What Are The Rules For Selling Your Startup?

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“There’s a company in our portfolio, I can’t say who, where the founders decided to sell to Microsoft,” one of my investors, Gill, said to me.

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“Congratulations,” I said.

“Well, they decided to sell a little earlier then I would have preferred, but they are the founders, so they get to decide (when to sell),” Gill responded.

You have incredible power when you are the founding CEO.


Gill was a seasoned investor. His fund had invested in hundreds of companies with many successful outcomes. However, he was relating a reality of the leverage founders have when it comes to startups.

Yes, Gill felt that the founders were selling out too early. There is an exception to this, and I’ll get back to it later. Yet, it was their decision, as the founders, to make, not the investors.


The last thing investors want is an unmotivated team.


Gill and I had that conversation over ten years ago. Since then, venture investing has changed.

Companies are staying private longer, and investors are pouring more money into successful portfolio companies. The goal is to make even more money as the valuation of the company rises.

In order to incentivize founding teams to stick with their startup longer, investors are allowing founders to sell some of their equity in a funding round. In the past year, I’ve worked with four founding teams that have done this.

The investors encouraged the founders to sell some of their equity (usually, a few million dollars for the CEO). The result is the founders are given a reasonable amount of financial security, and they are now incentivized to go long on the investment. It’s a win-win for investors and founders.


But, there are limits to your power as a startup CEO.


As I alluded to, there is one case where you can’t just sell your company. It should be obvious that there would be no way that Gill, or any other VC, would approve a portfolio company sale unless it was financially beneficial to them.

So, what would this look like?  Let's say you started your company three years ago, and you've raised $50 million in funding.  You get an offer to be bought for $70 million.  Let's further say you still own 50% of the equity, so you would clear $10 million, depending on liquidation preferences, in a sale.

It's very unlikely an investor is going to agree to that sale unless they don't believe in your company any more.  A $10 million return on a $70 million exit will not help their fund at all.

The bottom line is pretty simple.  Every buyout offer you get needs to be approved by your board and your investors.  If your investors, who are usually more important than your board, don't approve a deal, the deal will not get done.


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