How to sell your startup
process walk-through & things to keep in mind
Pithy title. I will share what I know in as plain terms as possible and I will break it down into 2 sections: (1) process, (2) macro things to keep in mind.
There is nuance and deep thought at every step. I am an optimist and I believe that in most cases everything can be done well and on the right terms such that both parties feel great after the deal is done.
But this email won’t break down the process in sufficient detail.
To make a sports analogy. If we are training for a race, the penultimate advice is to get a coach and go through every step of the training plan - all custom to you.
This email isn’t the equivalent of a full-time coach. This is more like a no-nonsense reddit post from someone who ran the race and will walk you through the course so you know what to expect.
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Few things before we get into the process:
This applies to teams who have traction, but are not a rocket ship with all trends in their favor. If you are a Figma or an OpenSea of 2020 you are not selling. You are waving off buyers and building.
I will skip negotiations. This is a key part of the process that deserves its own post or several posts. I have many thoughts.
This is all based on my experience selling a company I helped build, advising on sale of other start-ups, and being on the other side as an acquirer. And while there is nuance to each process and each business, I do think that at the most fundamental level - there are patterns that govern these things.
So let’s get into it. For the sake of this exercise, let’s assume that we are a series A/B consumer startup with some signs of revenue, large and growing MAU, team of 50, and product market fit.
Here’s the process from the POV of our start-up:
You decide you want to sell.
You put yourself out there. There is a saying: companies are bought, not sold. This saying has merit. How are we going to get bought? People need to know that we exist. Sometime it means getting on the radar of potential buyers who do not yet realize that we are a +EV add-on to their business. Cool so how? Different growth hacks to generate buzz, personal relationships, media, a quarterly report, a conference that you organize, direct pitching by us, a banker pitching their network, buying a billboard outside the F500 office or doing another off-line stunt, and many others. Sometimes it is serendipitous. Other times it can be hyper calculated.
Make a hit list. Who might be interested? Why? Who at each company would be a potential deal champion?
Form relationships and generate buzz
BigCo reaches out to learn more or to see how you can partner
You might be engaged with more than one potential buyer and running several processes concurrently until you enter diligence with one. This depends on you, but in a vacuum multiple offers are better because they give you choice and leverage.
Few calls or emails. You will be asked to share more about your business. How you see XYZ? What are key metrics? Can we see a demo of your product?
You sign an MNDA
Few more calls and emails. Maybe you get a list of questions. It’s starting to feel like mini diligence.
Sometime between step 1 and before the upcoming letter of intent you should share your intentions with your board. The sooner the better. You want to have an intellectually honest conversation with the board about the state of the business and why or why not selling now makes sense.
By now you should have a clear idea of who is your deal champion. More on this later.
The buyer will ask to learn more. You will answer. Some may ask a lot. You will need to figure out what to share with whom and where to draw the line. This is nuanced.
People on the email/calls from the buyer will often be a mix of the business unit and corp dev team.
They may declare their intention here or the dating will keep going. This varies by the buyer and can take many forms.
You will visit their office or do a Zoom where you present your business. Other SVPs will be in the room together with your deal champion.
Some buyers will want your standard pitch and your voice-over
Others will want a more concrete POV on how your business fits within theirs. This will require custom work and you should do it in spades.
Some will not ask for (b), but you should think through several moves ahead, figure out why they are interested, what your deal champion wants, and position your business that way.
There will be a letter of intent (LOI) or expression of interest (EOI). These are non-binding. Not spending much time on the POV of the buyer, but generally the deal champion will seek approval from the leadership team (no board involved yet unless the $ is exceptionally large) to get this LOI. Sometimes the LOI may have a target price, but no other deal terms will be stated.
You may chose to shop these around in good faith and anonymously. This is another topic and ties into negotiation strategy, relationship, and seller/buyer dynamics. A core part of any negotiation is information gathering and the person with perfect information wins (ex. can see your cards in poker).
You should be thinking about whether this is a company that you can see your team with. Is it a culture fit? Assuming you agree on the #s and the legal terms, does this make sense for the team?
You sign the letter. The time window from getting the LOI to signing the LOI is relatively quick (i.e. not months).
Your team will be invited to a deal room on dropbox/gdrive. Different companies will run it differently, but there is often a checklist. It can contain 100s of items. Diligence will depend on the buyer and the profile of your business. Typical buckets include people, product, tech/IP, financials, legal, key customers, security and more. You will be asked to answer additional questions and to submit specifics to the deal room ranging from all signed agreements to audited financials to open source dependancies to team stuff to key customer information to security. And the list goes on. This is justified.
