Who Decides When To Exit?

There's a post on the 37 Signals blog by Jason Fried saying that the Mint sale to Intuit was a bad move for a host of reasons and suggesting that the VCs behind Mint had forced it. It reminds me of similar discussions about the sale of Zappos to Amazon a while back.

I left a comment on that post to the effect that while I have no inside information, I highly doubt that the VCs forced the sale.

But this is a good opportunity to talk about who does decide when to exit. Here are some rules that I've learned over the years:

1) When the founders and management want to sell, the VCs ought to go along (within reason) because blocking a sale and having angry and unhappy founders and management running the business is a bad outcome.

2) VCs often impact the price and terms of an exit but they rarely drive the exit itself when the founder is still actively running the business.

3) When a company is doing really well, the investors rarely want to sell. VCs make all of their money on a few investments per fund. When a company is in that group, they don't like to see an early exit.

4) When a founder owns a large stake in the business and is still running it, it is very likely that the founder drove the decision to sell and the sale process and was advised by the investors and board.

5) If the founders are no longer involved in the business and the management was hired by the VCs, and the VCs control the business, then it is likely that the investors drove the sale process and the decision to sell.

6) If the company is not doing well, then the decision to sell was likely forced by the VCs.

Of course, like all rules, there are exceptions from time to time. But when you see an exit, you can parse the data by this set of rules and you can pretty easily predict what happened, who made the decision, and who drove the process.

#VC & Technology

Comments (Archived):

    1. fredwilson

      Well that explains all the traffic coming in from hacker news on this post

  1. Steven Kane

    This is a good descriptionBut you leave out an essential pointIn VC financings, VC’s exclusively reserve the right to make these decisions.That is, only preferred shareholders, and typically, only some VC fund preferred shareholders, can actually decide to sell a company)Founders or entrepreneurs or senior management are contractually precluded from making this decisionEven the company’s board can not overrule the preferred shareholders, who get these rights as preferred shareholders, regardless of what a CEO or founder or even board of directors may think or say or doSo if VCs disagree with founders and entrepreneurs or boards vis a vis whether or not to sell or liquidate or even shut down, then they may decide to adopt the opposing point of view, to keep the peace, or maybe because they get convinced of the wisdombut founders and entreprenurs and management and boards can never — never — impose their wills on VCs/preferred shareholderscorrect?

    1. fredwilson

      founders and managers and the board will make the decision and the investors can block it. but i have never been involved personally in a deal that was blocked by the VCs. i have seen it happen from afar, but it is very rare. just because someone has the right to do something doesn’t mean they will do it.

      1. Steven Kane

        Fair enoughBut what’s even more rare than VC’s using the right is VC’s not demandingthe right. Do you know of any deal where VC’s didn’t insist on reservingsuch rights exclusively for themselves?

        1. fredwilson

          the right gives VCs the opportunity to be at the table with something meaningful when this comes up. that is what it it about.

          1. Steven Kane

            Well, sort of.It gives the VCs the right, if they choose, to be the ONLY people at thetable.And also the right to remove everyone else from the table.No?

          2. georgewscottiii

            At the end of the day the company took the money from investors and was able to exit for a good sum which was a win for everyone. These days when someone comes to you with over a hundred million dollars you don’t spit in their eye. Take the money, if in a few years the aquiring company doesn’t want in the founders might be able to buy it back for a bargain price.

          3. fredwilson


          4. markslater

            see i tend to see it like this too. But i don’t see how you could get fred or the VC comfortable without having something close to this contingency. Its a tough one.

          5. David Semeria

            Speak softly and carry a big stick, right?

          6. fredwilson

            Yes. Exactly

          7. markslater

            doesnt that phrase ire entrepreneurs more than anything.

    2. zackmansfield

      If the question is explicit, legal, imposing of the entrepreneurs will on the preferred shareholders, you are absolutely right. But at the end of the day, regardless of the legal/corporate governance structure, these companies/boards are run by people and the dynamics of relationships, individual desires and even game theory (as alluded to below) have a huge impact on the outcome. You are absolutely right, I believe, with respect to most legal corporate structures. And I think your assertion carries much more weight/importance in the downside scenario (when to shut down, liquidate, etc) than in the upside scenario such as Mint. The entrepreneur that is building the growing biz that has to decide whether to sell at 100MM+ vs. keep growing towards a much larger exit – I believe this entrepreneur has much more implicit leverage in the process than any legal structuring would suggest. But this is very hard to quantify and very much in the art rather than science side of how you can look at this.

