Take a listen to the latest episode of the Organize Chaos podcast with MATH Portfolio company CEO, Chris Ronzio and Troy Henikoff. MATH made its first investment in Trainual in 2019, and Troy currently sits on the board of directors. In this episode, you can hear the story of how Trianual was built, how we met Chris, and some background on Troy. You can find this episode wherever you stream podcasts or here: Spotify, Youtube, Trainual.
Time to Quit Part II: When to Go All In on your Startup
Part II
This is the second part of our 7T framework. For Part I, check out the post here.
Truth: (A tracked metric that is an honest measurement of progress)
One of the dangers of being a founder is drinking your own Kool Aid. Let’s face it, founding companies suck.
No, I mean it - you are constantly looking for more resources, you are underpaid, underappreciated, and underslept. Your customers tell you that you need to do better, your days are long, and success seems far away.
In those dark days, you need a light that keeps you going, and there is no brighter light than progress. Progress is motivating. Progress lets you know that there is only one step in this journey that matters: the next one. If you can see how far you have come, then you can imagine how far you will go.
However, there is no way to do that unless you have an objective measurement of what success looks like. Think of this as a weight loss journey throughout which you need to weigh yourself Every. Single. Day. But you need to be looking at the progress over time. There will be ups and downs. Progress is not linear, but without the measurement, you won’t be able to see the trend line. Your investors are going to be backing that trend line above all else.
This might be revenue for your startup, but it likely isn’t granular enough to tell you a story. This can be cash in the bank, but honestly, you are in a good place as long as that’s going up. Money alone doesn’t tell you enough about strategy.
Think about conversion metrics. These metrics resemble some action divided by outcomes: clicks becoming customers, current customers willing to pay you more over ones that are leaving you, your customers leaving five-star reviews after you completed your jobs with them.
I call this an alpha metric, a constant measure of truth that tells you whether your actions today are getting you closer to your goal or not. Use that to adjust course. One of your superpowers as a small company is your ability to move FAST. Unless you are constantly iterating, you are leaving money and progress on the table.
Additional questions to explore on this topic are:
What are effective tools to keep track of your core metrics?
What numbers matter universally, and what numbers are useless?
How do you set up small experiments to demonstrate progress?
Who “owns” this metric across your company?
What is the right amount of progress with your alpha metric that tells you your idea is good enough to quit your job for?
Target: (Thesis, a WHY, a purpose that you are willing to spend years working on)
You should always have a goal that you are rallying towards. This includes your team (who you hire next), your customers (what they pay you for next), your product (what feature you build next) and obviously the metric you are tracking.
However, you should also have a mission. A raison d'être, as the French put it: a reason to exist. A singular purpose that you are willing to devote your life to.
I’m not talking about making a living and generating wealth, I’m talking about a reason to get out of bed in the morning. Something to care about, something greater than you that you can be a part of. A change that you want to see in the world. A wrong that needs to be righted.
Great companies are founded by missionaries, not mercenaries. You will need a fanatical belief that you deserve to exist, against all odds. You won’t get there simply by wanting more money or fame. That’s just not authentic enough to get around.
This mission is your single most powerful recruiting, sales, and motivating tool. It’s the call to arms that attracts people who want you to be successful. It’s because of this mission that you will draw up the courage to steer out of the known path.
This is an itch for change. This is an urge for progress. This is a calling towards a better future for people you care about.
It’s different for every founder - the right company for you to start is completely different from mine, and that’s a wonderful thing. This is where startups get personal. What is a mission you are willing to devote your life to? The answer looks like a concept called founder/market fit. It’s the signal that out of all the people in the world, you were the one called to build your startup.
A lot can change over time–your tech, talent, customer profile, even cofounders come and go. However, what makes a company a company is the belief in the mission that everyone can circle around. This is essential, and deserves deep reflection before you make the leap to becoming an entrepreneur.
Additional questions to explore:
What are exercises to define a company mission?
What is the difference you make in your customer’s lives as a result of your product?
How can you create a narrative that ties together all of your efforts towards a mission statement?
What does a great mission statement look like?
How can you define cultural values around your mission statement?
Time: (Breathing room. Savings.)
You need money set aside that you can live on until your startup can start paying you. Ultimately a deadline in which you will quit unless you are successful.
You need a deadline. You need a time slot that you are willing to do anything in, but anything above that is self-destructive. Especially as you go later in life, startups can wreck everything you have built so far: your savings, your relationships, your health.
You need to define what you are willing to bet before you start. Usually this is as simple as putting up a certain amount of money in savings, enough to live comfortably but not luxuriously. You start by making a personal budget and dividing your monthly needs with how long you can survive without progress. This gets way more complicated once you have others you need to take care of, such as children or aging parents with healthcare needs.
This timeline can be extended indefinitely once your startup starts generating income; that’s why it’s so critical to reach revenue as fast as possible. You can use that same time window to raise money from investors, but it becomes so much easier to find investors once you have a growing list of customers. It's almost not worth it to waste your time doing anything but finding early signals of traction.
You won’t be successful if you are worried about rent. Period. Once you run out of your savings, taking additional gigs or side hustles puts you into a negative feedback loop. Because you spend less time, you lose out on progress, and because you lose out on progress, your startup’s survival becomes even more difficult. This death spiral is best avoided with an honest conversation about resources and time.
This isn’t to be confused with timing - most great ideas don’t look like great ideas at the time. Perfect timing means early, so waiting for the right time is usually not a great strategy. This simply means having enough breathing room as you figure things out.
