Does Price Matter?

Most people assume that price is what matters most in a financial transaction. When you are raising money, you want to get the money at the highest price (least dilution). When you are selling, you want to get the highest price for your company. But that is not always the case.

Price matters, but my experience says that it often does not matter the most. In many of the venture deals we have done in the past few years, our transaction valuation was not the highest price offered to the entrepreneur. But the entrepreneur chose us as their partners anyway.

In the majority of the sale transactions that have happened in our portfolio, there were higher bidders for the company than the chosen acquirer.

You can get away with this behavior if you have a closely held business. If you have a public company, then you cannot. The Board has a fiduciary responsibility to get the best deal for the shareholders. And if you are a public company, that effectively means the highest price. That is one of many reasons I don't like being on public boards and operating as a public company.

Let's say you are one of two or three investors in a closely held startup company. Let's say that between the investors and the founders, the group owns ~90% of the company. And let's say that there are two purchasers. One is willing to pay $250mm in a clean transaction and the Board thinks they will be good owners of the business, will do everything possible to keep the team intact and the service vibrant. The other is willing to pay $300mm in a complex transaction, has a reputation for blowing up teams, and has been known to mess up the services they acquire. That would be a no brainer. The board should take the lower offer in a heartbeat, assuming they really want to sell the business.

When you are doing an important financial transaction that brings a new influential owner into the company, price matters but is not the most important issue. The most important issue is the chemistry between the existing owners and the new investor/owner and the reputation of the new investor/owner. You want to use the market to surface the right valuation band and you should do the transaction in that band. But once you have done that, you should optimize for chemistry and fit. And let price fall somewhere in the "market band."

If you cannot find an investor/owner who is a good fit in the "market band" then you should kill the process and not do a transaction unless you need to transaction to stay in business. If you are doing a transaction to stay in business, you have screwed up and put yourself in a bad position. And you should be prepared to be in a worse position soon. But that's the subject of another post.

So price matters but don't optimize for it. Not in a financing transaction. And not in a sale transaction. If you do, you will often regret it.

#VC & Technology

Comments (Archived):

  1. David Semeria

    Don’t you have a similar fiduciary duty with your LP’s?

    1. fredwilson

      we have a fiduciary duty to deliver them good returnsi do not believe we have a fiduciary duty to maximize every dealbecause when you maximize every deal you kill your franchiseand i believe they are investing in our franchise first and foremost

      1. David Semeria

        That’s a very good answer Fred.

        1. fredwilson

          i hope they like it when they ask me the same question!

          1. LIAD

            By not maximising each deal you’re maximising the franchise – thus maximising their return.- perhaps akin to decisively winning the war if not each and every battle.

      2. Adrian Bye

        really interesting post fred.are public companies therefore required to damage their franchises long term through maximising their returns?

        1. fredwilson

          not “required” but there are a lot of costs to being public for sure

      3. InTheBox

        sounds logical, but wrt your LP’s your fiduciary duty is probably to the fund (which in the spectrum of things probably sits somewhere between the franchise the deal). they are not investors in the GP and technically have no vested interest in future investments out of future funds.

        1. fredwilson

          unless they are investors in the future funds

  2. Niyi

    $50mm is a lot of money.What if, in the words of Don Vito Corleone, the less preferred investor makes an “offer you can’t refuse”?I was once told that every man has a price…just saying..

    1. fredwilson

      and marrying money is a full time job

      1. Harry DeMott

        I don’t need no aggravation I’m a lazy slob

        1. fredwilson

          well done Harrytattoo you was the last stones record i really love

      2. Tereza

        The people I know that married for money eventually hate the spouse…almost as much as they hate the money that brought them to that decision.A huge amount of collateral damage can happen to people you care about when the integrity of relationship isn’t there.But, worth saying is usually only you know how much money you walked away from. That tortures some people because while there’s a scoreboard for what you get, there’s no scoreboard for what you refuse and some people need numbers on a public board scoreboard for it to feel like it matters.

    2. Tereza

      Corleone’s unrefusable offer was, generally, a bullet in your head or concrete shoes — for you, or even worse, for your family.But backed into a wall you have to accept. You are choosing temporary survival.That would be the mildly preferred of two terrible options, and not a “good option”.The extra money is saccharine to distract you from an awful option that lacks integrity.

