Ask HN: Early startup valuation for acquihire?

https://news.ycombinator.com/item?id=9873974

by etsll • 11 years ago

52 47 11 years ago

news.ycombinator.com

I've been bootstrapping a company by myself and have gotten some traction but it is still very early. Now another early stage company in the same space is interested in purchasing my company. Their primary interest is in getting me on the team, (and I suspect eliminating future competition) not the product or technology per se.

They're better funded and I'm getting tired of working by myself, so joining up with them sounds appealing. However, I don't know how to come up with or evaluate fair terms.

I'm mostly trying to determine a dollar amount assuming I also get 10-20% of their company and a small salary. They have asked me to suggest a number but I don't know how to come up with one that's fair.

Any advice?

late2part2• 11 years ago

Here's some advice: The word "fair" stopped making sense in kindergarten. You don't get what's fair or what you deserve, you get what you negotiate.

Now, having said that, you have to determine your goals and how to synthesize an ideal set of negotiating levels.

Typically these levels are:

  1.  Possible Best Case
  2.  Likely negotiated agreement
  3.  Worse you'll take (walk away below)
  4.  BATNA - Your "Best Alternative to Negotiated Agreement."

There are several methods used for calculating acqui-hire or acquisition:

  1.  Comparables on metrics such as revenue, profit, market share, impressions, downloads, average daily/monthly users
  2.  The company's (buyer)'s budget - "Well all we have is this"
  3.  The sellers demands (I won't sell for less than this)

If I were looking at buying you, I'd consider it fair if I Can "buy" you for less than you'll make me, including opportunity costs.

You're going to have give out more (anonymous) details before most people can help you too much:

  1.  Are you a 1-man shop?  Including contractors?
  2.  How many people at acquirer?
  3.  How long have to both been in business?
  4.  How much revenue do you both have?  How much profit?
  5.  What guarantees do you want if you're hired?  What agreements are you willing to make (i.e. non-compete)

If you're a one man shop with an app that's generated $30k this year, I'd buy you for $60k and pay you $140k with a non-compete for 2 years. I don't know if you thin that's fair, but it would be to me.

Remember, a negotiation is a game in which both people agree things are fair, or both people agree that they get screwed equally.

After the negotiation, if you have to work with the person, then try to focus on the former case.

vonklaus• 11 years ago

This seems like a good answer. I would add that you should be somewhat tactful until you have a suggestion of terms. The "give us a number" doesn't seem serious and it would be wise not to release financials, code and strategy until things become serious and it is evident they are negotiating in good faith.

edit: I had a total brain malfunction as pointed out below. Do not be candid, use skepticism and protect your private information.

carbocation• 11 years ago

somewhat candid until you have a suggestion of term

"Candid" here might be a typo or might not be the word you're looking for. "Cautious" seems to be more fitting for what you're saying in the rest of the sentence.

etsll5• 11 years ago

Thank you for that feedback. "Walk Away Before" and BATNA seem easiest to figure out, so maybe I'll start by determining that.

My company is just me. They have 4 founders and will be hiring 5-10 people soon.

Both companies had successful crowdfunding campaigns but neither is shipping a product yet.

Udo• 11 years ago

Both companies had successful crowdfunding campaigns but neither is shipping a product yet.

That sounds like you might have to refund some or all of your contributors. After the acquisition, your project will cease to exist. It's unlikely that both crowdfunding promises were exactly the same. Even if the intention is to fold your product into theirs, the realistic outcome is that your employers will ship the product as they intended, leaving your supporters with little to nothing. You need to clean this up now, rather than later.

perlgeek• 11 years ago

but neither is shipping a product yet.

I wouldn't call it "bootstrapped", then.

For me, a company is bootstrapped if it makes enough money from its products to sustain itself and its founders/employees.

kenferry• 11 years ago

I'll just add: to estmiate stuff like BATNA, try breaking the problem down and summing up. It's the same as in programming. How do you solve big problems? By breaking them down into littler and littler problems.

Then when you go back to talk to these folks, give them the rationale and the small numbers rather than (just) the big number. If they have issues with your methodology you can likely work it out.

This is largely covered by the book, "Getting to Yes". Short and helpful.

cpncrunch3• 11 years ago

That seems a bit low, for a well-funded company. $1 million per employee is more like the going rate. See for example:

http://www.quora.com/What-is-a-typical-deal-structure-of-an-...

charlesdm• 11 years ago

These numbers are totally irrelevant to this situation. We're talking two small companies here.

If there's no leverage, the chances of negotiating a better deal than described above are relatively slim.

ojbyrne• 11 years ago

He says it's "bootstrapped."

AznHisoka• 11 years ago

You assume those deals scale down. Just because a company will pay $50 million for 50 engineers doesn't mean it's going to pay $1 million for 1 engineer. 50 engineers is magnitudes more valuable than 1 engineer.

ChuckMcM• 11 years ago

I really like this comment. There is no "right" answer, and there is no "fair", negotiate to terms you can live with.

saganus• 11 years ago

The word "fair" stopped making sense in kindergarten. You don't get what's fair or what you deserve, you get what you negotiate.