      1. fredwilson

        yup, you nailed it zack

      2. Steven Kane

        I guess I agree… Except I’m not sure any of this mattersIt’s certainly true that, as my favorite attorney on Earth, Michael Conza,says, “A contract is only the beginning of a discussion.”But if its not that big of a deal, then why do VCs always INSIST on theEXCLUSIVE right to make these decisions?Of course, so that they can…

        1. fredwilson

          No steve. Not an exclusive right to make the decision. Just an exclusive right to block it.The founder, if he or she is running the company, has the right the same right by saying ‘I won’t support this deal to my team, I won’t work for the buyer, I won’t sign the docs’The VCs rightly want the same abilityBut your favorite lawyer is right. It never plays out that way mainly because it can.

          1. Mark Essel

            I’m sure I’m not the only one that is drooling at the bit to close one of these negotiations. Must be an interesting set of meetings.

    3. markslater

      exactly steve – none of these scenario’s matter the VC nearly always gets Rights of refusal. There should be a seperate post discussing just this very clause – all the other stuff is irrelevant IMO.

  2. GlennKelman

    Agree with this post 100%. A founder sometimes disassociates himself a bit from his own decisions by blaming investors, none more so than when selling the company. With Plumtree, I was always surprised at how much latitude Sequoia gave us when we didn’t want to sell the business, even though we were growing more slowly than other portfolio companies.In general, it is so much easier for a founder to be confident of his decisions than an investor, just because the founder has access to better information, so investors often defer to the person in the room with the most passion…

    1. fredwilson

      that is why it is often foolish for VCs to block a sale when management who is in the business every day wants to do so

      1. Dan

        In your comment on the 37s blog you said the sales of Flickr and Delicious were both bad moves. Does that mean you think the founders could have made more money not selling?

        1. fredwilson

          Yes, that is part of it. I also think the services would have flourished as independents

  3. Parveen Kaler

    One very good reason to Exit is to be able to scale the business. I believe this was the case for both Mint.com and Zappos.I live in Canada. Both Zappos and Mint are not first-class experiences here. Zappos can speed up international adoption with the help of Amazon. Amazon already has shipping centres in Canada and in Europe.The same is true for Mint. Intuit already hooks into financial service providers outside the US. They also have a better understanding of accounting rules in these jurisdictions.

    1. Robert

      I can’t speak for Mint, but for zappos, it didn’t need Amazon to scale outside of the U.S. There are far more problems to overcome than just where the shipping centers are.

  4. Pascal-Emmanuel Gobry

    Yep, that’s been my experience too.I’m also surprised (in a good way) that you chose to write this post non-polemically. Plenty of people choose to “attack” VCs when you have these kinds of exits and it’s good that you didn’t respond defensively.

    1. fredwilson

      i did respond a bit more defensively in the comment on the 37signals blog but tried to be balanced there too

      1. Dave McClure

        i don’t think there’s a need to be balanced, as much as a need to — in jason’s own words — GET REAL.to be honest: jason shot his mouth off without being informed about the situation, and it’s highly irresponsible & childish in my opinion. he could easily have reached out to several people who know what’s going on, and (if he had done so) realize he was way off base.while his theoretical points might be valid, IMHO it’s rather immature (some might say FUCKING STUPID) to pigeonhole someone in a specific scenario w/o doing the tiniest amount of research to figure out if his guess was accurate or, as in this case, wildly off base .sorry if i’m not very “balanced” on this one… as an investor in the company, and a personal friend of aaron’s, i find Jason’s attack on the founder, the company, and the investors as incredibly ignorant.my .02,

        1. Dan

          It was linkbait. It worked.

        2. Keith Rabois

          Dave McC is 100% correct.

          1. kenberger

            He always is… but so is Dan right now, I believe 😉

        3. Pascal-Emmanuel Gobry

          Dave, two things:1- He said it’s “indicative” of a VC-induced mindset, meaning he was speaking about the role of VCs generally in Silicon Valley and the startup world, NOT accusing Mint’s investors specifically of forcing the sale. So reaching out would have made little difference.2- Whether you’re talking about the founders or the investors — he’s right! Services like Mint, Wesabe, Covestor, P2P lending and others have an opportunity to completely reinvent banking and finance, a sector which is *sorely* in need of some 2.0-ifying (and that’s an understatement if there ever was). Mint was one of the leaders of that vision. Selling to Intuit — and who is kidding himself that the product will keep improving at Intuit? — betrays that vision. Great startups aren’t about quick exits. They’re about changing the world.I’m sure the founders are really happy and the investors somewhat, but Mint had the potential to be so much more, and it’s no disresepect to call them out on it.