    3. Harry DeMott

      The good news is that if you own nd control the company – there’s just no offer you can’t refuse. It’s up to you.The issue on price sometimes becomes one of complexities. Say one guy is offering $250M in cash (say Cisco – who has over $30B in cash on their balance sheet). They just write a check – likely for $225M with another $25M in escrow for a year pending any issues.Let’s say the competing bid is from Facebook. It is for $300M – but it is being paid to you in Facebook common, which they have decided to value at $33B – based on the Second Market valuation of a few shares. They want a 20% escrow for 18 months.Now which one is the better deal?Hard to say. You might view Facebook as seriously undervalued, or, you might think it is worth only $20B – in which case you are not only getting less value – you don’t control when you get it!Lots of factors there.

      1. Tereza

        You’re so right — the probability that the deal will actually close is so important.I wonder if in VC and banking is there any favor that’s curried by an offer being the FIRST offer?I know real estate people who say — give some preference to the buyer who presented the first offer, because it’s more likely to go through. They made it without market noise, without influence other than, they want it and they want you.Later buyers may be influenced by market flurries and may punt when the chips are down.Do any of you guys have opinions on that?

        1. Harry DeMott

          I tend to agree.When there’s no market – and someone, without any social proof, makes a bid- it tends to mean that they do want the company – and have actuallyconvinced themselves that it is the right thing to do.By having others come in – it only increases the social proof of thedesirability of the target – and reinforces the original decision.Getting away from that sort of mind game is very difficult – and it is arare company that has the willingness and discipline to walk if the pricegets to high.I also think that we as humans tend to favor people who ask first. We do itwith our kids, and we seem to think it is fair that it is a first come firstserved world.All that said, as a fiduciary, I do think you have to take all the factorsinto account – cash versus paper, escrow amounts, managements desires, andyou have to really get a sense of who is getting to the finish line – whichis part reputation – part feel.In the example I gave, of Zing, Dell was the ultimate buyer – and they werenot known for doing deals at all. One of the other bidders was a dealmachine – almost 100% certainty they would close. We ended up taking a bidthat was not the highest bid – and one that was less than certain to closerelatively speaking – but it was the first bid, they really went after thecompany – and management was ultimately behind the bid.

  3. Jordan S.

    Interesting. The goal is maximizing value, with price as a component thereof.

  4. Harry DeMott

    Well put. When I was an investor in Zing a few years ago – we went through the process of selling the company and ended up with a few offers within $20M of each other – and all were good offers.What it came down to was 3 things:1. Price (and all the bidders were in the same band)2. Lack of complexity and easy of closing – were the buyers known as good buyers and were the terms clean (smaller escrow, shorter time frame, cash not securities etc…)3. And this is what it really came down to – where did the team want to go.Ultimately, the CEO and his team made the decision and everyone got behind him.A good outcome for everyone.

    1. fredwilson

      that’s more or less the way most sale processes i’ve been involved with have gone

    1. fredwilson

      good post by Brycei agree with him

      1. reece

        definitely. bryce’s post is really interesting, especially in light of the recent Mike Maples talk re: thunderlizards and pivoting. topic: is there an issue with Disqus? i just got this comment reply from you – an alleged 12 hours after you left it].

        1. fredwilson

          i believe disqus had a glitch with their emails yesterdayi don’t know that for sure, but i didn’t get any emails for most of the day

  5. Brett A McCall

    What I think you are pointing to is the Purpose motivator vs the Profit motivator:

  6. Wesley Verhoeve

    It works the exact same in the music business. Say I’m advising one of my artists on which larger label to go with, and one is a Major with a history of irrational decisions and lay offs, whereas the other is a bigger Indie with a solid team that has been around for a long time, and maybe not quite as many super hits but an overall history of success, then the latter could probably offer me 30% less and I’d still much prefer them.

    1. fredwilson

      there are a lot of similarities between the label model and the VC model

      1. Evan

        swinging for the fences and skewed distributions.

        1. Wesley Verhoeve

          True! Especially in the major label model of lore!

      2. Wesley Verhoeve

        Agreed Fred! I think we in the music business, artists/managers/labels alike, could actually stand to benefit a great deal by evolving our business model to more closely resemble that of the proper Angel/VC/Start-Up model. I wrote a post about this comparison that has gotten quite a bit of traction in the music world in the last few weeks, and I’d love to have some feedback from folks more closely related to the VC/Start-Up world like my fellow AVC readers:http://www.wesleyverhoeve.c…(I hate when people link bait, but I genuinely think this may be an interesting related discussion.)

