Exiting a Software Start-up
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This document discusses exits from starting a company. It defines exits as a change of control through acquisition or liquidity event like an IPO. The most common type of exit is acquisition, which can be an asset sale or acquiring shares. Buyers pursue acquisitions for strategic, expansionary, or integrative reasons. A company can be valued for an acquisition using public-private arbitrage, discounted cash flow analysis, or cost savings. The best time to sell depends on the company's stage - from earn outs for pre-revenue firms to public-private arbitrage for profitable, mature companies. The exit process involves negotiation, a letter of intent, due diligence, legal documentation, and closing. Investors can both
Exiting a Software Start-up
- 1. Begin With the End in Mind A little something about exits Stephen Forte @worksonmypc Weibo: SteveForte
- 2. Warning! Don’t start a company in order to get rich Your chances of success are very, very low! That said, if you want to learn about exits, start here ;)
- 3. Definitions Legal term: change of control Someone has taken legal ownership of your company Usually when someone acquires your company Legal term: liquidity event Someone invests in your company IPO
- 4. Type of Exits Acquisition Asset v Share Merger Reverse Merger IPO
- 5. Motives for an Acquisitions (buyer) Strategic Acquisition Expansionary/Entering new Geography Integrative/Supply Chain
- 6. Ways to price an acquisition Public-private arbitrage DCF/NPV analysis Cost savings
- 7. You sold your company, so you’re rich, right? Cash up front Cash + equity up front Installments (cash/equity) Earn-out (cash/equity) EBITA based Any performance metrics
- 8. When to Sell? Newco/pre-revenue Usually an earn out (unless strategic) Dependent on the owner’s ability to execute Early revenue/no profits Will usually bring out the DCF analysis Usually the Lowest valuation Profitable/mature Public-private arbitrage Best Valuation Post-mature
- 9. Stages of an exit Negotiation leads to an offer Letter of Intent (LOI) Due Diligence (DD) Legal Documents (“Docs”) Re-negotiation of the LOI! Close
- 10. How Investors Effect an Exit Investor may push to sell too early VC’s usually have warrants against your company Your ownership is diluted Your company will be *much* better structured for an exit Investor will be dispassionate at the exit (you will be emotional)
- 11. Q&A