Founders build value and then want to realize upon that value. But the typical road to success in the startup world is far from easy. Therefore, founders are vulnerable to manipulation and one of their softest spots is precisely the time when they think BigCo wants to acquire them.
I can't tell you how many times in these cases founders have caved to lowball offers with horrid terms once they have gone multiple cycles with the prospective acquiring company. How does this happen? They ask for what they think they deserve and they get an offer far below that. Having concentrated their efforts on a possible exit, they sound out other channels and find there is no immediate interest. They are then high-pressured by the prospective acquirer to do the deal on a short fuse or the offer will go away. They then begin to contemplate the risks of continuing down the path of uncertainty and begin to contrast this with how nice it will be to continue the effort under the rubric of BigCo, where they will draw a steady salary and no longer have to deal with entrepreneurial risks.
By this time, they are hooked. Then the details come in. It turns out that, low as that $10M (or whatever amount) was, they as founders will have to earn all or a significant part of it all over again by having to vest their interest over xx years once they begin working with BigCo. Do they have protection from termination and the possible forfeiture of their interest? Well, no, not really - company policy forbids this. So, if they want the deal, they will just have to take their chances and, if BigCo terminates them early, that is just the risk they take.
What about elimination of risks? Well, here they must represent and warrant that certain things are true as of the date of closing on the acquisition. For example, they must warrant that their IP doesn't infringe. OK, fine. But what does this mean? In a typical blanket warranty, it means that, if you sell your company and you know you haven't done anything whatever to steal code or otherwise compromise its integrity, you still bear all the risk of financial liability if someone later comes along and asserts, say, a patent infringement claim against your IP. With a multitude of trolls infesting the world these days, this is of course possible. What does BigCo say about this? It puts on its official corporate suit and weightily intones that it expects founders to stand behind their IP and will not allow them to hedge responsibility for it. Therefore, it doesn't matter that you didn't know about the potential infringement claim - if it hits, you pay the price for any liabilities and for any attorneys' fees in defending against it. Is there a cap on this? Well, maybe, but at a high level (e.g., 50% of proceeds received on the deal). As a founder, you wind up agreeing to this once you are committed to the deal because, after all, it is not likely to happen. But as to uncertainty and risk? Well, that still belongs to you on some pretty important issues.
And this is just one issue.
The point is this: once you as a founder start to rationalize, there is no bottom. You have rationalized that you can live with the low price. You have accepted the liability risk. You have accepted the renewed vesting terms without protections. Maybe you also agree to an outsized holdback on the purchase price. And who knows what else. The point is, by this time you are fried. You have no will to fight back. You have no leverage. You are stuck with the wishful thought that it will nonetheless be great to be working for BigCo and to have a chance to continue to realize your dream, even if it does involve some serious compromises.
I have witnessed this sort of thing for years and it always comes about when founders deal with professional acquisition teams from a perspective of relative weakness. They suck you in and then you need to fight like hell to get back into a mindset where you can tell them to take a hike. Most founders in this position just can't do it. That is certainly my experience.
This essay by PG captures the perils of this process in a way that is spot on and extremely valuable as a warning to founders who might succumb to temptation. Be warned. It is exactly as PG says. A truly important essay for all founders.
Just went through exactly this and managed somehow to muster the courage (or insanity, time will tell) of walking away. The last straw for me was when we flew to their offices to nail down the final deal and the price was still decreasing, decreasing. They couldn't help themselves from trying to squeeze every last dollar out of the deal, and putting more and more of the upside behind earn-outs and future growth. By the time it was 'here's our actual final offer' it was barely a P/E of 5 on current year earnings when YoY we were growing a triple digit percentage.
Sometimes the lack of liquidity can get to you. Funneling every last cent of profit back into growth is a crucible. The offer of taking a rest at 20 miles is the perfect analogy. The level of distraction in trying to close the deal is immense. And how, after so much pain, can you really make an objective decision to walk away at the 11th hour?
This all ties right back into the liquidity discussion a few weeks back. I have no interest in taking payroll and seeing less than half after taxes. So finding a fund interesting in purchasing a fractional interest of Common Shares (no preferences) at FMV (versus investment value the VCs pay) is a really great bridge past the CorpDev route.
> it was barely a P/E of 5 on current year earnings when YoY we were growing a triple digit percentage.
I'm kinda curious: Did you point that out as clearly as the line above? along with something to the effect of "If you think this number is close to the value we'd take, then we're wasting each other's time"?
Well, I think what we said was, "The price is just not compelling, perhaps the time just isn't right. We want to keep growing this and lets talk again in a couple years." But hopefully the meaning was not lost in translation.
Perhaps part of the problem is that it was the wrong partner who didn't value the technology nearly enough, and was too focused on discounted cash flows with an absurd discount rate, and too conservative a growth allowance. They passed that off as "their model" which couldn't be touched. Add in the fact they weren't even paying up-front but where much of the value was earn-outs with lofty targets, including a minimum 20% net operating profit... somehow they didn't see we could earn just as much, if not more, by keeping all the equity and just keep working for ourselves. It would have been this weird "half-exit" where all the upside was still in front of us. No thanks!
> somehow they didn't see we could earn just as much, if not more, by keeping all the equity and just keep working for ourselves
Yes, that was exactly the message that I was hoping you delivered with a sledgehammer, because I would have guessed that their reaction would be telling.
Anyway, kudos to you and your team for making (imho) the right call.
I used to be an investment banker and dealt with corp dev guys (gendered pronoun used intentionally and accurately) all the time. PG's article is spot-on.
One additional thing to note is that the diligence process can be an intelligence-gathering bonanza for a larger acquiror. The information they glean can be either harmless to you (data points on employee shares/salaries allows them to build knowledge of early-stage compensation, which is very useful when poaching engineers from other companies) or harmful to you (they see your private information and act on it in a way that damages your business).
For what it's worth, I would advise people approached by Corp Dev types to not only say no as PG suggested, but do so in 10 words or less. The email response should be "No, not interested. Sorry" -- no greeting, no pleasantries, no signature. You won't hurt their feelings and a longer email is just an invitation to them to start a conversation that is going to suck up your time and energy.
If you are interested I would demand a break-up fee as others here have noted, as well as an aggressively worded NDA and a non-hire agreement that stops them from poaching your employees.
Finally, I would also consider the effects that knowledge of an explored-but-abandoned acquisition would have on your employees' motivation if they found out. Generally not good for culture and/or long-term goal orientation.
And that's fair. The employee should be able to seek employment anywhere of their choosing. What is being discussed is not the same situation that went on with the major tech firms. In that situation we found out that the tech firms wouldn't hire each others employees regardless of situation.
In a hypothetical situation where you have two companies, lets call them Company A and Company B, who are in talks for an acquisition. If Company A is huge and is potentially an acquirer then Company B would be it's acquisition target. Company A is going to learn a lot about Company B to consider purchasing them. Company A could walk away at any time with all the salary information of Company B's employees.
Company B should have the right for protection in such a high risk situation. A non-solicit agreement that covers employees would prevent Company A from approaching, with the intention of hiring, Company B employees for a period of time that both firms agree upon.
Employees of Company B are more than welcome to approach Company A about jobs. Company B employees may even get a raise since Company A would know how much they are earning. However, Company A would want documented proof to show that the employee of Company B came to them. As they cannot approach the employees of Company B during the previously agreed upon period.
The system needs to protect employers like it protects employees. Not everyone runs a high margin billion dollar company.
I believe non-poaching agreements between companies discussing an acquisition would be less inclined to harm employees than the agreements you mention. A non-solicit in this case would be unilateral, and not the bilateral agreements that Google et al had.
Isn't it unilateral in the direction that hurts the employee? If your startup signs a no poaching agreement with Google. Now Google can't give you a higher salary offer.
I don't think I see how this would not hurt the employees. Seems like a classic startup management move that screws over the employees who are already taking pay cuts and huge life risks to make the startup successful.
Think of it from the other direction - if the agreement didn't exist, the startup wouldn't even talk to the bigger company, potentially hurting the employee and everyone else in the company.
For a startup, losing a key employee is a big deal and a big risk. A non solicitation agreement doesn't prevent the employee from applying for a job at the bigger company, but merely allow the startup to be more open t
o a potential competitor.
