
Don't Talk to Corp Dev - _pius
http://paulgraham.com/corpdev.html
======
grellas
Founders build value and then want to realize upon that value. But the typical
road to success in the startup world is far from easy. Therefore, founders
_are_ vulnerable to manipulation and one of their softest spots is precisely
the time when they think BigCo wants to acquire them.

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.

~~~
zaroth
Just went through exactly this and managed somehow to muster the courage (or
insanity, time will tell) of walking away. The last straw for me was when we
flew to their offices to nail down the final deal and the price was still
decreasing, decreasing. They couldn't help themselves from trying to squeeze
every last dollar out of the deal, and putting more and more of the upside
behind earn-outs and future growth. By the time it was 'here's our actual
final offer' it was barely a P/E of _5_ on current year earnings when YoY we
were growing a triple digit percentage.

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.

~~~
jpmattia
> _it was barely a P /E of 5 on current year earnings when YoY we were growing
> a triple digit percentage._

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"?

~~~
zaroth
Well, I think what we said was, "The price is just not compelling, perhaps the
time just isn't right. We want to keep growing this and lets talk again in a
couple years." But hopefully the meaning was not lost in translation.

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!

~~~
jpmattia
> _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_

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.

------
leroy_masochist
I used to be an investment banker and dealt with corp dev guys (gendered
pronoun used intentionally and accurately) all the time. PG's article is spot-
on.

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.

~~~
jtreminio
> and a non-hire agreement that stops them from poaching your employees.

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.

~~~
fecak
I believe non-poaching agreements between companies discussing an acquisition
would be less inclined to harm employees than the agreements you mention. A
non-solicit in this case would be unilateral, and not the bilateral agreements
that Google et al had.

~~~
Jormundir
Isn't it unilateral in the direction that hurts the employee? If your startup
signs a no poaching agreement with Google. Now Google can't give you a higher
salary offer.

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.

~~~
tomerico
Think of it from the other direction - if the agreement didn't exist, the
startup wouldn't even talk to the bigger company, potentially hurting the
employee and everyone else in the company.

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.

~~~
Blackthorn
Maybe the startup should stop the whining and compensate its key employees a
little better then.

~~~
haney
I totally agree that the free market should set salaries for talented people,
but consider the case when a startup is winding down and looking for a soft
landing, if the acquirer picks up the top employees and ruins the last bit of
hope the company has then the non "rockstar" employees would all be out of
jobs and have nothing but a failed company on their resume to show for it.
Also, and I may be biased but it feels like bullying on the part of a bigger
company with more capital but without the ability to find equivalent talent
without coming in the back door of a smaller company.

~~~
jtreminio
> if the acquirer picks up the top employees and ruins the last bit of hope
> the company has then the non "rockstar" employees would all be out of jobs

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.

~~~
hedgehog
It's not merit-based. If I'm an acquirer playing hardball the value of hiring
those people is the damage to the acquired's valuation with other suitors and
not anything to do with the peoples' abilities.

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.

~~~
Blackthorn
Looks like the equity the startup offered those employees was clearly not
enough to keep them around if the big company was so easily able to poach them
while their equity was literally in the process of being turned into actual
dollars. Being horribly cheap with equity to employees is endemic in startups,
maybe that will change it. So, still not seeing the problem here.

------
LargeCompanies
Love to tell my horror story re: my experience dealing with a Fortune 50
company. Under a NDA til May.

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?

~~~
kika
It was better for us, they didn't have engineers skilled enough to understand
what we were saying and asked for a second meeting with their top notch tech
people. But I've smelled something fishy and just forcefed them with top grade
tech-looking bullshit under very heavy pressure. Top notch tech folks were
confused, corp dev guys were pissed off, but they didn't have a nerve to ask
"just repeat what did you say in the last meeting".

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.

~~~
raverbashing
Yeah, you got lucky

But the part about them not understanding what you did doesn't surprise me in
the least

------
nkozyra
As neophyte founders, my partner and I talked to Corp Dev of two top 8 tech
companies. In retrospect, I don't think either had any intention of
acquisition despite spending months at a time with us.

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.

