Ask YC: Aquisition Advice

https://news.ycombinator.com/item?id=227750

by sports_guy • 18 years ago

34 35 18 years ago

news.ycombinator.com

My partner and I run a sports website. We were recently contacted by a major sports network that is interested in integrating our functionality into their site. Their are a few ways a deal could play out, with one scenario being a potential acquisition.

They have asked for a valuation and if we would want to become full time employees. We've never really thought about a valuation for our company, and are not sure the best way to come up with the figure. We have an idea of what we'd like from the deal but are not entirely sure what the company is worth.

We're also curious about employment deals that have worked for other startup acquisitions. Are there founders at YCnews that have become full time employees after acquisition (like reddit)? Have these deals been just a salary on top of acquisition price, or is there potential for a vested interest in the site continuing to be successful.

sebg• 18 years ago

if not confidential, i'd love to check out your site.

gm3• 18 years ago

Yeah, cammon, give us a link... It will not hurt anything to do so.

rokhayakebe• 18 years ago

If anything it will only add uniques thus valuation thus offers on the table thus better deal

markm• 18 years ago

Unique monthly visitors, monthly revenue and or compete/alexa are also valuable alternatives.

cmos• 18 years ago

Congratulations!

Once you have bitten the apple, it's tough to go back to a world where you have a boss. Do you really want to hear someone give you a 'performance review'?

Performance metrics are ok, but now that you don't have full control over your future, you might not be able to hit them because the 'marketing department' got it's budget cut. I would take as much possible up front, and keep the 'required' time to be there as short as possible.

Insist on a lot of vacation so you can be working on your next gig. Depending, of course, on the weowneverythingyouthinkof contract they'll want you to sign.

gm3• 18 years ago

#1) Get a mergers and acquisitions attorney NOW. It will be expensive, but you don't want to not get something you don't have coming. There are many ways to structure these deals, and if you throw employment into the equation, you are looking at even more ways to come out ahead or get screwed.

Talk to a speclialized attorney NOW. Why so urgent? You do not want to appear dumb to your potential purchaser. To appear prepared, you need to present a professional face and let them know they are not going to get away with a steal (which is bad for you). Let them know they will get away with a fair deal.

EDIT: Talking about ALL the possibilities will involve many, many pages of text, none of which is any good (better to google it) since we are not your attorney. (and only listen to your attorney, none of this friend of a friend thing).

Congratulations, by the way :-)

tptacek3• 18 years ago

The flip side, which anybody who works with lawyers on a weekly basis knows, is that lawyers can complicate stuff enough that people will walk away from the deal. This isn't advice, just an observation.

gm3• 18 years ago

Absolutely true, but never forget: The buyer has an attorney on their side, looking out for their interests. As long as you do not, you are screwed.

What if the buyer offers employment with a 70% purchase upfront and the rest spread out over three years? Good deal or bad deal? Ask your attorney... What if this, what if that? All of them are "ask your attorney" items.

This is not simple, just look at this: http://en.wikipedia.org/wiki/Mergers_and_acquisitions

All of this issues apply to a company being bought out, large or small. (i.e.: Does the valuation section alone seem a simple, "do it yourself" task? Large or small, companies being bought need to be valued correctly)

Unfortunately, to come out ahead, you need to spend money on the attorneys. And specialist attrneys at that...

sutro• 18 years ago

I agree with this sentiment. Lawyers have a much lower risk tolerance than entrepreneurs for obvious reasons. Yes there are horror stories of underrepresented entrepreneurs getting screwed, but what gets mentioned less is the opposite situation that tptacek alludes to, where deals are killed because too much control is given over to the lawyers, and the forest is lost to obsessive focus on the trees. As nice as it would be to turn over control and wash your hands of all legal decision-making, lawyers must be managed, just like any other employee or contractor. It can be intimidating for young entrepreneurs to override the recommendations of older, more experienced attorneys, but that is exactly what is sometime required to make deals like this go through.

As has been mentioned on this forum many times, there are plenty of law firms (in the Bay Area at least) who have emerging business practices that will defer your fees until an acquisition or an investment event occurs.

ntoshev• 18 years ago

I believe most of these potential deals fall through. If you spend a ton of money on an M&A attorney every time someone mentions acquisition, you're screwed.

steveplace• 18 years ago

I would think that there would be some initial fixed costs that you wouldn't have to repeat on your second time around. Also, it would provide valuable insight into some aspects of your company you haven't thought about (valuation).

Does anyone have evidence that costs diminish in this example?

tonystubblebine2• 18 years ago

Is it get an attorney or get an investment banker? I asked a related question about the value of investment bankers awhile back and got a nice answer: http://news.ycombinator.com/item?id=192860

tptacek3• 18 years ago

Your valuation is a multiple of your revenue. If you grossed $500,000 this year, expect $750,000 next year, and want a 2x forward valuation, you're worth --- do the math.