I totally agree that the free market should set salaries for talented people, but consider the case when a startup is winding down and looking for a soft landing, if the acquirer picks up the top employees and ruins the last bit of hope the company has then the non "rockstar" employees would all be out of jobs and have nothing but a failed company on their resume to show for it.
Also, and I may be biased but it feels like bullying on the part of a bigger company with more capital but without the ability to find equivalent talent without coming in the back door of a smaller company.
> if the acquirer picks up the top employees and ruins the last bit of hope the company has then the non "rockstar" employees would all be out of jobs
Sounds like a merit-based scenario to me.
Simply reading through HN for several years, it seems pretty obvious to me that many startups view employees and "theirs". There is no scenario where I would hurt my future opportunities simply so I don't hurt my (sinking) company's.
I owe nothing more than the agreed-upon work for money to my current company, and watching out for #1 is what has been so successful for me these past several years.
A smart developer would stay at current company if she truly believed there was a successful acquisition on the horizon. If she leaves with someone else, that's just the free market talking.
It's not merit-based. If I'm an acquirer playing hardball the value of hiring those people is the damage to the acquired's valuation with other suitors and not anything to do with the peoples' abilities.
Let's say you're selling, I'm buying, and we reach a tentative agreement for $100M. While you're winding down your other options I talk to five of your key people and hire them each for $2M. The next morning I start in fresh: Without those people our new offer is $50M. By the way that's a generous offer, part of the team works for us so you're worth even less to other acquirers. And hey, what if the press got wind that you were trying to sell and your key people were leaving. Sounds like a company in trouble.
You might say that's an asshole thing that nobody would actually do but there's a reason the poster up top suggested covering it.
Looks like the equity the startup offered those employees was clearly not enough to keep them around if the big company was so easily able to poach them while their equity was literally in the process of being turned into actual dollars. Being horribly cheap with equity to employees is endemic in startups, maybe that will change it. So, still not seeing the problem here.
>Isn't that similar to what Google/Apple/etc were doing recently, and were rightfully lambasted for?
Two differences:
* It would be a one-sided no-poaching agreement (or it should be).
* An individual start-up does not have close to the same level of market power as a large corporation so the effects of no poaching agreements on the market as a whole would be minimized.
It isn't the same for the same reason why low cap startups with a lot of competition are immune from anti-trust violations no matter what their behavior.
Good question, to be clear, these agreements don't stop employees from leaving on their own volition but rather make it easier for the target company (the one being diligenced) to get damages from the potential acquiror if they aggressively hire away the target's employees.
In practice this often looks like an agreement to only speak with a defined, very small number of people at the target and to absolutely not initiate conversations with anyone else.
If Acme Startup Inc is quietly exploring a sale to Google, and coincidentally one of its engineers drops a resume to Google's recruiters, she can still go work for Google, but rest assured that Google will document the hell out of who-contacted-who-when.
No company that is executing on patents is doing so without some amount of trade secrets. If they demand itemized financials, for instance, they have a snapshot of your suppliers and your costs, which makes them a stronger competitor in your industry even if they can't use your patents.
I think it definitely applies to the tech industry and in fact these tactics are pretty universal. For example, I've seen them applied by basically the entire paints & coatings industry's corp dev teams when we were exploring the sale of a paint company. Nobody's going to turn down the chance to look at a competitor's financials, even if they have to promise in writing not to use the information materially for their own benefit.
I'm not a lawyer nor do I have a ton of experience in patent-related matters. If the startup is patent rich and is sitting on a mountain of cash, and feels like it's weird that it hasn't paid an astronomical sum of money to lawyers in a while, then maybe it could justifiably feel somewhat protected by its patents. Then again, look at Apple/Samsung over the years...I don't think patents are the be-all and end-all.
" I would also consider the effects that knowledge of an explored-but-abandoned acquisition would have on your employees' motivation if they found out"
Love to tell my horror story re: my experience dealing with a Fortune 50 company. Under a NDA til May.
We are an east coast start-up and two months into creating our tech/product a large entity in the valley found out about us. This big name invited us out and talked about buying us. Well we have zero strong connections to such people like Paul Graham, but we did reach out to our network. They said, "I don't know if you should go or not, we've never had a billion dollar company like that make such an offer."
I wish I had found this post before wasting 4k on a trip and filing a provisional patent. We're a bootstrapped start-up.
Well when we flew out/got there to demo, this Goliath treated David like crap on a shoe. They invited us to demo, but when we went to demo at their offices in the valley they were blocking our tech from working(worked perfectly throughout every place we tested in the Valley including outside their building). Then they baited us with, "We'd like to work with you, please tell us how you achieved this technological feat." We took the bait and told them our trade secret. They soon left our meeting, then came back and promptly kicked us out! Right before leaving/being shown the door, one of these not so nice big wigs from X company said, "The race is on, better hurry!"
Ok, there was no guarantee of you buying us. We were cool with that. We weren't cool with being treated like crap on shoe and then stepped on and disrespected! It's hard to fathom that X company treats the little innovator guy as they did us.
It was better for us, they didn't have engineers skilled enough to understand what we were saying and asked for a second meeting with their top notch tech people. But I've smelled something fishy and just forcefed them with top grade tech-looking bullshit under very heavy pressure. Top notch tech folks were confused, corp dev guys were pissed off, but they didn't have a nerve to ask "just repeat what did you say in the last meeting".
Then they've asked for the code and I gave them the code! We had brilliant C macro library for memory management, hash tables, list traversal, etc developed by my cofounder. Very nice piece of code, elegant, efficient and reliable. They've got all of it :-)
When they came back confused I told them that I thought they want to check the clarity and quality of the code and this piece of code is quite representative. They had to specifically ask for the trade secret (and I would have refused) but again didn't have the nerve.
It was a big name in the industry, $5B yearly revenue back then.
Turn this around, and see it from the "big wig"'s angle. They get in some guys (you) who obviously have not been around the block a few times already. More importantly, there is no attorney present and no way after the meeting to establish who said what, when, to who, in what setting.
His upside to screw you nine ways to Sunday is a big bonus. Where's his downside? Simple: none.
You cannot even name and shame as someone else suggested. Retain an attorney to properly advise you before you put names up here post-May.
Chances are the "big wigs" you met were not C-level, nor the level of management below that. If my guess there is correct, then you were not really dealing with "big wigs"; you likely were dealing with essentially middle management. The closer to middle management you get, the more prevalent this cutthroat behavior comes out. I could post a wall of text on why I personally have found this to be the case in my anecdata experience, but this response is getting long in the tooth already. At Fortune 50 levels, if you are meeting with C-level or direct reports to C-levels, there might be some mitigating factors that makes them more trustworthy, but again, I don't have the time to get into that here.
Suffice to say, when these impressive-sounding Names start dropping by, you need someone with the sales experience to qualify the opportunity. There are ways to generally suss out how serious they are about vetting your team/tech/org, mostly in the vein of making them come to you. Most middle management won't have the budgetary clout to spend anywhere close to what a Big Name will really spend (easily 5 figures and up, or an equivalent amount of staff time and expenses) doing just due diligence evaluation.
The key is not the reporting chain as much as who has operational control of budgetary decision making. It far easier to find out who reports to whom than who really wields the check writing power, and how big a check they can write before they have to get someone else's approval.
Right now, you have yet to open source and still have the potential to out-compete the Big Name. That is worth potential income in the future. Big Name might be impressive, but there are any number of people here that can tell you from first-hand experience why Big does not necessarily mean You Shouldn't Compete With Them.
When you name and shame, your options narrow. You have no way to prove what happened, and you should get together with an attorney to find out how exposed you are to a lawsuit if you name and shame. And any potential future income can become entangled in litigation budgets if that happens.
With regards to "the right people", you got a ton of them right here on HN. Rare is the deal that cannot wait a few days longer, especially large deals (for the Corp. Dev. guy pulling the trigger on an acquisition/acquihire it is still a big deal, just not as potentially a life-changing one as for you). Take advantage of that latency to ping the hivemind here and find out different opinions you and your braintrust might not have considered yet.
If I blew up bridges every time I was stepped upon, then I wouldn't still be in business today. This happens in business; it's a very bloody game of inches that takes place over years and decades.