    2. Dave W Baldwin

      Interesting stuff on your site Wesley. With the opening of ‘real time’ communication and disbursment to the public spiking this coming decade, we do have a chance to push the fringe in rhythm, melody, counter melody, harmonies and so on.Push it!

      1. Wesley Verhoeve

        Thanks Dave, I really do appreciate that. Would love to hear you expound on that overall concept! Looking from biz inspiration always 🙂

        1. Dave W Baldwin

          Over the next decade, the ease/speed of communication will explode. This offers the opportunity of sharing ideas in all worlds, including music. Currently, the strong willed up and comer has to play the arena in order to gain exposure. With the current set up, there are so many niche focused apps/programs that can get the band’s sound out to however many. Factor in the paranoia issue where if you are a songwriter, everyone tells you if it is public and not protected, someone will steal it…it takes time before the real songwriter says, “screw it” because you can always write another. We do have protection in some ways due to the broadcast of a tune will have a date anyway.Daryl Hall has some good stuff with his basement project…now he is tweaking the Hall & Oates stuff, but it is good stuff. Not too far from now, interested writers can be thousands of miles apart, communicating ideas regarding a tune they bring up…since there is a timeline, they can point to a particular syncopation used, chord structure and so on. This will encourage the experimentation of the fringe, leading to a different world (Hall & Oates is just an example) as follows:The new band can be playing their original in a club, it is being broadcast live via a fan and they can get feedback in real time from someone a thousand miles away.The producer can be told of the hot sound coming up tonight and his tablet can alert him when it is happening and check it out…catching the live sound. Some studio buddies can be checking it out discussing as it is happening what they like…then go to playback.We can bring back creativity/originality.Excuse the quick message and hang in there.

  7. Darren Herman

    I’ll gladly lay a few quarters more for coffee at my favorite spot because they know my name and greet me with a smile

    1. Chris Savage

      Customer service — Sometimes it’s worth two quarters.

      1. CJ

        Customer service — Sometimes it’s ONLY worth two quarters.

    2. ShanaC

      I paid a bit more for coffee all through college. I never regretted having a comfy place to study nor a coffee shop that took the time to educate me about coffee. In turn, I actually helped customers choose drinks.Granted, I’m not sure how to value that relationship (and boy do I wish I had a similar coffee shop near me now)

  8. William Mougayar

    I look forward to the day when I have to choose between a $250M and $300M transaction. At that moment, Fred I will call you for advice.

    1. fredwilson

      most likely i’ll tell you to hold on and not sell 🙂

      1. William Mougayar

        🙂 I hear you…My interpretation: if you can get to $250M, then you can get to $1B+.

  9. John Saroff

    I agree with the spirit of the post, but not sure of the law. My corporate law is a bit rusty, but I don’t believe this is a public/private issue. In Delaware, if a corporation is holding an auction for itself (the scenario you describe here), then the role of the board changes from “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.”This holding is in effect regardless if one is public or private.In reality, the likelihood that a shareholder would sue in a privately held transaction is very minimal (because share-ownership is concentrated and not diffuse), but Fred, couldn’t you have a disgruntled former employee or small investor who would be frustrated by the $50 million you were leaving ont he table?….

    1. Dan Lewis

      Disqus cut off the period at the end of the URL. works, though.And I was wondering the same.

    2. fredwilson

      i am sure you are rightthat’s why you need to get a fairness opinion if the shareholder base is wide and diffuse

      1. Scott Edward Walker

        As an M&A lawyer for 16+ years, I would like to stress that the board of directors of a privately-held company owe fiduciary duties to its stockholders to the same extent as the board of directors of a public company, whether in the context of the sale of the company or otherwise.Particular situations where Boards need to be careful in the context in the sale of a private company and run the risk of potential litigation include (i) where “down rounds” or “cram-downs” have created a disgruntled stockholder base; (ii) where lay-offs or other reductions in force have created disgruntled employees; and (iii) where founders (and/or institutional investors) without board representation are hostile to the current board.Moreover, if some or all of the directors have a conflict of interest in light of the potential transaction, consideration should also be given to appointing a special committee of independent directors to assess the merits of a proposed transaction and, as Fred notes, the appropriateness of obtaining a fairness opinion.