If you're really small, and that number is really low, remember that the bottom side of the valuation is probably what an "awesome signing bonus" would be for a big company. As in, you wouldn't accept a buyout that equated to nothing more than a plausible signing bonus, because you can get that now and not give up the company or the site.

webwright2• 18 years ago

"Your valuation is a multiple of your revenue. If you grossed $500,000 this year, expect $750,000 next year, and want a 2x forward valuation, you're worth --- do the math."

When I sold a consulting business, this was a good starting point, but how many online startups are valued this way? I'm not saying that it's not ridiculous that some properties get sold for gazillions with no revenue (and no prospect of it), but if these guys tie to a multiple of revenue (which I imagine is pretty close to zero) they are probably priced to low.

aneesh2• 18 years ago

Yeah, facebook's Microsoft round was valued at roughly 100x revenue which is a ridiculous multiple.

Basically you're worth what people are willing to pay (which isn't very helpful, I know). See how you fit in strategically with the potential acquirer, and see how much leverage that gives you.

tptacek3• 18 years ago

There's no magic formula that produces valuations. But one way to think of them is as a negotiation about what the multiple is.

Consultancies commonly sell for 1.5x-2x, because staff turnover means the acquiring company is really only getting a pipeline, some relationships, and maybe a few staff.

Enterprise product companies commonly sell for around 5x. Security valuations oscillate between 5x and 15x (on the wildly successful side). Sometimes new, small startups sell for ridiculous high multiples because otherwise the total number would be too low.

I'm not saying, "take your revenue and multiply by two". I'm saying, "think about the value you provide your acquirer in the abstract", and then put a multiple to it.

epi0Bauqu• 18 years ago

Before you do anything else, you need to read up on M&A. Buy some books. A lot is on the Web. Some of the things you should know about off the top of my head (to get a sense whether you are reading the right things or to help you search for stuff): earn-outs, holdbacks, escrow, non-competes, indemnification, capital gains taxes, stock vs asset transactions, arbitration clauses.

That being said, there are numerous ways to value a company, e.g. multiples of revenue, users/customers, traffic, assets, etc. What makes sense is very case-by-case and industry specific. But what it comes down to is that valuation is just a tool to make a case for deal terms. In the end, a deal is an agreement between two parties about what the terms of the deal are worth to them.

They probably already have an idea in mind about the minimum they will pay, and they are probably trying to draw an initial # out of you. I'm not going to tell you how to negotiate, but just be very wary of this, i.e. throwing out an initial #. It can set the stage for the whole transaction, and since you obviously don't already have a well thought out valuation, you may come to regret whatever you throw out.

Whether to work for them or not and how that would look like, is again, very case by case. For example, it could be structured in a way where if certain targets are met you get more money (earn-outs), or it could be a short transition consulting contract, or simply a salaried position not otherwise tied to the deal. I personally would make sure whatever you get up front can not be influenced by your behavior as an employee, i.e. are completely independent.

xirium3• 18 years ago

Your deal doesn't have to be exclusive. Indeed, it may be in your interest to supply content or functionality in a non-exclusive deal. (A good example of this would be Microsoft licensing MSDOS to IBM on a non-exclusive basis.)

If you've got good content and functionality which is wanted by one website then there exists the possibility of others wanting it too. Getting the first sale is the hardest and one customer has already "beaten a path to your door".

A licensing deal would allow you to remain independent and it would reduce the legal complexity of an acquisition to that of a simple business deal.

Tags: [business] [licensing] [acquisition] [Microsoft] [IBM] [MSDOS] [content] [website] [sales] [legal]

axod3• 18 years ago

what's with the tag spam? Do we need those?

xirium3• 18 years ago

I'm working on tag search. See http://news.ycombinator.com/item?id=227184 and http://news.ycombinator.com/item?id=227932

Tags: [search] [tagging] [meta]

aneesh2• 18 years ago

He got tired of waiting for the semantic web ... So he's building it. From scratch. By himself.

run4yourlives• 18 years ago

I had you flagged, but then I thought that that would be inappropriate. Instead, I'll ask you this: What value does a comment have to me out of the context of the conversation I'm reading it in?

All you're doing is polluting your comment (and the site) with nonsense. You should really stop it.

xirium3• 18 years ago

Your profile contains the string #--hackrtrackr:3dwKMm0SsrZSeNg08YUOnuJBfQ3igl#

All your doing is polluting this site (and the web) with nonsense. You should really stop it.

boucher• 18 years ago

All I can suggest is, do everything you can to get them to give you a number first. Otherwise, you're just bidding against yourself. It can only hurt you to give a number first.

tonystubblebine2• 18 years ago

I love this question and hope somebody has some useful information or at least that you post your experience once the issue has played out. This is a very common scenario, rookie founders of small companies getting approached for acquisition, but there simply is not enough info on the sell side. The buyers know a ton and you have no info.

