
Ask YC: Aquisition Advice - sports_guy
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.<p>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.<p>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.
======
gm
#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 :-)

~~~
tptacek
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.

~~~
sutro
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.

------
nasser
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.

------
epi0Bauqu
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.

------
webwright
"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).

------
tonystubblebine
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.

------
tptacek
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.

~~~
webwright
"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.

~~~
tptacek
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.

------
drusenko
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.

------
boucher
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.

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

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

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

~~~
jcl
On the other hand, it will cause this thread to come up in a Google search for
"<site_name> acquisition", which could have a negative impact on the deal.
(Although putting a link in a user profile might not have the same
consequences...)

~~~
justin
Add a tinyurl (actually use another service that let's you delete links), then
delete that link in like a day :)

------
cmos
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.

------
fleaflicker
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.

------
simplegeek
Congrats but remember deals fall through.

------
xirium
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]

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

~~~
xirium
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]

~~~
axod
Tags: [irritating] [extra] [redundant]

~~~
staunch
Tags: [witty] [sarcastic] [funny]