There will be a model. If you are a SaaS business and especially if you are a B2B SaaS business - this will be more clear cut. You either have the metrics or you don’t. If you are a consumer-app, especially if you are unprofitable and pre-revenue, you will need to build a model with logical assumptions that take you to a state where you are profitable and generating revenue. The buyer will also have a model, but they will want to understand your long-term thinking about your business in excel.
Throughout this period or sooner, you begin to hash out principle deal terms.
Conversations with deal champion and the business unit continue throughout diligence. These conversations are additive to the diligence. The goal is to learn. Some of this might feel repetitive or arduous, but our strategy should be to answer everything fully and in good faith. For the buyer this is just as significant. They want to learn and understand. They are betting on you with their time and reputation. You and the deal champion will also want to close the valuation gap (you believe you are worth 10X and deal champ thinks you are worth X). This learning period will help you both get there and will help the deal champion advocate for you internally. What is the right way to think about your business and your potential?
You want to discuss values, operating plan, roadmap with your deal champion and/or CEO of the buyer. This will be several conversations and/or a few thoughtful emails. Money aside - how does the business operate after we sell? What kind of culture do we want to build? What values matter? What are our big product bets? 2 books that might help think through this are Creativity Inc and Loonshots.
There will be an offer. Unlike with step #14, our deal champion and the CEO will generally go to the board to get approval. Internal team will work on a concise deck that summarize your business, deal rationale, the model and key assumptions, operating and integration plan, value to the buyer, go forward plan. If the deal is small relative to the buyer’s P&L, board approval is not needed.
Note: at this stage we still do not tell our team. We want to minimize unnecessary stress and protect the people building.
You negotiate on the high-level terms
Lawyers engage to negotiate the deal agreement and finalize principle deal terms in writing. Other key terms are escrow, earn-out (if applicable), retention for key people, IP transfer, disclosures. Disclosures can be 50-100+ pages, depending on the business. The buyer will want to mitigate as much risk as possible from the transaction. Someone explained it to me that it is similar to purchasing a forever home. The house is advertised as X bedrooms/Y location/near Z school and that’s what you’ve discussed to-date (your metrics, product, team). But then you also want to hire an inspector to check the foundation of the home. You do not want to buy a home and find out later that something is broken in the basement because that is now your asset. So the buyer will do more diligence with their legal team, as they should. You and your legal team will also want to disclose everything about your business in disclosures so that there are now clawbacks from escrow and no surprises for your team.
You sign and announce the deal to the rest of the team. There is a waiting period between signing and official closing in courts.
Papers are filed in court and it is official. You closed!
Money starts to flow. From the buyer to you. From you to your VCs and angels. You might get a few questions or congratulations from angels or VCs who just found out. This depends on your relationships and check sizes.
Rough estimate for a Series A/B deal is anywhere from ~3-9+ months
1 week to 10+ weeks = dating period before LOI
LOI to first offer (diligence) = 2-10 weeks
Key terms negotiation = 1-4 weeks
Legal terms, disclosures, deal agreement = 2-6 weeks
Signing to closing in court = 4-6 weeks
Great chart from Battery that is relevant to #2 below.
Macro things to keep in mind:
Act with max integrity, professionalism, and empathy with everyone involved. Can’t say enough about the team, but whether it is protecting their time and their energy (see #7) or ensuring that they are well taken care off - this is on you. The same goes for the buyers. Whether it is engaging in the process with buyer A and deciding to go with buyer B or negotiating with buyer B and not agreeing on terms - it is important to treat people like people.
Your VC valuation is not the sale price. This is especially true in today’s environment. Public markets adjusted and many private companies are dead on arrival (see above). There are a few I can think of who raised at 50-80X ARR and would be in the 2-5 range today. The point is that you are worth what someone is willing to pay at a certain point in time. A VC valuing us, especially during a frothy period, isn’t comparable to a sale price. Besides embracing reality, another implication of this is that this is the buyers market relative to what it was FED rate was low.
You should have audited financials, historical P&L, all of your metrics, cap table, key legal agreements signed to date and a go-forward model. Different teams will want different things, but everyone will want this.
You should have a pitch deck that has your mission, key stats, product, team. This deck will improve as you go through the process. I wouldn’t overcomplicate this or turn this into a production for you or your team. See #7 below.
Your go-forward model might vary depending on the buyer and your business. Most startups won’t have one. Time to build it. Fidelity of this model will vary based on the buyer, but everything is doable.
Continue to build a meaningful relationship with your deal champion. Not just to close the deal and get through negotiations, but to connect and to understand. You and your team will work side by side with this person.
