.
Two differences:
* It would be a one-sided no-poaching agreement (or it should be).
* An individual start-up does not have close to the same level of market power as a large corporation so the effects of no poaching agreements on the market as a whole would be minimized.
It isn't the same for the same reason why low cap startups with a lot of competition are immune from anti-trust violations no matter what their behavior.
In practice this often looks like an agreement to only speak with a defined, very small number of people at the target and to absolutely not initiate conversations with anyone else.
If Acme Startup Inc is quietly exploring a sale to Google, and coincidentally one of its engineers drops a resume to Google's recruiters, she can still go work for Google, but rest assured that Google will document the hell out of who-contacted-who-when.
I'm not a lawyer nor do I have a ton of experience in patent-related matters. If the startup is patent rich and is sitting on a mountain of cash, and feels like it's weird that it hasn't paid an astronomical sum of money to lawyers in a while, then maybe it could justifiably feel somewhat protected by its patents. Then again, look at Apple/Samsung over the years...I don't think patents are the be-all and end-all.
excellent point.
We are an east coast start-up and two months into creating our tech/product a large entity in the valley found out about us. This big name invited us out and talked about buying us. Well we have zero strong connections to such people like Paul Graham, but we did reach out to our network. They said, "I don't know if you should go or not, we've never had a billion dollar company like that make such an offer."
I wish I had found this post before wasting 4k on a trip and filing a provisional patent. We're a bootstrapped start-up.
Well when we flew out/got there to demo, this Goliath treated David like crap on a shoe. They invited us to demo, but when we went to demo at their offices in the valley they were blocking our tech from working(worked perfectly throughout every place we tested in the Valley including outside their building). Then they baited us with, "We'd like to work with you, please tell us how you achieved this technological feat." We took the bait and told them our trade secret. They soon left our meeting, then came back and promptly kicked us out! Right before leaving/being shown the door, one of these not so nice big wigs from X company said, "The race is on, better hurry!"
Ok, there was no guarantee of you buying us. We were cool with that. We weren't cool with being treated like crap on shoe and then stepped on and disrespected! It's hard to fathom that X company treats the little innovator guy as they did us.
Is this the normal?
Then they've asked for the code and I gave them the code! We had brilliant C macro library for memory management, hash tables, list traversal, etc developed by my cofounder. Very nice piece of code, elegant, efficient and reliable. They've got all of it :-) When they came back confused I told them that I thought they want to check the clarity and quality of the code and this piece of code is quite representative. They had to specifically ask for the trade secret (and I would have refused) but again didn't have the nerve.
It was a big name in the industry, $5B yearly revenue back then.
But the part about them not understanding what you did doesn't surprise me in the least
Preferably with the name of the not so nice bigwig.
We are technologists who have a history of creating innovation that gets noticed & or a novel idea we published in 2007 has gone onto have million of users after being copied 100 or more times.
Our weak point is networking and overall connecting with people & getting the right people behind us! It's so frustrating.....
To the OP hang in there and don’t let these games get you down.
Turn this around, and see it from the "big wig"'s angle. They get in some guys (you) who obviously have not been around the block a few times already. More importantly, there is no attorney present and no way after the meeting to establish who said what, when, to who, in what setting.
His upside to screw you nine ways to Sunday is a big bonus. Where's his downside? Simple: none.
You cannot even name and shame as someone else suggested. Retain an attorney to properly advise you before you put names up here post-May.
Chances are the "big wigs" you met were not C-level, nor the level of management below that. If my guess there is correct, then you were not really dealing with "big wigs"; you likely were dealing with essentially middle management. The closer to middle management you get, the more prevalent this cutthroat behavior comes out. I could post a wall of text on why I personally have found this to be the case in my anecdata experience, but this response is getting long in the tooth already. At Fortune 50 levels, if you are meeting with C-level or direct reports to C-levels, there might be some mitigating factors that makes them more trustworthy, but again, I don't have the time to get into that here.
Suffice to say, when these impressive-sounding Names start dropping by, you need someone with the sales experience to qualify the opportunity. There are ways to generally suss out how serious they are about vetting your team/tech/org, mostly in the vein of making them come to you. Most middle management won't have the budgetary clout to spend anywhere close to what a Big Name will really spend (easily 5 figures and up, or an equivalent amount of staff time and expenses) doing just due diligence evaluation.
Also, what do I have to lose in naming and shaming them when we may just as well open source our work when we tell our story.
I'm tired of being stepped on and not being able to get the right people behind & helping us!
Right now, you have yet to open source and still have the potential to out-compete the Big Name. That is worth potential income in the future. Big Name might be impressive, but there are any number of people here that can tell you from first-hand experience why Big does not necessarily mean You Shouldn't Compete With Them.