Of course, ideally your startup starts paying you from day one. This is why expert founders will likely work nights and weekends on their checklist before they make the entrepreneurial leap. It’s so much easier to switch ships when the second one is moving already. Ideally, your startup is able to start paying you survival money immediately because you have secured early adopters, a reasonable first product, and team members who are helping you get started.
Remember that this isn’t meant to be a full replacement of your current income, or your potential income if you were to follow a professional commitment. Most startups end up paying their founders and early employees below market salaries for a while, and make up the difference with equity ownership.
Being generous with how much time you need is super important, because when that time runs out, you need to change directions with your startup. That’s the ultimate signal that things aren’t working out, and it’s best to cut your losses early and move on to the next thing (part of the same startup or otherwise). Use this time constraint as an advantage. Deadlines move people, and there is no immediate deadline greater than covering your basic needs.
Additional questions to explore:
What does it mean to be “ramen profitable” and why does it matter for your startup?
How do you put together a personal budget with basic needs that can stay consistent?
How much time should you give yourself until you start making “survival money”?
How do you justify this early investment you are making in yourself?
Trust: (Belief in yourself)
After all of this scientific, measurable progress, here’s a totally unscientific faith that leads to success beyond your wildest dreams.
You need to trust that it’s all going to work out in the end. Startups are hard. This is going to be a bumpy ride, and in the early days, success will seem forever away. Don’t lose faith. It takes years–sometimes decades–to become an “overnight success.”
There are LOTS of things outside your control and comfort zone, and the one thing you can control is your attitude. Have the conviction that your success is a given–that the universe wants you to succeed in your mission.
We never see the real struggle of successful entrepreneurs. Most of the journey isn’t glamorous. We all go through the dark days, the moments of doom, the feelings of loneliness and despair. It’s the great ones who face the struggle and continue with the journey who end up being successful in the end.
As Ben Horowitz eloquently articulated, the struggle is what keeps you up at night. The struggle is the emptiness in your stomach when your hot shot hire quits. The struggle is when your champion customer asks for a refund. The struggle is the guilt you feel when you need to lay off half your company. All part of the journey, all part of the playing field.
All of the items in this list are elements that improve the odds, but you still need to play the hand that you are dealt. And no matter how great the hand is, it’s still a gamble to start a company. There is no shortcut to success, you need to grind to make this happen. You need to crawl through a mile of mud to come out the other side. You need to trust yourself that it’s all going to work out in the end. Without this, you won’t make it to the finish line.
At this point, there is only one question that matters:
Do you believe in yourself to win against all odds?
Time to Quit: When to Go All in on your Startup
This is Part I in a series.
It’s hard to know if/when you should quit your day-to-day responsibilities to go all in on your startup. Whether you are a student or an executive in a tech company, we all struggle with this core problem: Is my startup good enough to quit what I have now? Unfortunately, too many people YOLO into a startup and hope for the best, while others wait for the perfect moment to get started.
The reality is that the only way to know is to do it - give it a try and see. However, there are things you can do WAY before you quit to even the odds and stack the deck in your favor. By making progress in these elements before your journey starts, you greatly level the playing field.
I want to get something out of the way right from the start: raising dollars from venture investors is not a good first step if all you have is an idea. Unless you are a super seasoned operator, the risks are simply too great. You may have a shot at getting into an accelerator if you have subject matter expertise, but raising venture dollars is going to be a tough bet. In addition, if you aren’t all in on your idea, why should the investors be? Venture funds get to make a handful of investments per year, and a founder who isn’t committed to the idea is an easy pass.
Think of this as a checklist, the more you have completed, the more you are likely to secure investors who add value to your journey. Venture is a risky business because there are always folks who are willing to make earlier bets. In some cases, elements such as a superstar team are enough to get an investment, but the goal isn’t to raise a round–the goal is to build a solid business for the long term. (It goes without saying that the terms of your round will be significantly better if you have more from the list below.)
I came up with 7 T’s - elements that you should have in your back pocket. The first part of this post will dig deeper into the first three: Team, Tech, and Traction. The second part will discuss Truth, Target, Time, and Trust. Let’s dig in!
Team: (People: early employees, cofounders, mentors, investors, advisors)
You need to have supporters. Whether they are cofounders, mentors, early employees, initial investors, or an unofficial board, you need people in your corner. These are your allies–folks that want you to win with your idea.
Starting something early is a team effort, and a team comes before the good idea. Talent is attracted to good ideas. If you think your idea is the next best thing since sliced bread, yet no one around you wants to join you, you should question that idea. Especially if you are surrounded by people smarter than you, you want their honest input in what you are doing.
Finding a cofounder seems like the first step, but that’s a HUGE commitment. Way before a cofounder, finding your allies helps you a great deal. They will push you to hone the idea, and it is way better to recruit someone from that group to be your cofounder, rather than hope that the first person you decide to work with is magically the best partner for your startup.
For instance, if your startup is in the food space, you should try to find an already successful food entrepreneur in the industry, preferably with a few successful exits under their belt. Share your ideas with them, and ask for their guidance and support. They likely have made way more mistakes than you, and can give you concrete advice on what to do, and more importantly, what not to do.
Their advice comes first, and if you find that useful, they will appreciate the relationship, too. It’s way easier to turn that person into an early investor or a powerful recruiting tool for their past team members.
At some point, you’ll need to start paying people. However, early on you need to be the missionary that gets others to believe. Find people who are as passionate as you are about the problem you are solving for your future customers.