Thanks, but lawyers cost money and that resource is lacking for us.
We tried and tried and tried to get out to the valley and via an incubator(YC or TechStars), but all we could get to help us are local incubators. We greatly appreciate their backing, but they do not have the backgrounds/experience/networks a YC or TechStars has to thoroughly help us.
THough there are some people in this east coast town who could help us, but they do not seem receptive to. It's not like we haven't tried to connect with them, though!
Most attorneys will listen for 15-30 minutes in a free phone meeting, enough to tell you in general terms how likely you will need their expertise; that is, how much hot water you are getting yourself into. Your braintrust (incubator, mentors, advisers, board) would at least have known about that; that is basic business knowledge. Either communications has broken down badly between your braintrust and you/your team, or I'm missing critical pieces of the picture.
Your public persona is a resource to be husbanded and crafted as carefully as your codebase and/or finances. If you plan on open sourcing your code, exiting the entire sector you are operating in and never intending to come back, then there isn't much Big Name can do to you even if they felt like it, as long as your wording was careful. Go ahead in that case, and burn down that persona for that space. But never is a long, long time. And this industry is still really, really small when you look at those you want to work with in a specialty.
If you intend to continue in your specialty, then I would take some time off, decompress, and figure out what is really important to yourself. The fact that this style of arguably unethical behavior is abundant and a regular feature of the corporate landscape is already out there now, via this thread and meta-discussions reverberating out there; while it can be emotionally satisfying to divulge details, make no mistake, there will always be a cost attached. Just be certain you are willing to pay that cost.
If you have any direct competitors in your space, and your space is very small, you can mention to them that Big Name is fishing for both technical and market intelligence details by posing as potential acquirers, and to be careful what is said around them. You don't need to mention your gaffe. If the space is small enough, then that will have the effect of freezing out Big Name on any future fishing expeditions. That is likely to have a bigger, more focused effect that has direct beneficial bearing upon your activities than trying to generally name and shame them out in the open.
Thanks, so we feel based upon that meeting and all the subsequent large companies (Fortune 50 to 500) who then reached out after we have created something extremely special.
Basically it's BlueTooth/BlueTooth Audio on Steroids via the web. Sync 100s to 1000s of IP devices together via a URL to play/control audio, video & or any media in unison on all devices.
Tons of software & hardware innovation will happen in this space, we've already created a few apps using our sync technology.
We just need the right people... their networks and money behind us! We have yet to been to accomplish such and we have shouted and waved our hands telling this story to those who can help, but it falls on deaf ears.
Once and if we open source this tech, we think doing such and then the community further developing will have a big impact on any company that currently uses BlueTooth and or has their own syncing standard.
ALL I WANT TO DO IS INNOVATE AND BE FAIRLY COMPENSATED FOR IT. I feel I have a knack for it based upon my history and all noted here.
If you go the open source route, then you will likely derive revenue from consulting and support activities. Modifying the open source code for specific requirements and applications, fixing bugs for paying customers, that sort of task.
If you are more into the tech than the business angles, then you could keep it closed source, create various platforms around it, and license the platforms. The F50-500 companies have already told you their likely use cases, even big wig himself probably revealed what they want to use it for. Instead of packaging the technology unto itself, create the interface to the use case, then license that integration package as a whole unit.
If they want to sync under a WebSphere stack, hold your nose if you aren't into the enterprisey stuff, dive into J2EE, build out as complete an integration to your tech as you can, then license that entire solution. You could do an end-run around big wig's team by making it feasible to get to a solution faster than his team could by themselves, since you only have to create the integration, and they have to build and refine the tech from the ground up and then do the integration. By the time they finish (if they finish at all), you are onto the next use case, and the next integration.
If you aren't relying upon this tech to put food on the table today, then you have nothing to lose by doing much of the integration work for your customers, and bridging the gap in the business case to adopt your tech much closer to reality for the business decision makers.
Thanks, but I am not the logic coder of my team. I'm the designer & design coder only.
We could use some more dev/manpower. Everything is written in the latest javascript frameworks like Web Audio API, Node.js and other similar frameworks.
If interested or know anyone who is interested in working on what we feel is game changing, we'd love to chat.
I am not a lawyer, but sounds like you don't have much to loose. It's your calculation to make, but you are probably in a position where calling them out publicly could bring you more benefits than harm (when that NDA expires, obviously), in term of visibility and respect.
The net for society of doing that is most likely positive as you are forcing them and others to reconsider their behaviors and warning other entrepreneurs of this behavior.
There is a risk they would try to sue your startup out of existence (ie. even if they don't have cause they can attempt to drown you in legal costs), but this would bring even greater attention to the matter.
A thought: Big orgs have a hard time getting shit done. Lots of initiatives die before they even get out the door. Just because this bigwig was excited doesn't mean something will definitely come of it. Another thought is this might be a FUD play. Get you to give up so you're not threatening something else. Definitely interested to hear the story after your NDA period.
This is unfortunately more common than many people think. I worked for a startup that had gone through something similar, though perhaps not as egregious. The patents were the only thing that (barely) saved it.
As much as HN likes to hate on patents, this is a huge reason why startups should file some if you have some technology worth protecting. Most probably they won't be enough to save you anyway, but it may be better than having no recourse at all.
On a cautionary note, and while I'm not a lawyer... Any patent is at risk of invalidation, and disputes become a battle of resources. At the same time, the provisional does at least help establish your freedom to use your own invention.
They don't even need to invalidate the patent, they can just run the lawsuit out for decades and most likely get the patent holder to settle for a pittance.
At this stage and without backing/guidance from networks like YC, TechStars (tried both a few times) or big angel or VC firms we have nothing to lose in telling our story.
We are technologists who have a history of creating innovation that gets noticed & or a novel idea we published in 2007 has gone onto have million of users after being copied 100 or more times.
Our weak point is networking and overall connecting with people & getting the right people behind us! It's so frustrating.....
> Love to tell my horror story re: my experience dealing with a Fortune 50 company.
A couple of points:
1. Obviously this is very different from pitching to an angel investor or venture capitalist, who might be unlikely to care about your secret technology. As you discovered, it's entirely possible that BigCo's engineers were very interested in learning what you were doing so they could do likewise, ideally without having to pay you anything.
2. Courts will sometimes enforce trade-secret rights even without a written NDA, if the circumstances were such that the party receiving the information implicitly agreed to keep the information in confidence. But that can be a really tricky proposition to prove, and will vary with the jurisdiction.
3. A written NDA might or might not be of much value in a situation like this.
A) BigCo might not want to sign an NDA. That's a red flag right there, of course. BigCo might even want you to sign an agreement saying that anything you say to them is not confidential (this is not uncommon, because big companies get a lot of idea submitted "over the transom" and don't want to have to deal with lawsuits from cranks who re-invented the wheel).
B) NDAs usually have carve-outs that say that "Confidential Information" doesn't include information that was published or otherwise known to others before disclosure (or that becomes such afterwards). BUT: Under U.S. law, a specific selection or combination of individual pieces of public information can be protectable, just as Kentucky Fried Chicken's secret blend of 11 herbs and spices is (reportedly) protected as a trade secret.
C) You want to be careful to comply with any requirement in the NDA that confidential information must be disclosed or summarized in a writing that's marked "Confidential" or "Subject to Nondisclosure Agreement" or something like that, on pain of losing protection. For example, in the Convolve v. Compaq case, the computer manufacturer Compaq (now part of Hewlett-Packard) defeated a claim of misappropriation of trade secrets concerning hard-disk technology because the owner of the putative trade-secret information didn't follow up its oral disclosures with written summaries as required by the parties' non-disclosure agreement. [1]
D) Enforcing an NDA can take a lot of time and money, especially if BigCo is convinced they haven't done anything wrong. On the other hand, sometimes it can pay off, because a jury might well punish a company that it found violated an NDA. See, e.g., the 1996 case of Celeritas Technologies v. Rockwell International, where a federal-court jury in Los Angeles awarded a startup more than $57 million, and the judge then added $900,000 in attorneys' fees, because the jury found that Rockwell had breached an NDA. [2]
4. Suggestion: Even for non-secret information, an NDA might be negotiated to include the equivalent of a break-up fee. That is, even if it turns out that the secret technology wasn't a secret after all, but the receiving party didn't know the technology, then the receiving party might be required to pay the disclosing party something as payment for "show-how" (as distinct from know-how), in return for having taught the receiving party about the information, thereby saving the receiving party from the time and expense of having to find out the information on its own.
