A Founders Guide To Selling Your Company

when investors have a lot of demand in investing in you is probably also — when acquirers will have a lot of demand. — Okay. Yeah. — And so it's this tricky catch22 where you're like why would I ever sell my company — and you shouldn't sell your company if you think that S-curve could get you to billions in revenue. — Yeah. You're basically making a bet. If you think it'll be more valuable, you shouldn't sell. And if you think that maybe if your S-curve gets you to 50 million in revenue and you're at 10, maybe there's a better deal there. This is Dalton Plus Michael and today we're going to talk about how to sell your company. I mean, look, this is easy. This is one of those topics that um there's not a lot of content out there about. Uh we did not make many videos at YC about how to sell your company. You're — not supposed supposed to die if you want to build your company. — I'd put this in the category of a question that a lot of people have. Yes. — They're afraid to ask. Yes. — About Yes. — And that it's sort of underexplored um in the content universe. — Very underexplored. I would also argue that as a result there are so many misconceptions seeing the number of fundraising announcements that are out there. I think one would assume there are far more acquisitions than there are. And now we kind of have a decent data set. Yes. Right. — We do. We have like an okay data set. We might be able to confirm there aren't as many acquisitions as you might think. — And I think this might be a secret every investor knows and most founders don't. — That's totally true. And again, it's a it's an undertalked about topic. It's awkward. Again, when you think about it, asking your investor how to sell your company is generally not the best idea. — No. — Or a stranger say they're not your investor. If you're just asking random people how to sell your company, — I know either. — Yeah. And how many CEOs that buy companies do you get to talk to regularly and get their advice from? So, let's help inform the audience. First, what do large companies look for in acquisition? And by far, what's the most common type of acquisition that large companies do? — The answer is simple. The answer is talent. — Yes. — If you think about um what an acquiring CEO wants or needs, — Yes. human talent, skills they don't have in house, specialized skills, products that are that'll slot right into what they're doing. You know, I've seen this. Yes. — And I think the in terms of the volume of deals, Allen acquisitions that really don't make people that much money are so much of the volume of deals. And I think it's interesting because sometimes you can see on Techrunch or on Twitter so- and so company sold for $40 million. And I think that there's like a thing that happens where you think, great, so the founders made $40 million. So explain what really happened. — Let's break down the math. Um this is called an aqua hire. Yes. — Acquisition hire. You know, if you're not familiar with the term. So let me break down how an aqua hire is structured. — Yes. — First and foremost, let's assume it's a relatively small company because they usually are. — Sure. — Usually every employee of that company gets put into a spreadsheet that the acquirer would look at. Yes, — they look at the LinkedIn and they're looking for the technical expertise of the people on that team. So, they're looking for talent. Often, — I'll go a step further. Often the most important ones of those people are interviewed and part of the process of getting — and so in an aqua hire often you literally have to go do like a lead code interview. — Your employees do with the hiring folks on the other side and that's to assess the quality of your technical team. — Yes. And so let's say that you pass that screen and they do decide they want to acquire you. Here's the trick. Let's imagine that you have a company that is valued at $10 billion. — And let's imagine that if you went to their website and applied for a job at that company — you got an equity package — that was worth several million dollars — over four years — under over four years with a bunch of assumptions. Does this make sense? Let's imagine you took the equity package for a random person off the street. — Yes. — What they would get over four years multiplied by some assumptions. Yes. — What dollar value would pop out? — It's often $5 million, $10 million, things like that. Right. If you do this math. — Yes. — And so the trick, the slight of hand in aqua hire is the people that they extend offers to in the acquisition. You sum up the value of all the equity that those people get over four years that has to vest — and out pops a pretty big number, — the retention pool. — And so what often happens is the investors get nothing or near nothing. — Yes. — The founders get something that might be a premium to if they went and applied on the website for a job there. Yes. — But it might be less a premium than you

