The entire industry around M&A exists to play on one emotion in its clients. Fear.
Fear will be stoked in you from the first meeting with any advisors. All of the people who are supposedly on your side know, the more afraid the customer is, the higher percentage of the deal price they can extract.
Fear that you could have negotiated a higher price, fear that you are going to lose the deal, fear that you will agree to a term that will screw you in the long term.
Once you are sufficiently afraid, you will then not bat an eye about spending literally millions of dollars for the mundane services they provide and feeling good about it.
There was just some discussion about this on /r/RealEstate. Apparently a 60 hour class and a multiple choice exam are all that's between you and a real estate license. I had no idea the threshold was so low.
Any fool can get a real estate license. The hard parts are joining a brokerage (owners usually don't want to take on random new agents) and then finding clients. In California the majority of license holders did zero transactions last year.
Here in Hawaii at least, the hiring process is actually reversed from most careers. You pay a variety of fees just to park your license there - wether or not you actually complete a transaction. Most brokerages will hire anyone so long as they aren’t actively damaging the reputation of the firm.
>Large tech companies exert negotiating power over founders and selling companies because they can, and stack the deck in their favor with buyer-favorable terms.
A large part of the reason for this is because many sellers are in no position to say no. Many times the seller is actually not profitable and running out of runway and seeking an acquisition as a way for the founders to cash out without having the company go bankrupt. As the old saying goes “beggars can’t be choosers.” If you look at acquisitions where the seller was actually profitable (for example WhatsApp), the sellers were able to get a good deal from the buyer.
There are many exceptions, but it is a deep truism that those who can walk away are the only ones guaranteed to get a deal they find satisfactory. It’s almost tautological: If you can walk away, and a deal doesn’t feel good, you just walk away. So what’s left? Deals you like.
There are many ways to be able to walk away. Cash flow and profitability are the easiest. Sometimes it’s being able to put a one-person company on hold and go rock climbing while you live out of a “craggin’-shaggin’-wagon.”
That being said... Here’s some personal and contrarian advice: Don’t organize yourself around being able to walk away just because you want negotiating leverage. If that’s your only motivation for generating cash flow or profits, emotionally you will always desire a deal, and in a very real sense you will fond it hard to walk away from money.
The ideal thing is to generate profit because you are attached to the idea of a functioning business, and not just a startup designed to conduct experimental market- and technological research.
The ideal thing is to want to grow from founding to running an operating business over the long haul, so you actually don’t want a deal even if the terms are financially favourable.
When you are able to walk away for your own personal and values-based reasons, you ironically will be in the strongest negotiating position.
It's probably more accurate to say "desireable" instead of "profitable" here. The decision maker at the acquirer has to believe that there is some profit in it from them, but that doesn't necessarily have much to do with profitability of either side of the transaction, it could just mean a bigger bonus, or shutting out a competitor, or so on.
A profitable company can continue without being acquired. A merely "desirable" but unprofitable may not have this luxury for long enough for another acquisition deal to crop up.
Yes, and it breaks away from the mindset that there's any one thing that matters here and that it could really just be anything that any acquirer finds they like, not just profit.
“1. Big buyers are bullies: Large tech companies exert negotiating power over founders and selling companies because they can, and stack the deck in their favor with buyer-favorable terms.”
Well duh. Gravity is a bitch. What else is new.
The problem is more like: most tech companies that get acquired by “big buyers” have less than $10m in annual revenue. There is very few competent advisors in this space because most tech M&A advisors work for boutique investment banks where $1m is the minimum acceptable fee. Hence founders genuinely do not know if a 30x revenue or a 3x ebitda is a “great offer”
“2. Big buyers get more protection than they need: Many of these terms are unnecessarily one-sided. For instance, buyers hold back a much higher portion of the purchase price to cover potential liabilities than they need.”
Self serving crap. This smells like “we won’t make you make scary sounding reps and warranties so we can pay under market” (see above re: very few founders can tell what a great offer is, which is exactly what Atlassian would prefer).
"there was no single transaction where the entire escrow fund was exhausted" -- that's not because no one acquired a startup that turned out to be mostly inflated metrics and bullshit.