Bottom line is this: it all starts with the people. You want to be part of an early cofounding team that shares this feeling: “Everyone in here is smarter than me. Everyone here is working harder than me. I need to step up to the plate to make sure I deliver.” Imagine if everyone on that team, in their respective fields, feels this way towards the others. This level of expertise feels like you are part of the avengers initiative.
Ps. Honestly, if you have a solid enough team, that is more or less enough to get you started… certainly enough to raise a preseed round to get things off the ground.
Here are some follow up questions worth exploring:
How do team members earn equity early on? How are you vesting it?
What are methods of receiving feedback with discipline?
What questions should you ask each other before committing to becoming cofounders?
How do you keep each other accountable, while respecting the boundaries of each other’s expertise?
How do you handle compensation when you have no funding or revenue?
How do you get someone to quit their job to join your startup?
Tech: (Product, means of delivering value to your customers.)
A product doesn’t make a business, but there is no business without the product.
You need to have a product that serves your future customers! I use the word tech deliberately. It doesn’t have to be fancy tech - if you are starting a cookie business, your oven is your tech. However, you need to be able to deliver value, or at least have a clear path to delivering value with technology and a product you understand.
The early version of your business should be able to deliver value without being fancy. Imagine making a painting tell a story, just by using stick figures. Imagine a melody, no more than a riff, waiting to become a song. This is critical, because no matter how much you plan, the moment your product hits the real world, it will need to change. It’s imperative that you get your idea out fast with a version that you aren’t proud of, just so that you can ask your customers about their experience. If you ask for them to pay, they will even be more honest.
Finally, this also weeds out ideas that you have no clue about. I hate to break it to you, but if you have never been involved with a hardware project, it's probably not a good idea to build a cell phone as your first startup. Being an outsider to an industry or a market can be an asset, but having no clear plan on how long it’s going to take you to develop an idea (or how much it’s going to cost you) is wasteful.
We can spend more time exploring the questions below:
How do you build cheap prototypes (both in time and money) that validate key assumptions on your idea?
What are effective ways to manage a technical team if you are a non-technical founder?
How do you avoid problems downstream by making effective product decisions in the early days?
How can you use the “jobs to be done” framework to ensure your product is inevitable?
When tech doesn’t work in the early versions of your product, how do you manage your early adopters?
Traction: (Early customers that pay a fair price for the value they receive)
You have a team, and at least a theoretical path to making a real product. Now you need sales. Most people wait until they have a “real” version of their product before they talk to their customers.
If there is one thing you take away from this post, it is this: There is nothing–and I mean nothing–more important than early sales to validate that you are onto an idea worth quitting your job for.
Whether it is a successful Kickstarter campaign, thousands in presales, folks signing up for pilots or early deployments, or hundreds of people on your waitlist waiting to sign up for your iOS app - you are onto something. First and foremost, it means that you will have a hungry group of incredibly motivated people willing to give you honest feedback.
This is invaluable because unlike your early customers, most people who want to support your startup will be nice to you. People you are already close to, people that love you, more often than not, aren’t amazing startup operators. I’m talking about your friends and family - it’s tempting to give feedback that lives on both ends of the spectrum. They are either:
Overly protective and want you to never venture out of the safe path,
Or they are overly supportive and want to give you a pat on the back, even when your idea is stupid.
Early customers don’t care about your feelings - they simply want their job to be done. Think how bad they must need your product. They are willing to take a risk with an unproven founder and a brand they don’t recognize. The fact that they signed up is an amazing signal. They are telling you that they have an urgent need that they are willing to pay to meet.
If you fail on your promises to them (i.e., miss your deadlines, compromise on features, deliver a buggy experience), they will let you know, immediately and effectively. I’d rather listen to my early customers than anyone else to give me product guidance.
There’s a clear art to how you do that. The old saying by Henry Ford is accurate: “If I asked people what they wanted, they would have said a faster horse.” (In effect, they would be right. A car is a faster horse after all.) I recommend the Jobs-To-Be-Done (JTBD) framework pioneered by Clay Christensen and Bob Moesta to interpret early customer feedback into a winning value proposition.
Above and beyond feedback, this is also your path to a salary. It’s way more reasonable to assume that your first paycheck from your new startup will come from a customer, instead of an investor. So work for it, and give yourself the flexibility that allows you to take a detour from the proven path.
Finally, early customers show that whatever means you used to get them can likely get you more customers down the road. Whether you are going to grow with your profits or an investor who can fast track you for a price, you will need a credible story on where your next set of customers will come from. This means more cash to grow, and more feedback to make a better product - all good things.
Here are other questions worth exploring as part of traction.
How can you create a trusted partnership with your early customers?
How do you price your product for the first time?
What are effective ways to get customer validation that aren’t measured in dollars?
Who should lead your early sales efforts?
What happens when your early adopters leave you?
Stay tuned for Part II in this series to read the read of the 7T framework on when to go all in on your startup. What do you think of the first 3 considerations? Let us know in the comments.
Most of the Journey is Still Ahead
Below is an excerpt from “Exit Right: How to Sell your Startup, Maximize your Return and Build your Legacy” This is a part from the Epilogue, Mark’s wisdom for all founders who recently had an exit.
Don’t make serious financial commitments for at least six months after the close
Brad Feld wrote eloquently in his book Startup Life his advice on what to do when you find yourself staring at your checking account and there is more money in there than you ever imagined.His simple guidance is to not do anything for at least six months. “People will come out of the woodwork to help you — financial advisors, friends, family, and other successful entrepreneurs who have already been through a big exit of their own. The advice will come fast and furiously, and you will feel the pressure to figure out where to put the money, how to invest it, and whom to hire to help you. Don’t succumb to this pressure.”
