11. Come to Terms

Congrats, you have one or more interested parties. Now it’s time to negotiate terms.

In the case of early-stage strategic exits, the plan for your business is to fold it into something else.

  1. Avoid involving 3rd parties in your early discussions. Investors, attorneys, advisors and others may want to get involved, but I find that this sort of formality puts a buyer in a defensive position at a stage when the conversation needs to be fluid. Get the rough terms settled in one-to-one conversations.
  2. Your buyer will want equity to be the bulk of consideration. You will want 100% cash. This is a common point of negotiation, and usually, parties settle somewhere in-between (majority cash, some equity).
  3. Once you have your rough terms, protocol is that they be documented in a Letter of Intent (LOI). The LOI will specify a closing date, and you will enter a period during which you are prohibited from soliciting competing offers while the buyer completes due diligence.
  4. Earnouts are usually where the most time is spent negotiating. It is fair for the buyer to want incentives for a smooth transition. It is also fair for the seller to not want too much consideration at risk after the sale. Here are a couple sticking points to watch:
  • Beware product performance incentives. Since the buyer will control your resources after the acquisition, they can also control product performance.
  • Earnouts that are contingent on key personnel tenure are fair, within reason. The norm is 1-2 years.

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