Posts from M&A

M&A Issues: Consideration

We are getting to the end of the series on M&A. Two more M&A Issues to talk about and then I am done. The final two are consideration and price. Today I'll talk about consideration and next week I'll talk about price.

Consideration is the way in which you and your shareholders will get paid. The most common way to get paid is cash. The other common way to get paid is in the buyer's stock. You may also get paid by accepting a note (an IOU) from the buyer. And of course, many transactions include more than one form of consideration. A combination of cash and stock is very common.

Cash is the best way to get paid in most cases. You know exactly what you are getting when you get paid in cash. If the purchase price is a signficant amount of money to you and your shareholders, I would almost always prefer cash. If you've created a lot of wealth with your company, why risk that wealth on someone else's company?

Stock is the best way to get paid if you are selling your company relatively cheap but you are a big believer in the upside of the buyer's stock. A good example of this are sales of young companies to fast growing privately held businesses. When Ev Williams sold Blogger to Google, the Blogger shareholders got privately held Google stock which appreciated a lot when it eventually went public. When Summize sold its twitter search service to Twitter, the Summize shareholders got Twitter stock (and some cash) and that Twitter stock has appreciated significantly since. In these kinds of transcations the Blogger and Summize shareholders would not have made much of a return if they had taken cash. By taking stock, they turned their company sales into fantastic transactions.

There are situations where the buyer will require the seller to take stock. It might be because the buyer doesn't have sufficient cash to make the purchase. Or it might be because the buyer wants the seller to be aligned with the buyer and incented to stick around.

If you are accepting stock as consideration, you need to be careful to evaluate the short, medium, and long term potential of the buyer's stock. Back during the first Internet bubble, we sold one of our portfolio companies for stock in another company. We did diligence on the buyer's company and knew that it was weak and in trouble. But so was our portfolio company. Three months later, the buyer went under and we lost our entire investment. We probably would have ended up in the same place if we didn't sell. But I tell this story so that you all understand that taking private stock can be risky. It is not an exit unless the stock is public and liquid and you can sell immediately and turn it into cash.

Selling for public stock is a lot different than selling for private stock. Public stock is a lot closer to cash, particularly if there are no restrictions on the seller's stock. If you get public stock with no restrictions, you can sell immediately and turn it into cash. Or you can hedge your stock with puts and calls and take a lot of the risk out of the position. Or you can put in place a regular selling program. If you are selling your company for public stock, pay a lot of attention to the restrictions the seller wants to put on your stock. And resist them as much as you can.

Taking a note from the seller is not very attractive. A note has very little upside (compared to stock) and it is not immediate cash. With a note you are still taking risk that the purchaser could falter and not be able to pay the note. It is true that a note will not fluctuate with company performance like stock. If the purchaser remains in business and solvent, the note will be paid at face value with interest. We've received notes as consideration in a few situations over the years but it is very rare in the venture capital and startup business. As a matter of practice, I like to avoid them.

In summary, you can get paid in multiple ways in an M&A transaction. Cash is usually best and is also the most common. Stock is attractive if you believe there is a lot of upside in the purchaser's stock or if it is public and immediately liquid. A note is the least attractive form of consideration and also is rare in the venture capital and startup sector.

#MBA Mondays

M&A Issues: The Integration Plan

For the past month we've been doing M&A Case Studies on MBA Mondays. It's time to go back to the basics of M&A. I laid them out in this post. For the next few weeks, I am going to discuss each of the key issues in detail. First up is the integration plan.

The integration plan is the way the buyer plans to operate your business post acquisition. You should get this figured out before you sign the Purchase Agreement. You are going to have to live with the results of the integration and you had better buy into it before you sign your company away to someone else.

There are two primary ways a buyer can "integrate" an acquisition. The first way is they mostly leave your company alone. Examples of this are Google's acquisition of YouTube, eBay's acquisition of Skype, and The Washington Post Company's acquisition of Kaplan (one of my favorite M&A cases). The second way is they totally integrate the company into their organization so you cannot see the former company anymore. Examples of this are Google's acquisition of Applied Semantics, Yahoo's acquisition of Rocketmail, and AOL's acquisition of our former portfolio company TACODA.

And, of course, there are many variations along the spectrum between "leave it alone" and "totally subsume it." In my opinion, consumer facing web services should largely be left alone in an integration. On the other hand, infrastructure, like Doubclick's ad serving platform, is best tightly integrated.

The other critical piece of an integration plan is what happens to the key people. Do they stay with the business? Do they stay with the buyer but focus on something new? Do they parachute out at the signing of the transaction?