When you name and shame, your options narrow. You have no way to prove what happened, and you should get together with an attorney to find out how exposed you are to a lawsuit if you name and shame. And any potential future income can become entangled in litigation budgets if that happens.
With regards to "the right people", you got a ton of them right here on HN. Rare is the deal that cannot wait a few days longer, especially large deals (for the Corp. Dev. guy pulling the trigger on an acquisition/acquihire it is still a big deal, just not as potentially a life-changing one as for you). Take advantage of that latency to ping the hivemind here and find out different opinions you and your braintrust might not have considered yet.
If I blew up bridges every time I was stepped upon, then I wouldn't still be in business today. This happens in business; it's a very bloody game of inches that takes place over years and decades.
We tried and tried and tried to get out to the valley and via an incubator(YC or TechStars), but all we could get to help us are local incubators. We greatly appreciate their backing, but they do not have the backgrounds/experience/networks a YC or TechStars has to thoroughly help us.
THough there are some people in this east coast town who could help us, but they do not seem receptive to. It's not like we haven't tried to connect with them, though!
The net for society of doing that is most likely positive as you are forcing them and others to reconsider their behaviors and warning other entrepreneurs of this behavior.
There is a risk they would try to sue your startup out of existence (ie. even if they don't have cause they can attempt to drown you in legal costs), but this would bring even greater attention to the matter.
Your public persona is a resource to be husbanded and crafted as carefully as your codebase and/or finances. If you plan on open sourcing your code, exiting the entire sector you are operating in and never intending to come back, then there isn't much Big Name can do to you even if they felt like it, as long as your wording was careful. Go ahead in that case, and burn down that persona for that space. But never is a long, long time. And this industry is still really, really small when you look at those you want to work with in a specialty.
If you intend to continue in your specialty, then I would take some time off, decompress, and figure out what is really important to yourself. The fact that this style of arguably unethical behavior is abundant and a regular feature of the corporate landscape is already out there now, via this thread and meta-discussions reverberating out there; while it can be emotionally satisfying to divulge details, make no mistake, there will always be a cost attached. Just be certain you are willing to pay that cost.
If you have any direct competitors in your space, and your space is very small, you can mention to them that Big Name is fishing for both technical and market intelligence details by posing as potential acquirers, and to be careful what is said around them. You don't need to mention your gaffe. If the space is small enough, then that will have the effect of freezing out Big Name on any future fishing expeditions. That is likely to have a bigger, more focused effect that has direct beneficial bearing upon your activities than trying to generally name and shame them out in the open.
Basically it's BlueTooth/BlueTooth Audio on Steroids via the web. Sync 100s to 1000s of IP devices together via a URL to play/control audio, video & or any media in unison on all devices.
Tons of software & hardware innovation will happen in this space, we've already created a few apps using our sync technology.
We just need the right people... their networks and money behind us! We have yet to been to accomplish such and we have shouted and waved our hands telling this story to those who can help, but it falls on deaf ears.
Once and if we open source this tech, we think doing such and then the community further developing will have a big impact on any company that currently uses BlueTooth and or has their own syncing standard.
ALL I WANT TO DO IS INNOVATE AND BE FAIRLY COMPENSATED FOR IT. I feel I have a knack for it based upon my history and all noted here.
If you are more into the tech than the business angles, then you could keep it closed source, create various platforms around it, and license the platforms. The F50-500 companies have already told you their likely use cases, even big wig himself probably revealed what they want to use it for. Instead of packaging the technology unto itself, create the interface to the use case, then license that integration package as a whole unit.
If they want to sync under a WebSphere stack, hold your nose if you aren't into the enterprisey stuff, dive into J2EE, build out as complete an integration to your tech as you can, then license that entire solution. You could do an end-run around big wig's team by making it feasible to get to a solution faster than his team could by themselves, since you only have to create the integration, and they have to build and refine the tech from the ground up and then do the integration. By the time they finish (if they finish at all), you are onto the next use case, and the next integration.
If you aren't relying upon this tech to put food on the table today, then you have nothing to lose by doing much of the integration work for your customers, and bridging the gap in the business case to adopt your tech much closer to reality for the business decision makers.
We could use some more dev/manpower. Everything is written in the latest javascript frameworks like Web Audio API, Node.js and other similar frameworks.
If interested or know anyone who is interested in working on what we feel is game changing, we'd love to chat.
As much as HN likes to hate on patents, this is a huge reason why startups should file some if you have some technology worth protecting. Most probably they won't be enough to save you anyway, but it may be better than having no recourse at all.