          1. Dave McClure

            Bullshit.using an errant and wrong initial argument as the foundation for your argument is incredibly suspect, and slapping all VCs with supposed behavioral traits is the WORST form of stereotyping. you might as well call all Mexicans and Blacks criminals by that logic. Get my point?furthermore, it’s not up to Jason to decide when a startup has reached enough accomplishment to call it a “win” and choose whether or not to take an exit. in addition, he knows nothing of whether there’s a deal with Intuit for Mint to revamp their core consumer finance products or not. perhaps in many acquisition situations the product may or may not achieve targeted goals, but it’s certainly reasonable to 1) take the payday, and 2) consider remaking the acquirer’s market in your own vision.however, the thing that pisses me off MOST about the piece is the UTTER lack of concern to get your facts straight and/or do even the tiniest bit of research before he shoots his mouth off. that type of irresponsible writing makes me want to challenge ANY assertion he comes up with, and also makes me think the rest of his logic and rationale is just as lazy & ignorant.in other words, you don’t get any credit with me for blogging based on bullshit, even if there’s a tiny piece of credibility buried somewhere in your contorted construction.make your points based on facts and merit. not conjecture and inaccuracies.

          2. Pascal-Emmanuel Gobry

            Ok, so criticizing the role of VCs in the startup ecology is akin to racism?Look, you don’t have to have inside information to have an analysis or an opinion about a market and companies in that market — thank God. People even have the right to conjecture. Just as you have a right to disagree. You even have the right to compare Jason to a racist and say what I’m writing is bullshit, but I don’t think that reflects well on you.I think Mint had the potential to become a large public company in its own right with a much higher market value, and therefore that selling this early was a mistake. I also think that the Mint sale is indicative of a broader mindset, certainly understandable at a micro level but inefficient at a macro level, of startups going for the quick exit. There are plenty of examples of companies that exited too soon, and of companies that turned down the quick pay day and turned out to be very, very right to do so (Google, Facebook, Twitter perhaps). To be sure there are also plenty of companies that turned down the payday and turned out to be wrong. But I don’t think Mint was in that league.And look, maybe I’m wrong. I certainly know less about this stuff than you. It’s fine of you to disagree with all of that. It’s another thing to hurl invective. And yes, Jason wrote an angry rant. Is that a reason to respond with even angrier comments?

          3. fredwilson

            To suggest that this is a VC induced cancer is wrong pascal. It is like racism

          4. Pascal-Emmanuel Gobry

            Sure it’s wrong, when you narrow it down to that. But to compare the anti-VC mindset, whatever its problems, to *racism* is laughable and, frankly, a little offensive to victims of actual racism. As far as I’m aware, prejudice against VCs never killed anyone. You can’t exactly say the same thing about racism.I started this thread by praising your cool-headed response. Let’s not anyone lose their cool.PEG

          5. fredwilson

            Someone else will pick up the ball and run with it. The disruption will happen

        4. fredwilson

          And how do you really feel dave? 😉

      2. Daniel Gackle

        Your comment on the 37Signals blog wasn’t defensive. You may have been feeling that way, but the comment itself struck me as clear, fair, and informative. I’m glad I read it (and this post too).

  5. Nick Oliva

    Fred, assuming #1 is true and that founders and management wanted to sell and the VCs went along… is there a precedent for the VCs to buy out a portion of the founder and management stock in exchange for happy peppy agreement to defer a sale until a time of the VCs’ choosing?With $170M offer, the chance of this deal turning out to be a home run and potential IPO is significant. Wouldn’t it be in the interest of the VC’s to consider pumping $10M or $20M into buying the monkey off the backs of the founders, management, and early investors? I could see myself in a similar situation wanting to take 50% out because of my lower risk profile as a founder and bootstrapper who isn’t wealthy. And if the VC wants to keep rolling the dice, why not align everyone’s interests?… though, I realize funds are probably not structured to do this. Just curious. Thanks!

    1. fredwilson

      that is done all the time. it is interesting that did not happen here. excellent point.

  6. alan p

    I can just feeel a game theory blog post on this coming on 🙂

  7. Nate

    It doesn’t really matter who pulled the trigger.Mint customers are disgruntled former Intuit customers, so that’s why the sale feels like a betrayal.Cashing out is fine, just don’t sell out to the dragon you’ve set out to slay.

