Posts from Fiduciary

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

Stay Packages

There's an article on Gizmodo today about Palm's effort to retain key execs during its sale process. The headline says:

Palm Bribes Key Employees to Stick Around as SVP of Software Jumps Ship

I think that's an unfortunate choice of words. These are not "bribes", these are stay packages. And they are very common, including in the startup/venture capital world.

When the board of a company makes a decision to sell a business, it is best that they share that decision with the senior team, not just the CEO. The senior team is an important part of the business value a buyer will get for most transactions. And the buyer will want to meet with the senior team in due diligence. The stronger the team, the more value the company will fetch in the sale process.

But once you tell your senior team that the business is for sale, some of them, maybe all of them will start getting antsy. They will worry that the buyer will not want them. Or they will worry that the sale process will not succeed and then what will happen. Or they will worry that they'll end up working for a buyer that they don't want to work for. And so once you tell your senior team you are putting the company up for sale, you risk seeing all their resumes on the street.

Enter the "stay package." These are compensation packages that are specifically designed to keep the senior team and all valuable employees in the company through the sale process. They usually include a cash "sale bonus" which is paid when the sale transaction closes and additional stock options that should increase in value upon a sale transaction with vesting provisions that incent the recipient to stay at the buyer for some period of time.

This appears to be exactly what Palm did. The company is required to disclose such packages for its most senior managers because it is a public company. It does that through a filing called an 8K. AllThingsD has the Palm 8K filings posted on their blog if you want to read them.

Not only are stay packages common, they are best practices in sale processes where there is a risk of a talent drain. A Board should seriously consider them whenever a sale process is discussed. They are a critical part of maintaining and ideally enhancing shareholder value which is the Board's fiduciary responsibility. Calling them bribes misrepresents what they are for and why they are important for all stakeholders in the company.

Enhanced by Zemanta
#VC & Technology