Every founder has likely run through the scenario in their head before.
You’ve been building a business for a while. The company’s working, but it’s not on fire and, looking ahead, it’s most likely going to be hard to raise more capital. Up until now, you’ve raised around $5 million, maybe $10 million dollars. You’re in a position where you could find a landing pad for the business by pursuing an acquisition as an exit strategy. This opens up a whole new can of worms.
You want to balance finding the right price, but you also don’t want to be waking up every day working for a company you aren’t jazzed about. You are looking for a pragmatic outcome, but where do you even start?
Navigating acquisitions is one of the more underexplored topics in company building — and it’s especially relevant during a volatile market, as fewer deal flows come in and an increase in down rounds concoct the perfect storm that pushes founders to consider this as a safer bet for an exit strategy.
Daniel Debow has become somewhat of an expert on the art of selling your company — and he’s got the track record to prove it. His most recent startup, Helpful, was acquired by Shopify in 2019. He’s worked at the e-commerce company ever since and currently serves as VP of Product. Before that, he co-founded Rypple, which was acquired by Salesforce in 2011. His first startup Workbrain was acquired by Infor in 2007.
Debow’s ability to leverage strong relationships and think on his feet has made him an extremely successful startup salesman. As a repeat founder who has successfully navigated three acquisitions, Debow knows a thing or two about all the careful considerations (and the emotional weight) founders have to face during the M&A process.
“People who've started companies demonstrate a type of grit and have an ownership mindset, that is often a really good indicator of success,” Debow says. “But there’s also an existential terror that faces you almost every day as as startup founder. It’s a level of stress that is really hard for people to appreciate, especially when navigating something as delicate as an acquisition.”
In this exclusive interview, Debow opens up his playbook for running an M&A process at a startup. Debow covers tactics founders can use to settle on the right price for their startup, concrete tips for building sturdy business relationships and analyzes the psychology of a buyer at a larger company.
He walks us through and shares his advice on what makes a larger company “founder-friendly” and ends on a playbook for life after an acquisition, detailing practical measures founders can take to set themselves up for success in the first 90 days after a sale.
Let’s dive in.
PREPPING FOR AN ACQUISITION: FOUR TIPS TO SET YOU UP FOR SUCCESS
In Debow’s experience, so much of the preparation that goes into an acquisition process is mental and founders with the highest success rate going into a deal are those that made a fundamental shift in how they viewed their own role in the process.
“The first thing to think about when considering selling businesses is that you don’t actually sell your company to another company,” Debow says. “There is no such thing as a company. It’s an imaginary legal construct. There are people who work together as a group, and that means you’re going to sell your company to a group of people who happen to work together in a company.”
This might sound like semantics, but Debow argues it’s much bigger. “Once founders understand that the challenge is convincing another group of people that they want to buy their company, it becomes more of a tractable problem.” The founders that approach selling their company as an antidote to an existing issue have the easiest time getting their foot in the door for a meeting.
“You go from ‘I have to sell my company to Twilio,’ to ‘No, I have to get Jeff Lawson to see that my company is a solution to a problem his organization has.’ And that’s very different,” Debow says.
One of the most important things for founders to understand is that you are selling something to an executive, who has a problem. And as the startup CEO — you are that solution.
Once founders adjust the mirrors for how they see into the M&A process, Debow says they are ready to tackle a sale head-on. He outlines the tactical tips he leaned on during each of his three acquisitions that first-time sellers can benefit from the most.
Tip #1: Brush up on your relationship hygiene
If nailing down the role of a solutions salesman is the kickstarter to any M&A process, the first action item Debow says is to leverage the most important business relationships in your network.
Ideally, you’ve been laying breadcrumbs here long before you started seriously considering a sale. “You should always be thinking about building relationships with executives at large companies,” Debow says. “Maybe this is contrary to what others would say, but these are business development relationships, partnership relationships and yes, maybe they are acquisition relationships. It doesn’t have to be as explicit. But I can tell you it sure as heck is explicit when you call up and say ‘hey we’re running a process, do you want to buy us?’”