A couple of points:
1. Obviously this is very different from pitching to an angel investor or venture capitalist, who might be unlikely to care about your secret technology. As you discovered, it's entirely possible that BigCo's engineers were very interested in learning what you were doing so they could do likewise, ideally without having to pay you anything.
2. Courts will sometimes enforce trade-secret rights even without a written NDA, if the circumstances were such that the party receiving the information implicitly agreed to keep the information in confidence. But that can be a really tricky proposition to prove, and will vary with the jurisdiction.
3. A written NDA might or might not be of much value in a situation like this.
A) BigCo might not want to sign an NDA. That's a red flag right there, of course. BigCo might even want you to sign an agreement saying that anything you say to them is not confidential (this is not uncommon, because big companies get a lot of idea submitted "over the transom" and don't want to have to deal with lawsuits from cranks who re-invented the wheel).
B) NDAs usually have carve-outs that say that "Confidential Information" doesn't include information that was published or otherwise known to others before disclosure (or that becomes such afterwards). BUT: Under U.S. law, a specific selection or combination of individual pieces of public information can be protectable, just as Kentucky Fried Chicken's secret blend of 11 herbs and spices is (reportedly) protected as a trade secret.
C) You want to be careful to comply with any requirement in the NDA that confidential information must be disclosed or summarized in a writing that's marked "Confidential" or "Subject to Nondisclosure Agreement" or something like that, on pain of losing protection. For example, in the Convolve v. Compaq case, the computer manufacturer Compaq (now part of Hewlett-Packard) defeated a claim of misappropriation of trade secrets concerning hard-disk technology because the owner of the putative trade-secret information didn't follow up its oral disclosures with written summaries as required by the parties' non-disclosure agreement. [1]
D) Enforcing an NDA can take a lot of time and money, especially if BigCo is convinced they haven't done anything wrong. On the other hand, sometimes it can pay off, because a jury might well punish a company that it found violated an NDA. See, e.g., the 1996 case of Celeritas Technologies v. Rockwell International, where a federal-court jury in Los Angeles awarded a startup more than $57 million, and the judge then added $900,000 in attorneys' fees, because the jury found that Rockwell had breached an NDA. [2]
4. Suggestion: Even for non-secret information, an NDA might be negotiated to include the equivalent of a break-up fee. That is, even if it turns out that the secret technology wasn't a secret after all, but the receiving party didn't know the technology, then the receiving party might be required to pay the disclosing party something as payment for "show-how" (as distinct from know-how), in return for having taught the receiving party about the information, thereby saving the receiving party from the time and expense of having to find out the information on its own.
[1] http://www.cafc.uscourts.gov/images/stories/opinions-orders/...
[2] http://scholar.google.com/scholar_case?case=1681061439024444.... Disclosure: I was part of Rockwell's trial team in that case.
We shouldn't have talked to them, but as I said, we didn't know what we were doing. One of them basically had us reverse engineer our stuff through demos for six months and then abruptly ended contact. We heard through the grapevine they had decided to develop their own version, which came to fruition. The takeaway is they probably did this with a few of our competitors and simply took the good stuff. A lot of awful, sleepless nights working with their tech team under the misguided impression we'd see a nice exit.
The next one came not six months later, another one of the big (although aging) ones. As part of the dating process they gave us free access to a bunch of their APIs but nothing else happened or happened incredibly slowly. The takeaway there is they weren't serious, they just wanted to keep us on the hook.
When we talked with VCs later (yes, later), they laughed at our naïveté and offered essentially the same advice - don't do it. Don't do it unless someone is talking numbers, very, VERY soon after the MNDA.
Why are you protecting them? Name them. It blows my mind that there's so much abuse out there but we're willing to cover for terrible companies.
I said both were "top 8," they both probably top 5. I doubt there's a lot of difference between those companies, frankly.
Look, when you're one of these companies and you can go to 90% of startups and just say "hello" and have them on the verge of sending you their source code, that's a critical tactical advantage.
The lesson is simply - when you get this call, take a breath and realize they're as likely to threaten to sue you as they are to acquire you as they are to let you linger on the hook for months on end. Be upfront, ask explicitly what this is about and where it might be going.
But if you are a founder, a million dollars is probably the best deal for you, and your people, and you should grab it with both hands. Numbers made up but you get the idea.
If you've not advised a large number of fledgling startups, you wouldn't know, but really truly talking to corpdev is demoralizing and dangerous. If they really want you they'll reach out with an dollar figure (albiet probably a low one). If they haven't done that, they aren't serious. Don't waste your time.
If actually you've raised from a VC, a small acquisition means you'll not clear preferences, which means you get nothing other than retention. The VC/founder conflict only comes up when you have a medium successful company that could be really successful. But in that case you can almost certainly sell secondary stock, lock in your $1 million today, and still go for it.