As neophyte founders, my partner and I talked to Corp Dev of two top 8 tech companies. In retrospect, I don't think either had any intention of acquisition despite spending months at a time with us.
We shouldn't have talked to them, but as I said, we didn't know what we were doing. One of them basically had us reverse engineer our stuff through demos for six months and then abruptly ended contact. We heard through the grapevine they had decided to develop their own version, which came to fruition. The takeaway is they probably did this with a few of our competitors and simply took the good stuff. A lot of awful, sleepless nights working with their tech team under the misguided impression we'd see a nice exit.
The next one came not six months later, another one of the big (although aging) ones. As part of the dating process they gave us free access to a bunch of their APIs but nothing else happened or happened incredibly slowly. The takeaway there is they weren't serious, they just wanted to keep us on the hook.
When we talked with VCs later (yes, later), they laughed at our naïveté and offered essentially the same advice - don't do it. Don't do it unless someone is talking numbers, very, VERY soon after the MNDA.
I said both were "top 8," they both probably top 5. I doubt there's a lot of difference between those companies, frankly.
Look, when you're one of these companies and you can go to 90% of startups and just say "hello" and have them on the verge of sending you their source code, that's a critical tactical advantage.
The lesson is simply - when you get this call, take a breath and realize they're as likely to threaten to sue you as they are to acquire you as they are to let you linger on the hook for months on end. Be upfront, ask explicitly what this is about and where it might be going.
Remember a VC doesn't want a company to have a 10% chance at a million dollars, they want a 1% chance of a billion, because that's how it works.
But if you are a founder, a million dollars is probably the best deal for you, and your people, and you should grab it with both hands. Numbers made up but you get the idea.
This is completely, 100%, wrong about how YC thinks about things.
If you've not advised a large number of fledgling startups, you wouldn't know, but really truly talking to corpdev is demoralizing and dangerous. If they really want you they'll reach out with an dollar figure (albiet probably a low one). If they haven't done that, they aren't serious. Don't waste your time.
If actually you've raised from a VC, a small acquisition means you'll not clear preferences, which means you get nothing other than retention. The VC/founder conflict only comes up when you have a medium successful company that could be really successful. But in that case you can almost certainly sell secondary stock, lock in your $1 million today, and still go for it.
But more than that, YC (and Paul) truly want to support the founders whatever they want. We celebrate the small sales as well as the big ones. It's simply not true this is selfish advise that you should disregard.
It's probably fair to say YC represents best practise in the VC industry and so any startup with options would be able to use them as a marker against which to persuade the general industry to improve.
Can I just clarify, the selling of secondary stock and locking in a million, is that actually having cash in the founders personal bank account, or is that some cash on some future funding event?
I seem to remember this as a discussion some years ago - where YC was set against the "keep them hungry" mentality. I am assuming it has not changed?
Secondary stock sales means the founder sells a portion of their stock in the company in exchange for cash today.
There used to be a widespread belief in the VC world that you wanted to prevent founders from seeing any cash until the ultimate exit. As negotiating leverage has shifted towards founders this has gone away.
It's stupid anyway, since allowing founders to see a little cash up front actually aligns incentives much better once the company is somewhat successful.
Founders who have a successful company but aren't personally well-off are much more likely to sell early rather than pushing on to create a super-valuable company.
This attitude is exactly what pg is warning against. Corp Dev wants to wave a million dollars in your face and say "Isn't this a lot of money? It's more than you've ever had and probably more than you ever really thought you'd have. Just sign here and we'll make all of your problems go away." That's how smart people spend one million dollars to buy a company that will soon be worth one billion dollars.
As pg said in the essay, the company making the offer got big enough to be an acquirer by resisting the urge to sell before they could achieve their full potential. They would like nothing more than to profit from others who lack the fortitude to do the same thing. Because the acquiring founders have been in those same shoes themselves, they know how appealing a million dollars can sound to a weary entrepreneur and they know what buttons to push. Do not give them what they want!
The numbers in your example are made up, and they can never really be known with certainty. The trajectory of a startup can change with one phone call. There's no way to know whether it's really a 10% chance at a $1MM or a 3% chance at $2.3B or a 7.8% chance at $10MM at any given point in time. When so much is in doubt, it probably makes sense to err on the side of a belief in yourself and what you honestly feel that you can accomplish. Don't sell yourself short just because there's money on the table. That's what I took away from this well written and insightful essay, at least.
And finally, this whole idea of "paul graham is trying to use his essays to manipulate founders into decisions that will benefit him financially" is silly and needs to stop. It's good to question the source, and to understand the motivations of those who give advice. But if there's anyone who has rightly earned a reputation for genuinely helping startup founders and generally doing the right thing, it's pg. He just doesn't want to see good people make the wrong decisions.
Having done the corp-dev dance a bit, I can promise you that grabbing a million dollars with both hands realistically looks way more like "selling your product to people to make money" than it does "sell your company to corp-dev".
PG's quote about the offers only being surprisingly low is correct, from what I can tell.
I'd like to add an example here. Forty five billion dollars may be cool but for me in my current situation, I'd say a million dollars (dare I say even before taxes?) would drastically change my situation. Also, we have to remember that even Google was at some point willing to sell itself for a million dollars...
>> Khosla stated it simply: Google was willing to sell for under a million dollars, but Excite didn’t want to buy them.
Well, yes. Is it 100x their thousandth? I don't know. Maybe!
But on the gripping hand, if you want a million dollars, don't start a start-up. If you want something with the expected value of $100,000, DEFINITELY don't start a start-up. If your goal in life is to get $1,000,000 and then you're going to be awfully happy, then for god's sake, go work at Google or Facebook or plenty of other biggish companies with good compensation. You won't get $1,000,000 all in one lump, but you'll get it, and on average, you'll get it sooner than a founder will.
Risk-adverse people should not be starting companies -- it's risky. And people who have made a solid decision to take a risky path should not bitch if their investors would also like the riskier, more profitable path.
At the point you are considered being acquired it might be:
100% chance of a million dollars: $1,000,000
10% chance of a billion dollars: $100,000,000
In which case I would go with the 10% chance because if I had run a startup and got it to be worth $1M, and then I fail I can probably make the $1M easy in the next thing I do.
The expected value estimate isn't sufficient. One should also estimate the risk of ruin more than "probably". If someone got to that point on friends and family money, and/or like Cisco using credit cards for financing, then another way to view this is 0% of bankruptcy vs. non-trivial chance of bankruptcy (including medical bankruptcy) and limited access to new seed money.
Of course, if your 90% case is to have a job paying 125K/year then the risk is very low. My point wasn't about you personally but the analysis that should go into this sort of calculation.
Hell yes there are lots of variables. It is a big decision.
This decision in it's purest form can be seen on the game show "Deal or No Deal" where they choose between an unknown value in a box and a $ amount from the 'dealer'. Even this simplified version of the problem gets the contestant on edge and they really have to think hard about it, talk to their spouse etc.
A gameshow is a sandbox. No contestant will end up bankrupt as part of the show. The worst possible case is winning nothing. While the contestant can be out travel costs and opportunity costs, those are not part of the game itself. Therefore I don't think it really includes a risk of ruin.
Now, if the expected value were awarded at each stage, and had to be reported as taxable income, and losing the show required that the contestant pay back the money but still had to pay the taxes, than that would have a real risk of ruin.
But, the probability estimates are usually bullshit. How do you know you have a 10 percent chance versus a 1 percent chance of being acquired? You don't, and you're kidding yourself if you think anything with that level of uncertainty is something you have a handle on. It's best to simply acknowledge that the billion dollar exit is far less probable than the million, and do the logic from there.
If founders and VCs could math, and if the probability estimates had real meaning, you would have to integrate over the probability and profit/loss curves to estimate future value.
Using single numbers like this is just story telling.
However - if you can spare the time, you can also play Corp Dev at their own game and see if you can get a firm offer.
As long as you're careful not to share IP or intelligence, a firm offer will tell you that your startup is worth at least 2-4X as much, could easily be worth 10X as much, and may be worth 100X as much (but probably isn't.)
