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Ask HN: Acquihire early stage bootstrapped SaaS advice
93 points by throw_advice on June 14, 2018 | hide | past | web | favorite | 43 comments

I'm running a bootstrapped SaaS service in the software engineering space. It's really early and slowly getting some traction. A pretty big player in this market has approached me about a possible acquisition / acquihire. My service would become part of their portfolio of services. I've had talks with C-level and we're moving to a technical due diligence. I'm open to an offer, depending on the terms of course. Any tips from people who went through the same process? Should I have an NDA in place for the DD? Thanks!

Haven’t been through an acquihire process myself, but I am familiar with this sort of thing.

Yes, you should have an NDA and other agreements (e.g. an MoU) before you divulge serious details. Think of it like this: there are two possiblities, and you can’t know in advance which is true: 1)BigCo is acting in good faith, 2) BigCo is acting in bad faith. In the first you have nothing to worry about. But if it is the second, after they’ve figured out exactly how you’ve implemented things, what exactly stops them from having their own techs build in a few weeks/months? An NDA/MoU or any other agreement doesn’t mean you’ll definitely sue them if they screw you over (mainly because you’re not that rich), but it will give them just cause to think long and hard before doing so. If you have signed paperwork validating your stand, you can (theoretically, but also practically) raise a stink about the whole business, if they turn out to be “dishonest”.

The more potential leverage (i.e. legal documents) you have, the greater the opportunity cost for them to screw you over - much easier to simply buy you out instead of copying your tech, and risking a furore in the media, and possibly with customers.

Understand that this is just business - just cost and benefit. They obviously have much to benefit from your tech, else they wouldn’t be pursuing you. Make sure the potential cost of possibly screwing you over is high enough. If it is cheaper for me to simply copy you and profit, and know that you can’t do a damn thing about it, I’d be damn stupid not to.

That being said, don’t be a dick to an acquirer if you want to get acquired. Be upfront and ask for the paperwork. Call it a proof of good intentions. If they are genuine, they’ll appreciate your situation and arrange it quickly. If they don’t that’s your first sign of trouble.

Good luck.

A corollary to this great answer, which I hope is apparent, is to get a lawyer who has experience with this sort of deal. A good one will be able to advise you through the whole process and tell you when they see red flags. Worst case you burn a few thousand dollars to prevent being taken for more. Think of it like insurance in that case.

To put it another way, it's usually cheaper to hire a lawyer to avoid a dispute than to resolve one.

Parent's and your advice make a lot of sense. I have a lawyer that is in this space, luckily. They are in the loop. I was just curious of other experiences from the HN "hive mind".

The real danger of going through this process is that you will get so enamored with this acquisition that the normal drudge of plugging away becomes uninteresting in comparison. They drag you along, you stop shipping, you stop growing and then they can offer you whatever they want or nothing at all. In the end, I don't think many people are very happy post acquisition, so if you feel good about your product and team, you might want to just stop talking to them and go back to work.

This is super true and super scary. I've been involved on both sides of this a few times, and you wind up spending so much time, energy, and emotion on the possible big deal you stall out hard - and when you compare incentives between the acquirer and the acquiree, it's in their best interests to string you along to devalue, but it's in your best interests to keep doing what's made you valuable in the first place.

Treat it similar to a big enterprise sale with a ton of stakeholders - establish a hard timeline with specific deadlines and penalties for missed stuff. Get it on paper, get your due diligence deliverables planned alongside regular work, and move your focus on until it's needed again.

Yeah, big danger. I'm not super new to the whole startup / investor cycle and we got semi burned by that some years ago, i.e. wasting way too much time on something that turned out to go nowhere. My stance is to keep shipping and developing as if nothing is going on.

I'd strongly strongy advise anyone in this situation to heed the OPs advice. I have been there, made this mistake, and it is BRUTAL - if you have traction, run at your traction, unless you're at risk of not being able to continue: do not get distracted.

Or, worse yet, you spend a lot of time and effort on this acquisition, time passes, due diligence goes through, all of your team already expects it to happen, growth stalls, everybody slacks off - and then they cancel it completely at the last moment.

What I see happening at a larger scale company merger is the walkaway price clause. I wonder if it could be used here as a poison pill.

I feel like is a common story i hear and yet every time an acquisition goes through and completes and is announced to the public, its all "congratulations" and everyones happy as larry. Maybes its just the whole millions in your bank account that makes it all a happy occasion?

