Q: Do founders after a big tech acquisition all sit back and relax?

A: All answers below are subject to the situation a given tech founder is in at the time of negotiation with the acquirer.

Summary

As you would see below there are many scenarios that can occur post-acquisition for a founder looking at exiting in a big tech acquisitions situation.

Many of which would be negotiated way before the deal closes. The pros and cons have to be weighed by both parties.

Though what I have found is that once founders relieve themselves on wanting a whole bunch of cash up front, they usually end up with more at the end.

Below see the 11 things that can happen for a founder post-exit.

1. Continue Operations for some time

Some founders looking to exit would agree to stay on and operate the company for a defined period. 

Usually, I have seen as short as 3 to 6 months, and I have seen from 12 to 36 months or longer depending on the negotiated agreements.

2. Continue Operations Indefinitely

Other founders either in love with their company, or otherwise, would choose to sell off a majority stake in their company and continue as an operational owner with minority stock. 

This is called “taking some chips off the table.” 

At times, some founders may be thinking that down the road, they may be able to buy back the shares or sell their minority stake at some point. 

However in a buy hold situations as an acquirer, if there was a decision to purchase the company, there would have been some kind of value in keeping the founder on to operate the company, so much so that they would be ok with having them retain a minority stake in the company.

On the other hand, this could be a situation where the acquirers are looking not to take all the risk in the deal (from a Cash Outlay perspective aka Cash at Close). Essentially creating a financial situation where the founder is involved in the financing of the acquisition.

3. Continue Operations and Recruit Replacement

This is a situation where it would be the founder staying on to operate the company while assisting heavily with the recruitment process of their successor. This can be done for many reasons, some of which are to:

• Maintain Client Relationships
• Maintain Leadership Style
• Maintain Corporate Culture
• Maintain Supplier Relationships
• Maintain Branding

There can be many more reasons. Ultimately acquirers may be concerned that client relationships have been so tightly knit, that if the founder leaves, all may collapse. So a smooth recruitment process of a replacement CEO/President/Leader or whatever you would like to call them is completed.

This many times would be structured in phases, for example:

• Phase 1 – Recruit

• Phase 2 – Train

• Phase 3 – Convey Relationships

Once this is completed the founder would be free to exit and move on with a sense of comfort for both parties.

4. Continue Operations and Transition to Board

Another common scenario is the owner sells their shares and is given an opportunity to sit on the board to continue in an advisory capacity. 

This may or may not come along with voting rights. 

The shares may or may not come along with Restricted Stock Units as well, which can contain many limitations if in place. Which it usually is.

5. Continue Operations and Earn-out a portion of the Acquisition Purchase Price – based on Profit/Net realized Performance Hurdles

Founders when in the negotiation process with a buyer would be portraying their financial numbers in the best light possible in most cases. Many times projections include attractive growth in revenues, gross profits, and net income over a propagated period of 3 to 5 years. 

Consequently, nothing is cast in stone where financial projections are concerned, therefore this uncertainty needs to be managed by the acquirer upfront. And in such cases where the founder may be stuck on a valuation number in their head, to find a manageable common ground, an Earnout is used to even things out.

6. Continue Operations and Earnout a portion of the Acquisition Purchase Price based on Profit/Net realized Performance Hurdles commensurate with Corporate restructurings.

This is an appendage to the point above where in this case the acquirer may be concerned about some additional moving parts in the business regarding corporate governance and policy but not so much so that they don’t believe it could be fixed.

How this would be measured is left up to negotiating what those definitive metrics are alongside the set performance targets. This is typically seen as very fair for acquirers, as it allows for the projections to be proven, which once achieved, based on how the Earnout is structured, the founder stands to get exactly what they were expecting. More or Less.

7. Exit the Company and continue as an Advisor or Consultant

Some founders are fine with staying on at the board level providing guidance and consultation to the other directors. This may or may not be in a shareholder capacity.

8. Exit Company and continue as Minority Common Stock Shareholder

This is in a lot of cases happens as well. Where the founder would sell the majority shares, move out of a functioning capacity and continue looking on as a minority shareholder. Not even in an advisory capacity.

In the cases where more experienced personnel and executives step in, this could be a godsend for some founders who stand to benefit from a rise in share price due to the new teams’ performance. Maintaining the opportunity to sell those minority shares at an even higher valuation as time progresses.

9. Exit Company and continue as Minority Preferred Stock Shareholder

This is a situation similar to the above but with nuances to how these securities are crafted where there may be preferred rates of returns and rights to the minority shares. 

The benefit here is that the founder during negotiations may be looking for some form of secured return based on the nature of the Purchase Agreement. If the acquisition team is any good, the founder stands to have stabilized (to a degree) his returns (if all goes well).

10. Exit Company and hold an Option

Some founders retain stock options in their recently sold company. This as you may know might be a good or a bad this depending on the performance of the stock/company. Based on the type of option held, it can variably skew projected expected outcomes for the founder.

There are a number of different types of options available, that may be used but usually, a call option may be issued.

11. Exit and Retire to Paradise

This is the dream situation for most founders in the tech world. This is what everyone is working so hard towards. Start a company for next to nothing and just your coding skills. Hire a couple of your buddies. Launch your niche platform. A big-name tech company approaches you to acquire. You value your company at a gazillion multiple. AND YOU GET IT!

It can happen. But not likely. LOL. It is very rarely clean.