We were approached early on and I asked everyone I knew for advice (founders, corp dev friends, former EIRs) and nobody had anything concrete, especially about the part which was most important to me: how do I value and sell the company.

Another hard part for me was determining if I wanted to sell. What I really needed was for them to give me a price so I could think about it. What I ended up doing was having the meeting and telling them both that I wasn't sure and that all my friends in the company had told me not to work there. What I figured was best case they'd give me a hard sell and worst case the conversation would end. I ended up with the worst case.

What people have told me afterward was that taking $1M at this age is a golden opportunity since you'll have a lifetime of ideas so you should go into this meeting selling. Tell them how big of an opportunity you open up for their business.

As for value, this is what I've heard. As a baseline start with $1M per employee (so for you $2M) and then let that number vary wildly. If you are essentially broke and they're bailing you out you might expect as little as $200k. If you're a high flyer you might expect as much as $10M.

nasser• 18 years ago

In my opinion (I'm in the process of selling my startup) before spending money on lawyers there are a few things you can do, some already mentioned:

- Do your homework on M&A.

- Study the guys who have approached you. Based on your knowledge of the market try have an understanding of your value to them.

- Important: This is a SALES job. It does not matter how much your cost has been or even how much money you are making (well, it matters, but it's secondary). The key valuation factor is how much you are worth to them, i.e., what would cost them (resources and time) to build what you have built and take to the levels (revenue, pageviews, registered users) you have taken it.

- Which also means it's important to understand why they want to buy you: Your technology? User base? User engagement?

- If you have done sales before, or you're good at negotiating, meet with them and listen to them. You don't have to commit to anything, but it'll be good to hear where they are comfortable and where they are not. It's ok to initially give them ranges rather than concrete numbers to get the ball rolling - again it's sales and don't look at it from a hacker's perspective! While to an engineer a price range of, say, "10 to 20 Million" sounds too vague, in negotiation it's a good starting point. Do not limit yourself, just give them enough so that they start talking and giving you ideas.

- Whether to do it or not is a question that goes back to your goals and dreams. If you're looking for a job that pays the bills, you can gradually grow it, and you can be your own boss and work on your own schedule then why sell (I'm assuming you are making money). If you want to make a bigger chunk of money, say to buy a house, and at the same time have a good salary, then sell and become their employee.

- The employment agreement itself is also subject to negotiation. You can promise that you'll stay at least a year, so that you have the flexibility of getting out later. Or you can ask for special arrangement such as moving or not moving, keeping your site independently managed, etc. Again, think of what you would like to happen and talk to them. If they have approached you they will be willing to listen, and good negotiation will get you where you want to be.

- When you're ready to make promises hire a lawyer :-)

Good luck, and congratulations.

simplegeek• 18 years ago

Congrats but remember deals fall through.

fleaflicker• 18 years ago

Nobody is more qualified to value your company than you are.

Ultimately it's your call. Think of a price you can live with, and don't take a penny less.

webwright2• 18 years ago

"They have asked for a valuation and if we would want to become full time employees."

As another poster said, it's a sales process. You should appear delighted at the prospect of working there. You can always say no later, but they should be wowed by your enthusiasm.

Regarding valuation, make them offer a #. A good way might be, "for a company at our stage, a formal valuation is pretty hit and miss. We kinda feel like the market should set our value. You guys certainly have more experience buying companies than we do selling them-- and we'd like you to make an offer." If they push you could always make noises about the best way being to see what a couple of other buyers might pay. ;-)

I'd avoid a lawyer for a bit-- they aren't going to help much with valuation.

The variables in the deal we did was:

1) stock options (part of employment agreement), vesting over 4 years 2) cash 3) cash signing bonus (just a way for them to put it in a different budget line) 4) relocation allowance 5) salary

Treat the employment stuff as separate. My buyer laid off 40% of the company in 6 months... I made the cut, but as easily couldn't have and would've lost my options and salary. Assume that'll happen to you (which means focus on cash, signing bonus, and relo variables).

drusenko• 18 years ago

First thing: get over it. Companies "sniff around" like this all the time. You're likely far away from an actual acquisition. It's to the point now where we almost don't talk with anybody without them asking for financial details of our company (to suss out the possibility of an acquisition).

Get them to give you an offer before you spend any significant money or time on this thing. If they're serious about it, the should give you numbers.

Ask YC: Aquisition Advice

Related Stories