A few million in the bank give you a lot of freedom to do interesting things in the future. I'd definitely take it.

One thing I've said to acquirers in the past is: "You're a big company that can afford to dedicate a person full-time to this deal for months with no impact to your company's focus and bottom line. We're not. I'm excited about this opportunity, can we brainstorm how to limit the cost of exploring this? And perhaps how we could share the cost a bit more equally?"

When we get into brainstorming mode, two things I navigate towards are: time-boxing the exercise (setting and sticking to an condensed schedule) and earnest money from them after some amount of diligence or discussion.

If a suitor can't commit to getting to a handshake/LOI after X weeks, I wouldn't pursue it.

Unrelated advice: try to hack your own brain and your team into believing that the default result of this is "no deal, time wasted". Many/most deals fall through, which can feel pretty brutal if you get optimistic about it.

Understand that your compensation can take many possible forms. It's all up for negotiation. Don't hamstring yourself by assuming you must be paid in cash, or that the payment must all be upfront, etc. Consider the myriad other possible options and variables that you can tweak to get the the outcome you desire. If you can, talk to people who can help you ballpark what a reasonable level of compensation is for others at the company in roles similar to yours.

If the process goes far enough (i.e. you like the offer), get a lawyer. I got a lawyer when my company was acquired, and she was great. She'd seen similar deals in the past, and she worked very hard over the course of a month to look out for my interests. There are all sorts of little clauses in this type of paperwork that are negotiable and worth negotiating. In the end, her bill turned out to be something like $2,500, which was more than worth it. I was expecting 4-5x that.

Wow, $2,500 is great. Can you share who that was? I had a small acquisition a few years ago and my bill WAS 4-5x that.

At this point I'm indeed considering all and any forms of compensation. Stock, cash, tiered / vested versions of both etc. etc.

Don't forget to do your due diligence.

Don't treat the acquisition as something that is purely about them making an offer you like. Dig into the nitty-gritty of how they run their company and its financials and whether you want to be working there. You're going to be an employee of them if an acquisition happens; what does that mean for you and your team?

I've been through a small acquisition/acquihire twice. The first time, it was part of a small team. The second time it was my own bootstrapped one-person startup.

My biggest piece of advice is if you believe in your product and that it's a good fit for the acquiring company, you should ask for an earn out as a sliding percentage of sales over 3 or 4 years. For example, you get 75% of sales the first year, 50% the second year, etc. In my experience, the earn out is a common part of product acquisitions. It aligns everyone on the goal of promoting and building on the technology being acquired.

Agree with this. You would usually discuss valuation etc and complete financial and technical due dilligence once you have broad agreement.

I would first set a sell price and ask a 15% diposit before due diligence. If due diligence fails, you keep the diposit, if DD succeeds, you get the remaining 85%.

This is a good test for good faith and allows you to offset bad faith.

This is good advice. Even if things aren't along far enough to even talk about a sell price, choose some portion of money that you think of as a small slice of that likely sell price, and ask for it as a deposit... before diligence.

There's a chance that this will drive away a potential acquirer, who may indicate that they are horribly offended by such a request.

That is a good thing. A company offended by the request to put down a slice of the money up front (before they get to see all your private details in diligence!), is likely either just shopping for information, o to be a big pain later in the process. A company who haggles about the deposit but agrees to pay something, likely is a serious buyer with whom you can reach a mutually agreeable outcome.

Is this a common practice?

It’s not common but isn’t completely unusual. It can be structured in different ways but is often referred to as a “breakup fee”. My sense is it’s much more common on larger deals than smaller ones, though.

Great points made here. We went through something similar not too long ago. From that experience, I recommend you discuss at least the ball park of what they're willing to offer up front (and what you're willing to accept), before going through any further diligence. This way you can avoid going through an extremely distracting process and then only find out at the end that the offer isn't a compelling one.

You should already have an NDA in place preferably including a non-solicitation clause, usually that comes first. After that you should have an LOI in place. After the LOI and before signing a purchase agreement, you'll go through DD. Even at that, you should hold back your IP until the Nth hour and you have a final version of the purchase agreement if you think that there's IP that they could steal and recreate to put you out of business.

Obviously, you should speak to a transaction lawyer too.

I was in a similar position several years ago, and it seems like you have already jumped through the first mental hurdle.. actually being prepared to give up working on your own business. (Note, I don't mean this in a negative way, it's a serious consideration and opinions will vary.)