According to Brad, there is no way to filter out who has your best intentions at heart. Some will be there to genuinely help; some will be there for themselves. We agree, financial advisors can simply see a new client with little experience, or family members might view you as deep pockets that can help bail them out of their financial challenges.
Simply put, by taking a deliberate break from making a decision, you can collect data dispassionately, seeing what the landscape entails, and letting the emotions settle before you start making commitments.
Be honest with yourself about your track record.
Your track record will depend upon the point of view of who is looking at it. Remember, you have multiple stakeholders.
• Your investors will look at how much they received at the time of closing and how you looked after their interests during the process. Be honest with yourself (assuming you would want to work with them again); how willing will they be to back you in your next company?
• Your employees will see how generous you were at the time of closing; did you go to bat to protect their jobs during the transition and fight for their rights inside the new company? Will they come work for you again? What is the future value of working together with a team that you trust?
• The corp dev leader and the person who championed the deal to acquire you, how will they look at this deal with the perspective of time? Did they stake their reputation on doing your deal? Was it a feather in their cap, or something to be ashamed of? Do you think they will want to do business with you again in the future?
There’s the story you tell everyone, and then there’s the real story of how others feel about you. Do everything in your power to ensure that those stories are one and the same
Improve the M&A process of your acquiring company
No transaction is perfect. There are always ways to improve the process. This is actually how this book got started. Mert went through a transaction with several learning moments. Mark coached him to write them down, in the spirit of sharing these learnings with his new company. So that (at the appropriate time) when they make their next transaction, it can go smoother for everyone.
We like to map out every process both functionally and — even more importantly — through the lens of an emotional roadmap. You’ve heard of a product roadmap? Do the exact same thing but map out the emotions. How does the recipient on the other end feel in each step of the process/journey? It’s an incredibly useful exercise to go through. How do you want people to “feel” as they go through an M&A experience with your company?
Remember to be humble. Not everyone is open to feedback. In the spirit of trying to improve their process, because you have fresh eyes (and sometimes raw feelings), you can provide valuable insights in the spirit of making it better for the next transaction.
When you leave, leave well.
Look, we understand, most entrepreneurs aren’t built to be in larger companies. Going from being your own boss to chafing against a rigid bureaucracy takes some getting used to. We urge you to be patient. Larger companies have much they can teach you — so hang in there for as long as you can and — importantly — as long as you are contractually committed to do so. Hang in there for your employees and customers who are depending upon you.
But sometimes you just have to go. And when you leave…leave well. Be open. Be transparent. Give plenty of notice. For goodness’s sake, whatever you do, try your hardest never to burn bridges. Maintain the integrity of those relationships you care about, and ensure your reputation is solid and that you can hold your head high.
Relationships matter; turns way more than you think
Who knows what your future will hold? With a successful track record, some money in the bank, and some real operating knowledge and wisdom, where will that take you? Whatever path(s) you end up pursuing, you can bet that some of the people that you have interacted with in this company will intersect with you again down the road.
As VCs, we love to see exec teams who worked together previously, had a successful exit, and through that pressure cooker, bonded to the extent that they want to continue on together, as a team. Really says a lot about the quality of trust between them and the mutual confidence in each other’s abilities.
Investors love to invest in people they already know and trust. Corp dev leaders like to invest in people they trust. Strategic channel partners like to partner with companies led by people they trust. See a pattern here…
Relationships really matter. It is one of your principal assets. Manage this asset like anything else that is precious to you. You will be shocked how often you will run into people today somewhere in your future.
Pay it forward and be generous of time and spirit
You just had an exit. Hopefully, a life-changing event for you and your family. You took huge risks. Worked your ass off. Your actions put you in the position to finally cash out. The truth is, as we talked to dozens of CEOs — and as we have experienced ourselves — there is also an element of luck and timing involved. Karma just smiled down upon you. Now is the time to smile back.
Our collective job is to pay it forward. To make this world better off than we found it. Be a mentor to a struggling entrepreneur. You will have so much wisdom, insight, and real- world experience to share. Open up your network to help others. To the extent you can, invest back into deserving entrepreneurs. You are now part of the flywheel of success that begets success.
Stay humble and grounded
After having sold your company, you are flooded with many intense and competing emotions, and if it was a successful exit, then you are probably feeling pretty good about yourself. You want to climb the highest hill and shout out to the world at the top of your lungs, “Fuck you, world, I did it!” You should absolutely do that…in the shower, to yourself. Go ahead and indulge yourself and let it rip. It will feel great.
Out there in the real world, you will be asked often to tell your story. It will be so tempting to start off with the words, “Well, I…” Stop yourself. Practice the following… “It was a team effort. So many people to thank who made this possible…”
Additionally, we urge you to think carefully about courting or encouraging publicity. It’s no one’s business how much money you made, and there can be unintended consequences from broadcasting that information widely. When Mark sold Kinesoft to SoftBank in 1995, his neighbor was a journalist for the Chicago Tribune and asked to interview him about it. Next thing you know, the article is the front page of the business section, and his wife and family were caught off guard by the family’s business that was now being talked about among relatives and classmates in their Chicago suburban community. This was an unintended consequence that, in retrospect, he wished he had avoided.