Founders might find themselves in a tough spot if that phone call is the first time they are making contact with an executive at a larger company. It’s why Debow says building that networking muscle and establishing rapport with the strongest relationships in your circle is a habit to start practicing regularly even in the earliest days of company-building.
“If you’ve met an executive who runs a business unit that is complementary or competitive to yours five or six times or, even better, if you’ve built a mentor relationship with that person, you are in a way better spot to begin with,” says Debow.
What starts as a routine phone call to a peer can instead become a natural conversation introducing the idea of a sale or at least a chat about what next steps make the most sense for your startup. Or it’s an easy segue into chatting about whether you can be the solution to a problem you know that executive has.
“The goal of any acquisition means you are going to work for that executive someday, so you really want to build that relationship of trust well in advance of trying to start a process,” Debow says.
When it comes to initiating these conversations organically, Debow points out that there’s nothing wrong with asking for a quick catch-up with folks in your network. For a cold outreach, Debow says founders shouldn’t be intimidated to simply ask for advice.
Some of Debow’s tried-and-true methods to finding potential business partnerships:
Call up and ask your VCs and investors
Attend industry events
Tap into your own existing network
Good networking habits are pretty instilled in founders and other startup operators these days (if you are looking to brush up on these skills, check out one of our most popular pieces on how to become insanely well-connected.) But when you’re heads-down building a startup, essential relationship building can seem like a nice-to-have, not a must-have, and consistently falls to the bottom of the list. But according to Debow, being as intentional as possible with who you are building relationships is a chapter that cannot be skipped.
How to find the right execs
The longer you’ve worked in the startup ecosystem, the easier these relationships will be to come by and the more doors contacts will open up for you. But for those that are greener to the startup world or don’t have as deep of contacts in their Rolodex, Debow also shares his insight into who key M&A players are at larger companies and what to look for:
Don’t shy away from the M&A team. “I don’t like the frequently-spouted startup rule of thumb to never talk to corporate M&A people because they’re terrible. That’s a very bad piece of advice,” Debow says. Instead, lean on M&A teams to open the right doors and guide you to the right people inside the org who have the power to get a deal done.
Not all companies approach M&A the same way. “At Shopify, we don’t even call it M&A, the team is called ‘product acceleration,’” says Debow. “The people who run it are very senior product leaders who have run different parts of the business like the core platform, talent acquisition, or the marketplace business. You shouldn’t be scared to approach these people with a conversation about a potential sale.”
But Debow warns founders to be careful about relying on M&A teams alone.
“It’s important to understand that very rarely does the M&A team inside a larger org have the ability to just buy a company,” Debow says. “It’s almost impossible for a corp dev team to acquire a company without some sponsorship from a senior executive inside of it. Someone has to put their hand up and say, ‘I own this thing.’”
So founders should consider their own background and pursue relationships with those inside the org that have similar skillsets to build up their credibility.
“If you’re a technical founder, building a relationship with the engineering leaders inside an org matters,” Debow says. Ultimately, you want to win the trust of the other technical people inside the org and earn their respect. But no matter the function or background a founder comes from, it always boils down to you solving a business problem for a business leader at the acquirer.”
Tip #2: Carve out a strategy to leverage those relationships
If selling a company is selling a solution to one person’s problem, then with strong networking muscles in place, founders can use these strategies to capitalize on the most strategic relationships in their circle.
But even approaching the topic with the best intentions, how can founders balance keeping the sanctity of these long-term relationships while also tactfully introducing a sale into the conversation? Debow says it’s best to be direct.
“There’s an important moment when you have to tip from delicately building a relationship to just being direct,” Debow says. “Because there’s a real frustration on the opposite side when a founder is being too smart or too cute. It’s clear when they are running a process and trying to sell their company, but they won’t come out and say it. That’s not helpful. Often the company can move quicker if you’re explicit about what’s going on.”
When the time comes for an honest conversation of what a deal could look like for both companies, founders should have materials ready to go.
“Before a meeting at Salesforce, I spent time with one of my designers to design what our startup (Rypple) would look like inside of the Salesforce UX. So when we went in for the meeting, it wasn’t imaginary. I was able to say that we’ve thought the acquisition all through, this is what it would look like, let me take you through the steps of how this can be used for your customers and what value can be added.”
