What Founders Need to Know: You Were Funded for a Liquidity Event – Start Looking

Steve Blank

Liquidity. While you might be interested in building a company that changes the world, regardless of how long it takes, your investors are interested in funding a company that changes the world so they can have a liquidity event within the life of their fund ~7-10 years. (A A liquidity event means that the equity (the stock) you sold your investor can now be converted into cash.) Currently M&A is the most likely path for a startup to achieve liquidity.

Selling your business? Find the emotional buyer

Berkonomics

The liquidity event and beyondThis is one of my favorite insights, since I lived this one in a positive exit from my computer business. Types of business buyers expanded. Most people will tell you that there are two kinds of eventual buyers for your business: financial and strategic.

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Why not share your liquidity success with those who got you there?

Berkonomics

Here’s a thought for you to recall later when and if the event happens. Some companies, especially those financed by angel or VC investors, have good, formal stock option plans with properly priced options set to reward all employees and managers in the event of a corporate sale. The liquidity event and beyondSo, you are close to selling your company, and counting the profits a bit early. Well, that’s human nature.

What’s your personal-business end game?

Berkonomics

But most of us dream of selling the business someday for lots of money and building our wealth upon that event. General The liquidity event and beyondRemembering our original vision.

A million things can kill the deal.

Berkonomics

Paying commissions to undisclosed third parties in order to obtain deals, hiding or entering misleading financial data, associating with anyone with a past SEC suspension, and many more “gotcha” events, qualify as strong deterrents to a good closing. What about events you can’t control?

What’s a “data room” and how do you use it?

Berkonomics

The liquidity event and beyondFirst, what’s a “deal book?”. Maybe you have not heard the term, “deal book.” That’s a comprehensive piece on a company for use by a buyer in determining fit.

Shareholders and founders: The muted thrill of the deal closing.

Berkonomics

But the closing was such a non-event that you wonder why people even call it a “closing.”. General The liquidity event and beyondNow you have worked for months to get this deal to the closing, anticipating the wire transfers to the shareholders that will come any minute.

Selling your company for less than expected?

Berkonomics

Sometimes the end game or sale of the company is not a happy event. Is there a liquidation preference in place where the preferred investors can take a multiple of their investment, (twice or three times the amount) from a sale before the common shares receive anything?

Will you be happy at your finish line?

Berkonomics

If you own a significant piece of the business, is this a time to consider planning an eventual exit or liquidity event? The liquidity event and beyondHave you figured out what you want to have, or to be, when you reach the end of your personal run in this business life? It is a fair question. Most of us work in our businesses, either as managers or owners, and rarely step outside to think about how this will end in a perfect world.

Are you thinking of the end game when managing your business?

Berkonomics

The liquidity event and beyondEver think about growing your business with the plan to sell it someday, cashing in on your hard-earned work over the years? Or if you’re an employee with stock options, are you aware of the increases in value you can make with your efforts? Then again, you may be an architect or doctor or other professional managing your. Dave’s book on exits. See [link] or amazon for this and more from Dave.

Avoid the race to zero…

Berkonomics

Protecting the business The liquidity event and beyondWhen do you sell your company? Obviously we all want to sell at the top. And there is the problem. How do you know when you are at or near that right point to sell for maximum value? Those of us in the business of calculating (guessing) this mythical peak in value often make the same mistake as our entrepreneurs.

The most satisfying life journey is never about the money.

Berkonomics

And yet, as I recall the greatest thrills, the memorable events, the best of memories, almost none are about the money. You’ll quickly be drawn into the governance of the organization and introduced into the process of discovery, coaching, leading deals, herding investors, serving on boards and helping entrepreneurs toward liquidity events. The liquidity event and beyondAllow me to reminisce. This is the final post of this cycle.

Turning out the lights is a type of exit.

Berkonomics

Pilot-authors tell their stories in the first person, and all of us readers slow down to think while reading of these events, wondering “what if” or whether this could happen to me. General The liquidity event and beyondIn my life as an early stage investor, I’ve been closely involved with so many businesses, there were bound to be numerous stories of failures, hopefully from which to learn lessons for all of us as we go forward.

Sell when growth is high, even if cash flow is low.

Berkonomics

For high growth ventures being groomed for a lucrative liquidity event, this is usually a wise choice, presuming additional growth capital can be successfully raised on agreeable terms. The liquidity event and beyondDave’s note: Our guest author this week is John Huston, founder of the 300+ member Ohio TechAngel Funds and a past Chairman of both the Angel Capital Association and the Angel Resource Institute. . By John Huston.

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Missed Expectations and The Eighty Percent Acquisition Rule

Berkonomics

Email readers, continue here…] As we move down the chain of experienced buyers, the problems of underestimation of capital, customers who drifted away from the acquired company, key employees who found the new enterprise a culture too different to endure and left, and other difficult-to-plan-for events overwhelm the majority of acquired companies, resulting in less revenue, less profit, and far less growth than forecast during the buyer’s due diligence.