Remember that credit travels down in an organization, while responsibility travels up. Resist the temptation to talk about yourself and what you accomplished. Talk about all the people who came together to make this possible and a success. In the event of failure, take ownership and move on.
Your success is a given. Your role is understood and assumed. You will actually build a much better reputation by being humble. This might come as a slight shock to you, but you are now a superhero to the next generation of entrepreneurs who will want to be and act just like you. Show them your better self. We know you can do it and can’t wait to hear the story of the right exit for you and the FAIR deal you made.
Get your copy of Exit Right today.
What is an M&A Term Sheet?
Below is an excerpt from “Exit Right: How to Sell your Startup, Maximize your Return and Build your Legacy” This is a part from Chapter 7, where Larry Chu, the Co-Chair of Global Tech M&A from Goodwin Procter Law, helps break down what’s inside a term sheet. This was originally posted on Mert Iseri’s personal blog here.
Getting to the term sheet is a real milestone. Most acquisition discussions don’t make it to the stage where a nonbinding term sheet is signed. There will be lots of discussions over the years to build up a strong rationale that justifies a price both sides are happy with. If this is a FAIR deal, prior to a written offer you should have had verbal alignment on the vision for the future, the timeline to close, and most importantly, the final price.
Take a deep breath here. There are many highs and lows in the startup journey, but this is a special one. No matter how you view it, it will be emotional to see a piece of paper that has the potential to create generational wealth. It’s OK to be excited, nervous, scared, or determined — we felt all those feelings too.
Despite the verbal promises you’ve already secured, nothing is real until things are written down. This is the phase when negotiating the particulars of the term sheet kicks into high gear. In order to negotiate well, we first need to learn more about what each of the terms means, what can and should be negotiated, and which points are not worth pushing back on.
When you receive the term sheet, especially if this is your first time, you are going to be experiencing wildly divergent emotions. Both elation and fear. The goal of this chapter is to arm you with knowledge so that when you sit down with your attorney, you will have a good foundational knowledge of what the terms mean and what is important.
We want to give special thanks to the Co-Chair of the Global Tech M&A Practice at Goodwin Procter Law, Larry Chu. As a partner with over $150 billion in transactions under his belt, he generously provided his wisdom in the making of this chapter. He is also an active investor, and we highly recommend working with someone extraordinary like him on your startup.
Ultimately, you, as the leader, need to give your attorney the right directions for what to focus on, and what not to squander time arguing about. The term sheet is by far the most important document in the whole transaction, and it is wise to treat it as such. It outlines the key terms of the deal, and done right, will become the foundation for a smooth process down the road. Signing the term sheet doesn’t mean you will close the final deal — it is usually nonbinding. However, it is the point of no return as it likely will commit you to negotiating exclusively with one party.
We know the feeling well. It is pure bliss to receive any document that says your startup is worth millions of dollars. The euphoria that comes from that tends to make founders overlook the rest of the document. The term sheet includes a LOT more than the final price in question. Here is an overview of what you should expect to find in a term sheet:
Price
a. Calculation
b. Front-end adjustments
c. Back-end adjustmentsClosing conditions and timeline
a. Necessary approvals
b. Due diligence checklist
c. Exclusivity and expiration datePersonnel agreements
a. Organizational structure
b. Governance
c. Retention tools
The fundamental differences between Letters of Interest (LOI), Term Sheets, and Closing Documents
An ideal term sheet sets the stage for the whole process of an exit. A letter of interest is simply a weaker term sheet with way fewer details, usually only indicating a loose timeline and price. The closing documents are outlined in the term sheet, and they get drafted once the term sheet is signed by both parties.
While the M&A term sheet looks similar to a financing term sheet, what’s inside is completely different. For the definitive breakdown of a VC financing term sheet, we recommend Brad Feld and Jason Mendelson’s excellent book that has stood the test of time, Venture Deals.
The M&A term sheet packs a punch in terms of the amount of detail in it and you should want it to — this is how you get full visibility into the material terms of your deal. Generally speaking, there should be no surprises, good or bad. Most often, the buyer will schedule a call in advance to walk through the key points and confirm that everyone agrees. It’s a practice that solidifies trust for both sides. Needless to say, founders should never sign a term sheet they don’t intend to finalize with closing documents. A signed term sheet means all the focus now turns to reflecting the agreed-upon terms to binding closing documents. If the deal falls apart afterwards, bridges are burned.
As a buyer, Gary Johnson always anticipates which parts of the term sheet the founders won’t like. He is a huge proponent of transparency and understands that the perception of a surprising negative term is likely a lot worse than what it actually means. More importantly, he believes that explaining why a term needs to be in there ahead of time helps founders get rid of this terrible feeling: am I getting screwed?
In 2019, Atlassian made a bold, unprecedented move for a seasoned acquirer. They published their standard M&A term sheet publicly and, in doing so, shared with the world what mattered to them most and, most importantly, why it mattered. (You can still see the term sheet itself if you search for the Atlassian term sheet.) Their efforts towards transparency should be highlighted and followed for everyone making an acquisition in the future.
Unfortunately, there is no standard set of documents companies use for acquisitions, since every situation, company, and strategic rationale for doing the deal is different. Picking one apart isn’t necessarily going to help the majority of the situations you can find yourself in, but it is worth familiarizing yourself with the general outline of information.
Instead of publishing a term sheet, we decided it would be much more helpful to share a framework of terms and questions you should familiarize yourself with before accepting your first term sheet. Our goal is to be as generic as possible here so that you can apply the details of your exact situation when the time comes. Then, the more details the term sheet can include, the better.