    1. Mike O'Horo

      If the dragon you set out to slay recognizes the strategic imperative of embracing the changes/improvements the would-be slayer has demonstrated, the make-or-buy question becomes easy. Why try to make another Mint that may or may not gain the same traction when you can buy the one that already has it? Likewise for Mint, for what company would they represent the same strategic value? Rarely does a company get to cash in on the intersection of economic value and strategic value. When such a deal presents, you grab it because it’s not replicable.

  8. Elie Seidman

    Makes a lot of sense. This is why entrepreneurs should pay close attention to control rights. In my opinion, the nuance of those rights are far more important than valuation considerations. My general opinion is that one of the major competitive advantages that startups have is that the owners run the business day to day. To the extent that the owners don’t run the business – and “professional managers” do instead – the startup has given up one of its major differentiators. A small company that has the same kind of professional management that a large company has but lacks the financial resources a large company has is likely to have a hard time competing as effectively as a company that is truly run by its owners. It is not an accident that so many of the largest and enduringly successful companies in America are run by their founders (Apple most famously, Bloomberg (kind of), Microsoft, Salesforce.com, Google, Oracle, etc all come to mind); Options can and do create an ownership mentality among many startup employees including hired gun professional manager and that ownership mentality is a great thing that definitely differentiates small companies from large ones (hard to feel like an owner as an employee of GE) but nothing beats being an actual owner and no one is an actual owner of a business unless they really are that owner. A real owner spends the company’s money as if it was coming out of their own wallet. There are a few cons to that (e.g. being penny wise pound foolish at times) but many benefits. Entrepreneurs – at least the great ones – take the success or failure very personally and that breeds a level of energy, urgency, and passion that is nearly impossible to replicate. While there are some examples where the entrepreneurs cannot go the distance and grow it and professional managers are hired and make something great out of the company, for every success, I’d guess there are 5 where the result was a lot of wasted time and money; professional managers don’t come cheap and it’s very rare that they work for equity only – they want the AND function of big cash and equity. More typical are outright failure or middling (limited return) success at best. And a professional manager knows that a failure at this company means that they will likely land on their shoes somewhere else pretty quickly (though people do pay attention to success rate of professional managers, of course). I’d guess that for many entrepreneurs, the scenario is almost beyond comprehension so there is never a real “safety net” in the back of their mind. It’s success or nothing. The extreme example of what happens with professional management participating in the upside but not really sharing in the downside – the divorce between who gets the return and who takes the risk – are the banks on wall street as evidenced during the most recent crash. A founder/owner would never behave that way bc when the company blows up, he/she is the one who blows up – not only financially but also psychologically. A related scenario in the world of entrepreneurship is when a VC pushes a startup to do unnatural things in order to hit a homerun so that that one deal can return the fund for the VC and even put money in their pocket. This is a particularly severe problem when the VC fund in question is late in its investment cycle (it’s an old vintage) and far away from hitting it’s high water mark and therefore very likely to be a VC fund no more. Outcomes that are great for the entrepreneur and management team may not be interesting to a general partner (in a VC firm) who won’t personally make any money off the exit and would rather swing for the fences – even if the likelihood of that being successful is slim to none.It’s hard to find entrepreneurs who have it all and running a big company is very very different from running a small startup. But the really huge companies – and even the “average” $200M sales – tend to come when the entrepreneur finds a way to adapt. Net net – VC’s already know that they should choose the entrepreneurs carefully. Entrepreneurs – often under duress to get money, any money – need to realize that they are getting married and divorce is hard to come by and messy when it happens. Choose your other shareholders very carefully and do your diligence. Self serving plug here: Ajay Agarwal and Mike Krupka at Bain Capital Ventures (as well as all the other folks there) are great people. They are my partners in Oyster and great ones.

    1. fredwilson

      i agree about Bain Capital Ventures. we are co-investors with them in one of our companies and they are terrific to work with.

    2. alan

      Elie, this is sage advice. I am a founder of a Web 2.0 company BlogTalkRadio, who has raised hundreds of millions of dollars and sold a company for $1bn. I am the largest shareholder in my company, in terms of investing the most amount of money. Selecting the right investor is equally important as selecting the right entrepeneur to back. I applaud your vision.Alan

  9. Deva Hazarika

    if TC rumors are correct (http://www.techcrunch.com/2…, then i’m curious about this chain of events:1: $130M offer rejected2: $14M raised at $140M valuation3: $170M offer acceptedDepending on liq pref of the round, that’s effectively equiv to the prior offer having been $140-150M. Sure seems like Mint went through an attitude change to decline it first time around and then accept it right after raising a round. Or, more likely, the rumor amount was false.

    1. Piepiepie

      I’m curious as to the entire purchase — mint.com relies heavily on yodlee.com’s technological back-end.