I believe the buyer needs to keep the key people in an acquisition. Otherwise, why are you buying the company? So letting the key people parachute out at the signing seems like a really bad idea. That said, the buyer also needs to recognize that great entrepreneurs will not be happy in a big company for long. So most M&A deals include a one or two year stay package for the founder/founding team. That makes sense. That gives the buyer time to put a new team in place before the founding team leaves.

Generally speaking, I think it is a good idea for the key people to stay with the business post acquisition. This provides continuity and comfort in a tumultuous time for the company. However, I have seen situations where the key people went to other parts of the organization and provided value. Dick Costolo left Feedburner post acquisition by Google and focused on other key issues inside Google. Dave Morgan left TACODA and focused on strategic issues for AOL post the TACODA acquisition. This can work if there is a strong management team left in the acquired business post transaction.

Another key issue is how to manage conflicts between the acquired company and existing efforts inside the buyer's organization. This happened in Yahoo's acquisition of Delcious. Yahoo had a competing effort underway and they left it in place after acquiring Delicious. This resulted in a number of difficult product decisions and competing resources and a host of other issues. I think it was one of many reasons Delicious did not fare well under Yahoo's ownership. You have the most leverage before you sign the Purchase Agreement so if you want the buyer to kill off competing projects, get that agreeed to before you sell. You may not be able to get it done after you sell.

These are some of the big issues you will face in an integration. There are plenty more. But this is a blog post and I like to keep them reasonably short. Take this part of the deal negotiation very seriously. Many entrepreneurs focus on the price and terms and don't worry too much about what happens post closing. But then they regret it because they have to work in a bad situation for two years and worse they witness the company and team they built withering away inside the buyer's organization and are powerless to do anything about it. It is a faustian bargain in many ways. But you don't have to let it be that way. Get the integration plan right and you can have your cake and eat it too.

#MBA Mondays

M&A Case Studies: WhatCounts

We continue with our M&A case studies on MBA Mondays. Last week we saw the impact VCs can have on your exit. This week we are going to look at the opposite situation: what happens if you've entirely bootstrapped your company. AVC community member @daryn introduced me to David Geller who, over ten years, bootstrapped, built, and sold an email company called WhatCounts. It's a great story, but a bit long for one blog post. So we've cut it in two. This week, the events leading up to the sale. Next week, the sale itself.

As always, the comments will be the most interesting part of this dicussion. Make a point to stop by, check them out, ask a question, or answer one.


Daryn Nakhuda, a friend, Fred Wilson groupie, former colleague and my co-founder at Eyejot before he left to become CTO at, suggested to Fred that I write about my company WhatCounts. WhatCounts was bootstrapped several years ago and was recently acquired. I agreed to accept the invitation knowing that bootstrapping is a sometimes under-appreciated funding path that startups often dismiss too quickly. Why is that? What's the attraction for new businesses, particularly technology-focused ones, to seek VC funding?

Iʼm a believer in self-funded companies. When I started WhatCounts it was seeded with $50K of my own money. It grew organically to be successful and was acquired in late 2010. With my co-founder, Brian Ratzliff, we were able to operate the company autonomously. Initially, I did all the product development and Brian orchestrated our sales and marketing programs. We jointly pursued new clients. Brian had more formal business training, including an MBA, but we both shared the same pragmatic approach to operating and growing a business. We liked the independence that came with self-funding and knew that the success, or failure, of our venture would hinge entirely upon our ability to win and keep business. Instead of VC funding we used customer funding. Our exit event was successful and the transaction benefitted the companyʼs original shareholders without any dilutive effect.

Is bootstrapping your business and funding it without outside capital a good idea? It was for us, but I have to admit that we arrived at that position more out of necessity than prescient planning. We actually tried to attract outside funding, without success, when we founded WhatCounts in 2000.

A brief introduction to WhatCounts may be useful.

WhatCounts developed a SaaS platform for creating, managing, deploying and analyzing mass email campaigns for transactional and marketing applications. It grew from the two of us to 50 employees and attracted clients like Costco, Alaska Airlines, Virgin America, MSNBC, FOXNews, Ziff-Davis, Pandora, REI and many other, well-known consumer-facing brands and media organizations. Many of you received emails over the years that were generated by our platform. WhatCounts became known as a technology innovator (later releasing an on-premise appliance solution to compliment the SaaS offering) and a company that did a surprisingly good job (for its size) attracting prestigious clients and providing them with exemplary service.

Thus far, so good.