  10. John Prendergast

    Fred,There is one other reason to go with the lower offer you describe. People who do clean deals tend to get deals done. Messy deals tend to go sideways and often blowup. As someone who took a nearly decade long break from an entrepreneurial career to do technology M&A. I’ve seen the dynamic play out literally hundreds of times.Though I must say I’m very happy to be back on the entrepreneurial side.Thanks Fred.

    1. fredwilson

      i am happy for you too”clean deals close”that is a good mantrai am going to use it

  11. akharris

    How about “money isn’t the only factor in the price of a deal?” All the things you describe are factors that have to be included in the risk/reward evaluation of a transaction. They’re part of the price if you’re looking at price properly. If you think price is just about money, then you’ve got to rethink it.

    1. fredwilson

      good point

    2. vruz

      you’re not thinking of the money or a price list. you’re thinking of value.the market obviously doesn’t feel the same way you do about your company’s value. for you it may be your lifetime achievement. for the market there’s a perception of how much your company is worth.on top of that there’s some intrinsic value like company assets, and other things which are uncountable and hard to measure for outsiders. (market traction, brand value, key employees, patent portfolio, widely deployed open source software)this market perception of value is translated into a price you have to pay (possibly with money) in order to acquire ownership rights on a share of the company.price, money, market value and other forms of value are all very different things.

  12. Nikita Tovstoles

    Interesting. In the $250/300m example above does the institutional investor not have a fiduciary responsibility to their LPs to accept the higher $$ (assuming the investor will exit with this TX)? Thanks.

    1. fredwilson

      i believe we have a fiduciary duty to maximize the returns we produce over the life of the fund and the firm

      1. Sam Birmingham

        I think this just about sums it up.That phrase “over the life of…” introduces an element of sustainability and explains why there is more to many transactions than meets the eye (just like Transformers :P)It is easy for an outsider to look at a deal in isolation, but in reality:(i) it may only represent one part of a broader portfolio for many of the early-stage investors; and(ii) knowing the way entrepreneurship works, the founders are likely to have a hundred and one more ideas bubbling in their brains, into which they are keen to throw themselves once they exit the current business.I have always been taught to leave some money on the table for the next person.From a legal perspective, though, problems are more likely to arise where the different investors have different objectives (or, more particularly, different fiduciary duties)

  13. skyrank

    Fred. I like this. It’s less important now to get the best price than it is to be with the right people. “Right” doesn’t necessarily mean the smartest. It means the ones you have confidence in to get the job done. This relates to human compatibility, productive mindmelds, and pleasure regarding how one passes their valuable time. You can often tell after a short conversation whether. This compatibility is there and that leads to productivity. Why do I choose to pre-order Boxee over purchasing GoogleTV? It certainly isn’t the $100 savings. The answeris obvious.

    1. fredwilson


  14. A Reader

    Was wondering if the timing of this post had something to do with potential offers that Twitter may be considering….”The other is willing to pay [more $$] in a complex transaction, has a reputation for blowing up teams, and has been known to mess up the services they acquire.” sounds like G to me. 🙂

    1. fredwilson

      it has to do with everything and everyonesomeone else is wondering if it has to do with a term sheet we have out right now 🙂

  15. Mark Essel

    You touched on so many topics that are deserving of a full post worth of review, here a few of my favorites: -when to sell-determining the proper market band-courtship for pairing new owners with the team-when should founders sign on for 3 years w/ acquirer vs. double trigger (ie bigco has an internally chosen corporate lead ready to integrate)-how much runway does your company need in a cash position-who are the strongest sales network nodes to big companiesMark Suster and yourself (Fred) have hit a few of these, but I don’t have the links handy

  16. Aaron Klein

    On the fiduciary duty issue that several people are bringing up, remember that maximizing value for shareholders doesn’t always mean the most cash up front.For example, let’s say the $250MM and $300MM deal leaves existing shareholders still owning part of the company (either because it’s an acquisition/merger using equity instead of all cash, or a dilutive investment).The $300MM can easily become $100MM in the future if the new owners don’t know what they’re doing. That’s an example where $250MM can easily be more than $300MM.