This is very interesting. I hope you don't mind me quoting you.

sidarok• 11 years ago

"a negotiation is a game in which both people agree things are fair, or both people agree that they get screwed equally"

Well said.

HelloThereHuman• 11 years ago

What does "some traction" mean? What's your profit? What's the growth rate like and how big is the market?

anatari• 11 years ago

As a 3rd party without detailed knowledge of the space and each company's position it's hard to say. Here is a possible framework for you tho.

Since you are basically asking for co-founder level equity in the merged company, pretend that you were working there the whole time when you were working on your own startup. The acquisition cost is the amount of salary you would have drawn.

sjbase• 11 years ago

First off, congrats on generating that level of interest!

The valuation of your company is going to take into account how much has been invested so far and potential for future growth (among other things). Since it sounds like you haven't had any investors, you'll want to figure out ways to quantify investment so far. Put together a spreadsheet. Don't necessarily show it, but use the sums you come up with as rationale during negotiation.

Some ideas along that line: -Quantify your personal time investment: add up the value of the time you've put in, including opportunity cost. If you didn't build this company, what could you have earned doing consulting? -Quantify your traction: if this includes revenue from customers, project how much those customers will earn for your company over the next few years and add that to the total value of the company.

Good luck!

gull• 11 years ago

Before doing anything, do you want to sell the company?

Read this: http://paulgraham.com/corpdev.html

codingdave2• 11 years ago

I would turn it right back around and tell them to make you the offer. You (probably) have no idea what is going on internally with them, so you don't know the full value you bring.

It doesn't even have to be a negotiation tactic - just tell them the same thing you posted here. You aren't sure what would be fair, and are not sure what number to respond.

Really, they are coming to you - let them do this part of the work, so you don't waste your time until you even know if you are talking in the same ballpark.

spinlock• 11 years ago

Great answer. This also wastes the least amount of your time if they are not serious. It's much better to work on your company than waste time on deals that are all smoke and mirrors.

haack2• 11 years ago

Surely you wouldn't want them to know you have no idea? I'd agree the onus is on them to come up with the initial valuation, however I'd let them think I knew how valuable my company was.

Disclaimer: I have no idea what I'm talking about.

codingdave2• 11 years ago

If it were purely a negotiation for purchase, I might agree. But they are talking about joining forces. Maximizing the valuation is probably less important than establishing their working relationship.

If it were me, I'd be more concerned with the "working together" part, so I would be open and transparent with what I am thinking, and who I am. If they come back with too small of a number, I could always say, "No." I figure they either will get along well and can come to a mutual agreement on this, or not. Trying too hard to make a deal happen sometimes just isn't the right answer, if the deal would be with people with whom you don't work well.

pbiggar• 11 years ago

It all depends on the circumstances. Is "early-stage" mean they have $1m in the bank, or $10m, or $100m? Do they _need_ you, or are interested in a hire?

I think if they're early stage enough that you might get 10-20% (btw, 10% is optimistic), then there's no cash available (apart from a small signing bonus like 10-20k).

But really, you need to talk through the actual numbers with someone who has been more of an idea. Do you have advisors? If not, happy to help: my email is in my profile.

etsll5• 11 years ago

I believe they have $1M-$2M.

I don't have advisors. Thank you very much for offering to help! I'll send you an email.

late2part2• 11 years ago

Ditto here, etsll - I'm happy to help give you a perspective in private email; mine is in profile.

brudgers• 11 years ago

They're better funded

If their funds are from outside then the founders and employees are also less in control. In addition, it does not mean that they are executing better or have a better product.

not the product or technology per se.

That does not mean that the price should not reflect the value of these things because it is not as if you will retain their value after an acquisition should it occur. This is especially salient if any of your compensation will be in equity in the current competitor because shutting down your product potentially enhances the value of theirs.

eliminating future competition

If this is obviously one of their motives [which is different from an assumption that it is] it is a red flag because it means the founders and controlling interests are focused on the wrong thing: something other than execution.

fair terms

If you think its fair, then its fair. Be willing to stick with that decision and learn from any of the outcomes [money left on the table, no deal, and everything working out so that you feel it's fair 50 years from now]. As you note, not working alone has some value to you but nobody but you can assess it right now or in two years.

Good luck.

jkarneges• 11 years ago

Start with alignment and worry about compensation afterwards.

You don't ask for co-founder equity without a strongly shared vision. However, if they are not that interested in your product or technology, are you guys even on the same page?

etsll5• 11 years ago

I probably explained that poorly. What I meant was that our products are so similar, and vision so aligned, that we have already independently developed many of the same technologies.

tptacek• 11 years ago

A company that has taken 1-2MM in funding is going to find it difficult to give a key hire 10% of the company. Just for what that's worth.

jackgavigan2• 11 years ago

How do you know they've received 1-2MM in funding?

blazespin• 11 years ago

Negotiation is trivial. It's all about your alternative. get another offer or figure out how much you will make going alone. Add about 15%. That's your walkaway ask.

