We learned a lot of non-obvious lessons during the AimBrain acquisition process. Looking back these are our key takeaways that can help you, and me, in the next one:
Before the acquisition
Understand what your deal-breakers are. Have a plan upfront for how you test for them. Stop the process as soon as any of them are triggered. Can you acquire a non-profit making company? Do you have the budget unlocked at the expected level? Do you have all the internal stakeholder buy-ins and go-aheads? Be honest with the founders upfront on what to expect or highlight. The worst you can do is to continue knowingly that there are in fact deal-breakers, hoping that you will find something that will offset them at later stages. Chances are it will just get worse, as everyone puts their best foot forward, and you are just wasting everyone’s time.
Do try to not come across as if you want to steal startup’s intellectual property. Be mindful how you escalate the process with more stakeholders and seniority. You and your team might be excited, but if you bring your full engineering team before the official process has even started, it will put startup on the defensive as it will feel like you are trying to brain rape them.
Make sure you get solid M&A advisors in place. Be upfront with them with your expectations. A lot of advisors are lazy and will only work with you if you have a term-sheet already in place. Some will engage you earlier, but will drop you immediately if the original buyer retracts their offer. Few will continue with you to find an alternative buyer if the original offer never materializes. Understand what you want to achieve – is it to opportunistically evaluate a market or you are set on acquisition? Anecdotally, I found that the more established the M&A advisory brand is, the less work they will put in on a day-to-day basis.
Understand exactly what M&A advisory terms are. Who will work with you day-to-day? Is it a senior partner or a junior intern? What is the scope? Is it only a potential acquisition or it also includes any fundraising for the next 12 months? Even if you are not planning on fundraising, a lot of M&A conversations end there and M&A advisors do not like being left out. What are M&A advisory carve outs? Can you raise from your existing investors or new investors that you find, without triggering M&A advisory fees? Are there any fees if you do decide to not take the acquisition offer? What happens if the M&A advisory firm decides to not continue – do they waive all of their fees & rights? What are minimum deliverables from the advisory? Who does the advisory know and are on friendly terms with? Nowadays everyone can reach anyone else via linkedin, but having warm relationships does save a lot of time.
Understand how fast your investors can realistically move in an M&A process. Pre-empt any potential roadblocks. Is there a board that they need to get a signoff from first? How often do they meet? What regulatory requirements do they have? Who is the main decision maker at the firm? Small delays will add up and you do not want to be in a position where your own shareholders are slowing down the overall process.
Get business unit buy-in. Corporate development team can make introductions, but ultimately it will be a specific business unit that makes a business case for or against the acquisition. Understand what their KPIs are, what is their roadmap and tailor your pitch for that. It is not unusual to have different presentations for different business units within the same company – they all are measured against different metrics and you need to get them excited about how you will accelerate them.
During the acquisition
Be transparent of the process. Communicate any specific due diligence or interview steps. Outline steps to completion and adhere to them. Resist creating new hurdles for startups to cross – surprise employee interviews, surprise new stakeholder meetings or yet another round of due diligence. It makes you come across as unprepared and unprofessional. Set expectations for each of the step and rough timelines – this will help for everyone to be on the same page.
Be mindful of your people involved in the due diligence process. Make sure that people internally who will be doing acquisition due diligence do not feel like they will be competing for the job / group position. If you are acquiring a deep learning company and already have a deep learning group internally, make it very clear how together they can achieve more faster – very likely the heads of internal groups will feel threatened and try to block any acquisition that would compete with their group. Personal feelings are a fact, but they often get in the way of good company-level decisions.
Clear legal blockers as early as possible in the process. Are there any issues with accounting? Legal employee status, VISA? Any ongoing patent or other litigations? Are there any legal regulations that the startup needs to adhere to that you do not have or not willing to get? Delaying hard facts that mean you cannot continue until late in the process will make you come across as untrustworthy in the long run.
If it does not work out, be honest of why. Providing detailed feedback is a grey area that legally might disadvantage you. Try elaborating on your decision via in-person coffee or a quick call. Leaving founders without closure is an asshole move.
Even though interviewing everyone is a bit annoying, for both sides, I strongly suggest that you do it. It will make people feel appreciated from the acquiring company. Good interviews leave good impressions. They also enable everyone to meet and get a sense of cultures. Interviewing everyone also creates a psychological feeling of exclusivity and “achievement” when passed.