Remember, as time goes on, the ability to negotiate dwindles and the pressure to close increases with each passing day. The negative feelings that accompany any concession can tank the deal as a whole. Not to mention that changes after the term-sheet stage are not cheap. Once you are into due diligence and the drafting of definitive agreements, the legal bills increase exponentially for any modification. Our recommendation is to negotiate the term sheet in earnest, and as long as the terms are FAIR, sign it with the intention of closing the deal. In this stage, there are three main components in the term sheet you should pay attention to: price calculation, certainty to close, and personnel agreements. Here’s what you need to know about each of them.
The holy trinity of M&A term sheets: price calculation, certainty to close, and personnel agreements
Entrepreneurs should use these three buckets as a mental framework to define what matters to them: price, certainty, and personnel. Signing a term sheet and going into exclusivity with one party means you are foregoing the option to remain independent, raise additional capital, or evaluate other buyers. The details need to make sense!
The worst term sheets are skinny letters of interest — they only indicate price, or worse, a price range in consideration for the purchase. This is rarely the starting point of a FAIR deal. The buyer should have already discussed the rationale, integration plans, and internal alignment needs with the seller; therefore, there should be no issues putting down the important points that frame your deal. Remember that whoever drafts the final documents (most often the buyer) sets the terms. You have maximum negotiating leverage before you sign the term sheet. What’s not inside this document is likely going to be buyer-favorable in the closing documents.
Typically, the term sheet will be accompanied by a cover letter with a few paragraphs on the rationale for the acquisition. This is as important as the document itself because it confirms the document was drafted with the ultimate objective: to actualize the goals embedded in that rationale. This is the moment that will prove that the buyer has thought carefully about the deal and that negotiating will be done in good faith. After all, the shared objective belongs to both parties, and both of you should be motivated to make that happen.
This is a good start as a basic primer — In the next post, we will dig into the most coveted section, the price calculation!
The FAIR Framework for Acquisitions
FAIR Framework from Exit Right
This blog was originally posted on Mert Iseri’s personal medium page. Check it out here.
After countless interviews, we identified four common elements in what makes acquisitions work. These are the elements that founders and acquirers should focus on to maximize the value of any transaction.
We call this the FAIR framework. It’s what everybody wants, after all — a fair transaction. Founders want to be treated with respect and expect a return for their hard work. Acquirers want to avoid companies with skeletons in their closet or invest dollars in failed initiatives. In short, both sides want this to work out for the best: a scenario where one plus one equals one hundred.
FAIR stands for Fit, Alignment, Integration, and Rationale. Each element requires time and attention to develop. Here’s how each impacts the future of your company.
Fit: the connection from parallel company cultures.
Company culture is a powerful force. Culture is how people will act when no one is looking. It specifies the behavior that is tolerated and what gets promoted. A company is a collection of people and fit simply ensures that the two groups of people involved in the exit share a common set of values around their respective businesses.
A good demonstration of correct fit is the acquisition of Zappos by Amazon. Zappos was known for their customer-obsessed culture. Employees sent handwritten cards, spent hours chatting to a single caller, and even boarded flights to personally deliver packages containing misplaced valuables.1
Amazon shared their vision for a customer-first approach to business. They were so well-matched that Amazon’s Jeff Bezos mentioned he didn’t see it as an acquisition. Rather, he said: “I personally would prefer the headline ‘Zappos and Amazon sitting in a tree…’” — framing the transaction as the beginning of a romantic relationship. He was certainly correct in his assumption that it was the right choice for both cultures.
On the other hand, we’ve all seen how a bad fit can easily lead to disastrous deals. In 1989, Sony paid $4.8 billion in debt to purchase Columbia Pictures. Sony was a conservative Japanese technology giant, while Columbia Pictures was a fast-paced, US-based movie studio. Both companies had completely different operating cultures, and neither side had a plan for how to make them work together. After five years, Sony had written off $3.2 billion of its investment in Columbia Pictures. Not the future any of them wanted.
Cultural fit stems from developing long-term relationships. It is extremely important for founders to begin meeting folks in their target companies for this reason. There is a world of difference between an exciting first impression and a relationship of trust that develops over years. It is easy to feign fit in the short term, while it is difficult to maintain long-term.
Alignment: there is agreement among the key people involved in the decision.
It’s clear that both parties have multiple stakeholders that need to agree to the transaction. It’s important to note that alignment isn’t a point in time, but an element of the transaction that needs to be maintained. Clear communication, incremental steps to credibility, and most importantly, mutual trust make up the core components of alignment.
In the following chapters, we will see a master class in alignment in the way Pandora bought Next Big Sound from its CEO, Alex White. While it was Alex’s first startup, the board and the shareholders were in lockstep alignment. This was one of the key ingredients that led to a speedy decision and deal execution. We will also learn from serial operator Anne Bonaparte about how she struggled with a rogue board member who wanted to negotiate behind her back with the acquirer.
Founders should first ensure that there is alignment internally, meaning that the four key stakeholders from the startup’s perspective are aligned:
• Co-founders
• Board
• Investors
• Executive leadership
We recommend that all startups have an annual “Exit Talk” that acts as a standardized framework to ensure continuous alignment on exit expectations and timing.
Once the internal alignment is there, founders benefit immensely from determining alignment within the acquiring company in parallel.
Integration: there is a clear plan to integrate all elements of the business post- acquisition.