  17. Peter C

    In a “financing” transaction, it is clear that the value a new investor brings to the table is a variable that should be considered. The quality of a new investor can have a material impact in the future growth and ultimate value.I am puzzled though by the comment that in the majority of “sale” transactions there were higher bidders that were not taken. Assuming a sales is determined to be the path to take, the reason to not take a higher value sale transaction should have nothing to do with what the buyer may or may not do with the business post-sale – only a founder or personal investor has the luxury of that altruistic line of reasoning.A professional investor investing other peoples money does not – the only time I can think that is not true is if the sale proceeds are in the form of equity and the sellers continue to have a financial stake in the combined entity.Once the risk of getting to closure is factored into the sale price, appropriate discounts taken for equity-based proceeds, and risk of escrow claims factored in, price is all that matters.While a board has a fiduciary duty to the company, the VCs on the board also have a duty to their investors and are therefore wearing two hats. On a sale transaction, a VC that is also a director would likely abstain from voting because of their conflict. But that doesn’t mean they don’t decide – they would certainly have controls in place in agreements among all or most shareholders that would allow them (assuming they can achieve the appropriate voting thresholds) to drag everyone into the sale or block it anyway.As a limited partner in a venture fund that’s what I would demand it work.

    1. fredwilson

      the world is not quite so simpleimagine that one of the reasons a VC gets a discount on the way in is that they are known for being supportive of the entrepreneur’s choice of home on the way outlimited partners want to be with VC firms that get the best deals, not the ones who are known for not leaving a penny on the table

      1. Dan Malven

        Hmmm…..that’s complicated calculus to factor in “future value” that accrues to the VC firm (and its LPs) by taking a lower net price because its in the best interest of the entrepreneur. I don’t doubt there is future value because reputation is the primary (sole?) value of a VC firm.But that said, you don’t even have to go to future value calculation. I do think it can be applied to that single transaction and say that the LP got a better “entry price” into the deal because of the social contract between the VC and the entrepreneur to find them a good home at exit. So net-net based purely on dollars and cents, you could still make the case to the LP that it was a better financial transaction for them to take the lower price.But what if the VC wanted to break that social contract to get the last nickel off the table? You could probably say that if the VC broke that social contract and tried to force the entrepreneur to take the higher price, the whole deal could go sideways and no exit would happen and the relationship between entrepreneur and VC would be poisoned and the LP eventually gets a lower net return on that deal because of it. Totally independent of the eroded brand equity of the VC firm and the long-term negative effect that has to the LP.

        1. fredwilson

          i have never tried to analyze these numbers Dan because my gut tellsme it is the right thing to doand i’ve got better uses of my time!

  18. CJ

    Price matters for commodities, not value-added transactions. Even in the relatively simple world of online commerce (buying/selling computer hardware) If you’re bringing value to the transaction other thanthe product I’m buying, I’ll pay a few dollars more. Amazon’s Prime program is a good example. I can pay a buck or two more because shipping is free for 2-day and $3.99 for overnight AND it’s virtually guaranteed to be there when they say. Having a busy life makes this added value of not having to shop locally & getting it quickly worth a few extra dollars.

  19. Robert Hacker

    Price is actually only important in one off transactions such as buying real estate. In most transactions there are more beneficial things to focus on such as covenants, solving working capital problems through suppliers, deferring R&D costs, Board make up, etc. Only the less experienced focus on price or interest rate or cost.

  20. Guillermo Ramos

    VC LP´s invest in teams not in funds, to the same extent VCs invest in people not in companies. At the end of the day, this is a business around people and good people do not only try to maximize returns in the short term, but also getting there being consistent with there ethics.Is curious to compare the VC business around people with this article : “(…) 70% of trading volume on the major exchanges is conducted by high-frequency traders who hold a stock for an average of 11 seconds”

    1. Dave W Baldwin

      Been thinking about the ’11 seconds’ thing. To have your connection right at the pit (or room next to it) puts that entity at a great advantage. So it is a matter of finding patterns related to all of the ’11 second’ groups since they are based on slight appreciation/depreciation to acquire/disown a particular stock.There has to be one way around it since the ’11’ will eventually become ’10’ and so on.

  21. cajeme

    Great post. I may not need this information now, but I will keep it for future use.