~~~
drzaiusapelord
>. One of them basically had us reverse engineer our stuff through demos

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.

~~~
nkozyra
I'm not protecting them, I'm protecting myself ;)

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.

------
gaius
Remember a VC doesn't want a company to have a 10% chance at a million
dollars, they want a 1% chance of a billion, because that's how it works.

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.

~~~
aetherson
Expected value of a company with a 10% chance at a million dollars: $100,000

Expected value of a company with a 1% chance at a billion dollars: $10,000,000

~~~
robotresearcher
The utility of a person's first million dollars is much more than the
thousandth.

~~~
aetherson
Well, yes. Is it 100x their thousandth? I don't know. Maybe!

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.

------
mark-r
I once worked for a company that was acquired - the founder wanted to cash in
on his success and retire early. In the first all-company meeting after the
closing, the CEO gloated over how cheaply he was able to get us. That was
really grating.

The advice about watching for unsavory tactics is spot on.

~~~
api
He gloated like this with you in the room? I'm only a little shocked... not
that he'd gloat, but that he wouldn't think about the effect this might have
on the morale of his new hires.

~~~
dethstar
Maybe in their head they thought of it like

"oh you all are great I can't believe I just had to paid X for this/you, it
was totally a steal!"

~~~
etjossem
Even when you rephrase it charitably, it still sounds like the acquirer's CEO
is talking trash about someone these employees have followed for years.

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.

~~~
mark-r
It wasn't that the founder was a bad negotiator, he was just outsmarted. The
agreed share price was tied to a metric that the acquirer understood much
better than the founder.

~~~
etjossem
Either way, it's a weird thing for the acquiring CEO to boast about at an all-
hands.

------
chollida1
> Corporate Development, aka corp dev, is the group within companies that buys
> other companies. If you're talking to someone from corp dev, that's why,
> whether you realize it yet or not.

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.

~~~
phkahler
I deleted my comment with the same complaint. He means if someone from another
company's corp dev is talking to you it's because they may want to buy your
company. This was unexpectedly unclear coming from PG.

~~~
AnimalMuppet
The (unstated) context is that PG is talking to startups. They don't have
CorpDev of their own, because they're startups. So the only CorpDev they could
be talking to is someone else's.

I'll agree that it could have been clearer. But it was probably clear enough
to be workable for the target audience.

------
noonespecial
_Acquirers can be surprisingly indecisive about acquisitions, and their
flakiness is indistinguishable from dishonesty_

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.

~~~
drpgq
On a smaller scale, this can be true for hiring decisions too.

~~~
Brushfire
It is also very similar to the FDA.

------
holograham
I used to work in corp dev at a big tech company (not a typical silicon
valley). This is pretty much spot on by Paul Graham per usual. I was typically
the one doing the initial contact with companies (as a junior analyst on the
team). I always found it interesting how many HUGE replies I got back from
startups. I rarely ever saw a company take PG's advice and say not interested.
Companies that were over-zealous were definitely thought less of while
companies that played a more aloof game were chased.

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.

~~~
dustingetz
" _Companies that were over-zealous were definitely thought less of while
companies that played a more aloof game were chased._ "

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?

~~~
holograham
A bit of both actually. No one is immune to some of that bias even the big
league players. The over-zealousness wasnt necessarily a turn off but it put
the corp dev department in the drivers seat. We could then respond and shape a
deal to our advantage as much as possible.

------
ph0rque
_Imagine what it would do to you if at mile 20 of a marathon, someone ran up
beside you and said "You must feel really tired. Would you like to stop and
take a rest?"_

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...](http://adventure.howstuffworks.com/outdoor-
activities/running/training/hitting-the-wall.htm)

~~~
Todd
YC was founded in the Boston area.

~~~
hiou
For the downvoter(s)

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](http://www.boston.com/marathon/course/stage4.htm)
[1]
[http://old.ycombinator.com/start.html](http://old.ycombinator.com/start.html)

------
peterjancelis
I think the more important advice is: If you do talk to corp dev, insist on a
breakup fee upfront, payable if no minimum price has been offered:

"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...

~~~
hyperliner
This is unrealistic. There are many startups that are worthless (product is
terribly architected, teams don't get along, they cannot track their customers
revenue, etc.). A company cannot be expected to offer money for something
without some minimum level of due diligence.

again, if you absolutely are not selling, then say that and move on.

~~~
AndrewKemendo
_There are many startups that are worthless_... _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.