But more than that, YC (and Paul) truly want to support the founders whatever they want. We celebrate the small sales as well as the big ones. It's simply not true this is selfish advise that you should disregard.
I seem to remember this as a discussion some years ago - where YC was set against the "keep them hungry" mentality. I am assuming it has not changed?
There used to be a widespread belief in the VC world that you wanted to prevent founders from seeing any cash until the ultimate exit. As negotiating leverage has shifted towards founders this has gone away.
It's stupid anyway, since allowing founders to see a little cash up front actually aligns incentives much better once the company is somewhat successful.
PG's quote about the offers only being surprisingly low is correct, from what I can tell.
Expected value of a company with a 1% chance at a billion dollars: $10,000,000
100% chance of a million dollars: $1,000,000
10% chance of a billion dollars: $100,000,000
In which case I would go with the 10% chance because if I had run a startup and got it to be worth $1M, and then I fail I can probably make the $1M easy in the next thing I do.
Of course, if your 90% case is to have a job paying 125K/year then the risk is very low. My point wasn't about you personally but the analysis that should go into this sort of calculation.
This decision in it's purest form can be seen on the game show "Deal or No Deal" where they choose between an unknown value in a box and a $ amount from the 'dealer'. Even this simplified version of the problem gets the contestant on edge and they really have to think hard about it, talk to their spouse etc.
Now, if the expected value were awarded at each stage, and had to be reported as taxable income, and losing the show required that the contestant pay back the money but still had to pay the taxes, than that would have a real risk of ruin.
But on the gripping hand, if you want a million dollars, don't start a start-up. If you want something with the expected value of $100,000, DEFINITELY don't start a start-up. If your goal in life is to get $1,000,000 and then you're going to be awfully happy, then for god's sake, go work at Google or Facebook or plenty of other biggish companies with good compensation. You won't get $1,000,000 all in one lump, but you'll get it, and on average, you'll get it sooner than a founder will.
Risk-adverse people should not be starting companies -- it's risky. And people who have made a solid decision to take a risky path should not bitch if their investors would also like the riskier, more profitable path.
If founders and VCs could math, and if the probability estimates had real meaning, you would have to integrate over the probability and profit/loss curves to estimate future value.
Using single numbers like this is just story telling.
However - if you can spare the time, you can also play Corp Dev at their own game and see if you can get a firm offer.
As long as you're careful not to share IP or intelligence, a firm offer will tell you that your startup is worth at least 2-4X as much, could easily be worth 10X as much, and may be worth 100X as much (but probably isn't.)
That's useful information, even if you have no intention of selling.
I see no problem with stringing Corp Dev types along on that basis.
>> Khosla stated it simply: Google was willing to sell for under a million dollars, but Excite didn’t want to buy them.
It's hard to know, but I have a hard time imagining Google taking over Excite and taking the same trajectory that it did as an independent company.
As pg said in the essay, the company making the offer got big enough to be an acquirer by resisting the urge to sell before they could achieve their full potential. They would like nothing more than to profit from others who lack the fortitude to do the same thing. Because the acquiring founders have been in those same shoes themselves, they know how appealing a million dollars can sound to a weary entrepreneur and they know what buttons to push. Do not give them what they want!
The numbers in your example are made up, and they can never really be known with certainty. The trajectory of a startup can change with one phone call. There's no way to know whether it's really a 10% chance at a $1MM or a 3% chance at $2.3B or a 7.8% chance at $10MM at any given point in time. When so much is in doubt, it probably makes sense to err on the side of a belief in yourself and what you honestly feel that you can accomplish. Don't sell yourself short just because there's money on the table. That's what I took away from this well written and insightful essay, at least.
And finally, this whole idea of "paul graham is trying to use his essays to manipulate founders into decisions that will benefit him financially" is silly and needs to stop. It's good to question the source, and to understand the motivations of those who give advice. But if there's anyone who has rightly earned a reputation for genuinely helping startup founders and generally doing the right thing, it's pg. He just doesn't want to see good people make the wrong decisions.
This is funny, so you think the probability distribution curve is discrete?
P(1Mi)=0.1 does not negate P(1Bi)=0.01, quite on the contrary
The advice about watching for unsavory tactics is spot on.
It's just complete verbal diarrhea and he should retract it (though the damage is mostly already done).
"oh you all are great I can't believe I just had to paid X for this/you, it was totally a steal!"
At best, it's a "you guys are great, but your ex-boss is a terrible negotiator and didn't know what you were worth." There's no reason to say that aloud.
Obviously I wasn't there to interpret the remark, but maybe it was intended as a compliment as to how useful the new company and it's employees were, and how much they can now do without breaking the bank to do it?