Missed Expectations and The Eighty Percent Acquisition Rule

Berkonomics

Email readers, continue here…] As we move down the chain of experienced buyers, the problems of underestimation of capital, customers who drifted away from the acquired company, key employees who found the new enterprise a culture too different to endure and left, and other difficult-to-plan-for events overwhelm the majority of acquired companies, resulting in less revenue, less profit, and far less growth than forecast during the buyer’s due diligence.

Can you list ten buyers for your business?

Berkonomics

Most entrepreneurs and certainly all investors would like to see “a positive liquidity event” (a good sale of the business) someday. Then I guide the group to focus upon column three, ignoring the obvious gain our company would make in liquidity (cash) to shareholders. Not only will group focus upon the possibility of a liquidity event, it will begin to focus upon a number of possible buyers. The liquidity event and beyond

Exit timing and price: WHEN to sell? How long does it take?

Berkonomics

His Strategic Exits Corporation provides M&A advisory services, and he is much in demand as a speaker at angel and entrepreneur events worldwide. – Dave. This is, in part, because the market for entire companies is much less ‘efficient’ and therefore more susceptible to changes in sentiment and liquidity. The liquidity event and beyondWe are pleased to host Basil Peters, perhaps the best known name in the world of early stage company exits.

Will your company’s sale be celebration or silence?

Berkonomics

The liquidity event and beyondFirst, there are at least three types of exits. I’ve been involved with well over twenty successful exits and four initial public offerings over the years, some of them with monstrous gains, some more modest. Then in addition, there are the exits that returned some portion of capital, but nothing more.

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Money is not the only measure of success.

Berkonomics

Email readers, continue here…] So, if that day does come when you have sold the business or come into a financial windfall, I propose that there are few times in life when the opportunity opens to look outward, to participate in charity events, extended family vacations, community boards, and even coaching other entrepreneurs. The liquidity event and beyond

Non-competes, gray areas, and salvaging a failed purchase

Berkonomics

Depending upon others Protecting the business The liquidity event and beyondLast week we introduced the subject of non-compete agreements. Let’s dive a little deeper and present some “gray area” scenarios to consider. Then we’ll address the success or failure of the buyer with your product… First the obvious case in point. What if you are the seller of a previous business or shares amounting to more than an insignificant percentage of a previous business?

Non-competes, gray areas, and salvaging a failed purchase

Berkonomics

Depending upon others Protecting the business The liquidity event and beyondLast week we introduced the subject of non-compete agreements. Let’s dive a little deeper and present some “gray area” scenarios to consider. Then we’ll address the success or failure of the buyer with your product… First the obvious case in point. What if you are the seller of a previous business or shares amounting to more than an insignificant percentage of a previous business?

Angels and VCs: Don’t be greedy even if you can.

Berkonomics

Sometimes the end game or sale of the company is not a happy event for the early investors, including the entrepreneur or the founders. Most sophisticated investors will take either a promissory note or preferred stock, both of which come before founder or management stock in a sale or liquidation. Further, preferred stock holders can be recipient of accrued dividends in a sale or liquidation. The liquidity event and beyond

Everyone wants to leave a legacy.

Berkonomics

And once a month, while watching TV, I spend part of an evening writing personal messages to each birthday employee, recalling an event or complimenting a behavior or success. Even today, years later, I am met at industry events by former employees with a common refrain, “Our company was the best employer I have ever had, before or since.”. Depending upon others The liquidity event and beyondBe honest now. Have you ever thought of what legacy you’ll leave behind?

Nothing commands a higher multiple than hope!

Berkonomics

The inciting incident in a movie is the event at the beginning of the story that causes the hero’s life to be completely transformed and irrevocably changed, and makes the whole story unfold. I thought of this in a recent liquidity event in one of my portfolio companies. The liquidity event and beyondDave’s note: Guest author, David Steakley returns to explain his theory of exit valuations.

Look for your strategic buyer first.

Berkonomics

The liquidity event and beyondDave’s note: John Huston is founder and past manager of the 300+ member Ohio TechAngel Funds and a past Chairman of both the Angel Capital Association and the Angel Resource Institute. . By John Huston. While you are busy building your high growth venture, you may have occasionally thought about which large companies might be the ultimate buyer of your company – a buyer that could optimize your idea, customer base, and team.

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Everything you do adds or reduces company value

Berkonomics

The liquidity event and beyondEach decision you make to commit resources – your money or your use of corporate or personal time – affects the future value of your business. Minor decisions, such as replacing employees who have left the company or replacing equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this test.

Timing your exit – Don’t ride it over the top.

Berkonomics

The liquidity event and beyondDave’s note: For the second time, we invite Basil Peters, author of “Early Exits,” back as our guest – to provide more of his insight into the “when” to exit by selling your business. In future weeks, we’ll add the voices of other well-known professionals in the field of exits to my own, and try to give you a compendium of useful advice in the process. . By Basil Peters.

