How to set up your company for sale from Day 1

The best founders think about the exit before they start. That’s heresy for Y Combinator or the Alchemist Accelerator, who argue you should focus on the customer and solving their problems. They say any thought of exits early is a distraction.

I call bullshit.

Thinking about the endgame and building something people want are not mutually exclusive. You can think about the exit, and then spend your time talking to customers and build something of value. The problems only arise when you are unintentional or take shortcuts.

It is absolutely possible to distract yourself with thoughts of exit early on–I did that as a founder. It’s a shortcut (and, in my defense, this is what I do best and know, so I gravitate towards it). But I realized it was a distraction, and refocused.

If you know the whole game, not just the opening, you will be better equipped to win. Especially because you will know where you are in your journey and be better able to say no to distractions like premature M&A discussions. Or, be able to guide your board to an exit even if they don’t see what you see.

This post is intended for founders at all stages to know what they need to do to set their company up for sale. If it’s not Day 1 for you–maybe it’s Day 90 or Day 627–it’s not too late to get your house in order so that you can maximize your outcome. Reading this might create some anxiety. Most startup founders will have made mistakes. Know that that is totally normal! Acquirers see that all the time. Get some advice on what specifically to clean up now and what to do later. Of course, if you’re just starting out, maybe do it right from the get go.

First, how to do it right. Then, what can go wrong.

Get the easy stuff right

Whether or not you raise outside capital, you want to set your business up properly. And, to the extent possible, run it like a business. This is because in 99% of buying processes, the person running the show will be an ex-investment banker. They have expectations. The more you conform to those expectations, the better it will go for you.

Sure, if the CEO or CPO of your acquirer is dead set on acquiring you, they can make the corp dev person go through with it. But you’ll be fighting uphill the whole time. Better to look like a pro.

What does it mean to look like a pro? Here’s a quick checklist.

• Incorporate properly. Incorporate in an appropriate jurisdiction with an appropriate structure–usually some form of Delaware corporation (S-corp, LLC, or C-corp). Stripe Atlas and other services make this extremely easy (and cost only around $500 at time of writing).

• Keep your cap table up to date and accurate. If you have investors, cofounders, and/or issue employee stock options, Carta and its newer competitors make this easy. It’s a tremendously bad look if it’s not accurate.

• Hire and manage your workforce properly and legally. This includes overseas contractors. Rippling, Deel, Remote all make this super easy to do on a global basis. Stripe Atlas (or your attorneys) can provide form employment agreements specific to each jurisdiction if your platform of choice doesn’t. Generally, always use your own paper for hiring contractors or agencies.

• Use professionals where appropriate. Use good accountants to prevent snags in diligence. As you grow, bring in experienced HR professionals first as contractors, then when you get past ~100 employees, full time. Use good lawyers. If you’re not using your paper, lawyers should draft and review key documents, including NDAs and hiring or contracting agreements. If you don’t want to pay a lawyer to review it, that’s a sign that you should skip that partnership or discussion! Deal with employee lawsuits or other disputes professionally, and document everything well.

• Build a stage-appropriate business model. This is an excel file at a minimum consisting of a Revenue tab, Expenses tab, and (to keep it confidential) a Salaries tab that is rolled up into Expenses. In the beginning it might be just 1 tab with everything on it. Later, it might be many tabs for different business lines, divisions, etc. Even if you don’t build this yourself, understand it because it will help you truly understand the levers to your business now and in the future.

• Manage your cash well. Pay your bills slowly and collect money quickly. Just because you have millions in VC in the bank and a vendor asked nicely doesn’t mean you should pay them net 5 days. Larry Ellison pays net 90 and Oracle brought in $13 billion last quarter. If revenue is trailing forecast–adjust your expenses quickly. This will keep you out of financial distress, and also make you look trustworthy to an acquirer.

In sum, run the company like a professional. That way when a professional banker comes in to manage hoards of accountants and lawyers, they’ll respect you and trust you on the few mistakes you will inevitably make–and that they will inevitably find.

Get the hard stuff right, too

Many growth stage acquisitions are done on the basis of a revenue multiple. That means you have to have revenue. Before you argue something like “My IP is worth a lot,” let me remind you–I’m your buyer. I ran acquisitions for a public company and I can say with certainty, nobody gives two shits about your IP. Sorry, not sorry.

Are there exceptions? Yes, there are. Perhaps you are one of them.

But the reality is that the reason why your IP might be worth a lot is because people are willing to pay to use it in some way. So if your IP isn’t generating revenue then it isn’t worth much. Simple. And, by the way, if you don’t generate revenue you will eventually go out of business–so even if the IP is worth something on its own, if you are running out of money it will be hard to capture that value.

The more revenue you have, the more options you will have when it comes to being acquired. Investment bankers, generally, won’t touch deals with less than $10 million in revenue (though some boutiques do work on smaller deals). Once you get past that, and especially when you are profitable, more financial buyers will be interested–making getting a bid much more likely, even if it might not be at a multiple you like.

Growth is also important. One friend was approached by Airbnb about acquiring his startup. But Airbnb didn’t pursue it, and he raised more capital. The next time–maybe 6 months later–he saw the Airbnb team the company was doing 10x more revenue. The time after that revenue was dramatically higher still. Airbnb realized if they didn’t move quickly, they wouldn’t be able to afford it. So they moved quickly.

Partnerships are the key

That Airbnb deal happened because they had partnered, or talked about it, over a relatively long period of time. The offers I received at various times as a founder were because of partnerships and relationships that were built over longer periods of time (a year or more, mostly).