think. And often the employees get no premium at all or they do not get a job offer and they have to go get a new job, a negative premium. — Yes. — And so when you squint at it, — by the way, but that deal on Twitter says so and so — $20 million or $25 million. — Yes. — And so what's funny is that if everyone announced getting a job at Facebook or Open AI this way, they'd be like, I was acquired by Open AI for $10 million. That's just their equity. That's just their job offer. — And so this is the slight of hand in most aqua hires. And the reason it persists is — it's face saving for the founders. — Yes. investors. — Yes. — Everyone looks like a winner. Yes. — And no one benefits by not saving face. Like there's no villain in this story. It's just sort of like everyone gets to show a win. Y — and the acquiring company gets talent. — Exactly. And the mentality of the acquiring company is this is a similar amount of equity or budget that they would give to hiring people of this caliber like basically if they meet the talent bar they are happy right — and also they work together as a team they know each other they like each other so there's some a little premium to that — right — did I miss anything like that's the economics of these things — that's the economics and I think that the unfortunate reality is like one these are the most common acquisitions so are job offers and two, because the company is buying you for your talent, often times your revenue, your product, your customers aren't particularly valued in this type of transaction. Yep. I think a lot of founders are confused when they, you know, a company's like, "Oh, we want to buy you. " And they're like, "Okay, well, we have $5 million in revenue. What is the forward multiple? You know, aren't we worth 10x that? " more and it's like for a company making billions of dollars in revenue, your 5 million in revenue is insignificant and like is offered not valued. Most of the time your product is shut down. Most of your time your customers are irrelevant. So this idea that like your revenue is being valued I think is also a really big mistake. Unless you have a lot of revenue and it's growing real fast, but then why are you selling? — Usually you're not. And so the way you should imagine this is there's like a marketplace that's fairly liquid of startups that are not working. I'm trying to think of a nice way to say it. Not working and maybe low on runway or their investors are telling them they should look for an exit. Yes. And so — that's part of the market. And then there's latest stage very large companies um that want talent and they're desperate for talent. Yes. And most of the matches in this marketplace occur when there's a really particular special technical talent that the acquirer wants um that passes their muster and ideally that technical talent is an expert in the thing that the acquirer desperately needs. Yes. So why don't you break down the desperate need part? What I found kind of seeing on the inside is um a company will look at their team and they'll be like okay our ML team is lacking and that's causing us problems X Y and Z and when we try to go out and recruit ML talent it's hard yada yada we've seen this company over here we've interact with them we've often we've done some little deal with them like so like we're their customer and we're impressed with their talent assuming they are not doing well which is most startup If we know the people we like there already, quality of their work, if comparatively we know how to slot them in and how fast we could get them going and d we're putting them on our list to talk to and maybe we're trying to figure out when they're running low on runway. — I think another thing to demystify is corp dev. So let's talk about corp dev. The real term is corporate development. — Yes. And this is a person that works at a later stage or public company that has that in their title and their job is basically to evaluate companies for acquisition. There's other aspects of court dev which might be to invest in companies but for the most part if you interact with a corporate development person it's about M& A. — Well I want to push back on that. I think they think their job is to evaluate companies for acquisition. — Well I'm getting it. — Oh sorry. Okay. — I'm just explaining — that's how they would describe their job. — Yes. That is your actual job. — So the way that you should think about corporate development if you're a founder is that it's exactly like talking to an investor. And what I mean by that is it's the same numbers game where an investor might meet with hundreds of companies, many hundreds per year and act really interested and make one investment a year or two investments a year out of the hundreds. And so for a lot of investors like a 1% writing them a check rate for meetings is like a pretty good investor. — Corporate development tends to be very

