The ultimate guide to cashing out, from founders who sold their startups to Amazon, Cisco, and Macy's for billions

AppDynamics Jyoti Bansal

  • There’s no set way to sell a business
    successfully.
  • We asked founders who have done it to share best
    practices and common pitfalls to avoid, and to provide best
    practices and war stories in exclusive conversations with Business
    Insider.
  • For example, Jyoti Bansal, founder of AppDynamics and
    Harness, recommends selling a few shares instead of selling the
    whole company if you need the money but don’t want to lose
    control.

  • Click here for more BI Prime stories.

Jyoti Bansal
decided to sell AppDynamics
to Cisco the day before the company
was set to go public.

Cisco had offered $3.7 billion for AppDynamics, which was nearly
twice what the app-analytics business was pricing its IPO at.

That meant many AppDynamics employees would fare very well
financially. And for Bansal, who is now the CEO of Harness, an automated software deployment
platform, his team’s well-being was the deciding factor.

“We had at least 400 employees who would make more than $1
million if we sold,” Bansal
previously told Business Insider
. “You have to do the right
thing for them — $1 million is life changing.”

Not every entrepreneur will find themselves torn between such
appealing outcomes. But deciding to sell the company you’ve built
from the ground up, and then finding the right partner, is rarely
easy.

So Business Insider asked Bansal, plus other seasoned
entrepreneurs and an academic director of entrepreneurship in
exclusive interviews, to share some best practices around selling a
startup — and the biggest pitfalls to avoid.

Our sources include:

  • Marla Beck, the founder and CEO of luxury beauty retailer
    Bluemercury. She sold the
    company to Macy’s for $210 million in 2015.
  • Justin Kan, the founder and CEO of Atrium, a law firm for startups. He
    sold Twitch, a live-streaming
    platform for gamers, to Amazon for $970 million in 2014.
  • Jeanette Miller, director of the corporate innovation and
    entrepreneurship major at Penn State Smeal College of Business and
    associate director of the Farrell Center for Corporate
    Innovation and Entrepreneurship
    .
  • Steve Martocci, the founder and CEO of music-creation platform
    Splice. He sold GroupMe, a group-messaging app, to
    Skype for $85 million in 2011.
  • Marc Lore is the CEO of Walmart eCommerce US. He sold retail
    startup Quidsi to Amazon for over $500 million in 2011, and
    Jet.com to Walmart for $3 billion
    and stock in 2016.

Read on for a practical guide to selling your startup.

Don’t build a company just to sell it

Miller, the Penn State professor, advises founders to have a
potential exit strategy (like selling your company or taking it
public) in place from day one.

You should keep that potential exit in mind during the
fundraising process. Beck has learned through running Bluemercury
that some venture capitalists want to see a return on their
investment sooner rather than later, which means they may pressure
you to sell or go public before you want to.

That said, building a company just to sell it can backfire.

As GroupMe and Splice founder Martocci
previously told Business Insider
, venture capitalists can
“sniff out” founders who go in with the intention to sell. They’ll
be dissuaded from backing those founders, who don’t seem truly
committed to fulfilling the company’s mission. Instead, those
founders are prioritizing monetary gain.

Focus instead on
making your business as successful as possible
. A growing
company will inevitably attract interest from potential buyers.

The right time to sell

Some founders wind up selling their company out of desperation.
Maybe their company is losing money or growth is stagnant.

To be sure, it’s hard to predict whether you’ll wind up in those
circumstances. But the best time to sell is when you don’t need
to.

That’s according to Kan, the Twitch and Atrium founder, who
wrote a
blog post
about selling a startup. In an interview with
Business Insider, he added that you should ideally be in a position
of leverage when you sell. Leverage could mean your company is
growing rapidly or you have interest from other potential buyers.
Twitch, for example, reportedly had acquisition offers from

Google
and
Yahoo!
.