Many founders are reluctant to talk to their competitors, whether other startups or established. These are your people. They’re dedicating their professional lives to solving the same problems you are, so you have at least that in common. They are also very likely to be interested in acquiring your company, at some point–whether opportunistically for their own benefit, or to keep it out of someone else’s hands. Obviously, don’t hand over your secret sauce. But get to know them.

Partnerships need to be based on sound business sense and strategy. Do not partner with companies only because one day they might invest or acquire your company. This is a losing strategy. Instead, pursue mutually beneficial partnerships, even simple ones like participating in marketplaces like the Salesforce or Hubspot platforms.

Avoid unsophisticated corporate venture capital (CVC) investment or ties if you can. Some CVCs are excellent. Many, however, are small-minded and are primarily playing defense. I have seen these kill exits for founders out of spite or jealousy–in violation of their own economic interests. These investors are hard to predict and more likely to do bad things. Especially avoid investment if it is tied to commercial deal terms. The commercial deal should stand on its own. There are exceptions, but they are very rare.

The endgame

You want to run a company doing meaningful revenue, growing at or ahead of market expectations, without any major issues (more on that below). Ideally that company is in a position where it could be profitable. If it isn’t profitable, that is because you made a choice to invest in growth. This gives you either infinite runway or the option to have infinite runway; both are valuable leverage in any M&A discussion.

Ideally, a company writes you an offer, or makes an offer, unsolicited. You can usually take this as leverage to get other offers, in a competitive process. You can also start this process yourself without an unsolicited offer, and can get a great outcome that way–but the best outcomes come when the market is pulling.

Note that if you do get an offer, you have a fiduciary obligation to present it to your board. As a founder, at this point you may lose some control over the process.

When you run a sale process, whether you do it yourself or hire a banker or advisor, you will want to get at least 3 competing bids. Once they’ve submitted LOIs and you’ve negotiated, chosen one, and signed it, you’ll enter confirmatory diligence. That’s where all of that “basics” stuff we discussed up front will be important–if you did things right, you’ll sail through this, close the deal, and ride off into the sunset.

What can go wrong

A lot can and does go wrong. A deal is not done until the wire has cleared! This is perhaps even more true of acquisitions than it is of investments or IPOs. The two biggest pitfalls, by far, are taking shortcuts and being unintentional.

Shortcuts, for the most part, create problems that cost money and time to fix. Shortcuts are doing things like not having lawyers review an NDA or an important, material partnership agreement. Not researching a trademark. They’re not paying attention to employment law or IP agreements in a foreign country. Perhaps sending contractor payments as cash rather than doing proper reporting and withholding, or promising an overseas contractor equity. They’re firing someone with a lot of expletives over slack (yes, that happens, and I’ve seen it). They’re having to restate your cap table because a SAFE was missing.

Shortcuts take time. Time kills deals. Running down employment law in another country takes weeks (hire local counsel, get them up to speed, etc.). Cleaning up IP agreements takes weeks. Tracking down missing SAFEs and getting angel investors to sign things takes weeks. It adds up.

All of these would be trivial to do right initially. Ask a lawyer. Use Rippling, Deel, or Remote. Retain an HR consultant. Use Carta. None would cost more than $1-2k to do right. But any could cost $50-200k to fix. Make too many mistakes, and the acquirer might call off the deal–either because they’re worried about what they haven’t found yet, or because they start to question your team’s ability or judgement, or because as time elapses people simply changed their minds (or the people themselves change).

Enough goes wrong outside of your control, you don’t need to add more time. A friend’s company was mid-acquisition process when the acquirer’s CEO unexpectedly died on vacation. That deal survived but only after heroic and somewhat lucky efforts by the founder to bring in a competing acquirer. Elon Musk bought Twitter right when it was about to close a deal to buy another founder’s company. That deal blew up. Time kills deals. Shortcuts take time to fix. Just don’t.

During a deal, shortcuts and unintentional behavior overlap when it comes to your operating plan. Early on your plan is less important. VCs haircut forecasts, so being conservative or accurate is perhaps a losing strategy. You have a lot of cash in the bank from investors, and that is what you use to pay salaries–not revenue. When you get to an acquisition stage, you need to hit or exceed your plan. Not only does that revenue pay for expenses, but also acquirers actually care. Not hitting your plan during the diligence process it is one of the biggest red flags. This is perhaps the most likely mistake to kill your deal or haircut it significantly. Make sure the operating plan you present is realistic, not a fantasy. If you are “selling the model”–that is, the promise of future returns in your financial model, not the revenue or profit of today–put the rosy numbers far out–not during the 3-5 month sale process. That way if you miss them, it will be after the acquisition closed.

In the beginning, and over the life of a company, being intentional can be the difference between getting offers and shutting down silently. What you focus on, saying no to most things, building the right relationships–this requires being intentional. So many things go wrong for unintentional teams. They usually lack a coherent strategy, argue a lot, and struggle to focus both as humans and as a business. They spread themselves thin, try to do too many things and do none well.

Unintentional behavior is most pronounced with people. This is where a founder hires someone opportunistically even though they don’t really have work for them. Perhaps that changes the exec team dynamic, perhaps it drags the company in a different direction. This is where an underperforming employee is kept on out of fear or cowardice.

Want more?

M&A is complex and it’s risky to try to substitute 2,422 words for professional, bespoke advice. It’s also tough because the very people who are best suited to explaining it to founders are the worst people to ask when you remain uninformed–your board, investors, etc.

If you’d like to learn more, I’m doing a live event, Exits for Founders, in a couple of weeks. Sign up here, and reply with anything you’d like me to cover that perhaps wasn’t in this post. Feel free to forward this (or the course) to other founders who are curious about exits–I’ve heard from so many lately, in private, it seems a hot topic.