

Startups Acquiring Startups for Equity - blahpro
http://spider.io/blog/2012/07/startups-acquiring-startups-for-equity/

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pmoehring
Great post and great ideas. Mathematically, it's definitely a pretty perfect
solution, but there are other factors that come into play. Most importantly,
the reason for the acquisition, and the fact who company B wants/needs to make
happy:

The reasons might be a) fire sale, b) talent acquisition, c) product/asset
buy, or d) merger (increasing value of the company from a to d).

in a) it will most likely go only to the investors, so scenario 1 in your
case. The founders will probably not even transition, as only the assets are
bought to be re-used by company B. Founders don't get money or stock, as they
haven't built a successful company, yadda yadda (that's what liq prefs are
for).

in b) the acquiring company will most likely want to keep the founders happy,
not the investors. Like a), it's often not the best performing business, but B
wants A's team to work for them. The investors will be made happy, and the
founders will either receive stock outright, or get great employment contracts
with lots of options. Recently, it seems to have happened more often that
investors didn't end up getting lots of the proceeds, but founders were very
handsomely rewarded afterwards (on a trust basis). The Milk acquisition by
Google seems to have happened like that (according to le bloggers), and
there's word about many more instances where the investors got screwed by
handshake agreements that turned into a nice payout for the entrepreneur
afterwards. This is again not a question of good vs evil, but simply a
question of who has control of the deal. This situation is now finding the way
into legal docs (I am sure the lawyers can weigh in).

c) is the most obvious case for your solution - company B wants to make
everybody happy so the investors agree to a sale, and the founders stay on as
employees of the acquiring company. But again, this depends on who the
decision power lies with, and who needs to get a sale, fast. Because the
company is a much smaller part of the resulting company, control needs to be
ceded (depending on the A-investors' power).

in d), the investors of company A will probably want to keep control of their
stock. If it is a merger of equals, this control would have to be granted,
because they would otherwise not agree to a sale.

On top of that, there are other things to consider:

\- How is the acquisition paid for? You assume new stock, but it might be part
cash, part options from an existing pool, part share transfers from other
shareholders... \- What are the pay out horizons for individual investors and
shareholders (especially if angels or a complicated structure is involved)

Fascinating topic.