That's useful information, even if you have no intention of selling.
I see no problem with stringing Corp Dev types along on that basis.
Ah so here we have a situation where VC and founder are not on the same page. What my grandparent said is valid from the VC's perspective. What you said is valid from the founder's perspective. I think it is important as a founder to have some understanding as to where VC's are coming from. :)
No, I think that the interests and risk appetite of a founder with a stake in a single company, and a VC with a stake in 100 companies, are not well-aligned.
I once worked for a company that was acquired - the founder wanted to cash in on his success and retire early. In the first all-company meeting after the closing, the CEO gloated over how cheaply he was able to get us. That was really grating.
The advice about watching for unsavory tactics is spot on.
Maybe it's a fine line between praising how useful the new acquire is and how much value they can add. The opposite would be stating that they paid too much, which may imply the company will underperform. Finally, if they paid the exact value of the new company, including it's future uses and newly imparted abilities, that doesn't really imply anything useful was done besides keeping the status quo.
Obviously I wasn't there to interpret the remark, but maybe it was intended as a compliment as to how useful the new company and it's employees were, and how much they can now do without breaking the bank to do it?
Unfortunately it was long enough ago that I can't remember the exact speech, but the meaning was very clear at the time. And he never seemed to care much about the company or products, merely about the revenue it was going to add to their bottom line.
I think that 'good' businesses, or at least 'good' senior execs, care about more than the bottom line. Note that they still care about the bottom line because, hey, they have to make payroll.
But there are businesses out there that care about more than the bottom line.
'Good To Great' and 'Start With Why' are good books that document such businesses.
Businesses that can't manage both at the same time should not exist at all. Bankruptcy and liquidation is a perfectly fine solution for businesses that can only break even by screwing their customers and/or employees. I wish more of them would take it.
I'm very interested in how precisely these two speeches ought to differ, in your opinion. If you are running a company in an internally transparent way, what specific differences do you suggest are appropriate?
I would suspect (though I am not a fancy CEO man) that it is generally best not to talk to employees about what a great deal you got on them, like they are cogs in your supply chain that you got on clearance.
It would only be marginally better if you complained about how expensive they were (especially if many of them benefited from the sale minimally as common stock employees).
I think it would be better to, you know, welcome them to the team and treat them like people.
Because your relationship with staff should be cordial and professional and mocking them because you managed to get them (this includes their salary/benefits) cheaply is petty.
Companies have an incentive to keep salaries low but also keep employee morale high. These two conflict.
He gloated like this with you in the room? I'm only a little shocked... not that he'd gloat, but that he wouldn't think about the effect this might have on the morale of his new hires.
Even when you rephrase it charitably, it still sounds like the acquirer's CEO is talking trash about someone these employees have followed for years.
At best, it's a "you guys are great, but your ex-boss is a terrible negotiator and didn't know what you were worth." There's no reason to say that aloud.
It wasn't that the founder was a bad negotiator, he was just outsmarted. The agreed share price was tied to a metric that the acquirer understood much better than the founder.
Seems kind of like keying the used car you just bought. It only damages the value of something you just paid money for; even if you think you got a good deal it is still a stupid thing to do.
Still - how would you feel as an employee of the acquiring company? Especially knowing that the newly-acquired employees are listening in? At best, awkward.
It's just complete verbal diarrhea and he should retract it (though the damage is mostly already done).
This reminds me of a UK Office episode where David Brent announces the bad news 'there will be redundancies' then he announces the good news 'I got promoted!'
> Corporate Development, aka corp dev, is the group within companies that buys other companies. If you're talking to someone from corp dev, that's why, whether you realize it yet or not.
Can someone piece this together?
> I remember once complaining to a friend at Google about some nasty trick their corp dev people had pulled on a YC startup. "What happened to Don't be Evil?" I asked. "I don't think corp dev got the memo," he replied. [3]
Hey, Paul Graham not afraid to call out Google! Good for him.
I deleted my comment with the same complaint. He means if someone from another company's corp dev is talking to you it's because they may want to buy your company. This was unexpectedly unclear coming from PG.
The (unstated) context is that PG is talking to startups. They don't have CorpDev of their own, because they're startups. So the only CorpDev they could be talking to is someone else's.
I'll agree that it could have been clearer. But it was probably clear enough to be workable for the target audience.
yes the 'thats why' is referring to the previous sentence, 'is the group within companies that buys other companies'. So he's saying 'hey this is the group that buys other companies, if you're talking to them it's because they [maybe] want to buy you'. Not really clear though.
I think he means it this way: "...if you're talking to corp dev (as opposed to anyone else, or the person you expected to talk to), it's because they're the ones in charge of buying other companies...."
Acquirers can be surprisingly indecisive about acquisitions, and their flakiness is indistinguishable from dishonesty
There's some hidden gold right there. Non-malicious business as usual can be just as damaging to you as if they had actively tried to screw you over. Expect it and don't become angry or take it personally.
I used to work in corp dev at a big tech company (not a typical silicon valley). This is pretty much spot on by Paul Graham per usual. I was typically the one doing the initial contact with companies (as a junior analyst on the team). I always found it interesting how many HUGE replies I got back from startups. I rarely ever saw a company take PG's advice and say not interested. Companies that were over-zealous were definitely thought less of while companies that played a more aloof game were chased.
Also I can say first hand all of the shady deal playing is absolutely true. The members of the due-diligence team and even the corp dev director you are dealing with are NOT the final decision makers. We are building an internal package that makes it appealing to the corp dev VPs/CFO to bless (and take to the CEO to bless sometimes). It's several layers of vetting and it's just as tedious and bureaucratic as it sounds.
I will say that the due diligence team typically will want the deal to be successful. No one wants to put in all that work to not buy a company. Corp Dev's job is to buy companies so having deals reach the 11th hour and fall through is NOT good. They pride themselves on stats like companies evaluated/year (wide funnel) and having a small fraction actually go to due diligence and the buying process. At the end of the day though, they want to buy businesses.
A bit of both actually. No one is immune to some of that bias even the big league players. The over-zealousness wasnt necessarily a turn off but it put the corp dev department in the drivers seat. We could then respond and shape a deal to our advantage as much as possible.
Imagine what it would do to you if at mile 20 of a marathon, someone ran up beside you and said "You must feel really tired. Would you like to stop and take a rest?"
I've been at mile20 many times and every time I think next Marathon I'm going to arrange for someone to meet me here with a picnic, and have a rest, then really cane the last 10km. Never quite gotten round to it yet!
I think the more important advice is: If you do talk to corp dev, insist on a breakup fee upfront, payable if no minimum price has been offered:
"We can talk but I am looking for at least $xxx million and will need $xxxK / $x million if you walk away during or after due diligence, to compensate for my time."
It's only without a breakup fee that Corp Dev can smoke you out...
This is unrealistic. There are many startups that are worthless (product is terribly architected, teams don't get along, they cannot track their customers revenue, etc.). A company cannot be expected to offer money for something without some minimum level of due diligence.
again, if you absolutely are not selling, then say that and move on.
Until you get your exit cash-in-bank-in-your-account, those Big Names are your competitors or potential competitors. The breakup fee is to compensate you for sharing more than just product name, price, and terms with them. Simply enthusing a little bit beyond "business for me is going great!" to a potential competitor who is in a related space can be sufficient market information for them to convince them to enter your space.
There is a lot of emphasis on people sharing tech/trade secrets, but keep in mind that simply confirming that users get excited by what you are doing in your space is information that these Corp. Dev. folks would dearly like to have. Never be afraid to say "no" to a one-sided deal.
Look at it this way: most Big Name Corp. Dev. won't even get out of bed for any deal less than an accretive $5-10M+ annual cash flow, and something that pencils out to much, much bigger than that 3-5+ years forward. If they are absolutely serious about acquiring, then they will start talking numbers soon after the NDA counter-signatures are exchanged, because no one wants to lose nearly guaranteed accretive income/revenue/users/etc.
If they are shopping you and your direct competitors to see if someone is naive enough to talk without compensation or willing to sell out for a relatively low number, then you see this behavior we're talking about in this thread. Whether or not you want to participate depends upon your personal exit parameters. This thread points out that everyone who might be in touch with these Corp. Dev. folks should already have some numbers in mind already, and a way to qualify the serious ones.