“If you’re running out of money, your company hasn’t been
growing, and you’re desperate to sell it, then you don’t have any
leverage,” Kan said. Partners aren’t just looking for a proven
record of success, they want to see the potential for continued
success.

Consider alternatives to selling

Bansal sold some shares of AppDynamics when he declined an offer
of $350 million, thinking he would continue to grow and try to
achieve unicorn status.

He points out that any founder can do the same: sell some of
your shares without giving up complete control of your company.
That way, you can continue growing the business while also gaining
some financial stability.

He said his wife wasn’t happy that he was turning down the $350
million offer. “But selling a small amount of my stock made her
very happy and supportive for continuing to do it in the longer
term,” he added.

Read more:
Jugs of coffee, lots of Advil, and no sleep for 4 days: A startup
founder reveals what it was like to sell his company for $3.7
billion

Think about what you want to accomplish before you
negotiate with potential buyers

Marla BeckDo you want to
scale? Do you need easier access to capital? Figure out what your
ambitions are — and remember that they might not be the same as
another founder’s.

“People forget that entrepreneurship is really personal,” Beck
said. “You need to actually understand what you want and what
you’re trying to do and actually take some time to reflect.”

Beck recently advised a founder who was evaluating multiple
offers from potential buyers. The founder realized that none of the
offers were exactly what she wanted. Beck told her to take a step
back and figure out what was important to her, and then push for
what she wanted if she wasn’t getting it.

Be realistic about your company’s valuation

It’s hard to be objective when calculating your company’s value.
As Kan points out, the potential buyer is likely valuing your
startup based on where it fits in with their short- or long-term
strategy — and their number is likely lower than yours.

Miller’s research suggests that new founders can be especially
naive. “The first business is always the most challenging because
you’re usually relatively unrealistic,” she said. “And the
opportunity that is in front of you, everybody thinks it’s going to
be a billion dollar company.”

It probably won’t be.

One potential solution is to get an external party (i.e., a
banker or a lawyer) to come in and value your company for you.
“When you have a banker and someone you really trust or believe
in,” Beck said, “they’re able to talk to all the parties and figure
out what the right terms are and what’s important to each party, so
you come to an agreement.”

Before selling Bluemercury to Macy’s, Beck interviewed five
different bankers before settling on one she trusted. She said too
many founders make the mistake of hiring the first banker they meet
and rushing to sign a contract, only to realize that the person or
the terms aren’t a good fit.

Read more:
A CEO who sold his first startup for $1 billion explains how to
build a company and stay happy at the same time

Set expectations with your partner upfront

Before you
sign a term sheet
, be clear with the acquiring company about
your vision for the partnership.

When Beck was in conversation with Macy’s about selling
Bluemercury, she was clear that she wanted to continue scaling
while still maintaining the company culture. She
set those expectations
with Macy’s upfront. 

Beck recommends getting into the nitty-gritty as much as
possible. For example, she said, you should decide how often you’re
going to meet with leadership at your parent company.

Beck, for her part, wanted to stay focused on growth and didn’t
want to be distracted by having to prepare for a weekly or monthly
meeting with Macy’s. “It was really important for me to have the
mind space to continue to be a creator as well as a CEO scaling a
company,” she said.

Read more:
The first-time founder’s ultimate guide to navigating a term sheet
and avoiding common pitfalls — with a sample from a major
VC

Know whether an offer is legitimate

Justin KanApproach every offer with a
degree of skepticism. 

In his
blog post
, Kan shares a few ways to tell if an offer is
“bulls—“:

  • It doesn’t come with an expiration date or the promise of a
    term sheet to be delivered within 24 to 48 hours.
  • The acquiring company isn’t doggedly pursuing you to prevent
    you from looking elsewhere.
  • They’re offering to pay you $10 million and your startup
    already has a term sheet for a $15 million Series A round. (These
    are hypothetical numbers, but the point is to clarify valuation
    expectations as soon as possible.) 

Do some research upfront to make sure you don’t waste your time
on subpar offers.

