Selling Your Company: A Founder's Guide

The Complexities of Startup Acquisition Decisions

Considering an exit through acquisition often leads to the assumption that a fair offer automatically translates to a straightforward "yes." However, recent discussions at TC Sessions: SaaS revealed this isn't always the case.

Founders face a multitude of considerations, and the decision to accept an acquisition offer is frequently accompanied by significant anxiety and uncertainty before a final resolution is reached.

Insights from Experienced Founders

A panel discussion focused on the post-acquisition landscape featured insights from founders who've navigated this process successfully.

• Jyoti Bansal, founder and CEO of Harness, previously sold AppDynamics to Cisco for $3.7 billion in 2017 – a week before their planned IPO.
• Monica Sarbu, founder and CEO of Xata, sold Packetbeat to Elastic in 2015, just two years after the company’s inception.
• Nick Mehta, co-founder and CEO of Gainsight, sold LiveOffice, an email archiving startup, to Symantec in 2011 for $115 million.

Each of these founders subsequently launched new ventures after their respective acquisitions, demonstrating a continuation of entrepreneurial pursuits.

Navigating the Sale Process

Prior to embarking on these new ventures, each founder had to carefully evaluate and ultimately decide whether to proceed with a sale.

It became apparent that each founder approached the sale process with a unique perspective and strategy.

The decision to sell isn't simply about the financial offer; it involves weighing numerous factors and potential outcomes.

The Process of Company Sales

In 2017, Bansal was prepared to launch his company onto the public market, and was satisfied with that prospect. However, Cisco initiated contact during the company’s roadshow, altering the situation. He initially declined two offers, but a significantly improved third proposal proved irresistible.

“They subsequently presented a third offer amounting to $3.7 billion. This valuation exceeded our anticipated trading price by more than double,” he explained. While undeniably attractive, the decision wasn’t straightforward, particularly with the IPO so close.

He described a complex balancing act involving various stakeholders – investors, employees, and founders. Ultimately, he believed the sale would benefit all parties involved. Indeed, nearly 400 employees became millionaires as a direct result of the acquisition, representing a transformative event. Despite this positive outcome, the decision remained challenging.

“The process involved four days of extensive board meetings, discussions, debates, and even disagreements before a conclusion was reached. It wasn’t a simple choice, even though a $3.7 billion offer might seem like an obvious win,” he stated.

Sarbu’s situation differed considerably from Bansal’s. Her company lacked substantial investor interest and was primarily funded through her personal resources. She recounted that during the 2013 launch in Berlin, venture capital predominantly favored B2C ventures, while her company focused on a technical network monitoring solution.

Although not actively seeking a sale, Sarbu decided to accept Elastic’s offer after discovering a strong alignment with its founders. This allowed her company to integrate into a larger organization. “It was crucial for me to join an organization where we could continue pursuing our company’s vision and further develop our product. Elastic provided that opportunity… We established a strong rapport with the founders from the outset, so it didn’t feel like a traditional sale,” she said.

This proved accurate, as Sarbu remained with Elastic for five years, spearheading the development of a new division centered around the Packetbeat product she had initially brought to the company.

Mehta explained that when he and his co-founders created LiveOffice, their primary goal wasn’t necessarily a public offering. They anticipated that a larger company might acquire them if they developed a successful product. This prediction materialized in 2011 when they reached approximately $25 million in annual revenue and were subsequently acquired.

“From a rational standpoint, I felt that selling was the optimal course of action for the company and beneficial for the shareholders, who realized substantial profits. It was a positive outcome for everyone involved. The decision aligned with all logical considerations,” he concluded.

To Remain or Depart: Founders' Perspectives After Acquisition

Following the acquisition of their companies, founders often face a pivotal decision: whether to remain with the acquiring organization or pursue new ventures. Mehta’s involvement post-acquisition lasted only six months, as he wasn’t significantly engaged in the transition process. Symantec facilitated his departure, recognizing his entrepreneurial drive.