~~~
TheOtherHobbes
>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.

------
hnriot
This seems to be written very much from the perspective of a VC backer and not
the company itself. There are lots of reasons to sell a company, many are
ignored by this blog article which does little more than make the M&A guys
look like a bunch of used car salespeople. Having been on both sides of the
arrangement, getting acquired (twice) both times by Fortune 50 tech companies,
and then buying companies I really haven't seen the robber-baron tactics.
Obviously every M&W guy worth his salary will try to get the best deal for his
company and any CEO getting bought out should have the experience to know the
way deals go down. If you're worth X to one Fortune 500, odds are you're worth
that to another, meaning the acquiring company has leverage to walk away. This
either helps set the price, or the price was artificially inflated in the
first place.

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.

------
ilamont
It would be great to have some examples.

I was also wondering about how the acquihire scenario typically works out. Is
it corporate development, or some other business unit making contact?

------
kika
Happened to me. I didn't sell the company in the end (mtg meltdown, tech
acquisition department got dismissed altogether, etc) and the company never
recovered from me taking the "rest". Wasted 3 years of my life and $250K of
angel money. Guilty as fuck.

------
api
Great essay. I'm at an earlier stage than PG's target audience for this --
still bootstrapping but experiencing 20-30% month/month growth and getting
ready to go that next step (probably seed).

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.

~~~
cj
I experienced the same thing when I was at the pre-seed stage.

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).

~~~
umeshunni
Out of curiosity, how did you use the information?

------
djb_hackernews
I think anyones answer to "Do I want to sell my company right now?" is mostly
going to be "It depends, what's the offer?"

There are of course circumstances where people absolutely do not want to sell
their company, but for the rest of us... it depends.

~~~
greggyb
Out of a link from the essay[0]:

>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...](http://justinkan.com/the-founders-guide-to-selling-your-company)

~~~
djb_hackernews
Yes, easier said than done.

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...](http://www.sec.gov/Archives/edgar/data/1326801/000132680114000047/exhibit991auditedwhatsappi.htm)

~~~
emmett
You don't need to take the meeting. If they're serious, you will get another
phone call with "How does $1 billion sound?"

If a company really wants to buy you, saying no will not make them go away. It
will make them up their price.

~~~
zeeshanm
Very true. I think this can be generalized to a scenario when an investor
reaches out to you and you tell them to circle back in a few months as the
company is busy in building out the product.

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.

------
danielweber
Earnest: Aren't there other things that corp-dev does, like arrange strategic
partnerships and reseller agreements, that can be very valuable for a
business?

(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.)

~~~
api
I'd love to hear PG and other knowledgable folks around here talk a bit about
partnerships: when, whether, why?

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.

~~~
pquerna
In my experience partnerships in a SaaS-like thing tend to be binary:

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.

------
cpncrunch
I think if anyone pulls the "my boss won't do the deal for the price we've
already agreed on" I'd just tell them to politely fuck off. If they really
want to buy you, they'll pay the agreed price. Or you might decide you don't
want to do business with immoral fuckers :)

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".

~~~
gaius
Their boss didn't say this - it's purely a negotiating tactic.

~~~
cpncrunch
That's even more reason to go directly to the boss (or someone even higher
up). Lowballing is one thing, but outright lying should be unacceptable for
any kind of business deal.

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 :)

~~~
sukilot
In your story, I don't see how lying hurt the person. Seems it helped get a
discount for a while.

~~~
cpncrunch
I just checked my records, and he didn't actually get as far as even paying
for the service at the reduced rate. He just got a month or two free trial,
which I would give to anyone. He lost out by pissing off his clients because
they wanted to use my product.

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.

------
marcamillion
I think one of the more interesting aspects to this is how much PG has
followed his own advice with YC. i.e. he made something people (founders)
wanted with YC.

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.

~~~
aragot
Yes, thank you PG, it lands on the very day I'm supposed to have one of those
meetings.

But PG sold ViaWeb to Yahoo, didn't he? So if we shouldn't talk to CorpDev,
how should those deals happen?

~~~
saturdayplace
That's addressed in the essay:

> 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.

------
rokhayakebe
YC should have someone in staff to handle these requests. For others there
should be a company that exists for the sole purpose of handling these types
of conversations, letting you focus on your product while they do the do.

