United States: Five Tips For A Successful Exit

Any number of factors can trigger a tech company’s exit: worn-out founders, anxious investors, industry consolidation, or wild, Instagram-like success. As tech founders and executives contemplate the possibility and timing of their exits, they inevitably encounter a multitude of questions about the approach, process and strategy.

While every situation differs, all entrepreneurs should be familiar with the core characteristics of successful exits. A thriving company and valuable product are the first and most necessary steps, but any exit can be enhanced with well-executed strategies that almost always improve outcomes for all the parties: founders, investors and employees.

As a company and its product matures, founders and executives thinking about an exit should consider these five tips:

1. Set Realistic Pricing and Terms Expectations

Everyone on the company side should understand and accept an honest valuation. Setting these expectations early, with as much industry due diligence as possible, will avoid morale issues during the exit process and keep founders, investors and employees grounded and united. Many deals have been lost because of divergent expectations among founders and investors. This risk can be mitigated through clear communications among all key members of the team.

Setting realistic goals on the exit front requires a critical mass of due diligence and valuation information. The main factors include: recent acquisition and valuation activity in the space; the perceived value of the team, especially engineers; and the potential for outsized demand — for instance, is there latent interest in the space from behemoths such as Amazon and Google? Check out Twitch, a site where gamers can watch others play which sold to Amazon for $970 million in 2014.

2. Stage Your Company — and Yourself

You don't sell a house without washing the windows and thinning out the closets. Likewise, your company should be orderly and tidy before you show it to prospective buyers. Building and running a company is hectic and time-consuming. A lot of seemingly small details can get lost in the noise generated by a growing company, but the time to address those details is before any diligence begins.

  • Financial cards must be current and audited to ensure that all transactions have been recorded correctly and that standard Generally Accepted Accounting Principles (GAAP) have been followed.
  • Develop and verify all documents regarding the onboarding of employees, including at-will work agreements; prior-inventions intellectual property contracts; confidentiality and non-compete agreements; and equity, options and vesting agreements. These documents from all relevant employees should be in good order prior to starting the due diligence process. Combing through files and fixing any issues before such a process begins is far easier than doing it in the heat of negotiations, or worse, as diligence requests pour in.
  • Founders should ensure their own interests are well protected in company vesting and equity contracts. This includes locking down elements like double-trigger acceleration vesting, as well as change-of-control incentives. Double-check personal and estate planning issues. The tighter your ship appears, the more comfortable potential acquirers — and their lawyers — will be in bidding for it.

3. Understand the Impact of the Current Funding Environment

There are many different types of investors pursuing startup companies: accelerators, crowdsourcing, angels, traditional venture capital and private equity funds. This tsunami of capital has fueled not only a large crop of startups, but it has also led to more exits. Founders face new pressures, as disparate classes of investors have varying goals and requirements.

Traditional growth capital investors often have a longer horizon when weighing the risk and reward of exiting now versus holding out for a chance at a much larger deal or even, in the rare case, an IPO. Growth capitalists answer to their limited partners, many of whom are institutional investors such as college endowment funds, and expect their capital to be locked up for long amounts of time.

Smaller investors, from angels to funds comprised of lower net-worth individuals, often have more constrained timelines. They may prefer to sell early and eliminate risk. The demand for liquidity from these new kinds of tech investors can accelerate exit paths and create dynamic sets of influences on founders.

Even companies that weren't venture backed may face pressures to sell from family members who had no part in creating or building the company. In many cases, company founders from the baby-boom generation, approaching retirement, don't see their own zeal for the business reflected in their younger scions. When there is nobody in the family to carry on, it can be an attractive time to sell.

4. Leverage the Larger Pool of Potential Acquirers

Just as the universe of tech investors has changed, so, too, has the profile of potential acquirers. Big tech companies still drive much of the acquisition demand, but companies ranging from media and advertising to insurance and retail are now acquiring tech companies not only for their products, but also for an injection of creative spirit.

Companies like Aetna, Home Depot, Wal-Mart and Capital One have all made acquisitions in the tech space lately. Understanding how these firms value talent and products is essential when striving for full value in a competitive acquiring scenario.

When dealing with any potential buyers, it's best not to be coy, but, as with any negotiation, it's also prudent to never show your entire hand. Companies seeking an exit are well advised to have at least two suitors before charging into an acquisition process. This gives the seller true clout that will net better terms and, often, even more interest in the deal from others. Corporate development officers operate like most other humans: they want things that other people want.

5. Leverage Your Advisers Early

Deciding whether to hire an investment banker as part of the active solicitation process is complicated. Some bankers with specific domain knowledge and experience can greatly enhance a deal. But many investment bankers only work on large transactions — $10M plus of EBITDA or $50 million in deal value are common thresholds—so this isn't always an option. Further, finding the right banker, the one with industry chops and connections in a particular space, takes time and usually requires an adviser with a deep network.

Lawyers with tech M&A experience can help determine if a banker is necessary and narrow the field of those who should be contacted—so having the right legal counsel on board early is particularly helpful in this realm. Experienced legal firms will also be able to brainstorm with founders and executives on appropriate ways to approach the market, whether to take a more organic approach or whether to formalize the process with a banker.

If the consensus is that a banker would greatly enhance the chances for success, your law firm can help you prepare and make your company more attractive to the right bankers, who prefer to take on projects that are already well buttoned-up and organized.

A banker can also make sense for smaller tech companies with lean executive teams, as the bankers will typically assume much of the work of finding a buyer and honing all the financial modeling, a substantial task that must be completed by a pro. Financial models, often carried out on multi-level spreadsheets with macros and adjustable inputs, will be the first thing on which any corporate development officer will spend a great deal of time.

Experience in dealing with the dynamic influences of investors, acquirers, employees and founders is paramount. It's also critical that any keystone adviser, be it a lawyer, banker or board member, possess a keen understanding of typical deal structures and the "gotcha" clauses often inserted into agreement language by acquirers and equity investors.

Every exit process unfolds differently, so there is no standard template to follow. However, there are certain common traits that distinguish the most successful sellers. And while there's no guaranteeing success in a complicated transaction, understanding the steps described here will drastically boost your chances of getting to an exit that leaves everyone on the selling side satisfied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.