Early-Stage Acquisitions – Should I Stay or Should I Go?

With an increasing search for talent and ideas, some early-stage start-ups are faced with a good problem to have – private acquisition interest from large companies. It is well known that technology companies such as Zynga, Facebook and Google have acquired many early-stage companies in recent years. While the interest can be flattering, founders should consider important factors before embarking on a courtship with a large, acquisitive company, whether public or private.

Survey the Lay of the Land.  First and foremost, do your homework.  Find out whether the company that approached you has a reputation for actually consummating early-stage start-up acquisitions or if they have a reputation for executing NDAs and then using the ideas of potential targets after a lengthy fishing expedition. Many early-stage deals are viewed as talent acquisitions by the buyer, so it is good to know if the company is looking to enhance its team in your area of expertise. It also helps to know how many opportunities the buyer is reviewing at any one time and how quickly it typically moves on acquisitions. Buyers may only close a very small fraction of deals they consider. 

Product Development or Talent Acquisition?  As a founder, aside from liquidity, consider your reasons for selling to a larger company. Are you looking to further develop your product and/or utilize stronger sales channels, marketing resources and R&D spend that the buyer can provide?  Or are you looking to collaborate with a larger team and move in a different direction from your current start-up? Aligning your expectations with the buyer’s can go a long way toward ensuring satisfaction in the months that follow the closing. A buyer may have various reasons for an early-stage acquisition, including the acquisition of talent, eliminating competition or ensuring that the start-up team or product is not acquired by a competitor, as well as acquisition and integration of technology into its existing offerings and developments. The founder should be on the same page as the acquirer when approaching the deal.

Appreciate the Cultural Differences.  Working in a start-up environment can be very different from working in a large company, so make sure that the transition is right for you and your team. Does the acquirer have a reputation for heavy bureaucracy and endless meetings? Or does it do a good job of harnessing entrepreneurial talent and giving people room to explore their own projects? Give cultural factors the time and attention they deserve when considering a sale.

Evaluate the Advantages and Disadvantages of Negotiating a Sale.  Negotiating a possible acquisition with a large company introduces you to an industry giant. While an obvious advantage is a possible early exit, a partnership relationship can also develop from your discussions. Be open-minded about the end result from initial discussions, but also be cautious. Consider that the process may lead to loss of IP, loss of employees, loss of time/resources and the risk that the deal could be prematurely leaked to the press.  Well-drafted legal documentation, particularly NDA and non-solicitation agreements, can mitigate some of these risks, but the risks cannot be eliminated altogether.

Maya Blumenfeld participated in writing this post.

This post on M & A was authored by Daniel Green.

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