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Ask HN: Ask for earnest money with offer?
4 points by throwearnest 8 months ago | hide | past | web | favorite | 4 comments
My co-founder and I have been running a small software company by ourselves in a low cost of living area for several years. We are in discussions with a larger company in the same industry who says they are preparing a formal offer. We are expecting it to be high 6-figures, low 7-figures, which could be enough for us to accept, depending on specifics. We will be working with a lawyer, but want to keep the fees manageable.

I have seen stories where the bigger company takes months in due diligence to inspects financials, code, etc. then walks away and builds their own version, instead of following through with an acquisition.

What can be done to minimize this risk? We were thinking a non-refundable earnest deposit, maybe 5-10% of the purchase price. Has anyone come across this on either side of a deal? I like to think it would discourage window shoppers, but for a larger company this amount it is still relatively cheap for market research and insight into a competitor. If they walked away it would not prevent their competition, but would at least give us something for our time spent on the deal.

There was an Ask HN about this with a huge thread of comments. Perhaps you can search and find it-- was within the last year or so.

I'd recommend getting a business person to bat for you on this rather than negotiating directly. And I believe you are low with your 5-10% number, if it goes anything past a simple meeting.

I haven't found that thread, but might not be using the right keywords. In case this helps anyone else, these threads came up from a couple years ago: https://news.ycombinator.com/item?id=3624505 https://news.ycombinator.com/item?id=7074264

A strong NDA is probably more beneficial than the earnest deposit. Think of it this way - if their plan is to just do some diligence and copy your business, how will the 5% earnest money stop them? 5% of the purchase price is much cheaper than 100%. So, paying 5% won't incentivize them to finish the deal. It will just somewhat increase their costs.

Can you have a lawyer write up a non compete or confidentiallity agreement? That should protect you I would think. Maybe tied into a refundable earnest deposit of 20%. So if they show they have not violated the confidentiallity but do not want to do it, they get the deposit back, afte a year or some such time.

I think yo are smart for worrying about this.

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