Ask YC: Aquisition Advice

My partner and I run a sports website. We were recently contacted by a major sports network that is interested in integrating our functionality into their site. Their are a few ways a deal could play out, with one scenario being a potential acquisition.

They have asked for a valuation and if we would want to become full time employees. We've never really thought about a valuation for our company, and are not sure the best way to come up with the figure. We have an idea of what we'd like from the deal but are not entirely sure what the company is worth.

We're also curious about employment deals that have worked for other startup acquisitions. Are there founders at YCnews that have become full time employees after acquisition (like reddit)? Have these deals been just a salary on top of acquisition price, or is there potential for a vested interest in the site continuing to be successful.

Congratulations!

Once you have bitten the apple, it's tough to go back to a world where you have a boss. Do you really want to hear someone give you a 'performance review'?

Performance metrics are ok, but now that you don't have full control over your future, you might not be able to hit them because the 'marketing department' got it's budget cut. I would take as much possible up front, and keep the 'required' time to be there as short as possible.

Insist on a lot of vacation so you can be working on your next gig. Depending, of course, on the weowneverythingyouthinkof contract they'll want you to sign.

The flip side, which anybody who works with lawyers on a weekly basis knows, is that lawyers can complicate stuff enough that people will walk away from the deal. This isn't advice, just an observation.

Absolutely true, but never forget: The buyer has an attorney on their side, looking out for their interests. As long as you do not, you are screwed.

What if the buyer offers employment with a 70% purchase upfront and the rest spread out over three years? Good deal or bad deal? Ask your attorney... What if this, what if that? All of them are "ask your attorney" items.

This is not simple, just look at this: http://en.wikipedia.org/wiki/Mergers_and_acquisitions

All of this issues apply to a company being bought out, large or small. (i.e.: Does the valuation section alone seem a simple, "do it yourself" task? Large or small, companies being bought need to be valued correctly)

Unfortunately, to come out ahead, you need to spend money on the attorneys. And specialist attrneys at that...

Before you do anything else, you need to read up on M&A. Buy some books. A lot is on the Web. Some of the things you should know about off the top of my head (to get a sense whether you are reading the right things or to help you search for stuff): earn-outs, holdbacks, escrow, non-competes, indemnification, capital gains taxes, stock vs asset transactions, arbitration clauses.

That being said, there are numerous ways to value a company, e.g. multiples of revenue, users/customers, traffic, assets, etc. What makes sense is very case-by-case and industry specific. But what it comes down to is that valuation is just a tool to make a case for deal terms. In the end, a deal is an agreement between two parties about what the terms of the deal are worth to them.

They probably already have an idea in mind about the minimum they will pay, and they are probably trying to draw an initial # out of you. I'm not going to tell you how to negotiate, but just be very wary of this, i.e. throwing out an initial #. It can set the stage for the whole transaction, and since you obviously don't already have a well thought out valuation, you may come to regret whatever you throw out.

Whether to work for them or not and how that would look like, is again, very case by case. For example, it could be structured in a way where if certain targets are met you get more money (earn-outs), or it could be a short transition consulting contract, or simply a salaried position not otherwise tied to the deal. I personally would make sure whatever you get up front can not be influenced by your behavior as an employee, i.e. are completely independent.