Don’t be afraid to negotiate or to see what else is out
there

Kan urges founders not to be afraid to say no.

“A potential acquirer’s first offer is rarely its best offer,”
he writes. “The potential acquirer isn’t going anywhere.” In fact,
Kan writes that being willing to walk away gives you some leverage
in the negotiation.

Another key negotiation strategy is initiating some competition,
Kan writes. It’s similar to the way a job candidate wants interest
from multiple companies, to incentivize each firm to bump up their
salary offer.

Bansal agreed. Once you’ve gotten an offer that piques your
interest, he said, ask around and find out from other potential
buyers what their terms would be.

Bansal admitted he didn’t shop around after Cisco offered to buy
AppDynamics. But, he said, “that’s a common thing that a lot of
companies should do.” That way, you’ll be more educated as to how
appealing the first offer really is, and you’ll be able to make the
right decision for all your shareholders.

Consider important factors beyond money

Money may be the most readily quantifiable piece of an offer.
But it’s not the only important one. 

Bansal outlines three questions to think about when evaluating
offers. 

  1. Does the buyer’s mission align with your company’s? “You want
    to solve a particular problem,” Bansal said. “How much does the
    acquiring company believe in that, and how much are they aligned
    with your mission and the vision that you had as a startup?”
  2. Does the buyer’s culture align with your company’s? “As a
    founder, you are responsible for your employees, your team,” Bansal
    said. “You don’t want them to get into a culture where they would
    not enjoy it, or they would hate it, or they would say something
    like, ‘This is not what I signed up for.'”
  3.  Will the buyer’s offer allow you to accelerate your company’s
    mission? Maybe the most compelling thing is their sales force, or
    their capital. Focus on what your potential partner is bringing
    you.

Considering these factors will save you potential regret after
an acquisition by making sure that the company you’ve built retains
its mission and culture.

Read more:
Founders and investors reveal the ultimate guide to scaling a
startup — and common pitfalls to avoid

Be prepared to experience some regret or confusion

Some entrepreneurs who have sold their companies have expressed
regret. Lore, for example, remembered selling Quidsi to Amazon as
something of a let-down. “It was this really depressing sort of
moment where we didn’t even want to go out for a drink,” he

previously told Business Insider’s Alyson Shontell
. “It wasn’t
a celebration. It was sort of like mourning.”

Even founders who are pleased with their decision should
anticipate some feelings of confusion. 

“It probably would’ve been good to raise more money and keep
going,” Kan said. “But I can’t really regret that.”

Explain to your employees why the acquisition is a good
thing

Whether or not they’re losing their jobs, employees may find the
acquisition news jarring. It’s your job to help them understand why
you made this decision and what their future looks like.

Entrepreneur and angel investor Brad Flora remembers telling the staff
at his startup, Perfect Audience, that he’d sold the company.

In a
Slate article
, Flora writes, “When I shared the news, the team
stared blankly at me, unsure if it was a good thing or a bad
thing.” He and his cofounder spent an hour answering employees’
questions. Eventually, they realized it was a positive development,
since most of the proceeds from the deal would go to employees.

Flora was able to tell his employees, who took risks to join the
fledgling company, that they had earned “a big chunk” of cash and
stock. He considered that the best part of the process. 

Keep your employees’ best interests in mind

Your employees’ careers are just as important as yours.

In periods of organizational change, Miller says there’s a “huge
uncertainty” among employees about what’s going to happen to them.
It’s important to consider their perspective as well. 

That’s why Bansal accepted Cisco’s offer and declined to go
public as planned. After all, how often can you deliver $1 million
to 400 employees?

Read more:
HOW TO START A BUSINESS: The ultimate guides for founders on
launching a company, raising money, and becoming wildly
successful

SEE ALSO: Building
a company that sells for millions might sound like a dream — but
for CEOs who do it, the next chapter can be just as
hard


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The ultimate guide to cashing out, from founders who sold their startups to Amazon, Cisco, and Macy's for billions