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.

------
lazyjones
This article is a useful warning. We got talked into a DD with a large german
telecom (by our VC who owned 50% back then!) less than 2 years after we
started. They looked at our contracts, our internal documentation, asked
strange questions and never talked to us in a direct manner. No acquisition
happened, they didn't even bother to talk to us afterwards. We felt violated,
unappreciated, insufficient. It took 10 years until we were willing to talk
about an acquisition again - and only with someone who we knew was a perfect
fit due to corporate culture and standing in the industry.

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.

------
programminggeek
I think this is good advice, especially considered that corp dev could also be
seen as a kind of corporate espionage program.

~~~
api
I had the same thought when I started reading, but didn't see any overt
references to this. I am quite curious: has anyone around here experienced a
case where it seemed like the objective wasn't to acquire/hire at all but to
derail, tar-pit, or gather intel? I can imagine this happening if the
approaching company is a direct competitor or is thinking of entering the
space.

~~~
jonnathanson
Intel gathering happens all the time. Corp dev people go on lots of fishing
expeditions under the ostensible guise of acquisition talks. Sometimes they
don't even need to mention an acquisition; they know that most startups will
hear "BigCo wants to talk to you," and will leap at the chance to take the
meeting. Bingo bango, they get free market intelligence, and all it cost them
was a few hours of their time.

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.)

------
7Figures2Commas
Can talking to corporate development be a huge distraction? Sure. But talking
to investors can be a huge distraction as well, and a lot of the things that
PG writes about corporate development folks are true of investors. Is PG next
going to suggest that startups avoid the Sand Hill Road dog and pony show? I
don't think so.

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.

~~~
jordanthoms
Actually PG says to avoid investors unless you are in fundraising mode:
[http://www.paulgraham.com/fr.html](http://www.paulgraham.com/fr.html)

------
AndrewKemendo
_If you think investors can behave badly, it 's nothing compared to what corp
dev people can do._

I didn't think it could get worse. Jesus, what is going on with this system?

------
ig1
A couple of things this doesn't address:

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.

------
robot
I have been in this position once and the biggest lesson I had for myself was
to aim for profitability and self-support in the company from the start. When
you do that you have a much stronger position. One could replace profitability
here with lots of user growth + VC money.

------
orph
Something not mentioned but which is very important is the price anchoring
that happens once you get a serious figure out of corpdev.

Future talks will be anchored on the initial figure regardless of your success
in the meantime.

------
rocky1138
I wonder which company it was who recently, mistakenly, spoke to a corp dev,
and inspired Mr. Graham to write this!

------
clairity
i appreciate this as a first approximation of what a founder should do, but it
presumes some specific clarity that is somewhat rare (which i'd guess even pg
would concede). for example, sometimes you don't know that the person
contacting you is corp dev, sometimes founders differ on when they should
sell, and sometimes you may have differing feelings from day to day.

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.

~~~
mark-r
Nobody's going to throw out even a ballpark without due diligence, and that's
the distraction factor. You really don't want to be roped into that unless
you're serious.

------
golemotron
> And that is the most innocent of their tactics. Just wait till you've agreed
> on a price and think you have a done deal, and then they come back and say
> their boss has vetoed the deal and won't do it for more than half the agreed
> upon price.

Ex-car salesmen?

------
rpwverheij
thank you pg

------
joegosse
Some companies also call this role "Business Development" or "Biz Dev"

~~~
etjossem
Biz Dev positions tend to focus on relationship management and strategic
planning across multiple companies. They close deals for cross-promotion,
partnership, and endorsement. What pg is talking about ("Corp Dev") is
different; at any large corporation that does acquisitions, there's going to
be person or department strictly focused on due diligence.

------
porter
The problem is that most founders would sell _for the right price_. Everyone's
got a price. How do you know what someone will offer you if you don't engage
in these conversations?

------
balls187
> ...otherwise comparatively upstanding world of Silicon Valley.

Ask women what they think of this statement.

ETA: [http://www.bloomberg.com/news/2014-11-13/code-of-silicon-
val...](http://www.bloomberg.com/news/2014-11-13/code-of-silicon-valley-
minority-you-can-t-be-angry-.html)

