Exit Right

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:

  1. Price
    a. Calculation
    b. Front-end adjustments
    c. Back-end adjustments

  2. Closing conditions and timeline
    a. Necessary approvals
    b. Due diligence checklist
    c. Exclusivity and expiration date

  3. Personnel 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.