  22. Darren

    Great post. Too many companies are just out there for the money and don’t realize It’s going to cost them in the long run if they don’t carefully pick their partners.

  23. RichardF

    The other reason you might want to think about the better partner to sell to rather than just the highest price is if you can’t get a “clean break” on the sale and are left with stock and a tie in period as part of the deal. In which case you want the partner whose shares are likely to perform best during the tie in period.

  24. PhilipSugar

    I guess for discussion purposes I like to go to the extremes.If its an all cash deal for 100% of the company, I can’t see how you could take the lower price.If its for a 5% ownership position, but has terms where if you miss a single random number they get the whole company you could not take the higher initial valuation.Any thing between is a judgment call. And that’s what a board is for.It does have a value and you should actually place the value on that and calculate that, and convince yourself that yup you are willing to place a value on that. I’ll give you an easy one. I was willing to pay $500 on a car I bought my Dad for two things: they took his trade versus telling me to Craig’s list it and they were 3 miles from his house and promised to come pick it up and drop it off for service. Not having to sell the car (random people coming to visit my Dad or me), selling it to somebody that in no way could ever come back if something went wrong, and not having the uncertainty on getting the asking price was worth at least $500, so I didn’t even have to calculate the local value.For instance if I was doing a social networking startup and I had the choice of taking money from USV versus a nobody fund with a notorious prick to be on my board. I’d have to discount the notorious prick’s offer by somewhere between 80% if not 100%. That’s a real calculation based on what I believe the future outcome would be. Also I should be willing to place a certain premium on USV’s value add.I should calculate it and be happy with it.

  25. Terefga

    Fred, Interesting you say “I don’t like being on public boards or operating as a public company” – yet most of what you expect from your portfolio companies is to aim for that IPO. Don’t you see a contradiction here? I happen to share your sentiment myself, but where I sit (private company founder with no IPO intentions) I get to practice what I preach. In fact, your sentiment is the reason I believe a more long term owner orientation is needed in the venture business. It is good for the VC, good for the company, good for the economy. The flip-it-to-a-sucker mindset (I am not saying you have it, but VCs collectively do) is like a steroid. It bulks up quickly and achieves some “wins” but at a huge long term cost.

    1. Fred

      Im on record many times on this blog saying IPOs are a bad idea for most venture backed companiesI’m not a big fan of IPOs

      1. Wesley Verhoeve

        Hear, hear! I think this is my favorite recurring Fred Wilson axiom.

  26. Scott Barnett

    You’re making the exact same argument that a startup needs to consider when pricing their own product. At every startup I’ve been at, multiple customers have told me that they didn’t choose our product due to price – and that there were plenty of alternatives they could have gone with. They chose the company they felt made the best partner. In practically any transaction, doesn’t it come down to short term gain or long term value?The one thing I’m not sure I agree with in your post is the comment about doing a transaction to stay in business. We hear so many stories about companies that were literally on their last dollar that turned it around – and I’m sure they weren’t able to make all the long term value decisions. I’m not saying it isn’t an admirable goal to try to take the long view, but hard in practice when payroll and other obligations are staring you in the face.

  27. Lloyd Fassett

    Hopefully this isn’t off topic, but the post sales relationship is important – you have my buy in there – so why not more clearly differentiate on what happens after the transaction than by reputation?Why not have the venture firm bring an experienced non-partner to work part-time in up to 3 start ups to provide more entrenched relationship, input and earlier detection of issues when they are small? It always seems odd to have everything riding on a once a month meeting when the real action in creating value is in the trenches every day. If it’s a partnership, why not make it a more involved partnership?This falls more into the economics of funding companies where Y-Cominator et al and Angels say they can be more involved day to day. I’d think this is another option to Paul Graham’s suggestion of ‘if time is the issue, do less due diligence and sit on less boards’ and Josh Kopelman’s suggestion ‘don’t stay on boards for a long time’. By partnering at the execution level with everyone could benefit by better leveraging what the VC firm brings to the table. That would resonate with entrepreneurs that see investors as partners that add value outside of cash.This would diverge from the music label model mentioned in the comments, because the music label doesn’t join the band. It would be closer to the economics of working with a law firm. I always call my favorite paralegal first, before the partner I work with because of the economics of it.Perhaps the hands on involvement isn’t as important in the size deals you usually do though cause things are already taking off?