Your job as the seller is to paint a picture of how two teams can work together in the future.
Tip #3: Treat the acquisition process as a job interview
One wire first-time founders tend to trip over in the M&A process comes from not taking the time to understand the psychology of their buyer. The most common pattern Debow sees is founders treating the M&A process too similar to a fundraising round. While they are both transactions, the leaders running point on the process have very different end goals.
Tech executives ≠ venture capitalists
“VCs tend to have a higher tolerance level for difficult founders because they aren’t working closely with them in the day-to-day,” he says. “Founders become a part of a portfolio of other bets they are taking. So the dynamic of forgiveness of quirky behavior or arrogance is much higher.”
When you’re dealing with corporate executives, they don’t want to deal with wild cards. Remember that they don’t have to pull the trigger. If a founder shows up and acts entitled, arrogant, or doesn’t act like a team player — those execs will walk away.
Scan companies for founder-friendly conditions
No matter how much a deal is worth or how many customers a startup can bring to the table, founders and executives are still going to have to work together for a period of time. In Debow’s experience, it’s rare for an acquisition to happen with a founder who doesn’t have to sign up for at least 18 months of working at the acquirer.
“When you are sitting across the table from an executive, you have to make them want to like you. Because they might work with you for three years,” he says. “It's a job interview, simple as that."
Treating M&A meetings as job interviews goes both ways. Debow says it’s also a useful exercise to map out the conditions you are looking for in an acquirer. Here are some conditions he considers when evaluating a possible buyer:
The Good: A pro-founder M&A function. “This just means that the people guiding the M&A function are honest and straightforward and are there to be helpful to founders by answering their questions during an acquisition process.”
The Great: People in-house ready to support founders. “The transition from founder to an executive can be challenging for people,” Debow says. “Keep an eye out for people in the company who are there to support, guide, mentor and teach founders when they come in.”
The Non-Negotiable: A founder-friendly CEO. “In my experience, it's totally crucial to have a CEO who appreciates and values founders,” says Debow. “I’ve been lucky in both instances where I ended up joining companies who deeply respect the mindset of a founder and it made all the difference. Look for CEOs who host lunches, offsites, or any community initiatives for former founders at their companies.”
People who have tried things and started companies demonstrate a type of grit and ownership mindset is a really good indicator of success. Companies that actively look for an entrepreneurial mindset as part of their recruiting criteria indicate a positive and founder-friendly environment.
Tip #4: Know what clear buying signals look like
Some M&A inquiries read as cut and dry as a cold sales email. Others might not even mention the words “merger and acquisition at all.” With the varied spectrum of how corporations communicate about deals, founders should be prepared to spot both explicit and implicit signals that a company is interested in a deal.
Debow reveals some of the biggest tells he’s observed of when a company is interested in buying a startup:
Executive access. Time is money and the higher up the corporate ladder you go, the harder calendar space is to come by. “If an executive, especially the CEO, is setting up a time to get lunch or dinner to meet with you, they are very interested,” Debow says. “They are certainly not doing that to tire kick.”
Quality of time with executives. Time on the calendar sometimes isn’t indicative enough to know just how serious a company may be about a deal. Debow says to pay attention to what topics are being discussed at a meeting. “How deep are they going in these conversations? Are they probing into what value is actually there? Do they seem interested or excited? Your radar should be looking for this.”
Questions about company goals. These questions can be as simple as ‘what do you want, founder?’ Or, ‘where do you see yourself in five years?’ It’s important here not to give maybes. “You should be ready for those questions,” Debow says. “Tell them what problems you want to work on, and if you can, give a demo of what you think your company could look like at theirs.”
Specific questions about your cap table. The most diligent inquiries may also be the most viable. “If you are being asked about which investors are on your cap table and what your revenue is, don’t get scared,” says Debow. “This just means they are serious about making a deal.”
Navigating inbound M&A inquiries
Founders that have been sourcing a deal for a while or have an attractive offering for certain buyers might be more used to receiving inquiries about a possible sale. But Debow says there’s always a chance that founders in the early days of building might be fielding offers in their inbox as well.
“Remember that M&A teams are tasked with doing outreach to companies in their space,” he says. “It’s part of their job to scope out new opportunities and bring it back their executives.”