With every deal, the majority of the work that determines if the merger will be successful happens after the documents are signed. This means that there needs to be a plan for integrating everything: people, culture, technology, customer support, parking passes, you name it. Sometimes the task is mundane, like issuing employee IDs, and sometimes the plan is to do nothing.
A successful integration is intentional, with both parties paying attention to details at every step of the way. It is the founders’ responsibility to make sure there is a clear plan and purpose around integration, with key metrics to determine success.
Integrations are difficult, in part because there is so much to do tactically all without losing focus on the big picture. It’s a complicated process that will generate a lot of questions. The good news is that M&A teams appreciate founders who ask questions about what success looks like post-integration; it tells the acquirer that a founder is serious about creating shared value and getting the deal done. Don’t wait until the eleventh hour of negotiations to ask questions around integration. Once you start discussing a term sheet, it is completely standard to ask questions to clarify plans around integration.
A well-crafted integration plan is a critical element of a smooth transaction. Take the time to build it during the closing process, and revisit it post-transaction to ensure mutual accountability.
Rationale: the plan to create new value as a result of the combined capabilities.
This is the final element that determines the success and longevity of an acquisition. A strong rationale is the main ingredient for victory, and a weak one is often the culprit behind deals that end in defeat. The rationale is the core reason behind the acquisition that all parties will align with. And there needs to be a clear business rationale that convincingly predicts an oversized outcome that would not be possible if the two companies remained separate.
The starting point for the rationale is timing: Is now the right time to make this purchase? Is the buyer better off by partnering (becoming a customer or a distributor) or building their own competing product? Timing determines whether an acquisition happens or not. Further, the acquirer will need to have absolute trust in the fundamentals of the business in question.
Trust is created through a credible team, robust technology, and real customers — in other words, you need to create a mountain of evidence to breed confidence in the future plans. Think of this as a basic requirement. In order to even begin discussing a price, you have to be a trustworthy entity.
Assuming that the timing is right and your team is credible, then we can answer these critical questions: Why should this acquisition happen? What is the mathematical formula of the future value we will create together?
No matter how strategic, at some point in the future, the bill will come due. The acquiring company needs to financially justify their investment in the future. To do this, they design a rationale based on the future success that the two companies will drive together, instead of the current performance of your company. Remember that you are selling a vision of the future that happens to be backed up by your credibility. Founders need to deeply understand the acquirer’s business to articulate a defensible rationale.
Facebook knocked this out of the park with its acquisition of Instagram. It was clear that the Facebook team was falling behind on mobile user growth. The tech giant lacked the technology talent and the infrastructure to translate its web-based technology to the growing mobile market. Instagram was clearly ahead, and the rates of growth indicated that each passing day made the budding photo-sharing app more valuable.
The Instagram acquisition is a longer story that we will visit during Part 2, but suffice to say Mark Zuckerberg was initially considered a fool for paying close to $1 billion for the photo-sharing app. Nearly a decade later, Facebook makes over $20 billion in ad revenue per year from Instagram, nearly a fifth of all Facebook revenues.
While Instagram is the crown jewel of Facebook’s acquisition portfolio, not every megamerger means a successful future. One of the most visible examples of bad rationale happened in the largest acquisition in tech history — when Time Warner and AOL joined forces. While it made for a good headline, most of the operators working on the deal could not articulate why it made sense for the two companies to join forces.
The rationale is the most critical component of a transaction. Know that as the world changes, so will the rationale. It is critical to build the alignment around the shared objective; this will be the fundamental driver of the transaction.
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Have an Annual Exit Talk
This post is originally published on Mert Iseri’s personal medium page.
Below is an excerpt from “Exit Right: How to Sell your Startup, Maximize your Return and Build your Legacy” This is from Chapter 2, where we discuss the importance of having an annual “Exit Talk” to maintain alignment across your board and shareholders.
The foundation of all trust is open communication. We all know this instinctively, but we tend to forget it when we get busy. We prioritize other issues and forget to stay in regular communication with the important stakeholders in our organization. But you need to talk about selling your company with your stakeholders, often and consistently. Getting acquired is not a bad thing, after all — a successful exit is the desired outcome for most startups. What hurts is when the acquisition is a surprise — a distraction from the shared commitment everyone is there for.
Start a conversation about selling too early, and the shareholders will doubt the long-term commitment of the leadership. Too resistant to a sale, and the shareholders will grow frustrated with their expectations for a positive return. This is a tough balancing act, but it should not prevent you from discussing an exit at all.
Unfortunately, the conventional wisdom is for founders to virtually never discuss exits with shareholders. It is frowned upon to talk about the sale — investors expect the founders to constantly be focused on building an even bigger company until they are ready to cash out. The challenge is that if the founders are bringing up the sale conversation, it looks like they are interested in selling the company before the maximum value can be achieved. In other words, the board will question the long-term commitment of the CEO if the conversation comes up prematurely.
Founders need to establish the expectation with their boards that once a year, the group will add an agenda item to the meeting related to the sale. It is simply a temperature check on long term strategy, potential strategic buyers, and time horizons. This will allow you to build rapport, continue the process of alignment, and establish the trust you need to have a FAIR deal. The exit is one of the most important moments in the life of a startup for the founders and investors alike. A conversation filled with anxiety, doubt, and mistrust serves no one. Carving out intentional space to have these conversations in an open and honest fashion on a periodic basis will improve outcomes for all parties.
The secret to board (and shareholder) buy-in is consistent communication on expectations and strategy to achieve objectives. This is where the CEO can withdraw from the trust bank that they have been putting the savings in over the years with their consistent communication.