  10. David Smuts

    Fred- I like the formula you give here, but I have a funny feeling the VCs were behind this particular sale.

    1. fredwilson

      is your funny feeling based on something you know or can share? i’d am curious to get your take on this one.

      1. David Smuts

        Not on something “I know” nor something I can share.

  11. kenberger

    What’s cool about this post, Fred, is that you’ve written out an invaluable rule set (that I totally agree with), but that unlike in your referenced comment, you’ve stayed away from a judgment on what you actually think of Aaron’s decision (because it is beside the point here). But it sounds like you hinted (I think) that it was “bad move” on Aaron’s part.Another rule set could be written out for “when an investor should try to fight a sale”.And another for “when an entrep should try to trigger it”.All 3 sets are akin to “when to hit in blackjack”, and not absolute.Just my opinion as someone who is neither VC nor funded entrep, but my answer would be a strong “right now” for both of those rulesets, and thus the investors’ and entreps’ feelings may have been strongly head to head opposed to each other on this one.

    1. Kevin Cimring

      Hi Fred, just to touch on Ken’s point on whether you think the decision to sell Mint was a good or bad one. I know that’s not the point of your post, but it would be interesting to get your take. Anyhow, with Aaron now head of personal finance products at Intuit, it will be interesting to see whether everyone’s fears regarding lack of innovation will be justified or whether Aaron can still fulfill Mint’s potential under the Intuit banner.

    2. fredwilson

      All true ken. But VCs are portfolio players and entrepreneurs have everything resting on one deal (usually)

      1. kenberger

        “Because…”, rather than “But…”

  12. Elie Seidman

    I’m totally guessing but perhaps they did not do this because they realized that the team was not one they actually wanted to back for a run at 500M or 1B – especially after having taken a lot of money off the table. While it’s surprising that this all happened so quickly after the latest round, you learn a lot at one or two post closing board meetings or phone calls that would have been harder to learn during a fund raising process.

  13. alan p

    Here we go – Mint Sale Truth table inspired by Fred’s post – spot of game theory for a Friday evening:http://broadstuff.com/archi

    1. fredwilson

      That was a great one alan. I’m sure you know that I reblogged the matrix on fredwilson.vc

  14. Jamie Hamilton

    When I first read Jason Fried’s post, I thought it was irresponsible and uninformed. Commenting from the outside on a decision to sell is like commenting on a couple’s decision to get divorced. You have no idea, and you’re out of line.On the other hand, I share the frustration about great startups continually being squelched by their acquirers. There are strong forces that keep most big companies from innovating. The same forces tend to destroy a startup when it is ingested — the corporate immune system goes haywire and attacks. Sadly I’ve seen this from the inside too many times.A good acquisition shouldn’t be an “exit.” It should be an entrance to something bigger, with even faster growth than you could achieve on your own. The world would be a better place if we could figure out a way to make this happen. I think that’s what really drives Jason’s post, and that sentiment I can agree with fully.

    1. fredwilson

      Yes, yes, yes. This is the problem we need to solve

  15. Alexander Muse

    I agree… 🙂

  16. Mark Moran

    A VC’s insistence on “blocking rights” is driven by legal considerations. A VC may have spots on the board, but its designee directors have fiduciary duties to other shareholders and stakeholders. But generally, as a stockholder, a VC is free to act in its own interest. There have been cases in a public company context where an investor’s representatives on the board have voted in favor of a transaction, but the investor as a stockholder refused to support it, and its right to do so was upheld. And if the management team and VCs have a good relationship (which as has been noted, is usually the case in a successful company and often not the case where things are going poorly), then the management team should be happy that the VCs having a blocking right, to block a transaction that the mgmt team and VCs oppose but may otherwise be unable to block. Let’s say a mgmt team and VCs together own only 25% of a company, and believe it has potential in the long run to be worth 100x its current value. An offer comes in for 10x its current value, and it is supported by the other stockholders. The mgmt/VCs may have to support it from a board/fiduciary perspective, even though in their hearts they wish the could block the sale. If the VC has blocking rights, it can do so.

  17. dig bands

    McC is 100% correct. $170M do you think they can earn much more without selling it?

  18. Mike O'Horo

    Thanks, Fred, for cracking the Rosetta Stone of the venture investor’s mind. In the absence of this kind of framework, you end up with a Babel of rumor.

    1. fredwilson


  19. Mark Essel

    I thought the Zappos sale was too soon, as I was familiar with the corporate culture, strategy and leadership. Curious what your take was on the sale Fred?