This doesn’t mean founders need to chomp at the bit any time they receive an offer. “There’s nothing wrong with saying ‘I’m super focused on building at the moment. I’d really love to do a call in a month or so and meet with an executive who would be relevant to us that you think we could best help out,” Debow says.
Another approach to answering an unwanted M&A inquiry is to use that as an opportunity to tunnel into possible relationships at the company and save them for the future.
“When you get that call or email, think about who you know at XYZ company and who the executive is there,” Debow says. “Taking a minute to strategize and zero in on where that inquiry is coming from within that business can be helpful even if you don’t want to go down a corporate development route with that company in the future.”
But a stickier situation can arise when founders are seeking out an acquisition as an exit strategy but are getting offers from places that aren’t their number one pick.
Debow’s advice is to always treat the company that’s most interested in buying your startup as the most viable option, even if it’s not your favorite.
“You want to talk to them first and get that M&A process credible,” Debow says. “So if you do get that call from your dream buyer down the line, you can point to this other company and use that legitimate offer as a way to get a conversation from your preferred company.”
Involving investors in the process
Even the founders with the most conviction around selling feel the trepidation around involving their investors. Venture-backed startups may feel an implicit or explicit pressure to never give up, to keep building out their product forever on the path to a billion-dollar business.
So when the time comes to break the news to a startup’s board or investors that an M&A process is the preferred exit outcome, Debow says the best thing to do is just be honest.
“I have found that the best relationships are the ones that are predicated upon honesty and a mutual understanding of interests,” Debow says.
If you can have tough conversations with your investors that map out why a sale is the best option for your company, you are better off than if you are being squirrely and information-controlling. Point out that you both have a mutual interest in seeing your company succeed.
Investors may also have feedback to share and outside insight about a company that can be helpful to a founder’s decision. But the biggest rule to follow here is to not blindside the people who have put money into your company.
“Investors are not happy when you tell them that everything is amazing, that you are going to crush it and then you turn around and tell them you have an M&A deal and you want to sell the company,” Debow says. “These are your partners in the business and real human beings that have put time and energy into you. You don’t lose face with a sophisticated investor by being honest and pragmatic.”
Another trap Debow has seen talented founders fall into is pricing themselves out of a great deal by being exclusively focused on getting the highest valuation for their companies.
“You want to maintain a range of possibilities all the way through the journey as best you can,” Debow says. “That way you give yourselves enough options for companies that can acquire you when it's time to exit.”
INKING THE DEAL IN THE BOARDROOM
In this section, Debow gets into the nuts and bolts of sealing the deal, from aligning with key decision makers and deciding on price to announcing the decision to the rest of your team.
Four steps to kick things into high gear
1. Start with your champion.
When it comes to initiating the official conversations in an M&A process, founders should start with the executive they’ve built the most trust with at the company they believe is most interested in closing a deal. “It’s not too far off from enterprise selling,” Debow says. “Start with your champion and work your way down the list.”
He shares some language founders can use to get that first conversation started:
“I know we’ve talked three or four times over the years about X problem you’ve been having and how our startup could be a solution to solving this. If you think this could be a possible partnership, we are ready on our end to have that conversation.”
And some follow-up questions that will be pertinent to ask:
“How fast could you move your organization?”
“Are you in a place where you are ready for my team to join yours and where I could come work for you?”
Rinse and repeat with any viable offers you have. “You have to run this cycle with all of your options to find out who is in this game,” Debow says. “And that can take a few weeks. But once you have a few options, you want to line them up in your preferred order.”
2. Involve key decision-makers
Once you’re aligned with an executive or a company that would be your preferred choice, the next step is to find out as much information about what needs to happen on their end to get a deal done.
This is the stage to sus out all of the key decision-makers who are necessary for closing the M&A process.
Questions to ask here are:
Who ultimately has the final say in this decision?
Does this have to go to the CEO? What about the board?
What is the M&A team’s role?
Who else do you think would be a key stakeholder in this?
How long are you expecting this process to take on your end?
What kind of diligence on our company would you want to know?
