A Quick Guide To How Acquisitions Work In A Startup
Many people are curious about how acquisitions in a startup environment works. Maybe you received an acquisition email recently or maybe you are hoping to lead your startup to an acquisition one day. In this quick guide, I will briefly walk through the steps of how acquisitions work in startups.
Different Types of Acquisitions
There are many types of acquisitions in the business world, but the most common ones for startups are asset acquisitions, equity purchase and mergers. An asset acquisition is usually the purchase of a company by buying its assets instead of its stock. Asset purchase happen quite often, usually the founders still have equity, but all the asset is gone to the parent company.
Related Read: Options Pool For Startups Explained
Equity purchase is when the parent company takes all equity and assets. This way they have full control of the company and owns the entire startup. Finally merger is when two companies or startups join together to become one.
If a bigger company is interested in your startup, they will usually have a representative contact you. This could be an email, a phone call, or an in person meet. For the bigger companies such as Google and Baidu, the representative will ask for you to sign a NDA and forward in a bunch of documents. They need to know everything about your startup so that they could speak with their executives about the buyout. This includes all legal documents, worker CV, background history, financial statements, and many more.
Some people like to call this part courtship or discussion zone. It can take months for the opposing company to get back to you. If they do reply, they will call you in for a more in depth discussion and meeting. This step is the most frustrating and annoying for most entrepreneurs. It isn’t a one time thing, multiple meetings will be held and negotiated before writing out a term sheet. Nothing is final in this round, you are still not guaranteed a term sheet yet. A lot of startups reach out to multiple companies during this stage.
The best part comes in this stage. After numerous negotiation rounds and numerous lawyer phone calls, a term sheet will be sent to you. Just when you thought everything was over…well, not quite yet. Nothing is official until all the paperwork is signed by every executive. Ensure that you have your lawyer look over everything. Having a lawyer and paying the fees is a must at this point because you do not want to sign any legal document that you are not familiar with. Acquisitions can be a huge headache, especially if you are reviewing multiple company’s term sheets.
Signed, I must be done now.
Signed, but you’re still not finished just yet. Once everyone signs the term sheet, there will usually be a timeframe where you cannot sign any other term sheets. This period could be thought of as a clearance period and technically you could still accept other offers, but 99% of the time the deal is closed here.
Depending on what your deal was you might not get your money right away. Typically, some cash is received up front, but it might only be enough for you to buy a car. The rest of the money will come in over time in a vesting schedule. This could be vested over a few years or it could be when the company reaches a certain revenue. Entrepreneurs are typically excited in the beginning, but the entrepreneurs usually end up being sick and tired of working for a cramped big company.
That was a quick overview of how acquisitions work in a startup. Acquisitions can be an extreme headache and it is always advisable that you talk to all your advisors, cofounder, lawyers, and accountants before making any move. Best of luck.