For whatever reason, escrow funds are mostly just used for little things like paying bills that came in after the documents closed. When the whole startup is rotten, the acquirer doesn't usually try hard to claw back money because management don't want to admit to themselves or their board that they were suckers.
Also, it's very hard to tell whether a startup was about to collapse before the acquisition, or collapsed as a result of the acquirer making the new employees work in beige cubicles.
Something like half of acquisitions destroy value. The worst case is when the acquired company colonizes and destroys the parent company by filling its management ranks with stooges.
So we’ll fix it by putting the non-compete in our favor and making you waive your right to a jury trial.
> Each Party hereby irrevocably waives all rights to trial by jury in any action or proceeding arising out of or relating to the provisions of this Term Sheet.
This is not a job contract. This is a big company paying you potentially hundreds of millions for your shares in a company. I think a non-compete is pretty warranted, or at least significantly less gross than the same clause in a job contract.
Assuming they're not lying in that these are more seller-favourable terms than any they've seen, you've appare to decided that "better" isn't good enough, we have to burn these people to the ground unless they go all the way to "perfect", whatever that is. If you have experience selling or buying contracts and these terms are comparably bad, then maybe you should include that context.
If these are the reactions companies are going to get, maybe next time they'll think twice about opening stuff like this up to the public.
Oh, I get why founders waiving their right to a jury trial if Atlassian screws them is a great idea for Atlassian. The question is why is it a great idea for the founders?
How much less money would accept to retain the right to go to trial?
Option A: sell company for $25 million and waive right to trial
Option B: sell company for $20 million and don't waive right to trial
Term sheets are negotiable, if you actually care that much about retaining the right to a jury trial. Just tell your lawyer to strike out the term and accept less money in exchange.
The point of this term sheet is presumptive starting terms. Those are not founder friendly terms. Obviously my lawyer is there to help me, but there's a lot of inertia to starting terms.
Juries probably don’t have a predisposition to either party in this case. If anything, they’re more likely to get bored and confused than a judge or arbitrator. This seems like the wrong thing to get upset about.
Maybe it's just to save the expense, delay, and uncertainty that jury trials introduce in highly technical corporate disputes? This is not opting out of the court system, since judges still get to hear the case as usual.
I'm not sure I like it even so, but it would prevent Atlassian from financially pressuring founders in a litigation by insisting on a jury trial.
I don't like clauses like this and forced arbitration clauses. But if you're selling a large software company you should be sophisticated enough to understand the contract, and not use a free term sheet without getting it reviewed.
“Admire the spirit, but I have many follow-up questions: In how many of the deals was the non-compete clause agreed to? How long was the non-compete? How many employees were forced to waive accelerated vesting, agreed to severance, or change-in-control provisions?”
How can the terms of the M&A contract signed by the employer force employees to waive accelerated vesting, agreed to severance, or espcially the change-in-control provisions which are in place to protect the employee from just that?
Establishment alpha shares foobar seemingly to help startup founders, while also aiming to maximize the number of founders aligned w/ alpha's preferred process.
Here: alpha is Atlassian, foobar is this new M&A term sheet
Also: alpha is Y Combinator, foobar is the SAFE
Also: alpha is Y Combinator, foobar is startup school
While there's probably a lot of truth to talking up one's book, I still much rather prefer foobar(s) freely published to move conversations and thinking forward for founders.
The key problem for the fish getting acquired by the whale is usually leverage.
With the largest whales increasingly using OSS rather than M&A ("buy" the OSS by inserting senior engineers to in effect lead it), I fear there will be less demand, increasing the leverage imbalance.
Any other macro factors which may help the small startup either live independently, gain M&A leverage, or forge more paths to IPO or other capital?
This is the least of how M&A is broken.
The entire industry around M&A exists to play on one emotion in its clients. Fear.
Fear will be stoked in you from the first meeting with any advisors. All of the people who are supposedly on your side know, the more afraid the customer is, the higher percentage of the deal price they can extract.
Fear that you could have negotiated a higher price, fear that you are going to lose the deal, fear that you will agree to a term that will screw you in the long term.
Once you are sufficiently afraid, you will then not bat an eye about spending literally millions of dollars for the mundane services they provide and feeling good about it.