There are many startups that are worthless...again, if you absolutely are not selling, then say that and move on.
Except the problem is, most founders have a "I wouldn't sell for $X but would for $Y" and the harsh terms for discussion immediately let the founder find out if CorpDev is 1. Serious not just doing business intel and 2. Willing to pay the right amount.
If the firm was totally worthless then generally no one would be calling anyway.
I'd say that Corp Dev, shouldn't be looking at your company in the first place unless they have some confidence in you, and the break up fee you ask for sets the level of confidence you require for any kind of talks.
It also lets them know that they can't just bullshit you for several months while they gather confidential information about your product for their own development teams to copy later.
Clauses could be added for anything that would obviously break due diligence that the sellers may know in advance. I am thinking of IP, Patent, Contract problems etc.
"product is terribly architected, teams don't get along, they cannot track their customers revenue" - none of these things make a startup worthless as they can be fixed.
This seems to be written very much from the perspective of a VC backer and not the company itself. There are lots of reasons to sell a company, many are ignored by this blog article which does little more than make the M&A guys look like a bunch of used car salespeople. Having been on both sides of the arrangement, getting acquired (twice) both times by Fortune 50 tech companies, and then buying companies I really haven't seen the robber-baron tactics. Obviously every M&W guy worth his salary will try to get the best deal for his company and any CEO getting bought out should have the experience to know the way deals go down. If you're worth X to one Fortune 500, odds are you're worth that to another, meaning the acquiring company has leverage to walk away. This either helps set the price, or the price was artificially inflated in the first place.
There are a lot of very naive startup CEOs out there, that's the real problem, from the Fortune 500 side of the table it's like babysitting most of the time.
Happened to me. I didn't sell the company in the end (mtg meltdown, tech acquisition department got dismissed altogether, etc) and the company never recovered from me taking the "rest". Wasted 3 years of my life and $250K of angel money. Guilty as fuck.
Great essay. I'm at an earlier stage than PG's target audience for this -- still bootstrapping but experiencing 20-30% month/month growth and getting ready to go that next step (probably seed).
At this stage I've gotten what after reading this essay sounds like the baby brother of this: the oddly aggressive hire attempt. These companies have been not necessarily direct competitors but people in related spaces who might want to add what I'm doing to their tech portfolio or use its techniques in their products.
The interactions have been quite different from any other "job interview" I've ever had. I've said no three times so far to some version of: "your project is awesome," followed by some interesting discussion, followed by a hiring offer. The hiring offers have been decent but not outstanding, and they've included nothing for the project -- no "acquisition" to go with the hire. When I bring this up, the response is that my baby isn't "worth very much on its own," etc. In one case the response was oddly condescending even in its wording, which was discouraging until I went and read all the users raving about my stuff and then looked at my rather nice looking metrics again. In another case it was explained to me that while my product was interesting, I obviously wasn't... "business" enough? That's not how they put it but that was kind of the implication. I interpreted it as "you're not coming off as alpha male enough to run a business" or some version of that.
In retrospect I saw these as negotiating tactics to shake my confidence in moving forward myself. These folks are trying to get me plus a lot (3 years) of code, users, and momentum without actually paying anything for the latter two things. Looks a lot like the kind of hardball PG is talking about-- I assume "corp dev" offers come in when you're at a bit of a later stage.
Now I've got another one in the pipeline. I've decided the best way to deal with them is to go ahead and chat but otherwise to change nothing about what I am doing, to not spend much time on them, and to constantly remind myself that I am the one interviewing them and deciding whether to accept their offer. At this point given the metrics I'm seeing, the offer would have to be very good.
I'd say that the advice in this essay is probably good advice. If you do have the internal discipline/experience to put these sorts of things in a "maybe but probably not" folder, it might not hurt to chat about it with them, but if you have any doubt or if you're too busy just say no and move on. If my current discussion turns out like the previous ones I will probably do the same moving forward.
I experienced the same thing when I was at the pre-seed stage.
I got an email from an exec at our competitor trying to hire me. I figured I'd grab dinner with them to see what they had to say, and they ended up being completely transparent with their business and sales strategy, competitive advantage, their opinion on our other competitors, etc. All while I reciprocated very little information about my business.
The cost was a few days of distraction, but it turned out to be tremendously valuable in understanding the market (and this particular competitor).
Sounds like they were "negging" you pretty hard. The parallels with dating seem numerous when I look through the lens of you (in a technical hire context) as "the attractive woman at the bar" and corp dev as "the pick-up artist."
Two out of three were. The third was polite and professional but the offer just wasn't quite good enough. When I turned it down they just kind of went dark, which I interpret as a no. Interesting the third was a big successful late-stage startup, while the rude ones were early stage startups.
Negging? New to me. Shows how little I know about sleazy dating (and hiring?) tactics.
Should I now worry about waking up with a headache, being unable to remember what I did the previous night, but with a folded up copy of a signed asset transfer agreement in my pocket? :)
> Should I now worry about waking up with a headache, being unable to remember what I did the previous night, but with a folded up copy of a signed asset transfer agreement in my pocket? :)
If they literally try to wine and dine you... maybe?
Are you looking to be hired? Whenever a company comes to me with a "great open position you'd be a perfect fit for" I tell them no, I'm working on my startup and I'm not interested. I'm not going to waste my time talking to them.
They weren't really clear about their intentions right away. If they were, I'd probably just say no. In two out of three cases it sounded like they were interested in being a customer.
Up front give them a high salary number (plus one off for your project) that you'd be willing to accept, and tell them you talk if they are willing to meet that.
Saves you time in the worst case, but still lets good offers through.
Keep at it and grow that thing you're building, the more serious offers will eventually come. For the time being just ignore the noise any time you spend on will not be made up.
Of course your VCs don't want you talking to Corp Dev types. Their interests in this matter are not aligned with yours. They want you focused on turning your startup into one of those Big Companies yourself, because that is the outcome that would maximize their return on their investment.
The flip side of that is that the odds of you actually pulling that off are pretty slim, historically speaking; and if you try it and fail you walk away from the table with nothing. Whereas if you get acquired, you walk away with money in your pocket. Maybe not as much as theoretically would have been there if you had persisted, but real money in your pocket beats theoretical money any day.
So the logical role model for a founder looking out for her own self-interest is Kenny Rogers: "You got to know when to hold them, know when to fold them; know when to walk away, and know when to run." (https://www.youtube.com/watch?v=Jj4nJ1YEAp4)
To your VCs, a modest exit is not really that much better than a complete loss; all that really matters is how many home runs they can put on the board. If you happen to swing and miss, that's no great tragedy for them. But it could be a tragedy for you, since you'll only get a few times at bat in your life, and if you whiff them all you could be worse off at the end of your career than you were at the beginning.
>Do not enter acquisition talks unless you are ready to sell your company. Negotiating an acquisition is the most distracting thing you can do in a startup: going through M&A is an order of magnitude more distracting than raising money. All of your ability to run the day-to-day operations of your company will grind to a halt. You should only enter an acquisition process if 1) you are certain you want to sell the company and 2) you are likely to get a price you will accept. Don’t talk to potential acquirers “just to see what price you can get.”
Suppose I am a cofounder of WhatsApp. We just booked 10M[0] in revenue and are seeing a lot of success. I'm pretty proud of myself and see big things for WhatsApp.
Though really, my ultimate goal is to compete with Elon Musk putting humans on Mars. I figure I need a few Billion to do that. But that's just a dream.
Facebook "corp dev" comes knocking. I read the news and see they bought Instagram for 1B, which isn't going to get me to Mars, and I'm not sure what they are offering, so I take PGs advice and tell them no thanks. However, if I take that meeting, I end up with several Billion dollars...
Very true. I think this can be generalized to a scenario when an investor reaches out to you and you tell them to circle back in a few months as the company is busy in building out the product.
The same happened in Google's case when they asked Ron Conway to come a few months later to invest. And so he did. For sure Google had a good team, product, etc., but this sure enticed Ron to invest in one way or another.
It's all about expected values and your subjective preferences over those. All of this is determined under circumstances of uncertainty.