similar. And so what happens when you're a founder is it's very easy to get connected to corporate development. They're not hard and they're very good at seeming extremely interested and very nice. — Yes. — And have lots of reasons things will take more time. And the surprise here is that often to get acquired at best what they can do is introduce you to senior management that would acquire your company. They're basically gatekeepers. — Yes. — And their job is to filter sort through all the stuff. — Yes. So that the real person who would actually acquire your company that has budget that would make a decision will only see the 1% or so that passes through corp. So go ahead and I would argue that they're kind of like an associate in a BC firm. — They think they're responsible for analyzing the pool and picking out good players, but fundamentally they really realize their job is to help facilitate the deals that the partner they're working with wants to do. — Yep. And often times I think you should think corp dev the same way. An executive you know often times someone in product and engineering is impressed with you and your company. They pitch an executive. An executive is the one who actually has the budget to sponsor a deal. And corp dev is the facilitator is the negotiator. — Yes. — Of the deal. They're the ones who actually know how to execute an acquisition assuming an executive is sponsoring it. — Yeah. The way to think about it is they're effectively service providers for either the CEO or like a super senior executive who has budget. And so their job is to deal with all the gnarly stuff the CEO doesn't want to deal with. Lawyers, negotiation, back and forth, coordination. — The executive can be a nice guy and the corp dev guys bad. — Actually, we're going to give you half of what you want. — Yes. — And so they're doing all the dirty work, but at the end of the day, — their job is to help. — They don't actually buy companies. — They're not the decision makers. They're not that. And what's fun is that they're compensated and they're excited by doing deals. — Yes. — So like if an executive wants to get a deal done, they're like, — "Yeah. " — If there's no appetite for a deal being done, and one other aside here, what's funny is the way someone that's good at corporate development is evaluated in a very similar way to a VC. And let me explain what I mean by that. They want to buy things very cheaply that end up being worth way more than they bought them for. And I think sometimes f founders are like, — "Oh, these big companies just have so much money. There's money everywhere, so they're just going to give me some of that, right? " Like — they have money, I should have some. And they're shocked — that is not the mentality. And if you think about what are some of the best corporate development deals of all time, Google buying YouTube, YouTube is worth a lot more than they bought it for a billion. Facebook buying Instagram. Instagram is worth a lot more than Facebook bought it for. — WhatsApp as well. — WhatsApp. And so those, you know, the acquirer paid a lot of money, but the terminal value of those businesses, the corp dub people look like geniuses. — Instagram more than it was a great deal. And conversely, paying some random startup a lot of money that doesn't — that can't be that, — they would get fired very quickly if that's the kind of M& A they would do. And so again, the the point that the founders need to understand about corporate development is they're looking to buy low, sell high. Like they're looking for smoking deals and not super expensive deals. — Yes. — Well, I think this is interesting point and and you're bringing into this. We talked about acupires. Let's talk about these deals that are big how do people make a lot of money in acquisitions — and I think that you nailed the point so well which is because I can underwrite that for whatever we're paying you our RO 10x — now — sometimes that's because your product's doing really well and growing fast sometimes that's because the company buying you thinks that they can push your product better than you can — like u most people don't know But most of the products inside of the Google Workspace uh whatever their office competitor I don't know what it's called now were acquisitions. — That's exactly right. — And it was like yeah we can bundle these things and sell them for a lot more. — Well and Cisco is famous for this where they would acquire a company so their sales team could cross-ell it to their existing customer base. So like we can buy it for X dollars. — Yes. — We can grow it much faster with our sales team. Yes. — And so this is a smoking deal. Again like they're in the business of making money here. Another thing though that you brought up is the idea that like sometimes a big acquisition happens because a company is perfectly placed in the road map of where a much larger company wants to go. Riff on that one. — Yeah. So look, I'm still close to a lot of very latestage companies. Yes. — And they actually bug me all the time asking me to help them find companies to buy. — Y — and what they're not saying is Dalton, who are some struggling startups that you know with bad technical teams? We really want to give them lots of money. — Yes. — They're instead saying, Dalton, who are