Entrepreneurs: Take the time to celebrate your exit.

Berkonomics

The liquidity event and beyondWe come to the end of this cycle of insights with a thought about how you might view your successful exit from the company you have spent so much effort to build. You’ve worked hard for years to reach the payoff, and the money sure looks good as you contemplate the wire transfer to come, and then watch your bank account fill to a level you only dreamed of during those rough cash flow years.

Flippers vs Keepers–At times earnings don’t matter

Berkonomics

Betting on the traditional public stock market speculator’s “greater fool theory” has been just plain wonderful for the owners of the Flippers, as aggressive acquirer’s value determinations are based on future events, rather than achieved profitability and present balance sheet values. The liquidity event and beyond

Envision the end game. Advance toward the goal.

Berkonomics

But most of us dream of selling the business someday for lots of money and building our wealth upon that event. It will help you to explain the value of your business to potential investors and certainly help focus your efforts as you advance toward that goal of a liquidity event in your future. The liquidity event and beyond

Entrepreneurs do not easily retire.

Berkonomics

Next week, we begin again with new insights from startup through liquidity event, including guest postings by some of the nation’s best known angel investors and entrepreneurs. The liquidity event and beyond This is the final posting in this cycle. Purchase two years of these insights in a single book, ADVANCED BERKONOMICS, for yourself or as a gift.

Failure is the greatest of teachers.

Berkonomics

The liquidity event and beyond Not all companies are successful. The end game can be a failure of the business. In fact, many angel investors or venture capitalists look for and respect the lessons learned by entrepreneurs that have survived a failed business. The key question is how did the entrepreneur fail? And then: What lessons were learned from the failure?

A million things can kill the deal.

Berkonomics

Paying commissions to undisclosed third parties in order to obtain deals, hiding or entering misleading financial data, associating with anyone with a past SEC suspension, and many more “gotcha” events, qualify as strong deterrents to a good closing. Events that you cannot control such as changes in the buyer’s circumstance, a drop in the market price of the buyer’s stock, a bad quarter at the buyer’s shop, all can contribute to abandonment of a good deal.

Do you engage an investment banker?

Berkonomics

The liquidity event and beyond Many CEOs have asked me if I felt an investment banker adds value if the buyer has already been identified. Investment bankers sometimes slow the process by requiring a “deal book” to be prepared containing considerable information about a company to help a buyer. Deal books are expensive to create.

Provide for succession well in advance of need.

Berkonomics

The liquidity event and beyond When we are young and early in our business lives, we feel infallible to the degree that we do not think of what might happen if we die while in office or decide to leave the company for any reason.

Start a deal room and keep it current.

Berkonomics

The liquidity event and beyond Maybe you have not heard the term, “deal book.” That’s a comprehensive piece on a company for use by a buyer in determining fit. A “deal room” is an electronic or physical space dedicated to storing the massive amounts of data to be used in due diligence by a buyer, lender or by an investor. Deal rooms contain access to or copies of all significant contracts with suppliers, customers, consultants, and others.

The most satisfying life journey is never about the money.

Berkonomics

And yet, as I recall the greatest thrills, the memorable events, the best of memories, almost none are about the money. You’ll quickly be drawn into the governance of the organization and introduced into the process of discovery, coaching, leading deals, herding investors, serving on boards and helping entrepreneurs toward liquidity events. The liquidity event and beyond

The muted thrill of the deal closing.

Berkonomics

But the closing was such a non-event that you wonder why people even call it a “closing.”. For those of you who ever experience the muted thrill of today’s electronic closing, you can give a nod to those days when the smoke-filled rooms were real and the tension palatable, when a closing was a face to face event. The liquidity event and beyond

Create equity value with every step.

Berkonomics

Positioning The liquidity event and beyondYou may be an architect or doctor or other professional managing your business, knowing that the end game value of your client or patient list is small and not easily transferred to any buyer without attrition.

Don’t be greedy even if you have the power.

Berkonomics

Sometimes the end game or sale of the company is not a happy event. Is there a liquidation preference in place where the preferred investors can take a multiple of their investment, (twice or three times the amount) from a sale before the common shares receive anything? The Trados Decision (Delaware Court of Chancery) protects the common and early stage investors even if the late stage investors can claim all from a sale with their liquidation preferences.

List ten companies that could buy your business.

Berkonomics

Next, have the group focus upon column three, ignoring the obvious gain our company would make in liquidity to shareholders. Email readers continue here.] The magic of this exercise is not only in the organization of group focus upon the liquidity event and possible buyers. Positioning The liquidity event and beyond

Think of your exit as you commit your resources along the way.

Berkonomics

The liquidity event and beyond Each decision you make to commit resources affects the future value of the business to some degree. Minor decisions, such as replacing employees who have left the company or equipment needing updating, are usually considered operational in nature, and unless the business is changing direction, not relevant to this analysis.