If you are highly profitable, why sell at all? Use the $ to to allow you to focus on other things you want to do and keep that golden egg laying duck in house.
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#12I'd say definitely delete this thread. You are showing the other side all of your cards.
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#13Unless you are truly prepared to walk away from the offer, you won't receive what you are actually worth. It's scary as hell to do it. But if you turn it down, work hard for another year they make come back with a 5x offer.
Are you strategically valuable to them?
Also, if you've worked for 5 years on it and have an actual business, you should receive at least some up front.
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#14In the worst case, they could fire us on day #2 and we'd have only the token money we got up front to show for it.
To me, this would be enough to immediately reject the offer. I don't believe in doing deals which make my worst case worse unless I will be in a position where I can prevent the worst case from happening -- and it doesn't sound like you'd have any way to avoid getting screwed here.
they've expressed to us that involving bankers would 'change the tone' of the discussion, whatever that means
Any time someone tries to convince you to not consult your advisors, run away immediately. If they think they're offering you a good deal, they should be encouraging you to talk to everybody.
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#15I only have limited experience with things like this, but my advice would be to not let them pressure you into anything.
As a rule of thumb though, you probably won't be able negotiate a good deal unless you're willing to walk away from it. They will have way more leverage over you if they know you are desperate to sell.
When negotiating, I find it very helpful to switch positions and think about it from the opposing perspective. What are their motivations for acquiring your company? What is it worth to them? How much do they want your company? Could they easily acquire someone else or duplicate the same functionality. Knowing the answers to these questions and gathering as much relevant information from them can help you gain more bargaining power. Ideally, you want to sell your company at what it is worth to them, and not you, because there could be a gap in your favor.
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#16Step 1: Be sure you and your fellow founders are on the same page. United we stand, divided we... Key areas for agreement are (a) decision to sell, and (b) minimum price you'd accept. Nothing will expose cracks in your team's facade like M&A discussions.
Step 2: Tell the buyer the price they've offered is too low, and offer to explain why. The first offer is just the beginning of the negotiation process. A buyer who is not willing to discuss an offer is not the sort of partner you want to work with. At it's best the negotiation process is a mutual education process, with you explaining your value and them explaining why your value isn't what you thought it was. At the end you'll either agree to disagree or you'll agree. If you agree, you'll do so for the right reasons (i.e., you are both roughly on the same page). While outside advisors can help here, the real work must be done by you, as no one will understand your business and its prospects better than you.
Step 3: Ensure that the deal you've struck is a real deal. If the deal pushes a lot of the pay into the back-end, it is not a real deal. It is an option. Earn-outs and other back-end payment structures can help bridge a disagreement in valuation, so they have their use, but a seller who isn't desperate to sell should ensure that he is happy with the deal even if none of the back-end targets are satisfied. Otherwise he's traded his business for a dodgy option. Rarely a good trade. Here again advisors can be helpful, particularly for tax issues, but usually a good deal is clear enough that you can understand it without the help of advisors.
A good lawyer is essential. A banker less so.
Fred Wilson's blog has had some good posts on M&A recently.
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#17You should also post this on Quora.com under "Startups" to make sure you get all possible answers.
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#18They're trying to take advantage of you.
Always assume the counter party will try to stick you with the worst case scenario and ensure your agreements and contracts guard you against that.
HIRE A LAWYER and incentivize them correctly. If they 'work against' you, they work against themselves, and they will be investigated and disbarred.
It's not about the people you're dealing with - the entire upper management of the acquiring company can change within months, and boot you with 3 years of equity that isn't vested, or dilute you to worthlessness, or any number of things that will short change you.
Cash is king.
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#19> we've received a low 8 figure verbal offer over the phone today.
Try to get something on paper.
> they could fire us on day #2 and we'd have only the token money we got up front to show for it.
That's something you should take care of contractually.
> the offer is low by about 20% from what would make us "happy" to sell for.
20% is not a whole lot to be off for an opening offer, but keep in mind that if you go for broke you might end with nothing.
> We're very excited (indescribably so) at the prospect, we love the company and really want to make a deal and start working on the million ideas we have for the future - but at the same time we are afraid of cutting a deal now that we'll be second guessing ourself on for 4 years.
How long before the next offer comes along?
Will it be a better one?
Will this offer stand?
Are you the next twitter or are you operating in a space with competition? This matters a lot in your risk assessment.
> The purchaser has made the deal seem very much like a standard-fair offer and has (without saying so) implied that they make an offer and that is it - they don't go back and forth on it.
I would say that :) That doesn't mean it's true. But it does mean that they want to pressure you a bit and apparently that is working.
Keep your head cool.
Don't sign anything on the spot ever, always think it over, always have it reviewed. Be as cool as you can be and don't allow yourself to be pressured.
> We are also being courted by attornies/firms and investment bankers who want the business, and it's hard to get a bead on some really solid advice without feeling like the person giving it has something to sell us. They basically have all told us it's ridiculous we've come this far without getting an LOI already, and the purchaser has basically said they don't issue LOIs until the terms are agreed on in principle.
That makes good sense but even a letter of intent is essentially meaningless. Even a term sheet is meaningless. The only document that really matter is the final contract, and only then when it has been signed.
> So anyhow, what next?
Get a really good lawyer! An experienced one and one that will not blink on doing a deal like this (as in, that has done multiple deals like this and comes with very solid references). Deals like this happen only a few times in a lifetime, don't be cheap, that might come back to bite you big time.
> They are waiting on our go-ahead to put together an LOI.
Get a lawyer.
> Counter immediately?
Get a lawyer.
> Is it stupid to be afraid of "ruining" a deal?
No, not at all, that actually happens. Don't ruin it!
> Should we involve our attorney?
YES!
If you end up with a deal on the table after negotiations are finished and you don't like it walk away.
Treat it as a learning experience up to that point and only sign if you are 100% sure that it's a good deal for you and your buddies.
Good luck!
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#20Don't be afraid to counter, make it what YOU want, plus a bit. You should have some amount of guaranteed cash at closing, plus earn-out, plus stock, plus a clause for at least some kind of acceleration if your employment is terminated for any reason.
Ask for double of what you would accept, not just a bit more.