

Would you accept a buyout offer that made you rich but you still felt was undervalued? - os111

I.e., would you turn down an otherwise lucrative offer for pride?
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Flemlord
I was in that situation and turned down the offer. The same buyer came back in
a couple days with a fair offer and we accepted it. Had the buyer not come
back, we would have been caught in the general market crash and the value of
our company would have shrunk. But nobody knew that at the time, and I would
not have regretted turning the offer down. I wasn't in a hurry to sell and
there would have been other opportunities down the road.

Just like buying a house, you shouldn't get too attached to an offer or buyer
until the ink is dry on the signatures. Keep your options open and be ready to
walk away even at the last minute; if you don't maintain that perspective you
lose control of the process and become vulnerable to last-minute deal changes.
Don't let buyers put things in terms of how much money you'll make, keep it
focused on what the company is worth and whether it's the right strategic move
for the company.

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fortes
Depends on the size of the offer & how undervalued it is.

If it's enough to set you for life, then I'd be inclined to take it and move
onto the next challenge in life.

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mattmaroon
It depends on your financial situation. How much money do you think will make
you happy? If you hold out for more, even if you make it, will your life
significantly improve? What are the chances of ending up with nothing?

I'm a swing for the fences type of guy, but I'd have a hard time passing up
any offer that hit my minimum number. That's why I think investors should let
founders of companies take money off the table at a certain point. It gives
them more desire to go for the big score, knowing that even if they fail,
they're still set.

~~~
nazgulnarsil
this is the crux. will it make your life any better? I'd say the law of
diminishing returns applies here. 1 million will make you happy because you
don't have to work anymore, 2 million will make you happier, but not twice as
happy.

~~~
hhm
Do you really think 1 million means you don't have to work any more? 1 million
is 10.000 per month for less than ten years. Unless you invest them I'm not
sure you can't stop working forever if you have that amount of money.

~~~
suboptimal
I do. Put the million in a savings account, move to an affordable area and
rent, or purchase a living space and bank the rest, then live (modestly) off
the interest. Or if you can tolerate greater risk, pursue investments with
higher returns, and/or expatriate yourself.

The question is, could you stop working and retain your sanity? I wonder about
people who achieve success too early in life--they have many years ahead of
them and much to learn, and wealth in some ways may be a hindrance.

~~~
wschroter
People undervalue $1 million (or similar numbers) incredibly. It doesn't mean
you don't have to work, but it pays for just about all of the things you end
up working the first 15 years of your life for - house, furniture, "stuff".
Once you've purchased all that crap, any money you make over and above that
actually seems like a lot more because it's not going toward buying couches
and bedroom sets.

I made my first million when I was 22, and though it didn't keep me from
working ever again, it basically paid for all of the things I needed. Anything
beyond that has been incremental gains. It's a lifestyle changing amount of
money.

~~~
hhm
Thanks you all for your interesting replies (all comenters replying to my
original comment).

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ericb
This goes to an area where economics hasn't caught up to reality yet. If you
watch Deal or No Deal, many economists would say contestants are making a
mistake (being irrational, unlike the ideal homo economicus) when they accept
a deal that is significantly lower than the average value of the cases
remaining.

What they miss is that dollars offer diminishing returns at scale, so the
decision is rational. Going from 0 to 100,000 dollars is very different life-
style wise than 3 million to 3,100,000. Because those first dollars are
"worth" so much more, and because the upside of the best outcome is not worth
as much proportionally, the decision is rational (although people are often
being irrational in other ways in this game).

In your case, I suggest you consider your BATNA (Best Alternative to a
Negotiated Agreement) and estimate their interest, then consider countering.
You can only negotiate your "best deal" when you're willing to walk away. If
you're not willing to walk, you play it safe and "make a deal."

Edit: Keep in mind, if you counter, the worst they can say is no, and you can
often still acquiesce to their original offer.

[http://en.wikipedia.org/wiki/Best_alternative_to_a_negotiate...](http://en.wikipedia.org/wiki/Best_alternative_to_a_negotiated_agreement)

~~~
reitzensteinm
You're totally right about the phenomenon. But it is well understood in
economics - it's called marginal utility and it's in any Economics 101.

~~~
ericb
"The implicit assumption of conventional economics is that the only relevant
metric is the magnitude of the absolute change in expenditure." I'm not the
first person to say this:

[http://en.wikipedia.org/wiki/Loss_aversion#Can_loss_aversion...](http://en.wikipedia.org/wiki/Loss_aversion#Can_loss_aversion_ever_be_rational.3F)

~~~
reitzensteinm
I'm no economist, I just took a few units a while ago, but I'm pretty sure
that's not an implicit assumption, because marginal utility is an important
part of economics.