3. Have your homework ready to turn in
With a timeframe in place and key stakeholders identified, treat the next step as part of a sales process.
“Just like in enterprise selling, you want to have all your decks and your demos finalized and ready to present,” Debow says. “You do not want to be making it up the night before.”
Tactical tip: Debow recommends that founders pull together a small team internally, a maximum of three people, to assist with gathering materials and helping you prepare for any in-person meetings. “Nothing says ‘this is a real thing’ more than having a built-out data room and a link the M&A team can click to start doing their evaluations. It demonstrates professionalism while also saving you a month in the process.”
4. Nudge toward a deadline
There will inevitably be a waiting period where any corporate team will need to do their own evaluations and diligence. But Debow says it’s okay to introduce your timeframe and establish an ideal deadline for the deal to be done.
“People get motivated around a deadline,” Debow says. “Remember, there are lots of other people who are trying to sell their company to the same place as you. The corp dev team is busy and they most likely are working through another transaction.”
Founders should make it as easy as possible for corp dev teams to evaluate them. Having all of your materials ready and being upfront about a timeline is a really effective way to move things along.
Now that the ball is rolling and a deal has been lifted off the ground, it’s time to talk shop. As a jumping-off point, Debow says there is always one number founders can start with.“A great starting point is how much the company was valued at during the last round of funding,” Debow says.
Opening with this number will open up one of two doors for founders, depending on the financial situation it is in.
For startups that can hold or grow its last valuation: “The early conversations around price will be about whether the startup can sustain its valuation, or it’s propositioning that startup as a business that can go on and make more money,” Debow says.
For startups that will come in below its last valuation: “In this case, what you want to do is talk about how much cash has been put into this business,” Debow says. “Which is really saying, ‘here’s how much cash you’d have to pay back my investors, which is often the number around what buyers are thinking.”
With these two anchor points in place, founders should follow up by asking if the buyer would be able to exceed that price. “They should be able to say yes, or ‘no, no way, let’s not waste your time or ours,’” he says.
However, no matter how many details or technicalities around valuation are discussed, founders should be able to pick and say a number they are comfortable with. This is where relationship-building, due diligence on your own valuation and sales discovery become crucial,
“Founders are in a much better position if they have articulated and created credibility over time that there are multiple prospective buyers at the price you are listing,” Debow says.
Create the perception (through reality) that there is an alternate bidder — always. That creates the competitive tension that gets you to a fair price.
The ‘Do Not Do’ list
While the intricacies of each acquisition are unique to each company’s situation and ideal outcomes, Debow has seen plenty of well-meaning founders fumble a good opportunity inside the board room faster than you can say “how to make a deal go sour.”
Here are the three mistakes first-time founders should avoid if they want a deal to go through:
Don’t inflate your numbers. “Remember that these are people that are betting some of their entire careers on you. Appreciate that,” Debow says.” “If there is something you are worried about, air that out early. You’re not going to fool them into buying you.”
Don’t be arrogant. Debow sees this the most with founders using non-standard definitions for their numbers or performance, intended to make them look better. Remember, “they don’t have to pull the trigger,” says Debow.
Don’t think the deal is over just because they said no. “A great mentor of mine once said ‘all great deals are lost before they are won.’ If a deal falls apart, that might just be the moment where you have to rally. You can’t give up on this journey. You have to be quite relentless.”
So what can first-time founders expect inside the board room? Debow says the three most common questions that will be asked are about a startup’s cap table, their revenue and when their last round was.
“These are basic fair questions for someone to ask because they are ultimately trying to assess if they should spend time on you,” Debow says. “And if you think that there's some dark thing in there that you could do to make them change their mind, you don't want to waste time on it,”
POST-ACQUISITION: THE FIRST 90 DAYS
The evaluations are in, all the key stakeholders have been informed, a price was negotiated and a deal was signed! Congratulations are in order for the whole team, which just made it through one of the most arduous exit processes a company can go through.
To ensure the most seamless transition from a startup to a new team inside a larger organization, founders should place just as much emphasis on building a strategy to achieve their goals after an acquisition as they did with all the preparation that went into the deal.
In this section we’ll cover communication strategies on how to craft internal messaging for the rest of the team, how founders can motivate themselves and their team after they’ve been acquired and a task-oriented plan for the first 90 days post-acquisition.
