Many entrepreneurs are now building their startups with the expressed intent to sell them to another company. This has been fueled by the astronomical offers some startups have recently received in their infancy. One of the latest examples was Instagram. This company, with only 13 employees, received a $1 billion offer from Facebook and ultimately closed the deal for over $700 million.
If you are in the enviable position of receiving an offer for your startup, you are probably wondering whether you should take the money now or hold out for more. Well, in the immortal words of Dirty Harry, “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do ya, punk?”
In all seriousness, there are many issues to consider in making this decision. Every situation is unique and there are no easy answers. However, below are a few questions you may want to ask.
1. If you reject the offer, do you have sufficient funds to continue to grow?
If not, will you continue to require investments from private investors? Are you certain this funding will continue to be available? Even if you can secure more funding, the higher price you hold out for will be offset by further equity dilution.
2. Will the acquirer become your biggest competitor if you turn down the offer?
Are you willing to play David to the acquirer’s Goliath? For example, Zappos, an on-line shoe retailer, accepted a $1.2 billion offer from Amazon. Had they not accepted the offer, it’s likely that Amazon would have pursued another avenue to dominate this segment. Path, on the other hand, rejected a $100 million offer from Google for their startup. Google has already introduced a competing product, Google Circles.
3. What other options are available to you as an exit strategy?
As discussed, you can hold out for a better offer. If you are profitable, you may be able to continue without additional investment or even file for an initial public offering. Google is an example of a very profitable company that could have remained independent, but chose the IPO route. Of course, you can try to go public if you are unprofitable too. However, this can be rough going, as evidenced by Groupon. They went public and subsequently failed to generate profits. As a result, their stock has now fallen over 80% to under three dollars per share.
4. If you have founded a startup, you are probably already somewhat of a risk taker
However, turning down a good offer for your unprofitable startup can be akin to playing the lottery. Be sure to take a step back and be honest with yourself. What are the real chances you will become the next Twitter or Facebook?
5. Is “quality of life” important to you?
While it is certainly fulfilling to build your own company, live on the edge and spend your time asking for cash infusions from private investors, the details can certainly take some of the fun out of it. How much longer are you willing to do this?
The good news is that many acquirers would like the founders to stay on and help run the company after the acquisition. In some cases, the founders can even continue as the CEO in the new subsidiary. For many, this is the best of all worlds. You can stop worrying about money and concentrate on building the business with the additional resources the acquirer has to offer. Of course, you may also have less stress and more time to spend with your family and friends. What’s not to like?