Strategy for a Soft Landing

Posted on July 31, 2012. Filed under: Uncategorized |

Something I find interesting is that there is a liquid market for “soft-landings” in todays technology landscape.  If you build and don’t succeed, there are 10 or so places you can go to be acquihired…these conversations don’t begin with product or technology, but rather resumes and technical interviews.  We are in a moment in time when downside case is not, in fact, a goose egg, as it has been portrayed for so many years…people think that when you startup a technology company, the likelihood of crapping out is great, and that is true…but today’s “crap out” actually looks more like a set of cushy jobs at “Bigco” with your closest friends and colleagues at about 130% of market salaries…

No founder endeavors to build for a soft landing…but even for investors, these deals can yield 25-100 cents on the dollar depending on how much $ was raised and how the acquirer performs over the year or two post deal.  Note, however, that the soft landings that you read about where a team was acquihired, at least from what I’ve seen in the current market are not the “1 Million per engineer” that we scrawl on the backs of envelopes around board tables…the buyers that I see active in this “soft landing” market are increasingly frugal when it comes to doling out for even strong teams…deals are looking more like $2-4M in common/restricted stock with 4  year earn outs and less than $1M paid out to the cap table than they are “singles” from an investor’s standpoint.  And…when you amortize the equity grants over 4 years, that “purchase price” starts to look a lot like market comp + 30% where the excess can be justified as a backloaded recruiting cost.

In these deals, Bigco’s M&A group looks a lot like HR on steroids.  Should you find yourself in a position where “soft landing” or “crash landing” are the two options, and it’s time to figure out how to make it happen…here are a few rules of thumb:

1)   Time is the buyer’s most valuable asset.  A corp dev team has effectively infinite options for “soft landing” targets…especially post seed boom…so you are but one opportunity in a pretty full pipeline.  The key metric that corp dev will look at out of the gate is “likelihood of close”…where they don’t want to waste their cycles on you  if A) your not excited, B) your not reasonable, and C) your not efficient.  Going into “soft landing” conversations with any posture other than “I want to get a deal done” seems like a pretty sure way to get booted out of the funnel.  Now, if you have any options, or are strategic to Bigco, or have technology that will be usefull post deal, you are not in the “soft landing” funnel I am describing and there’s a whole other set of nuances to consider, but just for “soft landings” I think the best approach is to make corp dev believe that their investment in recruiting you will yield fruit…

2)   An initial offer can often be 50% or what they’re willing to pay. Don’t be spooked or offended by the first offer Bigco makes

3)   If your deal is a soft landing…nobody is getting rich. Not founders, not investors, not employess…and that’s fine…you are fighting to make a less than ideal outcome as good as possible. A typical “trick” that Bigco will employ is separating founders’ interests from investor’s interest.  Large stock grants in the employee pool and minimal payouts to investors is the most classic example…buyers will keep dropping little carrots along the way in a negotiation…you have options on what you can push for in a series of terms…my suggestion is to optimize for investors and employees first, and yourselves as founders last…life is long, build good will…don’t be penny wise and pound foolish because this isn’t the deal that will define your career or lifestyle on the upside, but if handled poorly, could define it on the downside.

4)   Pay attention to tax implications of the deal and make sure that it is structured in a way that is efficient for founders and employees…it will be more work for Bigco (and sometimes…hopefully…they have got it down to science already), but it’s worth fighting that battle up front

5)   Talk to your lawyers all the time…don’t sneeze without their blessing…this is a scenario where it’s worth the $ to pick up the phone before acting

6)   Your tone when talking to the buyer should always be “I’m pumped…assuming” or “We’re excited…as long as.”  Bigco doesn’t want to buy you if you don’t want to be there…just like startups don’t want to hire people who don’t want to be there…so always lean in…but establish caveats… “assuming the vesting schedule is reasonable” “as long as we all get to work on things that interest us” etc…leverage is a very tricky animal, especially when they know you don’t really have any…but the threat that you will walk away once they’ve invested in the process is the only thing you’ve got, so love them…but don’t let them believe you’ll do the deal no matter what…because if they think that…they are sure to serve up “what”

7)   If you find your way to the “close,” congratulations. These are strange times…there will come another era where failure = 0. You happened to crap out at the right time.

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at (p.s. i don’t use spell check…deal with it)


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