You can make a reasonable estimate of the current value of your company, and a reasonable estimate of how likely you are to be offered that value.
You can also make a reasonable estimate of the future value of your company at time X, and a reasonable estimate of how likely you are to be offered that amount at time X.
There are large margins for error in these calculations. You can determine, though, the net present value * probability of the current and future options. The goal of this exercise should be to determine not the exact values (because your error margins are too big to have large confidence in the resulting numbers), but to determine which option you like more.
It's ultimately a subjective decision, but if you are not confident that you will get enough money to definitely want to sell now, then wait.
The original article and the one I linked both put the advice in more absolute terms, but it is obvious that the decision to sell or wait is a difficult one. The goal of both articles is not to answer the question, but to help you understand first that it is not a casual decision, and provide details which may help you decide whether you want that process now.
That scenario seems extremely unlikely though. If you talk to FB with the mindset of "just to see what price you can get", I doubt they would have gotten anywhere near the 19B price tag. That was an extremely well negotiation process that leads to the price: they must have at least some idea what's going on.
In this particular case, I can almost guarantee that the reason the deal ended up this huge is that the founders absolutely, positively didn't want to sell, and especially not to facebook. And facebook had to literally make them an offer they could not refuse (in the sense of the amount of money for every employee... not as in the Corleone sense).
You can glean some idea of why that was from this public information https://blog.whatsapp.com/245/Why-we-dont-sell-ads. This is in direct voice of Jan Koum, the founder and CEO of whatsapp. That gives you some idea of his personality and it's an entirely accurate one. I'll be willing to bet large amounts of money that the Zuckerberg himself had to engage in a full court press before getting a response at all.
It's usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you're sufficiently likely to get an offer at an acceptable price. In practice that means startups should only talk to corp dev when they're either doing really well or really badly
It's that "it depends" that initiates the chain of events that PG is cautioning against. Judiciously reining in curiosity when history has demonstrated it to be a fruitless endeavor and a distraction is the message of this essay.
Well if you do what to at least have the discussion, one tactic might be to throw an optimistic-but-reasonable valuation at them.
"Yeah, that'll be $50 million..."
Then when they push back or ask for more info, just more or less repeat that and say you're too busy managing your growth to spend more time on it unless they're willing to move forward with an offer on paper. Just turn the whole thing around. If they go away, you're done (which will probably happen 99.9% of the time). If not, maybe you'll actually get it.
You could even pull the exploding term sheet trick backwards on them. "We wouldn't be interested in less than (insert biggish number here), and we'll need a response in two weeks." (Obviously word it more politely.)
Maybe it's more like wandering onto the used car lot in the hopes that they'll surprise you with a deal you can't pass up. Maybe they will, but the process of getting there is not one you will enjoy.
Does it still depend if finding out what the offer is will derail you for 3 months and almost certainly result in an unsatisfactory answer (or worse)?
I think that's his point: In theory you might like to know the answer, but in practice unless you are in a very strong or very weak position (and know it), you shouldn't let yourself be distracted this way, as it is incredibly unlikely to be worth the time.
Earnest: Aren't there other things that corp-dev does, like arrange strategic partnerships and reseller agreements, that can be very valuable for a business?
(My personal experience is that these partnerships never live up to their hype, but my feeling is that one time out of a hundred they give the company a huge boost.)
Usually corp dev = acquisitions, biz dev = partnerships, but it varies across companies, and could be the same people in some companies.
I've been in about five of these "corp dev" conversations (low N, but nonzero), and every single one started with an entreaty of "you should partner with us", which very quickly dissolved as it became clear they were solely interested in an acquisition.
I'd love to hear PG and other knowledgable folks around here talk a bit about partnerships: when, whether, why?
My experience too is that most partnerships are only valuable for social proof. Often nothing much else happens, maybe one or two customer connections. At the same time with some partnerships there is a risk of brand dilution. If you are letting someone re-sell or bundle, there's a risk that they might downplay your brand in favor of theirs and sort of appropriate your brand equity.
These sorts of things do sometimes make me feel out of my depth as I try to put on biz-dev shoes as someone who's primarily technical.
In my experience partnerships in a SaaS-like thing tend to be binary:
0) Press-release and a few links on a website: Basically worthless.
1) Sales-team integration: you train the partners sales force, they get quota retirement (somehow, this can be complicated), this has some great customer outcome -- you give them margin on re-selling/kickbacks/discounts/whatever to get access to their sales/marketing machines, making it worth their time/effort.
In my opinion, it is often useful to take the meetings but most won't be fruititious. You are likely to gain industry knowledge especially from other startups. If you are talking to a big company and you get to a meeting with an hour+ powerpoint, you have to really reconsider whether it is a good use of your time. If the deal is really you selling your SaaS software, it is probably worth it, otherwise probably not. Definitely don't take a sharp turn and sit in startup no-man's land while considering some big new partnership that will likely never work within the scope of your current vision.
If you're working with content licensing (i.e Spotify, Netflix), product integration (more common in b2b SaaS), marketplace supplier relationships with major partners (say if Airbnb wanted to offer Mariott rooms on their platform), etc. than partnerships are important.
When companies reach a certain size, the real partnerships stuff spins out into dedicated "Business Development" or "Partnerships" teams.
It's really safe to assume that anyone with a "Corporate Development" title at any reasonably sized technology company spends all day evaluating and executing acquisitions. Don't go in thinking that you're about to have a partnership conversation.
I think if anyone pulls the "my boss won't do the deal for the price we've already agreed on" I'd just tell them to politely fuck off. If they really want to buy you, they'll pay the agreed price. Or you might decide you don't want to do business with immoral fuckers :)
Although given that this was google, I would probably just contact one of the higher-ups and tell them "I'm still interested in discussion the acquisition, but I was screwed around by your corp dev guy".
That's even more reason to go directly to the boss (or someone even higher up). Lowballing is one thing, but outright lying should be unacceptable for any kind of business deal.
I did catch one of my customers lying to me - he claimed he couldn't afford the normal fee (which was only a few hundred bucks, or $1000 at most), and I later discovered he had millions of dollars in funding for this project. We had a big blow up about it, and the project died. Later, he came begging to me, as his clients really, really wanted my product. He paid the full price (and I would have charged him more if I could have gotten away with it).
Overall, lying to get business is a very bad idea. It will backfire and you'll end up spending more, and perhaps losing your job (at least, it will if you deal with someone who has morals and ethics, like me :)
I just checked my records, and he didn't actually get as far as even paying for the service at the reduced rate. He just got a month or two free trial, which I would give to anyone. He lost out by pissing off his clients because they wanted to use my product.
I just looked him up on linkedin, and I see he's now got a job at the university of San Diego, so I guess his business ventures didn't work out.
I think one of the more interesting aspects to this is how much PG has followed his own advice with YC. i.e. he made something people (founders) wanted with YC.
That allowed him to craft the entire experience around what is good for founders which worked out to be great for others (including investors and acquirers).
So much so that this advice he is giving, I am sure many other investors have wanted to give publicly before - but they don't want to piss off people who can provide an exit for their portfolio. The whole fiduciary responsibility thing.
But YC companies are encouraged to think of things quite differently - so much so that even if someone as might as Google (who PG pointed out) thumbed it's nose at YC companies to spite PG....they would be much worse off, because of the quality of companies coming out of YC.
That is the power of seeing "make something people want" to it's natural, logical conclusion.
Being able to say and do what you want, to force behaviour change in an industry to benefit your organization and your goals.
This is also why PG is so well respected by those of us on the outside looking in, is because we see the sheer audacity of him giving blunt advice, about specific tactics that only benefit founders. Even if it may hurt him temporarily.
Thanks again for constantly doing this PG. We appreciate it.
> It's usually a mistake to talk to corp dev unless (a) you want to sell your company right now and (b) you're sufficiently likely to get an offer at an acceptable price. In practice that means startups should only talk to corp dev when they're either doing really well or really badly
If you're sure you want to sell, and are convinced you'll get the price you want, talk to them. Actually, that second qualifier seems REALLY useful here. I imagine that its easy for founders to get stars in their eyes about a potential acquisition. Forcing yourself to think rationally about what price you might realistically be offered might help you evaluate wether a meeting would be worth the time or just a distraction you can't afford.