In the business domain, is there really anything else to care about?
If there is, I have yet to see it in my 25+ years in software development.
But there are businesses out there that care about more than the bottom line.
'Good To Great' and 'Start With Why' are good books that document such businesses.
Unless you are a sociopath, the wellbeing of your employees and customers.
I can agree with your sentiment, but that's all it is I'm afraid, at least according to my experience.
It would only be marginally better if you complained about how expensive they were (especially if many of them benefited from the sale minimally as common stock employees).
I think it would be better to, you know, welcome them to the team and treat them like people.
Companies have an incentive to keep salaries low but also keep employee morale high. These two conflict.
Oh here it is: https://www.youtube.com/watch?v=oS8WWjR7O98
Can someone piece this together?
> I remember once complaining to a friend at Google about some nasty trick their corp dev people had pulled on a YC startup. "What happened to Don't be Evil?" I asked. "I don't think corp dev got the memo," he replied. [3]
Hey, Paul Graham not afraid to call out Google! Good for him.
I'll agree that it could have been clearer. But it was probably clear enough to be workable for the target audience.
I think he means this:
If you're talking to someone [from another company] from corp dev, [they want to acquire you], whether you realize it yet or not.
There's some hidden gold right there. Non-malicious business as usual can be just as damaging to you as if they had actively tried to screw you over. Expect it and don't become angry or take it personally.
Also I can say first hand all of the shady deal playing is absolutely true. The members of the due-diligence team and even the corp dev director you are dealing with are NOT the final decision makers. We are building an internal package that makes it appealing to the corp dev VPs/CFO to bless (and take to the CEO to bless sometimes). It's several layers of vetting and it's just as tedious and bureaucratic as it sounds.
I will say that the due diligence team typically will want the deal to be successful. No one wants to put in all that work to not buy a company. Corp Dev's job is to buy companies so having deals reach the 11th hour and fall through is NOT good. They pride themselves on stats like companies evaluated/year (wide funnel) and having a small fraction actually go to due diligence and the buying process. At the end of the day though, they want to buy businesses.
Do you think mediocre companies tend to be over-zealous, or are you implying that appearing socially proofed is an important signal?
In the "hot girl at the bar" analogy, playing games is +EV, but I would expect the big league players are too smart for that, am I wrong?
I wonder if PG knows about The Wall that occurs at ~mile 20 in a marathon, or if it was a lucky coincidence? http://adventure.howstuffworks.com/outdoor-activities/runnin...
Around mile 20 of the Boston Marathon is "Heartbreak Hill"[0].
Origin of Y Combinator[1].
Care to elaborate on why you decided to anonymously downvote the above comment?
[0] http://www.boston.com/marathon/course/stage4.htm [1] http://old.ycombinator.com/start.html
"We can talk but I am looking for at least $xxx million and will need $xxxK / $x million if you walk away during or after due diligence, to compensate for my time."
It's only without a breakup fee that Corp Dev can smoke you out...
again, if you absolutely are not selling, then say that and move on.
Except the problem is, most founders have a "I wouldn't sell for $X but would for $Y" and the harsh terms for discussion immediately let the founder find out if CorpDev is 1. Serious not just doing business intel and 2. Willing to pay the right amount.
If the firm was totally worthless then generally no one would be calling anyway.
Sadly, not so. Especially in a bubble.
Internet history is littered with the wreckage of Big Corps divisions that paid well over the odds for Small Corpses.
Corp Dev may be serious, but that doesn't mean they know what you're worth. No one may know what you're worth - not even you.
But a Corp Dev offer gives you a market estimate, which is the next best thing.
"product is terribly architected, teams don't get along, they cannot track their customers revenue" - none of these things make a startup worthless as they can be fixed.
Until you get your exit cash-in-bank-in-your-account, those Big Names are your competitors or potential competitors. The breakup fee is to compensate you for sharing more than just product name, price, and terms with them. Simply enthusing a little bit beyond "business for me is going great!" to a potential competitor who is in a related space can be sufficient market information for them to convince them to enter your space.
There is a lot of emphasis on people sharing tech/trade secrets, but keep in mind that simply confirming that users get excited by what you are doing in your space is information that these Corp. Dev. folks would dearly like to have. Never be afraid to say "no" to a one-sided deal.
Look at it this way: most Big Name Corp. Dev. won't even get out of bed for any deal less than an accretive $5-10M+ annual cash flow, and something that pencils out to much, much bigger than that 3-5+ years forward. If they are absolutely serious about acquiring, then they will start talking numbers soon after the NDA counter-signatures are exchanged, because no one wants to lose nearly guaranteed accretive income/revenue/users/etc.