Telling the rest of the team
Even as a repeat startup-seller, if Debow had a chance to do an acquisition over again, there is plenty he’d want to fix. One of the biggest takeaways he learned from his three startup sales is that how founders communicate a sale to the rest of the team matters immensely.
“Founders are usually super excited about an M&A deal going through,” Debow says. “It’s something they’ve been working on for years and it fulfills a dream or a vision they’ve privately had for their company for a while. But what founders should understand is that the second they tell the rest of the company about the sale, employees will think about how the deal will affect them. There are real, serious concerns that employees shoulder.”
It’s a personal choice on whether a founder chooses to keep their team in the loop during the M&A process or reveal the outcome once it’s happened, and neither is wrong. It’s why Debow says the most important thing for founders to remember here is to lead with empathy.
You want people to walk into that meeting where you break the news and leave feeling that their leader cares about them. That they were considered during the whole M&A process, that this acquisition can be a good thing for them, and that even if you don’t have all the answers at the moment, they’ll trust you to get back to them.
How to keep working once you’ve been acquired
Joining a new company, in a completely new role and shedding off the founder mindset is worthy of an entirely separate playbook.
“Just on this topic alone, I've had probably four calls in the past six months of people who have been acquired, asking me ‘how do I survive here? It's so different.’ So it is disorienting, and founders shouldn’t think they are weird, or something's wrong with them if they are feeling similar. It's an enormous psychological change. Even just the tension release after going through the journey of being a founder can be hard.”
It’s why Debow suggests that founders use the days immediately after an acquisition to take time off to buffer the two very different operating experiences in their lives.
“If you can, give yourself a break,” Debow says. “Your family and friends probably want to spend time with you after you’ve been heads-down building for many years and most of the companies that will acquire you will understand that.”
But there are practical measures founders can take to help guide them in the first chapter of their career journey post-acquisition.
The First 90 Days
A to-do list for founders in their first 90 days of working inside a larger organization.
Remind yourself: You are not CEO anymore. “Psychologically, you should prepare yourself for some sort of turmoil,” Debow says. “You are operating in a different environment now where your ownership and drive and hustle will likely change.”
Find other founder peers inside the company, quickly. Just like most other aspects of the job, being a founder can be lonesome and mentally grueling. Transitioning into an executive role and losing the autonomy of a founder can wreak even more emotional havoc. “Locating other founders who have been acquired into the company will build a sense of community and comfort that will be crucial to your success in the early days.”
Don’t be a smart ass. Lead with humility instead. “Think of how you are being perceived as a new person coming into a company, where most people know you as the person who just made millions on this deal just to get here. Being aware of that and taking time to understand the processes and culture of your new place will go a long way, rather than coming through the door with strongly-held opinions.”
…But don’t roll over either. “That being said, you don’t need to do everything the machine tells you to do,” Debow says. “Try and maintain some sense of your ability as a dealmaker and become known as the person who moves things along.”
WRAPPING UP: REMEMBER, EVERY FOUNDER SELLS IN SOME WAY
The decision to sell a startup will metamorphize the trajectory of a founder’s career — and affect everyone involved in a company as well. It’s a lofty decision that founders shouldn’t make lightly — and often comes with the added psychological burden that if you just grind harder, you won’t have to sell at all. But Debow reminds entrepreneurs that this is a false dichotomy.
“Founders: get rid of the mindset where you are left wondering ‘am I going to sell my company?’ he says. “The question you’re really asking is, ‘do I sell the company now or just part of the company?’ Selling comes in a bunch of different flavors. Because if you’re raising money, that’s still selling part of the company. You go public, that’s selling the company.”
You will sell the company — because every founder sells a company. Let’s be clear when you sell shares in your company to a venture firm, you have already sold part of the company.
With this crucial mindset shift, you’re ready to tackle the decision to sell (and the arduous process ahead) with a clearer head and firmer footing.
This article is a lightly-edited summary of Daniel Debow’s appearance on our podcast, “In Depth.” If you haven’t listened to our show yet, be sure to check it out here.
Cover image by Getty Images / the_burtons