Deals far apart. Often. For many reasons and despite everyone’s best intentions. There are 2 key implications from this. First, I strongly believe that a small subset of the team should be involved in the deal to minimize disruption to the team. Second, you and the select few who are involved must be focused on the process and the business. Regardless of the outcome of this process (sell or pass) - you do not want the business to lose the momentum. Keep building. The latter is idealistic, but I think is correct. Some will say that you need to be 100% focused on the process and if things fall so be it - I disagree for # of reasons. There will be many times where you need to be Atlas. This is one of them.
Depending on where you are as a business, your edge, what you raised, your investors and other variables - you and the board may want different things. There are different reasons for why you might want to sell. You might see something that you board does not. You might run out of energy. Odds are your board will discourage you from selling. They are smart, have good intentions, and are here for a reason so it is important to have an intellectually honest and open conversation with the board.
Buyer may want you for 3 reasons: (1) your business/product, (2) team or acquire, (3) IP. Sometimes it is a mix of these. The valuation will depend on these.
Think about your post-close incentives. What do they do to your team dynamics and to your business trajectory short-term and long-term? For example, what would emphasis on revenue vs. MAU do? You want to win the battle and the war.
Figure out where your buyer is and reverse-engineer your strategy. This partially ties to negotiations so won’t take about this much, but heads up. The buyer may want to move fast because of internal dynamics. They might have a window within which they are working and the reasons for that window can vary. The buyer may want to move slow to de-risk the acquisition. Why? Maybe there are #s that are just around the corner that are embedded in your forecast that they can see to feel better about their model or maybe you are in the middle of selling a key customer/landing a key deal and they want to see it close.
If the buyer starts the process and then proposes a deeper partnership or a co-marketing deal - I walk away in most cases. Not because there is clearly no deal, but because these things are often a massive distraction for the team and will hurt the start-up speed. These proposals looks good to execs and BD guys, but do little for the product and the end-user. I’ve found these to be -EV and a waste of everyone’s time even if the buyer team is really nice and smart.
Make progress every day. Initial getting-to-know you period with several buyers before you enter diligence might feel like playing 1 v 10 in tennis. An avalanche of serves in your direction. You might get the same feeling when you enter diligence with one buyer. There will be 101 requests from the buyer or from the legal teams. Think it is important to get organized, answer everything with max professionalism/polish, and return everything as it comes in. Do not let things stack. Maintain momentum.
Do as much as you can in writing and over email. Make lists and methodically address every point. Save the calls to land key things, to connect with deal champion, and for legal. Not everything needs to be a phone call.
If you want to do any changes to the business or the team - now is a great time to do it. Your company is already going through a transition period. If you need to make tough calls - do them now. One example is parting way with teammates who are not performing or might not be a fit with the plan after the sale. Be decisive.
You might be getting a lot of advice. Do not attempt to act based on the average of all advice given to you. Think independently from the ground up. Weigh the advice of your leadership team and most trusted advisors who have your back above everyone else.
Take care of your health. Be mindful of your energy.
Who are the main players from the POV of a startup?
Usually there are 3: (1) the team, (2) the banker, (3) the lawyer.
The team is standard. This should be a small group made up off the founders and select members of the leadership team.
The banker is standard, but I believe you can do without one for most start-ups. Yes, I am a product of my own experience and I sold without a banker. Zero. Was it a mistake? I am not sure. I think that you need more professional help the larger the deal, but at the Series A/B stage I do not see a need. The singular largest pro of a banker that I see is that they can help shop you around in their network. Some leads are better than none, but if these leads are not coming organic via your network - they may not be qualified high value leads. The downside is that a banker will be one more resource to manage. Notice that I am not bringing up fees. I don’t think that fees is a good enough reason to pass on a banker. We are talking about selling your life’s work, creating liquidity for the team that you love, and doing it right. If we think someone can help - it is worth their X%, but I simply do not think they add value net of the cost of managing them. What are the banker fees? There is generally a retainer in the $XX thousand range and a deal fee of 2-5% if the deal closes. By the way - what does this mean in terms of banker’s #1 incentive?
The lawyer is standard and +EV. A good law firm that will fight for you is gold. I would highly recommend. I did not do legal justice here because it beyond the scope of this email, but it matters.
That’s it for now. We did not spend any time on negotiation strategy. We did not spend any time discussing how to integrate in the most healthy way for your team or how to reset deal expectations (common). Important!
We did not spend any time on the POV of the buyer. There are many nuances there ranging from internal team dynamics to key buyer fears to acquisition scorecard to deal cost components etc. This also matters and while all buyers differ, there are patterns.
A walk through the course to help you see around corners. Not a substitute for a proper training plan.