How entrepreneurs get paid after an acquisition?
There’s plenty to think about and keep you busy without even considering trying to navigate an exit for your startup.
The acquisition process alone is like a whole new MBA of hustle and hard knocks and street smarts crammed into a few months. Though how do you actually get paid if you make it through the finish line to the closing?
It’s worth thinking about now because you don’t want to count your chickens before they hatch, and how you get paid can dramatically change how much you should be asking for and when it is really worth selling your startup company and not.
Do not take another step or phone call in discussing selling your business until you know about getting paid.
How Long Does it Take to Close an M&A Deal?
More than anything when you are thinking about how entrepreneurs get paid after an acquisition, the most important piece of information is the section of the LOI that would talk about the closing, the longer it is going to take to get paid.
An acquisition is nothing like one-click Amazon Prime Air, with 30 second delivery by drone.
How long it takes to close can depend on who your buyer is, how big the deal is, how organized your accounts and documents are, and any crazy events that happen in the middle.
The longer the deal takes, the higher the odds issues will arise. The economy can burst, terror attacks can throw markets into chaos and markets can be disrupted by other players.
The fastest deals can happen in as little as 30 days. Though they can stretch out for over a year if you are unlucky.
Remember that mastering the storytelling side and how you are positioning your business is critical when it comes to engaging and speeding up the process. This is done via your acquisition memorandum. This is super important to reach a successful acquisition. For a winning acquisition, memorandum template take a look at the one I recently covered (see it here) or unlock the acquisition memorandum template directly below.
When You Get Paid From Selling Your Startup
If you are wondering how entrepreneurs get paid after an acquisition the good news is that you should get some money on the day the deal officially closes. Cash can be transferred to your bank account the same day. Stocks can be dropped into your brokerage account.
Don’t forget to carefully go over the numbers with your CPA to accurately calculate your share of the proceeds. If you’ve raised money, your cut may be quite insignificant compared to your investors.
Also, make sure you’ve factored in taxes before you go and start spending or commit to giving it away. Expect the IRS to take a lottery sized bite out of your proceeds. How much will vary on how the sale is classified, how you are paid, and your personal tax situation.
The bad news is that you might only get paid 50% to 70% of your portion of the deal right away.
How You Get Paid When You Sell Your Startup
You may get some upfront cash or stocks in exchange for ownership of your company. Though that may only be a percentage of the total cover price. This is probably the tricky part to understand when it comes down to how entrepreneurs get paid after an acquisition.
Stocks can obviously fluctuate in value as well. Know in advance whether you will be locking in a fixed number of shares or a fixed dollar amount of shares.
Of the entrepreneurs I’ve interviewed on the DealMakers Podcast who have taken stock, many have waited too long, watching the stock price skyrocket and then crash miserably before they sell.
In addition to cash or stock, you may also be asked to hold a note for a part of the deal. Effectively that means you are financing the purchase to them, with installment payments to be paid over the next few years.
This may be a reasonable request in selling a national credit franchise or commercial real estate. Though can be risky with a tech startup given you have no control over what they do with the company during that period. They could theoretically run it into the ground and then refuse to pay you.
Holdbacks and escrow are another way that a portion of your funds will be delayed. This may represent 10% to 15% of the deal. Is something goes wrong this is put in place to give some guarantees which can completely blow up how entrepreneurs get paid after an acquisition.
These funds are held in escrow, typically for 12 plus months to protect the acquirer from any misrepresentations and liability. They will be released after that time if there are no claims.
Earnouts make a part of your price and proceeds subject to the performance of your startup after the sale. This could be as much as 50% of the deal. Your contract will stipulate what milestones and targets will need to be hit in order to actually earn these extra funds.
It is very important to remember that you may have very little control over your performance after the closing.
Regardless of your title, accounting can be mingled with your new parent company, and you may have little budgeting or decision making control.
If an earnout is involved, make sure you are happy with any upfront price as it being all you expect to get. Consider any earnout money as gravy on the top. the length of those earnouts play a huge part in how entrepreneurs get paid after an acquisition.
Just as with vesting periods for your cofounders and the initial team at your startup, you may be put into a new vesting or revesting period.
Just like an earnout, this can be a difficult and unpredictable period. Some founders have had fantastic experiences going to work at Google and Apple upon being acquired.
Though most entrepreneurs can find it very difficult working for someone else after tasting the freedom of being a founder. Know yourself, and take a look at just how many other high profile founders have left quite soon after an acquisition.
When thinking about how entrepreneurs get paid after an acquisition you need to remember there are a variety of different ways. Trends change over time, and what’s ‘standard’ may vary somewhat by size and type of acquirer as well.
Remember everything is negotiable. Given these factors, ask for a lot more than you want, expect it to take a lot longer to close than you plan and to get less in your pocket, especially after taxes.
Your exit could still be the best day of your life. It’ll just be that much better if you know what to expect and negotiate a deal you really like.