The goal of these conversations is not to kick off a sale, but to ensure there is alignment around key questions:
What is our threshold walk-away price?
What is the fund timeline to return proceeds for limited partners?
What objectives need to be accomplished for existing investors to further capitalize the company?
Who are the key buyers, old and new? With whom should the CEO be building relationships in those companies?
What is the key performance metric those buyers care about? What is the strategy to optimize that further?
We call this the Exit Talk: a key ingredient for a successful exit and effective governance. It is also an opportunity for a CEO to educate their shareholders and board on what matters. These are the moments to build shareholder confidence, define what the possible exit can look like, and execute on that premise.
It is true that if a founder never mentions a sale for eight years and suddenly starts bringing up the topic to a board, it signals a lack of energy to win even bigger. The reverse is also true: VCs are managing a fund with return expectations. A founder unaware of the dynamics of the investors and their timeline doesn’t help the anxiety surrounding the sale.
Instead of fueling the awkwardness of the exit topic by staying silent, we are putting forward a new norm that we believe the entire industry should adopt: the Exit Talk.
The moment the founder shakes hands with the investor who will join the board, they should agree to bring up this question once a year: are we ready to sell our company? In most cases, the answer will be a simple no — but the space itself will take out the anxiety that a founder will feel when they bring up this question. This is one of the many norms we hope to shift in the world of startups today, in order to take the stigma out of this important conversation.
In addition to the board, regular check-ins (about once a year is the right cadence) with the core leadership team to update them on the current thinking surrounding an exit are similarly beneficial. Take the temperature of your team and fill them in on where your head is. Is everybody still in the game? Are there things we should be worried about? Is this the right time to sell? Use correct judgment and limit the discussion to your top leadership, but be honest and transparent with the folks who will take the company to its ultimate destination. If the ultimate goal is to go public, you need to have extreme dedication from your key leadership to stick it out long-term, not just from the founders.
Learn more on how to prepare and execute a successful exit in the book Exit Right. Follow this link to buy on Amazon.
Community at the Peak: Surviving a Startup and the Ascent to Angel’s Landing
Photo by: Elisa Sepulveda
I hiked Angel’s Landing this past weekend. It was one of the most magnificent places I’ve experienced. The trail up included lots of switchbacks and narrow uphill scrambles with drop offs that are thousands of feet to the ground. It was intense, precarious, and a mental challenge I didn’t expect. In climbing the 1500 ft of elevation on this strenuous hike, I witnessed behaviors amongst complete strangers that mirror the needs of entrepreneurs in their journey of founding and building a startup.
Make thoughtful, deliberate decisions to build relationships that aid in the ascent
The very first days of building your startup are really scary and exciting. You are embarking on an unknown path that, while traversed by many before, can only be experienced by you. You are not alone on the ascent, there are many others who are also on the same journey. While your experiences may be different, some may huff and puff a little more up the steep bits, you are sharing a similar challenge. On the trail, I made a thoughtful and deliberate choice to engage those around me that were just ahead and just behind. This allowed us to support each other through the more challenging aspects of the hike and have someone to snap our photos at the top.
As a founder, it’s essential to build a community of founders around you that are both a bit ahead and a bit behind. These relationships allow you to seek guidance, support, or a place to vent when everything goes wrong. These relationships become central to your success because you can truly trust and rely on each other. Your founder community is the foundation of your collective success.
The path will be narrow and precarious. Know what you need and how to ask for it.
As the wide path began to narrow and the sand became jagged rocks, I definitely questioned my ability to continue up the ascent. I took time to stop and assess where I was at both physically and mentally. I was anxious. Did I have what it took to continue? I started asking people who stopped with me what they were thinking and feeling. I received encouragement, support, and empathy from the strangers around me.
This rollercoaster of emotion and execution is something that entrepreneurs face every single day. You are going to lose customers, have your servers crash, and disappoint a lot of people in your life, including your friends and family, over and over again. Your community of founders understands what this is like because they are experiencing it too. As a founder it’s critical to stop and assess how you are feeling mentally, physically and emotionally. Lean in to the community of founders to listen, provide advice, or commensurate. These common bonds provide us the perspective, but we won’t benefit if we don’t ask.
Self-awareness, vulnerability, and empathy are your strengths
I watched experienced hikers forge the narrow passes to the peak without blinking at the thousand foot drop off below. This was not me. I was anxious and unsure of my ability to continue once the rocky path became only a few feet wide with chains to support the ascent. I knew my limits, I wasn’t afraid to admit them, and I stopped 300 ft short of the peak. I knew that pushing myself beyond that was detrimental to the experience, so I stopped and enjoyed the view.
Know your limits and know when pushing past them won’t help you. Sometimes grinding it out can result in burnout or worse. If you’re reaching your limits, don’t be afraid to tap into your vulnerability and discuss with your founder community. Talk about how you are feeling and the challenges you are facing. The best option, sometimes, is to stop and that’s okay. Be empathetic with yourself and leverage the community around you to validate your position. In turn, by being vulnerable, you provide a safe space for others to do the same.
While the ascent as a founder is filled with trials and tribulations, a strong community of people on the same path will help you achieve your greatest potential. While it is a path many have traversed before, your journey is unique and deserves support. You are not alone because there are thousands of people hiking to Angel’s Landing with you. Don’t be afraid to engage your peers because they become your biggest supporters.
What experiences have you had in your personal life that relate to your journey as an entrepreneur? Jump into the comments below and let us know what you learned through them.