In my case, we met, no NDAs, they outlined initial terms (no actual numbers), and the idea of them shutting down the thing I'd built and working for them on their flat salary structure was too unappealing so I withdrew before we got to numbers.

I've been through this process. Everything came out alright, but had some bruises.

It's easy for the acquirer to take their sweet time. Some here suggest ignoring them completely. I think it's fine to go down this road if it's what you want and you like them well enough, but, first, understand that they want you and your team, so you should treat your interactions like a normal two-way job interview. Do you like and respect the company? Do you like and respect the people? Could you work there for five years?

A competitive situation is for the best--that encourages the acquirers to move swiftly and to ignore immaterial imperfections. If you can't create a competitive situation, then be sure to do the following: 1) reserve enough time and/or sandbox the rest of the team so that the business continues to advance during discussions; 2) if you sign a no-shop provision (it'll be hard not to), make sure it expires in 30-45 days; 3) do not extend the no-shop provision. If they can't close in the initial timeframe, it's fine to let them keep going so long as you still like them, but be very firm about not extending the no-shop.

Be sure to be professional and courteous throughout, even if things don't go through. It's good practice and you'll want a good reputation. Always remember your BATNA.

A bit orthogonal to the questions (apologies for that), but leaving the link just in case someone might find it useful: http://www.paulgraham.com/corpdev.html

The tactics you encounter in M&A conversations can be like nothing you've experienced in the otherwise comparatively upstanding world of Silicon Valley. It's as if a chunk of genetic material from the old-fashioned robber baron business world got incorporated into the startup world.


If you are getting traction and enjoy what you are doing focus on that and keep working at it. You might not be interested in selling in 6 to 12 months or you might sell for 10x what you would sell for now.

If you haven't check out @DHH's start up school talk. (Link is to a section for you, but go back and listen to it all) https://www.youtube.com/watch?v=0CDXJ6bMkMY&feature=youtu.be...

I’ve been through M&A twice from the selling side and once from the buying side. You need an LOI before you turn anything over you wouldn’t tell a potential investor. NDA should have been the first thing done before talking in detail. Feel free to reach out if you want to talk confidentially through the process.

Edit: if they are keeping the product/tech you should have them value it based on future expectations of value. It’s less of an acquihire in that case. Don’t take an acquihire price if they’re going to immediately realize more value than they’re paying you to take a job.

Thanks John. I looked up your background and will take your advice to heart. You are correct it is not a strict acquihire. The product will be used /integrated in some form. There is just no real revenue / customer base as of yet.


Might contain a few useful tidbits. What most stuck with me from his pieces on microSaas is that the best time to sell is when you don’t have to - which implies that you should not put yourself in a situation where starting the talks leads you to have to sell (because you fall in love with the idea of selling, of you neglect the business, etc)

Only take the deal if it's great money, a quick process, has very little risk of failing, and you don't believe you could make way more money operating independently.

I am not a good founder. I have weak risk tolerance, I'm lazy, and I don't have the mental fortitude needed to see complex problems through to completion.

So if someone seriously offered me quick money for my lackluster business, that's the only time I would take it.

Someone like Justin Kan could help you with this process. Look into his startup Atrium - but looks like you already have an experienced lawyer, so it might not be as useful.

I'm also going through this process right now, and it's a lot more work than I've envisioned. Others have said this, but make sure not to burn out - I'm trying to best.

Lots of great stuff here, but I'll add this:

Make sure if you absolutely can't stand it and you leave after 7 months you still are ok. You'd be surprised at how bad things can get.

Also, if you want more specific advice tailored to your situation feel free to email me. I've been around HN for almost a decade and I know how to keep my mouth shut.

License it to them as a whitelabel reseller (15% commission) with the option to buy? They can go to market with it immediately giving you immediate cashflow with less DD and you are protected by the resell agreement that they can't copy it.

If someone comes to you to discussion purchasing it and you come back at them with a commission reseller deal they're going to think you have no idea what you're doing.

No way I’d go through any DD process without an accepted offer. They’re likely digging for info and will just clone your product themselves. No offer on the table? You are naive and will get screwed here, hire a lawyer now.

I'll just leave this here as on point of view: http://www.paulgraham.com/corpdev.html

You might get a lot of value from the following book

"Magic Box Paradigm: A framework for startup acquisitions"

lawyer up

"I'm open to an offer" is fundamentally unserious and everybody knows it

It's not and they don't.

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