  28. vanelsas

    Investing in a company needs a return. That return has to be cash, but it should always be something less tangible too. Belief, trust, and the willingness to make it happen together count a lot too.I’ve made mistakes in the past where I would accept an offer without looking at the other parts. It never, ever worked out. When you accept an offer from an investor, remember that the both of you are in for a bumpy and possibly long ride. You need to have trust and be able to count on each other.

  29. Richard Kain

    People react to taking losses and taking gains differently — a lot of this discussion presupposes the company sale would be at a profit. If the amount invested was $350m and the consideration was taking a $50 or $100m loss would the board act differently? If the answer is yes I think there’s fuzziness in being willing to take less in the gain hypothesis. There is a bit of a conflict in interest — the venture capitalist has improved their position with the entrepreneurs for subsequent deals where other investors (that remaining 10%) in this deal will not participate.Allowing such non-economic considerations to govern the company can be fine if that is the consensus of investors but it should be unanimous. “Stakeholder theory” of the corporation might be fairly applied here but not as a stalking horse for certain investors getting better deals later. If such theory is going to be applied it should be more robustly, including possibly impact on the community.Have you seen deals where the impact on the community is considered? Say, Fresno CA has it’s first hot internet startup. Facebook makes an generous acquisition offer, contingent upon relocation of the team to Palo Alto. The mayor calls and asks this deal not go through. How much should that be weighted?

    1. Evan

      is the mayor and/or the city a shareholder? is he offering incentives to stay?

  30. ShanaC

    well then, how do you price the relationship (odd way of thinking about it)-it’s like pricing branding, every company is going to have different qualities for there needs.

  31. David Anisman

    A mentor once told me “All the information is in the price”.Price is a powerful signalling mechanism.An entrepreneur is asking for an unreasonable high valuation, he is telling you something.A VC is offering you an unreasonably low valuation, he is telling you something.When one accommodates to make the deal, he is telling you yet something again.

  32. ninakix

    Makes sense – in some ways, you have to pay a little more for higher quality, just as you would in any other financial transaction.

  33. kagilandam

    Price really matters when the price is disruptive … 3 or more times higher or lower. Lower for making a competitive product and higher while selling a product (company).20% -30% price variation only calls for all other factors.Won’t anyone sell a company to a bad buyer for 1B when nearest good one is asking for 250mm??

    1. fredwilson

      if they decide to sell, yes

  34. Dave W Baldwin

    Good column once again. Those reading need to remember the $250m vs. $300m is to prove a point.There are those that want the easy ride and the product/biz plan is all short sighted and requires the sell. That usually matches the investor not giving a damn about the team.On the other side is the fact if you have a design that would bring (no-brainer) $250m so that other parts of the bigger plan can fall into place via yourself and lead investor(s) that would bring between $700m to $1b you have truly accomplished something.I agree with Fred on the IPO part along with investors and entrepreneurs needing to be a good match. If you look at things from the same vantage point, down the road it is easier to look at product/market situations and be on the same page.

  35. OMA

    I think it would be fair for everyone if you continue to negotiate.If there are $250mm and $300mm offers on the table it would be unfair for investors to take the lower offer.It would be fair to continue negotiations with the lower bidder to improve the price.If the high bidder might not keep the team intact – negotiate a compensation for the team or negotiate keeping the team intact.If the high bidder would mess up the service for your loyal customers – put that on the table, and ask them for their plans.When decisions are “no brainer” as you’ve said, there is room for more negotiations.Good decisions should always be difficult, management should always try to bring the board two real options, options that choosing from would not be “no brainers”.The difficult decision may beShould we accept one of the offers on the table, or continue negotiating while risking loosing one of the deals.

    1. Dave W Baldwin

      Didn’t mean to set off negative emotion regarding ‘no-brainer’. The point is considering $250m with the investment team that look at the bigger picture vs. the $300m offer from a group that would slice/dice and all that is an obvious choice. You just have to have the ‘where it can move to’ laid out so you are not looking for the quick….it is a sign of desperation.Otherwise, there are some loud mouths that claim anything can be developed for less than $100k…and they plan to sell quick. These same folks will try to spook the new entrepreneur into their short sighted scenario as the only way. And they would grab $260m instead of $250m- screw the innovators in a heartbeat.Looking from outside the boxes, it comes down to those that are too ‘linear’ which shortens shelf life. Add in Accelerating Returns and that shelf life becomes even shorter. The true visionary is able to do something more, producing the truly disruptive, leading to a better product serving multiple segments.