If they are shopping you and your direct competitors to see if someone is naive enough to talk without compensation or willing to sell out for a relatively low number, then you see this behavior we're talking about in this thread. Whether or not you want to participate depends upon your personal exit parameters. This thread points out that everyone who might be in touch with these Corp. Dev. folks should already have some numbers in mind already, and a way to qualify the serious ones.
There are a lot of very naive startup CEOs out there, that's the real problem, from the Fortune 500 side of the table it's like babysitting most of the time.
I was also wondering about how the acquihire scenario typically works out. Is it corporate development, or some other business unit making contact?
At this stage I've gotten what after reading this essay sounds like the baby brother of this: the oddly aggressive hire attempt. These companies have been not necessarily direct competitors but people in related spaces who might want to add what I'm doing to their tech portfolio or use its techniques in their products.
The interactions have been quite different from any other "job interview" I've ever had. I've said no three times so far to some version of: "your project is awesome," followed by some interesting discussion, followed by a hiring offer. The hiring offers have been decent but not outstanding, and they've included nothing for the project -- no "acquisition" to go with the hire. When I bring this up, the response is that my baby isn't "worth very much on its own," etc. In one case the response was oddly condescending even in its wording, which was discouraging until I went and read all the users raving about my stuff and then looked at my rather nice looking metrics again. In another case it was explained to me that while my product was interesting, I obviously wasn't... "business" enough? That's not how they put it but that was kind of the implication. I interpreted it as "you're not coming off as alpha male enough to run a business" or some version of that.
In retrospect I saw these as negotiating tactics to shake my confidence in moving forward myself. These folks are trying to get me plus a lot (3 years) of code, users, and momentum without actually paying anything for the latter two things. Looks a lot like the kind of hardball PG is talking about-- I assume "corp dev" offers come in when you're at a bit of a later stage.
Now I've got another one in the pipeline. I've decided the best way to deal with them is to go ahead and chat but otherwise to change nothing about what I am doing, to not spend much time on them, and to constantly remind myself that I am the one interviewing them and deciding whether to accept their offer. At this point given the metrics I'm seeing, the offer would have to be very good.
I'd say that the advice in this essay is probably good advice. If you do have the internal discipline/experience to put these sorts of things in a "maybe but probably not" folder, it might not hurt to chat about it with them, but if you have any doubt or if you're too busy just say no and move on. If my current discussion turns out like the previous ones I will probably do the same moving forward.
Negging? New to me. Shows how little I know about sleazy dating (and hiring?) tactics.
http://www.urbandictionary.com/define.php?term=Negging
Should I now worry about waking up with a headache, being unable to remember what I did the previous night, but with a folded up copy of a signed asset transfer agreement in my pocket? :)
If they literally try to wine and dine you... maybe?
I got an email from an exec at our competitor trying to hire me. I figured I'd grab dinner with them to see what they had to say, and they ended up being completely transparent with their business and sales strategy, competitive advantage, their opinion on our other competitors, etc. All while I reciprocated very little information about my business.
The cost was a few days of distraction, but it turned out to be tremendously valuable in understanding the market (and this particular competitor).
Saves you time in the worst case, but still lets good offers through.
There are of course circumstances where people absolutely do not want to sell their company, but for the rest of us... it depends.
"Yeah, that'll be $50 million..."
Then when they push back or ask for more info, just more or less repeat that and say you're too busy managing your growth to spend more time on it unless they're willing to move forward with an offer on paper. Just turn the whole thing around. If they go away, you're done (which will probably happen 99.9% of the time). If not, maybe you'll actually get it.
You could even pull the exploding term sheet trick backwards on them. "We wouldn't be interested in less than (insert biggish number here), and we'll need a response in two weeks." (Obviously word it more politely.)
Go outrageous. Honestly, it's not worth letting them see in with DD for a small enough amount.
>Do not enter acquisition talks unless you are ready to sell your company. Negotiating an acquisition is the most distracting thing you can do in a startup: going through M&A is an order of magnitude more distracting than raising money. All of your ability to run the day-to-day operations of your company will grind to a halt. You should only enter an acquisition process if 1) you are certain you want to sell the company and 2) you are likely to get a price you will accept. Don’t talk to potential acquirers “just to see what price you can get.”
[0]http://justinkan.com/the-founders-guide-to-selling-your-comp...
Suppose I am a cofounder of WhatsApp. We just booked 10M[0] in revenue and are seeing a lot of success. I'm pretty proud of myself and see big things for WhatsApp.
Though really, my ultimate goal is to compete with Elon Musk putting humans on Mars. I figure I need a few Billion to do that. But that's just a dream.