In fact the article you linked to says exactly that:

"All of the above effects can be expressed in terms of the utility function of
money, and, in particular, not regarding money as a linear measure of utility.
In other words, if money has diminishing marginal utility, then each dollar is
worth less than the one before it. To use the example before, the first $1000
might be worth $1000 to a person, and the second $1000 worth only $950 (in
terms of utility). This would not be "loss aversion" but just a phenomenon
adequately explained by economic theory."

~~~
ericb
At that point in the link they're going over counter-arguments to the standard
line.

Anyhow, I agree marginal utility is well understood by economists, just
disagree that that is the standard way dollars themselves are viewed in
classic economic theory. And perhaps I over-reached when I built my straw
economist.

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Hates_
Personally I wouldn't. I think a lot of entreprenurs get too emotionally
attached to their businesses, which is fine if you plan on being around
forever and passing it down through the family. For me though, starting a
business is about making money and creating new opportunities. A buyout is an
stepping stone to my next success.

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goofygrin
Have you had this conversation with your partners?

This is actually the one sticking point with my partner. He has "mega bucks"
on his mind, but if an offer comes through in 6 months for mid 6 figures+, I
would be inclined to take it unless we have some serious traction. Not enough
to make you rich, but enough to bootstrap you better for the next challenge :)

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symptic
With the numbers I tend to play with, if it's enough to live off the interest
comfortably for the rest of my life, sure. Then I can work on whatever I want
with my time rather than avoiding projects because of the assumed inattention
they would receive.

If the company has more potential than the offer, most likely no.

The real question is... will this buyout impact your life they way you want it
to? ...or will you be miserable or somehow transformed into someone you don't
want to be as a result?

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TrevorJ
No, I think feeling undervalued will be a constant for anybody who's most
interested in innovation. Now, if you are in it for money then sure the
possibility exists for you to walk away from a deal someday thinking "Damn, I
REALLY robbed 'em blind on that one!" But I don't think those of us that do
things with passion because we believe in an idea will ever feel that money
can every truly put a full value on our vision.

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jdavid
there is only one reason to sell a business, YOU WANT OUT.

if you are profitable and you want out, you have to ask; "will this enable me
to do my next activity?" if not, then don't sell yet you are much better off
growing your business.

if you are not profitable and you want out, well i would ask; "Will this cover
my effort on this project?"

I have a personal number in my head that covers my anticipated yearly
expenses, plus has room in there to keep adding to savings. above that amount
in wealth i very well may sell my first business, if i will find my next idea
more desirable to pursue.

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aagha
I think one way to look at this is from an NPV (Net Present Value)
perspective. If you work on a project where your cost to implement it is $x,
but the reason you decide to undertake the project is because you think it's
value is >$x+$1 and someone comes and offers you (exactly) $x+$1, but still
less than you thought you would get, would it be a good sale? From a pure NPV
perspective, if there were no other, better offers out there, the $x+$1 sale
should be made.

The thing that really happens in life is that in addition to NPV, there's this
little thing called pride, and when you think something is worth more that
what someone else thinks its worth, it's sometimes hard to step back and say
maybe they're right and I'm wrong.

Here's the thing to ask yourself: Do you think there's someone out there that
will reasonably pay you more than the $x+$1 you have an offer for. If so, hold
out. If not, sell.

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rglullis
How much is your pride worth?

All transactions are made on the principle that what you are giving is worth
(to you) less than what you are receiving in return. All of them. No
exceptions.

If you think that the you are rejecting an offer _just because_ of pride, than
it your adding the value of it to the transaction price.

If you do however think that what you have really is worth more than the value
offered, you'd refuse.

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mattmagpayo
Unless I was dead sure that my company was worth 5x as much, I would take a
'make you rich' offer in a second. Then just rinse and repeat.

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lastdual
Plenty of people might "feel" their company is undervalued when the offer may
in fact be fair. Decisions like this should be based more on the numbers
rather than "your gut feeling" - assuming your goal is to maximize wealth. If
your life goals are tied up with the mission of your business, then by all
means follow your passion.

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chrisconley
yes and then off to the races with the next more meaningful endeavor

Unless, of course, you're already working on your life's mission :)

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mynameishere
It depends entirely on how much you enjoy being a bigshot. Being rich doesn't
make you an alpha male, but being an executive, maybe even CEO, of a company
does just that.

If it's something you're running out of your mom's basement, well...

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alyx
I guess it all comes down to one's priorities. If you put your ego and pride
above all else then I don't think any amount of money will ever be enough to
quench your self-obsession.

On the other hand, if you have the chance to become comfortably rich and
essentially free then why not?

Of course there is a third (fourth, fifth and so on) variation. Perhaps it has
nothing to do with pride or money, perhaps you enjoy the work that you do so
much that being rich is not something you can enjoy with the same amount of
passion.

I'd probably take the money though.

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anamax
Are there other people involved whose interests might be worth considering?

I'm thinking of someone with a much smaller share. As someone has pointed out,
the 100% increase from 50k to 100k is different than the 100% increase from
$1M to $2M.

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smook
Have fun, learn, and make money! If you are doing that with your company, why
sell it ? Live long and prosper.

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flashgordon
well what is the true "economic cost"? :D rather, is it going to set you for a
while? how do you define the "true" value (apart form a gut feeling or using
made up projection numbers)?

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pibefision
YES

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kingkongrevenge
Colonel Sanders sold KFC cheap. After he said "If someone puts a million
dollars in your hand you close your fist."

~~~
jyu
He was 74 when he sold the franchise. Maybe that had something to do with it?
<http://www.corbinkentucky.us/sanderscafe.htm>