  36. Dave W Baldwin

    Unrelated to this post in the mind of most, but I’ll put this here Fred in reference to your two from last week regarding Android- my response made sense communicating it is not a matter of how many app stores.

  37. Boris Fowler

    More than price, I think the overall value is the most important. Just the other day, I was shopping for groceries and I distinctly remember putting down a cheaper product for its more expensive counterpart. The reason was because I valued it more than the other one. At the end of the day, I am willing to pay a little bit more for more quality and for something I will likely enjoy more.

  38. Si Chen

    Very good post… The tip of the iceberg on this topic? As the great value investor Martin Whitman once said — “In financing it’s not the rate but the terms that matter the most.” He was referring to debt financing.For selling a startup the bigger issues is stock versus cash — is the stock overvalued and is there sufficient liquidity for you to convert your stock to cash, or will your attempts to unload your shares cause the stock price to tumble (and public shareholder lawsuits to follow)?BTW In this there might be a conflict of interest between VC’s and investors. When the company is sold for stock the VC distributes it to LP’s, gets a “Thank you very much,” and collects their percentage carry. Since they have essentially converted their stock to cash, the VC would be indifferent whether they sold for stock or cash, so the higher offer is (almost always) better as long as it is clean.Not so for the LP’s and the employees and managers own the stock. Just imagine if you’d sold to Yahoo! back in 2004. But even Yahoo! is not so bad — at least it’s a big company with a very liquid stock, and you could’ve gotten out if you thought it was overvalued or not going the right way. If you’d sold to a smaller company with a less liquid market for its stock, or if you’d end up on its Board, you really wouldn’t be able to get out any more.

  39. riemannzeta

    Put another one up on the board for slow capitalists. Nice post.

  40. pbreit

    If it’s a sellout, take the money.

  41. Increase RSS

    Price also vary on the quality..

  42. Markus Frind

    Sounds a like like what happened with Yelp.It really depends on what happens with the core team. If they are all set for life than they will probably pick the cash offer. If they still need to work for a living after selling they will most likely want to join the company that they want to work for and helps them maximize their future net worth. This means they probably want to do another startup in a few yeras and in the mean time work at a company where they can improve their skills..

  43. Lucas Dailey

    I agree completely. As a co-founder of a stealthed startup that might (if we need to) start looking for investors in about 6 months, price is definitely not our highest consideration, for many of the reasons you listed. We have a series of products we want to launch after our initial so we’re not planning on a sale exist, but as you say, the investors that are more likely to fight for a better home are more likely to be a better partner for the duration of the relationship.I did have a question though, relating to your aversion to public company boards: B corps,… , know much about them? Any opinion?When an LLC no longer works for us, we’re looking at becoming a B corp to have a socially and environmentally responsible public company. The first one was registered less than a month ago, so the jury is still out, but it seems like a great and long overdue option.

    1. fredwilson

      i don’t know much about B corpsthe concept is interesting for sure

  44. Greg Tapper

    In my experience as an entrepreneur, price is invariably (without fail) second in rank– to Terms. Never underestimate Terms. Especially when selling your company. Think of it this way: If I came you and said, “I will give you $100M for your company, but you can’t see the terms. However, you must agree to them, sight unseen; and second, you can never back out of them, even with a court ruling or force majeure.” What kind of naive entrepreneur would agree to that? Terms bind our behavior (sometimes frustratingly so). They define your future more than you can anticipate. Skip the conversation about Price…and focus on the Terms. Therein lies the deal.

  45. raznick

    great post fred.

  46. ea cpe

    Interesting post. As a business owner, it’s true that price is USUALLY the biggest deciding factor for consumers– but other things definitely come into play. More often than not, things like loyalty, how the customer is treated, overall experience, etc. also play a big role, and can sometimes overrule price.

  47. fredwilson

    are we “really discussing” these issues here?i hope sothat was entirely the point of this postand your comment is very insightful on many levelsif you have a firm that keeps its team around, keeps its funds in the hands of the same LPs from fund to fund, you can mitigate that riskto date, we’ve done thati hope we can do that forever (which is until we hang up our cleats)