YC should have someone in staff to handle these requests. For others there should be a company that exists for the sole purpose of handling these types of conversations, letting you focus on your product while they do the do.
If a buying founder has their biz dev, corp dev, contact a founder then it is safe for the receiving founder to forward that request to his corp dev, inside or outside their company.
This article is a useful warning. We got talked into a DD with a large german telecom (by our VC who owned 50% back then!) less than 2 years after we started. They looked at our contracts, our internal documentation, asked strange questions and never talked to us in a direct manner. No acquisition happened, they didn't even bother to talk to us afterwards. We felt violated, unappreciated, insufficient. It took 10 years until we were willing to talk about an acquisition again - and only with someone who we knew was a perfect fit due to corporate culture and standing in the industry.
I can imagine that corp dev people know very well that founders who are willing to talk to their kind frequently in a short time must be desperate or greedy and not very passionate about their company.
I had the same thought when I started reading, but didn't see any overt references to this. I am quite curious: has anyone around here experienced a case where it seemed like the objective wasn't to acquire/hire at all but to derail, tar-pit, or gather intel? I can imagine this happening if the approaching company is a direct competitor or is thinking of entering the space.
Intel gathering happens all the time. Corp dev people go on lots of fishing expeditions under the ostensible guise of acquisition talks. Sometimes they don't even need to mention an acquisition; they know that most startups will hear "BigCo wants to talk to you," and will leap at the chance to take the meeting. Bingo bango, they get free market intelligence, and all it cost them was a few hours of their time.
Things get messier when you talk about intentionally "derailing" companies. I'm sure this has happened before, but this is legally murky water. BigCo doesn't want to be perceived as anticompetitive, or as acting in bad faith. (Of course, it's very hard to show that they are acting in bad faith. Keep that in mind if you smell anything fishy.)
I imagine that corp dev would probably get enough info to determine if the company would be better off building or buying to get in whatever space they want to enter. What happens after that I suppose depends on the company.
The other side is if you could get enough information about customer acquisition or some of the metrics that govern the business, you could likely jump ahead of where you would be if you build from scratch without having to learn from time and experience.
Can talking to corporate development be a huge distraction? Sure. But talking to investors can be a huge distraction as well, and a lot of the things that PG writes about corporate development folks are true of investors. Is PG next going to suggest that startups avoid the Sand Hill Road dog and pony show? I don't think so.
Broadly-speaking, investors today are overvauling startups. Seven figure valuations and ridiculous convertible deals are being handed out like candy to early-stage companies with way more potential than proof. It's a hot market and investors want dealflow, so they're not quibbling. There's also a greater fool dynamic at play.
This in turn leads founders to believe that their companies are worth more than they really are. In many cases, the "surprisingly low" acquisition offers these companies might receive are only "surprisingly low" when viewed through the lens of the angel and VC environment. On their own, they might be quite reasonable.
The big challenge for founders is that a high valuation can be a friend made enemy. It's great to raise a bunch of cash on favorable terms, but lots of companies will eventually fail to live up to their valuations. Once your valuation reaches a certain point and the structure of investments is more complex (liquidity preferences, etc.), founders can easily find themselves in a no-win situation even with a moderately successful business.
As they say, a bird in the hand is worth two in the bush. This post seems intended to get founders to forget this.
1) Corp dev can also do strategic investment; you probably don't want this at an early stage but can be worth considering at a later stage.
2) Corp dev teams don't magically know that they want to acquire you, assuming they're not connecting to you via an existing investor (in which case they probably have some inside knowledge on you already), they may well just be at the stage of trying to figure out what you actually do and how you fit into the ecosystem. So it might be worth having a conversation but not necessarily giving away any secrets,
3) Acquisitions are like investments, having a warm relationship helps. But they can be time-sinks and you have to judge how much time you want to invest when you're not actively seeking.
I have been in this position once and the biggest lesson I had for myself was to aim for profitability and self-support in the company from the start. When you do that you have a much stronger position. One could replace profitability here with lots of user growth + VC money.
i appreciate this as a first approximation of what a founder should do, but it presumes some specific clarity that is somewhat rare (which i'd guess even pg would concede). for example, sometimes you don't know that the person contacting you is corp dev, sometimes founders differ on when they should sell, and sometimes you may have differing feelings from day to day.
in my limited experience, these kinds of discussions usually end in email. they likely wouldn't give you a number, but would it hurt to ask for an offer to see if they're serious before taking a meeting? the "we're focused on growing" answer can always be thrown out to end the discussion if it's not solidly serious.
Nobody's going to throw out even a ballpark without due diligence, and that's the distraction factor. You really don't want to be roped into that unless you're serious.
> And that is the most innocent of their tactics. Just wait till you've agreed on a price and think you have a done deal, and then they come back and say their boss has vetoed the deal and won't do it for more than half the agreed upon price.
Biz Dev positions tend to focus on relationship management and strategic planning across multiple companies. They close deals for cross-promotion, partnership, and endorsement. What pg is talking about ("Corp Dev") is different; at any large corporation that does acquisitions, there's going to be person or department strictly focused on due diligence.
The problem is that most founders would sell for the right price. Everyone's got a price. How do you know what someone will offer you if you don't engage in these conversations?
>Corporate Development, aka corp dev, is the group within companies that buys other companies. If you're talking to someone from corp dev, that is likely the reason, whether you realize it yet or not.
I can't tell you how many times in these cases founders have caved to lowball offers with horrid terms once they have gone multiple cycles with the prospective acquiring company. How does this happen? They ask for what they think they deserve and they get an offer far below that. Having concentrated their efforts on a possible exit, they sound out other channels and find there is no immediate interest. They are then high-pressured by the prospective acquirer to do the deal on a short fuse or the offer will go away. They then begin to contemplate the risks of continuing down the path of uncertainty and begin to contrast this with how nice it will be to continue the effort under the rubric of BigCo, where they will draw a steady salary and no longer have to deal with entrepreneurial risks.
By this time, they are hooked. Then the details come in. It turns out that, low as that $10M (or whatever amount) was, they as founders will have to earn all or a significant part of it all over again by having to vest their interest over xx years once they begin working with BigCo. Do they have protection from termination and the possible forfeiture of their interest? Well, no, not really - company policy forbids this. So, if they want the deal, they will just have to take their chances and, if BigCo terminates them early, that is just the risk they take.
What about elimination of risks? Well, here they must represent and warrant that certain things are true as of the date of closing on the acquisition. For example, they must warrant that their IP doesn't infringe. OK, fine. But what does this mean? In a typical blanket warranty, it means that, if you sell your company and you know you haven't done anything whatever to steal code or otherwise compromise its integrity, you still bear all the risk of financial liability if someone later comes along and asserts, say, a patent infringement claim against your IP. With a multitude of trolls infesting the world these days, this is of course possible. What does BigCo say about this? It puts on its official corporate suit and weightily intones that it expects founders to stand behind their IP and will not allow them to hedge responsibility for it. Therefore, it doesn't matter that you didn't know about the potential infringement claim - if it hits, you pay the price for any liabilities and for any attorneys' fees in defending against it. Is there a cap on this? Well, maybe, but at a high level (e.g., 50% of proceeds received on the deal). As a founder, you wind up agreeing to this once you are committed to the deal because, after all, it is not likely to happen. But as to uncertainty and risk? Well, that still belongs to you on some pretty important issues.
And this is just one issue.
The point is this: once you as a founder start to rationalize, there is no bottom. You have rationalized that you can live with the low price. You have accepted the liability risk. You have accepted the renewed vesting terms without protections. Maybe you also agree to an outsized holdback on the purchase price. And who knows what else. The point is, by this time you are fried. You have no will to fight back. You have no leverage. You are stuck with the wishful thought that it will nonetheless be great to be working for BigCo and to have a chance to continue to realize your dream, even if it does involve some serious compromises.
I have witnessed this sort of thing for years and it always comes about when founders deal with professional acquisition teams from a perspective of relative weakness. They suck you in and then you need to fight like hell to get back into a mindset where you can tell them to take a hike. Most founders in this position just can't do it. That is certainly my experience.
This essay by PG captures the perils of this process in a way that is spot on and extremely valuable as a warning to founders who might succumb to temptation. Be warned. It is exactly as PG says. A truly important essay for all founders.