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On December 9th, Venture Archetypes and Greenberg Traurig pulled together a panel of some of the top entrepreneurs and most active acquirers in Silicon Valley to answer your questions about start-up M&A. So whether you’d like to know what the serious players are looking for or how to position your start-up for a healthy acquisition, you’ll find the wisdom right here!. Read the rules.
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How do you establish a valuation for an early stage company in the absence of Comps. with early revenue or perhaps even pre-revenue?
Elad Gil
Twitter (sold Mixer Labs)
I think valuations can be misleading. I have been helping people who have been doing this, especially on the smaller side, let’s say 5 to 10 million dollar acquisitions. Certain things can actually cause really big movements in the value that the entrepreneur ends up with. The first is the lockup period, or the vesting schedule. If you're not going to stick around, let’s say you have a three-year vest and you leave after a year, you just left two thirds of the value on the table. As an entrepreneur, you may have gotten some of that up front, but fundamentally you need to take that into account. So a 10 million dollar acquisition where you own 30 or 40% of the company because you haven't raised a lot of money could be worth one million dollars to you instead of three or four million dollars or whatever multiple on top of that. The second is dividending out cash or not. If you have in the bank a million dollars in cash that you raised, and somebody is buying you for five million dollars and you don't dividend out the cash, you just subsidized the acquisition by a million dollars. So you just reduced the deal value by 20%. The third is the upside of the currency. Some companies are going to have multiples in terms of where they are today, especially certain private companies. And some aren't, so that also impacts the upside that you have. So I think that, ultimately, straight valuations are a little bit misleading and you should really take into account all these different factors when you're considering selling a very early stage company.
Amin Zoufonoun
Director, Corporate Development
We have a magnetic dart board. But seriously, for a private company that is small and with a small team, maybe unproven technology, and no revenue yet, it's difficult. We have one luxury which is: we're a comp. maker in the Valley so we can look back at our previous deals. We also use advisers and lawyers who give us an idea of the other deals that are happening in the Valley so we have a pretty good idea of what is happening in the market and through our VC network in terms of valuation. But again, for those types of situations, where you can't do a DCF and you can't do traditional comp. analysis in a public market, it is really a negotiated valuation. You look at what you did in the past that had similar size, similar build time, and a similar size team. You consider who the VCs are, what kind of returns they expect, and how much money has gone into the company. And then you do your best to come up with something that's a win-win and reflects the market, and then it's negotiated.
Taylor Barada
Senior Director, Corporate Development
The other thing to do is to twist the question a bit. I think we fundamentally view an M&A transaction as a collaborative beginning to a relationship that we are going to have. With two deals we've done this year, the Citizen Sports and the Dapper deal, the leadership team in both of those has come in and taken bigger roles beyond just the business they were running pretty quickly. And frankly, we're looking to get a feel for when that can happen and when they can do it. So, in order to put together a deal, my assumption is, yes, companies are bought, not sold, and I definitely understand that. But on the flip side, I can't make anyone sell who doesn't want to sell, and I can’t make them take a price, so I don't even try. I think we focus very much on trying to pay a fair price for a business that we both believe we can make bigger together. So one of the rules that we have is, we won't put an offer out without seeing the cap table and understanding the dynamics of what you're facing. Frankly, sometimes that helps you a lot because we realize that, due to the natures of the venture world, sometimes we need to stretch a little bit more just to keep all the stakeholders happy. And it's one of those things where within a realm of reason, sometimes you can do those things. It's in everyone's interest to get the facts on the table and understand what the real dynamics are that are going on in the boardroom when you’re having these discussions.
Michael Brown
Manager, Corporate Development
I think Elad's point is really good. I think he's right. I'll just add one additional piece: One thing that goes into our consideration is managing the esprit de corps of the Facebook engineering team. I think this was mentioned a little bit, but we can't just spread extra frosting all over these new engineers that are coming in because for folks who have joined us through the front door it's pretty frustrating. It's kind of a shady thing to do, when you look at the guy to your right, or the woman to your left, and you say, Wait a minute, why did this person get a significantly better deal than I did? We face that and we take it seriously. I was in an engineering meeting recently with directors talking about buying a company for about $20 million dollars of Facebook stock, and we got a significant amount of push back from some of the engineering directors. They said, Well, wait a minute. Do we really value these people that much? Because we can take 10 superstar engineers from Google -- just kidding -- that we really admire and we could provide each of those 10 superstars with a $2 million dollar bonus, right? People take those alternatives very seriously, in terms of how we're using our company's money. I think our engineers will listen if we hire someone who is a reputed superstar, and someone will say, Yeah, OK, I get it. That person maybe got paid better than I did because they're a superstar and I am just a normal star, or whatever. And I think that doesn't disrupt the spirit of the company that much. But managing an engineering culture, and scaling it where you are trying to keep hundreds, or maybe someday Facebook will have thousands of engineers. Certainly, these companies do because they're bigger and successful. It's hard to manage those competing interests. I am the deal guy so I want to do lots of deals because doing deals is fun, and buying companies is fun, and it's very exciting. But at the same time we need to manage the engineering culture because ultimately those people have to work together, hopefully for years to come.

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