A serial entrepreneur turned VC who's been through three acquisitions explains how much to disclose.
By Jason Lemkin (Managing Director, Storm Ventures)
Founder Question: ”How can you as a founder talk to a buyer and what are common errors disclosing too much information too soon, especially when the buyer is a competitor or in the same space? I’d would love to see a follow-up post on protecting yourself or business in case the deal falls through and they steal your roadmap?”
Answer: Serial entrepreneur Jason Lemkin, a venture capitalist at Storm Ventures, in July 2011 sold his company EchoSign to Adobe. Prior to that he was part of two previous companies that were acquired. Here is Lemkin’s personal opinion on this.* It originally appeared on exitround.
At EchoSign, I made plenty of mistakes in our acquisition. In an earnest attempt to be 100% transparent, I shared everything except our detailed customer list with Adobe. I thought the easiest thing was to share everything. We’d been around for five years, had tens of thousands of customers and millions of users, and anyone could use our app. And a Google search would turn up the rest, so what was there really to hide?
Adobe was quite clear that if we didn’t sell, they’d buy a competitor (which is pretty standard pre-term sheet). But they did say it repeatedly. So, I decided I would not share any actual customer names and contact info, so I wouldn’t be handing them a list to steal our customers. Which they were fine with.
But this 100% transparent disclosure created too many sub-issues. It created 60 people in the meetings asking me things that didn’t matter. Buying a company at the end of the day is a binary decision. You decide to buy it or not. In truth almost nothing else matters except your team and traction.
With my first startup as a co-founder, NanoGram Devices was acquired by our direct competitor in part for our technology. I shared nothing with them except our customer contracts, which they already knew. That is, only revenues. I only allowed technical due diligence with an agreed list of third parties, who then summarized their learnings of our technology to both sides. This was necessary because they were clear they were trying to copy our technology.
Finally, when I was an executive at startup BabyCenter it was acquired — and we shared absolutely nothing except top-line revenues. We closed the deal in one weekend. That was the best way, albeit it was easier there because it was a true CEO-to-CEO deal. My biggest mistake of all three was the last one, when I let Adobe do four weeks of due diligence. They learned nothing they didn’t already know, and it just created lots of drama. I should have just said no: Take it or leave it.
Give what's Needed, Not More
As for information, unless they ask for it, don’t give it. Even if they ask, don’t. Just say no. If they do keep asking, just say you don’t need this to do this deal. They’ll ask 20 times but there are only maybe four things that really matter.
You know what you know as an acquirer already — before you do any diligence. How much diligence did Facebook have to do on Instagram? Zilch.
These are land mines for corporate development or legal teams, not the decision makers. At some point, the decision’s already been made to buy you. All it’ll do is stretch out the process or add risk to the deal. Nothing good comes from diligence. Most founders don’t know that so they over-disclose.
In SaaS companies what matters are the revenues and how does that fit into the acquirer’s strategic plan. In consumer, it’s the user base numbers and how does that fit into the acquirer’s strategic plan. If you let them do all this work, they’ll call all 100 customers you’ve ever had.
Don't Be Over Secretive
The core top-line metric is revenue or users. Those numbers are not so confidential–you can find ballpark numbers online. It’s $50,000 revenue or maybe it’s $80,000 revenue. Who cares? You can figure it out from Compete or Quantcast. You can share top line numbers and bottom line loses if that matters. Then they can try your product.
What else do they need to know? For information on the team, there’s Linkedin. Revenue, users, growth, losses, and bios–it’s not that complicated.
Who, Not What
Who’s the person asking? In an M&A transaction, a lot of people will get involved. If you’re being asked for all this other stuff from a lower-level person, you may worry that it’s just a fishing expedition. However, if this is an acquihire, that could be normal.
Usually only one person matters: Your champion or sponsor, who is typically the CEO or a VP, with a couple of people with him. At the end of day all that matters is what your sponsor thinks. That’s the person who really wants to buy the startup. So while I say don’t give them everything, I’d be highly transparent (and ethical) with what really matters to this person. Transparency builds trust.
The most important thing to know is it’s risky for your sponsor. If it blows up it’s bad for them. You don’t want to add to their risk and anxiety. You want to be hyper-transparent with your champion. Anything below that: no. There’s nothing in it for you being transparent with their minions. People confuse that.
And your sponsor–the person in the company who will own your team–just needs to know these certain things. Make sure your sponsor has that. But she doesn’t need to know everything in the weeds.
Are They Fishing?
You can’t know for sure. One way to know they’re not “fishing,” is when, say, Larry Page calls you. Or Mark Zuckerberg calls Kevin Systrom. There’s zero percent chance there.
But a lot of deals are VP-level deals. The VP will reach out directly if they have a relationship. With VP-level deals sometimes you don’t know if it’s a fishing expedition. But no one is wasting their time. Companies are always trying to decide whether to build, buy or partner. In other words, “Should I partner with you instead of building a competitor?”
There’s no such thing as a pure fishing expedition with no desire to do anything, People take the idea of a fishing expedition too seriously. So take the meeting and learn.
With our sale of EchoSign to Adobe (for nine figures), it was five years from first meeting to close, mid-2006 to July 2011. Was that first meeting in 2006 a fishing expedition? Perhaps, but if we hadn’t taken that meeting we wouldn’t have had a familiarity and relationship in 2011.
Building relationships with potential partners (and later, acquirers) from the day you start your company–that’s your job as a founder/CEO. Those relationships lead to a lot of things. It can lead to a partnership. In 2006 we worked on a partnership with Adobe building a product. It never launched, but that’s where we connected. The same person who headed that partnership was the same SVP who later bought us.
To conclude: Just Say No. Revenues + What’s Already On Google = Enough Diligence.
*This is a much longer version of a Quora post Lemkin wrote on this topic.
About the blogger: Jason is a managing director of Storm Ventures where he focuses exclusively on early-stage SaaS/enterprise startups. Prior to Storm Ventures, he served as CEO and co-founder of EchoSign through its acquisition by Adobe. Prior to EchoSign, Jason co-founded NanoGram Devices.