the most talented technical teams that you know who would be interested in acquisition with expertise in X? — That's still a hire. So I — Okay, you're right. So let me let me Okay, Barry. — Yeah, — it's that plus it's a business that they have a very clear line of sight. — Yes. — Can make their business better. And basically the more desperate the acquirer is — and the more they feel that it's existential for their company — the more likely they'll pay lots of money. — Yes. — And so what's in the news right now this week when we're recording this is cursor. And it is clear that Elon decided that it is extremely strategic for XAI and Grock to have better coding models. I think that's true. — Yes. And so Elon was willing to back up the truck. Yes. And pay a lot of money. Yes. Because Elon himself decided this was strategic to the company. — It's unique. Perhaps uniquely strategic to his company. Yes. One would argue the same perhaps with Mark and Scali. Uniquely strategic to their company. And which is weird because it's like the market price for that company if you were to survey 20 acquirers might be very different but if it's uniquely um strategic for one company that's where a big acquisition can really happen. — Yeah. And it's basically impossible to do this on purpose. As a quick aside there was not a universe where the founders of cursor would have been like well Elon is going to buy us. Think about the chain of events for Elon acquiring Twitter and then him starting XAI and then for coding agents to take off and then it's like the butterfly effect. — Yes. — And so as a founder, — there's really nothing you can do to optimize for that other than make something — people want you build a good company — frighteningly successful. — Yeah. Exactly. — Like there's no universe to increase the odds of that happening. You can't hack that, right? You can't hack. And again, that's why I think it's a good case study. — I think the other thing that people don't understand is um the motivation of the CEO and therefore the management team of a public company. And I think I didn't really understand this well either. I would have thought making a business leaner would be rewarded. I would have thought okay like if we can run this company with uh 700 people instead of 800 people, we should do that immediately. that would be rewarded of the market. What I've come to understand is the market rewards revenue growth. And one reason why you see a lot of companies out there that maybe have more people than you would assume is because they're trying to leverage those people to create revenue growth. The math that I was told by an old board member was revenue growth is valued by the market 3x more than cost savings. The other thing that happens with revenue growth, if you do it well, is it's compounding. Yes, cost savings tends to be a step function. Oh, we're cutting our staff by 50% every year until we're one person. That doesn't really happen. When you have to model out in your mind how you're valuable to a new company, you've got to think, are we making enough money? And is that amount of money growing fast enough that if it were added to the sales effort and to the totals for that company buying us, it would make them difference to public market investors. — Yeah. That's what's crazy is a for a lot of the big companies, the stock price, they want to make acquisitions that raise their stock price. And it has to move the needle in a bunch of different ways. — Yes. — Right. — And I think what is not understood as well is that at these companies, the CEO on down and all the shareholders, they're all motivated by the stock price movement. Like they're not making their money on their salaries. They're the stock price movement. And the stock price is a imperfect but as good as we get estimate on how much more money this company will make in the future. So once you start understanding that motivation, you might see, well, okay, even if you have 50 million in revenue, but it's only growing 5% year-over-year. Some company doing a billion dollars in revenue doesn't move the needle. And like, if you were a public market investor, you'd be like, great, you have $50 million in revenue, but how much do you expect that to grow? Not much. I think we should try to share some specific tactics. Yes. and misconceptions on how to actually get acquired here. So, we're going to give you all the goods. — Yes. — To start with aqua hires to start. — Yeah, let's start with Aqua Hires. So, how let's say that I am a founder watching this video and for whatever reason, maybe I'm just curious, Michael. I don't want to admit that I want to be aqua hire, but I just want to know more. How does one do that? One thing that I'll say is oftent times what a founder needs to do is they need to talk to people in their network whether that's customers or friends at potentially interesting companies and often times what they have to do is kind