“I recall the conversation with the acquiring party when I was asked about my desired tenure. I anticipated a request for two or three years of commitment, but instead, they demonstrated remarkable understanding. They acknowledged my inclination towards launching another startup,” Mehta recounted. “Consequently, a six-month period was proposed.”

Fortuitously, Mehta’s wife was expecting their third child, with the due date coinciding with the end of his six-month commitment. This timing presented a natural conclusion to his involvement, though leaving proved emotionally challenging after dedicating considerable effort to building the company.

“The culmination of work invested in company culture and core values – aspects I deeply cherish – effectively concludes with the acquisition. The product itself persists, and has even grown into a substantial business. However, the intangible elements that define a company’s identity tend to dissipate,” Mehta explained.

Bansal similarly found that a larger organizational structure didn’t align with his working style. He served in an advisory role for six months following the sale, but was already focused on future opportunities. “My interest lay in tackling new and compelling challenges. Therefore, a proper handover was essential, and the six-month advisory period allowed for a smooth transition,” he stated.

Despite the logical rationale, the emotional detachment from his initial company proved difficult for Bansal, mirroring Mehta’s experience. “The human element is particularly challenging. It’s your company, a daily presence, and then suddenly you’re no longer part of it. The loss of daily interactions is keenly felt, creating a bittersweet transition,” he said.

Even Sarbu, who stayed with Elastic for five years after the acquisition, eventually felt the urge to embark on a new venture, leveraging the insights gained from her time within a larger organization.

She noted that her current startup, Xata, presents more complex technical hurdles than Packetbeat did, partly because she is now prepared to address more ambitious challenges in her career. “I’m at a stage where I can confidently undertake more demanding tasks compared to my first company. The maturity and experience accumulated over the years have undoubtedly been beneficial,” she added.

Mehta subsequently founded Gainsight the year after selling LiveOffice. This company was acquired by Vista Equity Partners earlier this year for over $1 billion, a transaction Mehta described as an investment rather than a traditional purchase, and he continues to lead the organization.

He emphasized that his experience with LiveOffice instilled in him a desire for long-term commitment. “The key lesson from my previous experience was to dedicate myself to my next venture for as long as possible. I genuinely enjoy my work with Gainsight and aim to continue building it for the foreseeable future,” he said.

Bansal, after selling AppDynamics, initiated several projects, including the venture capital firm Unusual Ventures and two startups – Harness and Traceable.ai – affirming his passion for entrepreneurship. The financial resources from the AppDynamics sale provided him with considerable flexibility.

Guidance for Startups Considering a Sale

For startups contemplating the sale of their business, what key considerations should be at the forefront? Bansal advises founders to carefully evaluate their post-sale intentions – whether they envision remaining with the acquiring company or pursuing new ventures. While contractual obligations may dictate a temporary stay, he emphasizes proactive consideration of this aspect during negotiations.

“Entrepreneurs frequently consult me when their company is being acquired, seeking advice on the best course of action,” Bansal explained. “They often ask about my departure from Cisco, seeking guidance. The decision often presents itself as a dichotomy: either commit to a brief transition or dedicate a substantial period – three to five years, for instance – to a meaningful mission and impactful contribution.”

Sarbu highlights that financial gain isn't the sole determinant. If a prolonged tenure with the acquiring company is anticipated, aligning with their values and vision is crucial. “Prioritize selecting a company you genuinely believe in and desire to contribute to, rather than solely focusing on the financial aspects,” she stated, “as these factors aren't always commensurate.”

Mehta shares a candid perspective, revealing that he experienced profound sadness following his company’s sale. He cautions that regardless of the ultimate decision, an emotional impact is inevitable. “Anticipate an emotional journey, and acknowledge that experiencing a range of conflicting emotions is entirely normal, even when the outcome appears positive on the surface,” he noted.

Ultimately, the decision to sell a company represents a significant turning point for its founders, irrespective of their subsequent path. As evidenced by these three entrepreneurs, a sale doesn't necessarily signify the end of one’s startup journey; new opportunities and challenges may await after the transaction is finalized.