Have a fallback plan in case acquirer pulls out. If the acquirer is asking for exclusivity for the due diligence stage, make sure there are clauses for what happens if the acquirer decides to not continue the process, unless due to your fraud. As a ballpark you should ask to at least be compensated at your burn rate for the length of exclusivity.
Keep the momentum going. All relationships start with a honeymoon excitement and finish with a big conclusion. In the middle there is a lot of hard work, sweat and tears. It is important to not only keep the momentum going with the acquirer, but also have small milestone celebrations internally as well. Most of the employees have discrete touch points, while founders see the continuous process. Find a way to communicate progress to everyone on a weekly basis.
Understand if there will be cultural fit. Chances are the main value is in the people and the intellectual property. Cultural misfit is a significant reason for people leaving early post-acquisition, even if it means leaving a significant amount of money on the table, making both sides lose value instantly.
Understand where all members will fit career-wise. Having an impact is one of the main reasons for joining an early stage risky venture. Can you continue providing that freedom post-acquisition? How will the individual career progress tracks look like? It is very demotivating for high-achievers if they cannot secure the same or better career progression post-acquisition. Understand the roles people had and expectations for the future – pigeonholing founders, CEO, CTO and other C-Suite to mid or low level management positions, or worse – individual contributor roles, will be demotivating for the individuals.
Make sure that legals are cleared out as a first thing. Employment agreements, payroll, pensions, options, etc – any surprises or delays here will likely create resentment. Own up to any mistakes – it shows leadership and empathy. There might be items out of your reasonable control – make sure you communicate that (see below). Do not make assumptions on behalf of new joiners – always double check and ideally run any thoughts or drafts by them. This will make them feel inclusive and that you have their best interest in mind.
Communicate CONSTANTLY. Overcommunication early days is even better. Make sure your HR and managers do it. You do not want people wondering who they should talk to regarding their queries – is it old company HR or new company HR? Is it my manager or manager’s manager? Overcommunicate the progress of integration, and even more importantly, any outstanding action items on your side. You do not want people feeling insecure of when they will receive their salary. Is it the same day as at the old company or different? What is my bonus structure? Such questions hit at the fundamental safety necessity, in the Maslow’s hierarchy of needs, and if not communicated can easily create resentment or result in underproductivity.
Connect. It is important that new joiners spend time around the old teams. This will help to adopt company culture and understand non-written rules via osmosis. It will also make them feel more included and appreciated. If your HQ is not in the same city, I strongly suggest you invite people over for an on-boarding period.
Deliver the benefits you promised. Is it company shirts or swag that everyone has? Perks you promised? Make sure you make new joiners feel like they are part of the team, rather than a remote stand-alone branch. No matter how big or small the promise was, make sure you deliver it in a timely manner. Not doing so can make people feel excluded.
Follow-up on cultural fit and career progress. Arrange one-on-ones with key individuals / ex-founders and talk about what expectations were met, overdelivered or underdeliverd. At this meeting do not talk about your expectations – those are better suited for being set as individual / group / company goals. You are here to listen by creating safe space and trust with key individuals to make sure that you are held accountable. What you hear might help you to learn things you didn’t know about your own company and can help to steer the company forward better.
Have clear and documented internal processes. Verbal directions do not scale and emails / chats get lost. Acquisition is a significant change – make the adaptation easier by having clear expectations, starting with IT setup (e.g. employee laptops, corporate VPN), travel (e.g. do employees book and expense or your HR books instead? What class are you allowed to fly in? What hotels are you allowed to stay in?) ending with culture (e.g. is it ok to expense a lunch with a potential customer? Are there any unofficial communication channels, like whatsapp groups?). Sure, people will learn this over time themselves, but your goal is to lower the time to peak productivity.
Define what success looks like. At each step, starting with the number of offers you want to see, ending with the expectations 1 year post the acquisition. You cannot improve something if you do not measure it.
Give tools to succeed. People cannot succeed if the company does not give them the tools to do so. Think if you are enabling the new joiners to the best of your ability by providing right tools and listening to their feedback. Inversely, new joiners, think if you are using the tools at your disposal to the best of your ability.
Have realistic goals. It will take time to onboard new joiners, especially if they previously have never used the tools that you use in your business.
Be professional & do not waste people’s time. World is small. Particular industry is even smaller. Founder world is tiny. If you have lied, were not transparent in the process, caused negative surprises or did anything unreasonable – it is going to leave a bad taste. By the principle of Karmic Retribution it will manifest in the most unexpected ways in the future.
Thanks Alesis Novik and Jason Purcell for feedback and thoughts.