of — be upfront. Yes. — Like there is no like oh let me like backoor my way into someone pretentious like oh let me just talk to you and then you it'll be your idea to buy us. It's like, no, you got to be upfront. And I think that a lot of what your job here is to get through options quickly. — Yes. — You need to understand what the real field of interest is versus the kind of fake field of interest. — This is going to drag on forever if you don't do that. — Exactly. So, it's talking to your friends. potential customers. Even better, if you've got customers who could champion a deal, um, or who are one step removed from somebody who could champion a deal, communicate to them that you might be interested in acquisition. and ask them what are next steps and would they be interested. — The biggest misconception I see here is that founders believe that strangers might actually buy their company. — Hard and especially hard when you're reaching out to the stranger. — Yes. They think they can like cold email — very hard — or get a warm intro from someone random. — I will give a plug to YC here. I think YC and there might be other communities like this but I think YC is interesting where I do think a founder of a YC company can reach out to a founder of another YC company and it is kind of a warm intro. — Yeah. And so like one of the reasons why we see so many talent acquisitions within the YC network is like you know you can email Parker and be like hey you know we see that a lot but I think like true strangers. — Yeah. Again, the way to think about this is that the social proof of someone vouching for you, yeah, is everything. And so YC is a form of that, which is like, oh, you got into YC and I can like look you up and I can go ping people at YC that know you. It's easy to do references on someone that's a YC founder. — Yes. An absolute stranger. — Yes. — The key thing is that someone vouches for you. And then a lot of talent acquisitions, there'll be a person — that knows both parties — that facilitates the vouching process. often the acquiring the company that's being acquired doesn't really see that part. — They don't realize what's going on behind the scenes. You're right. — No. Like they don't realize that someone vouched for them quietly. Yep. — Yes. — Or didn't. — So things can get more interesting if when a founder does that there are multiple companies that are interested. — Yep. It's not like an ACU hire will normally or regularly turn into one of these big acquisitions. But you do have more leverage in how you negotiate, maybe how much money you get up front, so on so forth if you can get multiple biders, just like with investors, you get more. — And that makes me think of another really common misconception that gets founders tweaked out. I think Justin once called them like fake acquisitions or acquisition offers. Let me explain what I mean. If you're in a meeting with someone and they say, "Oh, you know, we'd love to acquire your company. " Is that an offer, Michael? — No. No. — How often do people say things like that? — No. — It's so easy to say, "We're really Yeah, of course we're interested. You should consider us interested. " — Yes. — And so the thing to understand is casual comments are not an offer. And that to go from — words into a piece of paper, — high failure rate. And very, very hard. — Very hard. Many steps. And you bring up this a lot. It's important as a result to time box this experience because you could have a set of interesting parties for 3 years — and never get you to a written term sheet. — Yeah. — So often times by time boxing by saying, "Hey, I'm going to do this for two months or do this for three months. " You should expect at some point having to say to some of these folks, are you in a UA? And I think that's always scary for founders, but it's once again, we got to discover the real market because do you really want to spend six months having meetings with a bunch of people who never wanted to buy your company? You're just wasting your life. Like not worth it. And by the way, — the overall success rate for aqua hires is low. — Yes. — So like your job here is really to assess as quickly as possible. Is there any interest? — Yep. — And if not, we got to go to plan CDE. So that's Aqua Hires. And then the nice thing I will say about aqua hires is they tend to move fast. Yeah. Like if there is mutual interest. Usually the company's early on, there isn't as much diligence. Maybe it's a month of diligence and things can go. — Um bigger deals. Bigger deals are tricky because they come in different flavors. Sometimes bigger deals involve bankers. Smaller deals almost never involve bankers. Um, but if we're talking about acquisitions that are in the 500, a billion, a billion plus, often times there's advisor involved. Um, often times there's a degree of a company is interested and so we're going to kind of like check if others are interested, you know, like so someone's kind of triggering the interest. So like the

banker can help you circle around with others. Often times weird like how the acquiring company is doing in the market at this point. Totally. like what the in like we've heard a famous deal the Facebook deal got blown up because Yahoo had a bad quarter. — Yeah. — And so like it's like — there are stigma thing remember they got acquired — unacquire the government can unacquire your company. It turns out like have guns and do whatever you want. So there are a lot more external factors than an acquire where it's like a rel limited budget and you know it's done really fast. I think the other thing that happens for the bigger acquisitions that's tricky for founders is um they can also fall through without giving too much details like I've worked with this a bunch of times where folks are like I am internally processing the idea that I might make $100 million and then no deal happened. Yeah. — And now I am — it's bad for morale. — I am sitting in my startup like and you got to think about