Facebook "corp dev" comes knocking. I read the news and see they bought Instagram for 1B, which isn't going to get me to Mars, and I'm not sure what they are offering, so I take PGs advice and tell them no thanks. However, if I take that meeting, I end up with several Billion dollars...
[0] http://www.sec.gov/Archives/edgar/data/1326801/0001326801140...
If a company really wants to buy you, saying no will not make them go away. It will make them up their price.
The same happened in Google's case when they asked Ron Conway to come a few months later to invest. And so he did. For sure Google had a good team, product, etc., but this sure enticed Ron to invest in one way or another.
You can make a reasonable estimate of the current value of your company, and a reasonable estimate of how likely you are to be offered that value.
You can also make a reasonable estimate of the future value of your company at time X, and a reasonable estimate of how likely you are to be offered that amount at time X.
There are large margins for error in these calculations. You can determine, though, the net present value * probability of the current and future options. The goal of this exercise should be to determine not the exact values (because your error margins are too big to have large confidence in the resulting numbers), but to determine which option you like more.
It's ultimately a subjective decision, but if you are not confident that you will get enough money to definitely want to sell now, then wait.
The original article and the one I linked both put the advice in more absolute terms, but it is obvious that the decision to sell or wait is a difficult one. The goal of both articles is not to answer the question, but to help you understand first that it is not a casual decision, and provide details which may help you decide whether you want that process now.
It's usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you're sufficiently likely to get an offer at an acceptable price. In practice that means startups should only talk to corp dev when they're either doing really well or really badly
You can glean some idea of why that was from this public information https://blog.whatsapp.com/245/Why-we-dont-sell-ads. This is in direct voice of Jan Koum, the founder and CEO of whatsapp. That gives you some idea of his personality and it's an entirely accurate one. I'll be willing to bet large amounts of money that the Zuckerberg himself had to engage in a full court press before getting a response at all.
I think that's his point: In theory you might like to know the answer, but in practice unless you are in a very strong or very weak position (and know it), you shouldn't let yourself be distracted this way, as it is incredibly unlikely to be worth the time.
The flip side of that is that the odds of you actually pulling that off are pretty slim, historically speaking; and if you try it and fail you walk away from the table with nothing. Whereas if you get acquired, you walk away with money in your pocket. Maybe not as much as theoretically would have been there if you had persisted, but real money in your pocket beats theoretical money any day.
So the logical role model for a founder looking out for her own self-interest is Kenny Rogers: "You got to know when to hold them, know when to fold them; know when to walk away, and know when to run." (https://www.youtube.com/watch?v=Jj4nJ1YEAp4)
To your VCs, a modest exit is not really that much better than a complete loss; all that really matters is how many home runs they can put on the board. If you happen to swing and miss, that's no great tragedy for them. But it could be a tragedy for you, since you'll only get a few times at bat in your life, and if you whiff them all you could be worse off at the end of your career than you were at the beginning.
(My personal experience is that these partnerships never live up to their hype, but my feeling is that one time out of a hundred they give the company a huge boost.)
My experience too is that most partnerships are only valuable for social proof. Often nothing much else happens, maybe one or two customer connections. At the same time with some partnerships there is a risk of brand dilution. If you are letting someone re-sell or bundle, there's a risk that they might downplay your brand in favor of theirs and sort of appropriate your brand equity.
These sorts of things do sometimes make me feel out of my depth as I try to put on biz-dev shoes as someone who's primarily technical.
0) Press-release and a few links on a website: Basically worthless.
1) Sales-team integration: you train the partners sales force, they get quota retirement (somehow, this can be complicated), this has some great customer outcome -- you give them margin on re-selling/kickbacks/discounts/whatever to get access to their sales/marketing machines, making it worth their time/effort.
If you're working with content licensing (i.e Spotify, Netflix), product integration (more common in b2b SaaS), marketplace supplier relationships with major partners (say if Airbnb wanted to offer Mariott rooms on their platform), etc. than partnerships are important.
I've been in about five of these "corp dev" conversations (low N, but nonzero), and every single one started with an entreaty of "you should partner with us", which very quickly dissolved as it became clear they were solely interested in an acquisition.
It's really safe to assume that anyone with a "Corporate Development" title at any reasonably sized technology company spends all day evaluating and executing acquisitions. Don't go in thinking that you're about to have a partnership conversation.
Although given that this was google, I would probably just contact one of the higher-ups and tell them "I'm still interested in discussion the acquisition, but I was screwed around by your corp dev guy".
I did catch one of my customers lying to me - he claimed he couldn't afford the normal fee (which was only a few hundred bucks, or $1000 at most), and I later discovered he had millions of dollars in funding for this project. We had a big blow up about it, and the project died. Later, he came begging to me, as his clients really, really wanted my product. He paid the full price (and I would have charged him more if I could have gotten away with it).
