For the last 4 years, I was involved in various roles in 5 processes of M&A of technology startups.
Every time I observed the same conflict of interests between investors and a core tech team/co-founders because in every technology startup there are 3 groups of stakeholders with different interests:
1. Investors;
2. Investment banker, legal and accounting teams;
3. Co-founders/technology team who developed the core IP that is the subject of acquisition.
Usually, by the time the question of M&A is raised co-founders/technology team have already dedicated more than 4 years of their life to the startup, but they never get all their shares at closing. Therefore they have to work for the additional 1+ years to receive all the money from the deal (shares + stock options), as well as the core technology team has to sign a non-compete agreement for 1+ years and other obligations.
At the same time, other 2 groups (investors, IB, legal and accounting teams) receive money immediately at closing without any additional obligations and restrictions, thus their only interest is to get money as soon as possible.
It means that if, for example, a founder owns 50% of the company and an investor just 20%, at closing of the deal the investor will receive 20% of the price, but the founder could receive LESS than the investor as the acquirer is usually interested in motivating the founder to work as long as possible in the acquirer’s company. Also, the founder has to spend the additional time of his life for this business project comparing to the investor.
Usually after signing the term sheet beneficiaries that get money immediately at the closing start to push other groups to sign any non-compete terms, limited terms of Good Reason resignation, and very long obligatory time to work for the acquiring company.
How to avoid such conflicts of interest?
From my experience I see only one way – all these conditions should be incorporated in the term sheet.
As soon as all these conditions are in the basic deal document the temperature of such conflict of interests lowers significantly.
Good luck with business and M&As to everyone!:=)
Best regards,
v @ vactivity.com