what that's like to be like I think I made it. I'm right back where I was a month ago. That happens a lot, too. So, maybe one other thing I'd like to talk about is what can you do to increase the chance your startup is acquired or it's more valuable? Again, this is we're just telling the secrets here. So, I actually have an answer. knowing so many folks that acquire companies, — they really care about who is on the engineering team. — Mhm. What their LinkedIn say, and they will like create scores of how strong your engineering team is relative to others. And the more that it looks like to a third party that your startup has hired excellent people that are better than the people that work at the acquirer. Think about the acquirer. They know what kind of people work there. — And so if they're like, "Oh man, this startup has like way better people than work here. — If we acquired you, you would be amongst our top 1% of engineers. " — Like if that's what you're doing, — the market is real. Yes. — They would never pass our technical screen, they're not going to acquire your company. This makes sense. So you really have to be brutally honest if you want to do a self assessment here about what the relative strength of your engineering team is. — Yes. — And the quality of the founders from a technical perspective. If you have like — CSP PhDs who used to work at, you know, foundation labs. This is one of the reasons by the way that those companies raise at such high valuations. — Yeah. — Is because — Yes. — Even if it doesn't work, someone will acquire them to get all the PhDs doing ML research. — Yes. There's almost a floor, — right? — Yes. — And so, you know, you're like, well, how is this actionable, Dalton? I think it's like, well, hire great people, recruit great people. — Yes. That's a core. The only thing I would add to that is it's the same thing on the quality of your business. So, if you're doing enough revenue or revenue is going to be a factor in the deal, the quality of that revenue, revenue expansion, how much your customers like your product, that goes into it. If you're on the usage side, like Instagram, well, it helps that your average user uses your product two hours a day and shares it with all their f, right? It's like they're assessing the value your product is making. Unfortunately, right? If you're, you know, if you have a product doing 10 million in revenue, but like half of your customers turn every year, a good company is going to discount that almost completely. So it's like actually have to have good talent and then the multiplier effect is you actually have to have a good business. Y and this is a kind of tricky point, you know, and I like to close on this point because this is something that a lot is brought up in the kind of popular conception. businesses don't always look the same during their entire trajectory and sometimes there are moments where they look like much better acquisition targets than others. There are a lot of companies that kind of have this S-curve and like when you're trying to sell and you're on this part of the S-curve — Yeah. — another way of saying this that's far simpler is that when investors have a lot of demand in investing in you is probably also — when acquirers will have a lot of demand. — Okay. Yeah. And so it's this tricky catch22 where you're like, "Why would I ever sell my company and you shouldn't sell your company if you think that S-curve could get you to billions in revenue? " — Yeah. You're basically making a bet. And if you think it'll be more valuable, you shouldn't sell. Yes. And if you think that maybe — if your S-curve gets you to 50 million in revenue and you're at 10, — maybe there's a better deal there. And maybe last thing for me, I've done a lot of office hours on this topic with people obviously. And the math I tell founders to do is to do the thought experiment of if they went and applied for jobs, what would their total comp package be? What would their engineers Yes. — And would they choose

— to work there? — Yes. Because if you're weighing an aqua hire and you're like, well, either I could go work with struggle bus — flat stock price public company or I could go get a job — at a good company — somewhere awesome and all my employees could too. — It's sometimes better to just shut down than to pursue an aqua hire. — And this is shocking to founders. — It is often better. Yeah. Because fundamentally separately you can probably much more frequently get better deals for yourselves than together. I mean this is cherrypicking a little bit but if I think about a lot of the YC alums that I worked with that shut down their company and went and got a job at Anthropic — that worked. — That was like — that worked — in hindsight. — Yes. — Much smarter than literally pretty much any other option of what they could have done. — Again hindsight. — And so remember your value and the value of your employees. — Yes. and that trying to do an aqua hire just for the face saving aspect might actually be a pretty poor decision. — I think that's a great place to close, but we should shout out Justin who's got Justin Khan's got a great blog post on selling your company that you should check out, too. — Awesome. Cheers.