We decided to do some informal investigating to see if WhatCounts could get VC funding. Using contacts Brian and I had established during our time working at Paul Allen's Starwave (me running an engineering team and Brian a marketing team) and later at other startups, we setup informational interviews with a few Seattle VC firms. Not surprisingly, our few meetings failed to generate a lot of excitement. Weʼre both good communicators and present strong messages, but I suspect the VCs we visited knew that we didnʼt believe in the hockey stick growth story – for us or anyone else in our space.

As cool as we thought what we were doing was (or was going to be), we also came to realize that the email industry, in the 2000-2001 time-frame, was not an overly attractive investment space for VCs. This was certainly true for pure email service providers, of which we were one. Other businesses involved in email were still garnering excitement from investors. Fred mentioned the 2002 merger between Return Path and Veripost in his Dec 6, 2010 post. He highlighted the fact that both of those firms had received VC funding. When we started we were confident weʼd be successful operating a small business but didnʼt believe we were going to turn the company into a $100 million juggernaut. We became convinced that we would not be able to grow to that level in the time horizon we believed VCs were typically interested. We also looked suspiciously at some of our competitors that were making VC-friendly (and overly optimistic) growth projections.

Now, we could have retreated and tried to retool our business model and presentation materials in preparation for a new round of meetings. We could have created a more exciting story or twisted things to appeal to our potential investors. But we liked our business model. Our customers did too. We were making money! We knew that if we decided to ignore outside funding opportunities weʼd potentially be jeopardizing our chances of growing the company at an accelerated pace. But the benefits we saw and were experiencing running things ourselves seemed to out-weigh the potential value and overhead VC funding would deliver.

To recap, the facts Iʼve described, so far, are the following: (1) we started a company; (2) we had some early VC meetings; (3) we didnʼt gain much traction from those meeting (admittedly we didn'tʼ try very hard);  and (4) we settled back onto our original plan of utilizing a customer funded growth strategy.

One of the most obvious benefits to a simplified, self-funded growth strategy is that if youʼre lucky enough to grow the business and get acquired youʼre going to gain all the benefit from that transaction without sharing it with outside investors. Calculate your ownership position and compare it with a diluted position after one round of funding. Then identify the intersection where they deliver the same benefit to you. Now consider a second round of funding and further dilution. Or a third. Of course, building simplistic models like this is for illustrative purposes only. Yet, itʼs important to know that a bigger piece of a smaller pie, at some point, is the same as a smaller piece of a much larger pie.     And, donʼt let anyone tell you that baking a bigger pie isnʼt a whole lot more difficult.

Self-funded businesses, by their very nature, involve fewer outsiders. So there are control benefits that can be enjoyed in their absence. Fewer outsiders dictating (or strongly suggesting) direction means that you will be able to pursue your goals more closely and with less friction. Back in 2001 Brian and I knew we had a great platform. Our customers told us so. Slowly, but surely, we started gaining traction by winning new customers. Weʼd hire additional staff whenever we had a large enough financial buffer to keep them employed even if our growth were to slow or even regress a little. Itʼs the model we had been told Microsoft had adopted early on. We both felt personally responsible for every person that trusted us and trusted our vision enough to join the firm. Many of the people that joined WhatCounts had sacrificed potentially higher salaries from larger companies to work in an environment that was smaller, people and pet friendly and somewhat more lifestyle-oriented – with the belief that we would grow. So, we tried to make sure there was always enough in the bank to cover payroll for approximately six months. We also disbursed bonuses to everyone each year.

Despite our early success, we were still aware that we were a relatively small company. When new competitors began appearing we decided to consider additional sources of funding. We had about $1 million in the bank but, with an increasingly growing employee base, considered a large portion of it to be part of our special payroll reserve. That led us to apply for an SBA loan that was quickly approved and provided us with an additional $500K in the form of a line of credit. We never needed to draw on the credit line and turned it off within the first year.

Throughout the years WhatCounts continued to grow. New engineers were hired. Our support and account management teams grew. New leadership for engineering, sales and customer service all helped the company to mature and appeal to larger, more sophisticated clients. The business continued to invest in our technology and the infrastructure required to support ever-increasing client expectations and requirements.

Two events in 2010 proved to be important for the company. First, after operating the business for almost ten years Brian and I decided to see if we could find a buyer. We had started to see consolidation in the space and M&A activity appeared to be increasing after an almost two year lull. Second, a few weeks after inking terms with a banker we were approached, literally out of the blue, by another firm about the same size as WhatCounts asking if weʼd consider being acquired. They had the backing of a large PE firm and quickly delivered an LOI. The process that began with their first phone call and ended with their acquiring our company was complex, challenging, long and, at times, nerve racking.

Next week Iʼll share some of those details with you.

#MBA Mondays