If walkaway trying to get more, you are kidding yourself. That being said, you can ASK for more. Just don't walkaway if you don't get it.

Also, remember the guy who comes up with the ask is usually the chump. Make them make an offer if you can.

jackgavigan2• 11 years ago

Their primary interest is in getting me on the team, (and I suspect eliminating future competition) not the product or technology per se.
I'm mostly trying to determine a dollar amount assuming I also get 10-20% of their company and a small salary.

Given those two statements (and without knowing any details), my instinct would be that you'd effectively be joining their company as a sort of late-arriving co-founder. On that basis, my advice would be as follows:

1. Decide whether you want to become a co-founder of the company. They key thing is whether you want to join that team and work with those individuals.

2. Don't expect to receive a large dollar amount. It's not an exit - it's an acquihire. You want to find out how much the co-founders are getting paid and use that as a benchmark for your salary.

3. Do make sure that you do full due diligence - you need to see the cap table and understand what terms all the existing shareholder (including the founders - e.g. vesting schedules) and investors (e.g. any preferential terms) have. I'd be wary if they were reluctant to share any of that information. It's not unreasonable for them to ask that you sign an NDA. Get a lawyer to review any document they want you to sign and talk you through what it means. In fact, it's not a bad idea to get your own NDA drafted up and put it forward to them.

4. Be clear on what your role will be going forward. You don't want any hand-waving or "We'll sort that out later."

5. Ensure that everyone's expectations (including both yours and the other company's investors') are clear and aligned. Don't make any assumptions. Lay everything out in painstakingly explicitness.

6. Make sure that you're protected in case things don't work out. Basically, think about what could go wrong. Will your equity be subject to vesting? What happens if they fire you before the vesting period is complete?

If you want to go into specifics, I'd be happy to talk further on a confidential basis. My contact details are in my profile.

greglindahl2• 11 years ago

Acquihires are usually a mature company buying talent from a failing company. Your situation is not much like that. It's more of a "hey, let's join forces, we can build a better company together than we can separately" situation.

I'd start by asking them for their cap table, so you a can see what they're offering you in equity compared to the existing founders. You should also determine if they're going to give you the label "founder". (They should.)

Next, cash. The most expensive thing at the stage they're at is cash. If the company is a big win, 99% of your compensation will come from the equity. But any cash you extract now is a big PITA, given their funding level.

I would look into non-cash ways of getting a similar effect. For example, you could receive equity that has a liquidation preference, as if they had paid you cash and you turned around and invested it in the company. That's a little unusual, and may spook their existing investors. But paying you a wad of cash when they've raised only $1-2mm may also spook their investors.

What you really need is advice from some people who've been through this scenario, not people who know about acquihires that are very unlike this situation.

Good luck!

hkmurakami• 11 years ago

Yup this looks like the reddit-infogami merger and other union of early startups.

paulsutter• 11 years ago

A number I've heard for T&T (team and technology) acquisitions is to grant about twice as much /unvested/ stock options as if the individuals were hired through ordinary channels. The idea is that a cohesive team is worth more than separate hires. But not exponentially more.

But that's not your situation. It seems like you do have traction but you don't have a team.

If your traction is >> theirs, you might consider hiring them.

If their traction is >> yours, they won't give you much.

Raj123123• 11 years ago

The more thought and due diligence you put in, the lower the probability you will get screwed. However, how much effort, time, and $money into finding, hiring, talking to lawyer(s) do you want to put into this?

If you are at all worried about whether they are negotiating in good faith, then before you go any further, file one or more patents asap. This provides you with at least 2 things:

1) increases what you have to put on the table

2) if talks dissolve and you find they were in it to get as much info from you as possible (e.g. to use in their product), you have some legal options. Whether you need this recourse AND whether its even feasible, is left for a later time.

Business is war, expect no less. And in this case, the more they give you (cash or equity), the more they lose.

jwatte2• 11 years ago

How much would you realistically make if you competed your course successfully? What are the real chances of that actually harkening, over how long? Multiply the two, and subtract an estimate of how tired you are of the working alone part, and that's you're bottom.

On the other hand, estimate what it would cost them to fund and hire your alternative, including equity, recruiter, and hiring bonus fees. That's their upper end.

Add cash on hand, subtract liabilities, in both cases.

andfrob• 11 years ago

What is the ROI for the company buying you?

If it is website traffic... multiple your monthly new visitors by $1.50 or whatever and given them a reasonable break-even period (12 months)?

If it is a team.... what would they have to pay in recruitment fees?

If it is code... what would it cost to build it?

For another small business that is bootstrapped, this is the only way they can think of it.

You get a bit of a negotiation advantage if you can identify what matters to them most and use that as the metric. You can start amplifying how much of a difference you really can make for them.

tehwebguy• 11 years ago

Tell them that if they are serious they will make you an offer. Otherwise you are just losing ground by talking with them.

If they make an offer and you accept only then are you on the same team. Until that point you are adversaries.

Ask HN: Early startup valuation for acquihire?

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