Acquisitions · Valuation

Acquisition Negotiation - How to Frame the Equity Part?

Anonymous

September 16th, 2015

We had an opening discussion with a potential acquirer. They're serious, and we agreed to open with ballpark numbers.They're also a startup, and some part of the deal with be equity. So if we say we're looking for...

$X cash
$Y stock

...what does $Y mean? In other words, at what valuation? They closed a big round about year ago. I was thinking to add a qualifier like:

$Y stock (fully vested, based on pre-money valuation from your last round)

How's that? Is there a better way to approach it?
As a founder, you’re always in fundraising mode (whether active or passive). In this course, we’ll teach you how to successfully raise follow-on capital, establish a valuation for your company, build an investor pipeline for your next round, and more.

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

September 16th, 2015

Also, oversimplifying, if you sell control of the entire company you will get 'fair value' (equity value divided by the number of shares) for your shares. If you take cash and minority shares back from the buyer and in the future want to sell them out before a full capital event, then you will be paid "fair market value" for your shares, which can discount the fair value by up to a 50 percent aka minority share discount for lack of control and lack of liquidity.State laws treat 'fair value' and 'fair market value' different if you have to litigate. Understanding the difference between 'fair value' and 'fair market  value' for minority shares is one of the most important concepts to master. Best approach is KISS and take the money. Otherwise you can get into disputes. Disparate 'stories' abound such that no jury and most judges will ever understand what the lawyers are talking about. Trust me.

Charlie Graham Entrepreneur & Executive With 15+ Yrs Exp. Building Successful Consumer & SaaS Businesses

September 16th, 2015

Also - make sure to talk to a tax attorney.  If you take <50% of the value in stock,you may have to pay taxes on the 409a value of the stock the year you sell even though you got no liquidity from it.  

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

September 16th, 2015

It may be more complicated than that. If they've raised capital, it's likely they have one or more classes of preferred stock in addition to common stock. There's likely a huge difference in value between common and preferred, and the notion of pre (or post) money value from their last round is insufficient to value what it is you're actually getting.

Yaniv Sneor Founder, Mid Atlantic Bio Angels; President, Blue Cactus Consulting, Trustee, ILSE

September 17th, 2015

There are many tangible and intangibles that go into this question, and there is no correct answer, since the answer, by definition, is subjective to you.

Here are some (but not all) of the things you should consider:

§  What is your company's valuation (and comps)?  Since there are multiple ways to compute valuation, you will likely have several answers here.

§  What is the valuation of the acquirer, and the potential value of their stock (to determine your current and future values of Y)?

§  Is your company one in a string of acquisitions?

§  How critical is your company to the acquirer's future value?

§  What is your liquidity for Y, and the acquirer's general liquidity?  (Is someone going to buy them soon?  Is there an IPO in their near future? Can you reasonably expect to sell your shares if there is no liquidity event and for how much?)

§  How involved do you want to be with the future company?  How likely are you to remain there beyond a couple of years (realizing that most principals of purchased companies depart or are ousted within two years or less)?

§  How much money are you willing to leave on the table (read: gamble), and what is the minimum you need to take away right now?

§  Etc. 

I have been on different ends of this several times and am happy to assist with your considerations.

Yaniv

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Yaniv Sneor

President

Blue Cactus Consulting (bluecactusconsulting.com)

David Still Founder of Start-ups, Entrepreneur, Financier and Advisor

September 16th, 2015

There is definitely a better option:

$Y stock = $0 Don't take on anyone else's problems as a minority shareholder.

$X cash = 100 percent of the cash price you are willing take.

In startups, take the money and run. Time is the death of many deals.

This is advice I feel very strongly about, Good luck, D