Founder Exit Negotiation Tactics for Better Returns: A Guide by Evolve Venture Capital
Exiting a startup is often viewed as the final reward for building something for many years. Nevertheless, negotiating a founder's exit can be a complicated and painstaking process. Founders can encounter a maze of financial, emotional, and strategic dimensions. In this e-newsletter, we will discuss key tactics for negotiating a founder's exit for more favourable returns. These tactics can be applied to negotiating acquisitions, mergers or initial public offerings (IPOs) and can help assure that a founder is paying attention will maximize their exit value.We will also remind and/or mention how Evolve Venture Capital can help them in this important phase of the process.
Negotiating a Founder Exit
The following are simply a few pain points a founder may experience when negotiating their exit:
Emotional Detachment: Founders oftentimes invest their blood, sweat and tears into a startup, making it difficult to separate intellectually during the negotiation and approaching the negotiations objectively.
Unrealistic Expectations: Sometimes, founders will have high expectations of their eventual exit that don't line up with market realities.
Uncertain Strategic Direction: After the exit of the founder, the future "strategic path" of the company can be uncertain which might impact negotiations.
Investor Alignment: Founders can find it difficult to juggle the expectations and interests of numerous investors.
Key Negotiation Tactics for Better Returns
1. Understand What Motivates The Buyer
Understanding what motivates any buyer will give you leverage. For example, if the buyer is an acquisition company with an immediate agenda to gain access to new customers and markets in a short time frame, you can leverage that time-sensitive motive to raise your price because you can show your readiness for integration. Once that motivation is understood, it can assist in preparing your case for a higher asking price.
2. Anchor Your Expectations
You should anchor your asking price high. By doing this, you can cement in their mind how you value your business and manage their expectations, giving you room to negotiate the price. The goal is to push the final deal price higher than you would without using an anchor expectation.
3. Make the Buyer Compete
You can create some competitive noise by engaging with multiple buyers (a good practice anyway). For example, after disclosing a second serious bidder to another bidder, company X ended up with a final price 20% higher.
4. Remind Them What Makes You Unique
You sometimes need to remind buyers to understand what makes your business unique. For example, Startup Y used its unique patented technology as leverage to negotiate a sale price 30% higher than the industry average. Sometimes a unique differentiating factor can speed up a negotiation process.
5. Use non-monetary levers
There are times your buyer will find it more attractive to provide their employees a future in their company through an employment contract or some sort of royalties.
6. Leverage Data
Robust financials and a comprehensive plan can substantiate your valuation. For example, Company Z's presentation of a thoughtful five-year growth plan led to a selling price that was 25% above initial offers. Data-driven negotiations bring credibility and confidence to the table.
7. Timing the Exit
Timing is everything. The best time to start the exit process is when both the market is favorable and the startup is in a good financial and operational position. Exiting too early or too late could have a major impact on the valuation and terms.
8. Organization for Negotiation
You should have an effective team engaged in negotiations to support you in different aspects of the business (e.g. finance, operations, legal). Having an effective team will help your company stay focused during negotiations and work together without conflict.
9. Managing Investor Expectations
Align investor expectations early in the process in order to prevent issues with their expectations during negotiations. Open discussions can ensure that the investors' needs are considered in light of the overall needs of the startup over the long-term.
10. Justifying Startup Valuation
You should be prepared to defend your valuation based on good financials, market potential and growth metrics. Good validation of your valuation puts you in a strong position in the negotiations.
How Evolve Venture Capital Can Help
At Evolve Venture Capital, we know how difficult and complicated it is to negotiate a founder's exit. With years of experience in venture capital and strategic exits, we can help in many ways:
Strategic Advice: We’ll give you strategic advice on the negotiation process and how to achieve the best value on your exit.
True Market Insights: Our insights on the market will give you a clearer view of buyer motivation and market condition, allowing you to negotiate from a better standpoint.
Response to Investor Expectations and Agreement on Exit: We can also help with your investor relations by managing expectations and alignment on your exit.
Valuation and Negotiation Strategy: We have a data approach to provide support for how you will support your valuation and your negotiation process in order to have a strong basis to negotiate.
Conclusion
Exiting a founder is an important process in the life of a startup. By using a strategic process, leveraging your strengths, and understanding what motivates buyers, you can be positioned to yield better exits. Evolve Venture Capital is here to help you through this process, offering strategic assistance, buyer insights, data, and the leverage you need to execute your founder exit. Reach out today to learn more about how we can help you execute your founder's exit process confidently and systematically.