Overall, lying to get business is a very bad idea. It will backfire and you'll end up spending more, and perhaps losing your job (at least, it will if you deal with someone who has morals and ethics, like me :)
I just looked him up on linkedin, and I see he's now got a job at the university of San Diego, so I guess his business ventures didn't work out.
That allowed him to craft the entire experience around what is good for founders which worked out to be great for others (including investors and acquirers).
So much so that this advice he is giving, I am sure many other investors have wanted to give publicly before - but they don't want to piss off people who can provide an exit for their portfolio. The whole fiduciary responsibility thing.
But YC companies are encouraged to think of things quite differently - so much so that even if someone as might as Google (who PG pointed out) thumbed it's nose at YC companies to spite PG....they would be much worse off, because of the quality of companies coming out of YC.
That is the power of seeing "make something people want" to it's natural, logical conclusion.
Being able to say and do what you want, to force behaviour change in an industry to benefit your organization and your goals.
This is also why PG is so well respected by those of us on the outside looking in, is because we see the sheer audacity of him giving blunt advice, about specific tactics that only benefit founders. Even if it may hurt him temporarily.
Thanks again for constantly doing this PG. We appreciate it.
But PG sold ViaWeb to Yahoo, didn't he? So if we shouldn't talk to CorpDev, how should those deals happen?
> It's usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you're sufficiently likely to get an offer at an acceptable price. In practice that means startups should only talk to corp dev when they're either doing really well or really badly
If you're sure you want to sell, and are convinced you'll get the price you want, talk to them. Actually, that second qualifier seems REALLY useful here. I imagine that its easy for founders to get stars in their eyes about a potential acquisition. Forcing yourself to think rationally about what price you might realistically be offered might help you evaluate wether a meeting would be worth the time or just a distraction you can't afford.
If a buying founder has their biz dev, corp dev, contact a founder then it is safe for the receiving founder to forward that request to his corp dev, inside or outside their company.
I can imagine that corp dev people know very well that founders who are willing to talk to their kind frequently in a short time must be desperate or greedy and not very passionate about their company.
Things get messier when you talk about intentionally "derailing" companies. I'm sure this has happened before, but this is legally murky water. BigCo doesn't want to be perceived as anticompetitive, or as acting in bad faith. (Of course, it's very hard to show that they are acting in bad faith. Keep that in mind if you smell anything fishy.)
The other side is if you could get enough information about customer acquisition or some of the metrics that govern the business, you could likely jump ahead of where you would be if you build from scratch without having to learn from time and experience.
Broadly-speaking, investors today are overvauling startups. Seven figure valuations and ridiculous convertible deals are being handed out like candy to early-stage companies with way more potential than proof. It's a hot market and investors want dealflow, so they're not quibbling. There's also a greater fool dynamic at play.
This in turn leads founders to believe that their companies are worth more than they really are. In many cases, the "surprisingly low" acquisition offers these companies might receive are only "surprisingly low" when viewed through the lens of the angel and VC environment. On their own, they might be quite reasonable.
The big challenge for founders is that a high valuation can be a friend made enemy. It's great to raise a bunch of cash on favorable terms, but lots of companies will eventually fail to live up to their valuations. Once your valuation reaches a certain point and the structure of investments is more complex (liquidity preferences, etc.), founders can easily find themselves in a no-win situation even with a moderately successful business.
As they say, a bird in the hand is worth two in the bush. This post seems intended to get founders to forget this.
I didn't think it could get worse. Jesus, what is going on with this system?
1) Corp dev can also do strategic investment; you probably don't want this at an early stage but can be worth considering at a later stage.
2) Corp dev teams don't magically know that they want to acquire you, assuming they're not connecting to you via an existing investor (in which case they probably have some inside knowledge on you already), they may well just be at the stage of trying to figure out what you actually do and how you fit into the ecosystem. So it might be worth having a conversation but not necessarily giving away any secrets,
3) Acquisitions are like investments, having a warm relationship helps. But they can be time-sinks and you have to judge how much time you want to invest when you're not actively seeking.
Future talks will be anchored on the initial figure regardless of your success in the meantime.
in my limited experience, these kinds of discussions usually end in email. they likely wouldn't give you a number, but would it hurt to ask for an offer to see if they're serious before taking a meeting? the "we're focused on growing" answer can always be thrown out to end the discussion if it's not solidly serious.
Ex-car salesmen?
Ask women what they think of this statement.
ETA: http://www.bloomberg.com/news/2014-11-13/code-of-silicon-val...