Navigating the Exit Panel


These are my notes from the panel discussion Navigating the Exit at FailCon 2010.

The panel was moderated by Nathan Beckord @startupventures of Venture Archetypes, and the panel was composed of:

  • Gleb Budman @budmang of BackBlaze, a startup that was almost acquired
  • Elad Gil @eladgil of Twitter, founder of Mixer Labs
  • Steve Hoffman @captainhoff of Founders Space, previously with Spider Dance
  • Jennifer Zeszut @jenniferland of Lithium, founder of Scout Labs

I found that about a third of startup acquisitions fail between the deal closes, and about another third unravel within the next 18 months.

Steve: Spider Dance was during the early venture days. We grew the company to become #1 in our space, and we were eating the lunch of the larger public company in our business space. We were providing the infrastructure and creative for running interactive TV shows. We were doing so well that the company came to us after we landed Turner, and they said that they wanted to acquire us. For me, it was great; it would have been a very big exit. My venture guys said they would handle it; they turned down the $40m offer and asked for $150m. That's a big differential, but also it was the dotcom payday. It seemed reasonable. They were on an exchange worth over $1b. What ended up happening is they didn't buy us and the deal fell apart. I was sitting on the sideline during this process. Six months later, the dot-com bubble burst. All of our clients cut everything. NBCi went from 250 people down to 2. All the advertisers were gone also. We negotiated a deal with our arch-enemy but then I refused it. After that we had to shut down because we could not raise money. The moral of the story is, if there's good money and it looks good to you as the founder, take it. If you can close the deal, just close it.

Jennifer: Big brands around the world use our application to see what their customers are thinking. We were in a hot space with some amazing technology, but there is massive consolidation happening right now, and the expectations that companies have for platforms like ours is huge systems rather than tiny widgets. We had to scale; we had to either raise a lot more money or consolidate. Unless you truly can negotiate a 100% cash up front offer, you have to figure out who you can worth with and for. Finally we hooked ourselves to a rocket ship that was even faster than ours. That's how we went into it. I closed the deal on the day that my third baby was born, literally in the labor and delivery room. I chose the room based on the internet connection. That's a day that I won't forget for many reasons.

Elad: We considered six options:

  1. Where is the market? How is it evolving? How will we play into it?
  2. Where can we as a team has the biggest impact?
  3. Where would the best place be for our employees?
  4. Upside financially
  5. Stakeholders: What did our investors and parters think
  6. Who do you want to work for if you're not working for yourself?

It came down to, do we exit to Twitter or not exit at all.

Jennifer: When you start a company, you're thinking of making it as big as you possibly can. We had a term sheet that once we sat down and ran the numbers, we had a shitty cap table. Once I ran the numbers of the exit with a package for the management team, with the preference stock, I could work for my investors for years and years and maybe make them $80m and a tiny bit more for myself. When you start, make sure that you have a clean and simple cap table, because it will make a very big difference on your exit later.

There's participation and there's preference. So if you had 2x participation preferred, if you sell at 100m, then the investors get twice their investment back, so $20m. Then the rest is taken at the percentage that they run the company, so they will get 70% of the next 80%. That math is really different than if you're all in it together.

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