Mergers & Acquistions in Consumer Internet

Mergers & Acquisitions in Consumer Internet Sept 2011 contact Ashish Kelkar [email_address] http://www.linkedin.com/in/ashishkelkar

Before we start some things to remember:
Every deal is different and yet similar.
This talk and learnings are based on my experiences in the finance and corporate development team at Google (2004 - 2010).
CEO's, Founders, CTO's and employees are all humans and have very different agendas and expectations. It can be especially emotional for first time founders.
No good founder ever starts his company with the intention of selling.
There is usually no magic formula, but you can do things to get a favorable outcome.
Lets get rolling......

Types of deals
- Mega deals ($$$, people, usually public, SEC fillings)

- Large size deals ($$ like AdMob, ITA software etc)
- Mid size deals $50-$200+M (Slide, Playdom, Playfish etc)

Deals in Web2.0 space for this audience
- These also happen to be the sweet spot for mid to large companies
- Anywhere between 1 to 30 people (sometimes larger)
- Usually $0.5 - $3M per tech employee (developers and product mgrs)

- These deals can be broadly classified as:
Talent and Product acquisitions – 80.00%**
Product and Traffic acquisitions – 18.00%
IP and code base – 1.999%
Sales and channels – 0.001%
Let there be no mistake its mostly about people, people and people (talented people!!!)
**numbers are illustrative only

Finding targets?

1. Most acquisitions are a result of inbound engineering and product leads from development teams
teams feel ownership and it's a successful integration
result of personal relationships that continue
2. Product roadmaps and inputs from development teams
3. Teams are always scouting, meeting founders in social and business settings.
4. General blogs, social media and especially specific product related blogs, publications.
5. VC's and bankers showcasings - usually not productive
Focus on 2 and 1 in that order.
Look for specific holes in companies product offerings, do not assume they must be working on it because you can move much faster (Picnik, DocVerse, C-search)
Hire good talent, usually good people know other good people at larger companies.(Etherpad)

Do you want to sell? Typical target company - Launched, some traction, not the next instagram. - Freemium model, thousand plus users, tens to hundred paying customers. - Few angel investments (convertible debt), looking to raise first round of serious funding to start expansion. - Usually M&A teams are competing with Series A term sheets Considerations - Your expectations and reality check (market, traction, product) - Your personal financial situation - Your employees and their future - Potential dilution versus selling today

Deal mechanics – quick look at mechanics
(since I will be referencing a lot of these milestones)

- Scouting and very preliminary talks, discussions with technical teams
- Internal discussions with engineering and product teams - Thumbs up
- Initial discussions with business and start-up
price expectations
type and reason for deal - talent or non talent deal
people / hiring expectations (especially non-technical staff)
process and talent evaluation / interviews
- Interviewing and talent evaluation (more on this later)
- MOU or LOI
- Term sheet
- Diligence
- Signing
- Closing and any PR announcements

Talent / IP acquisitions - you have decided to sell Companies ideally want to evaluate the talent as early as possible and you want to delay this as much as possible - Why? - MOU / LOI / Term sheets are non-binding (except no-shop clauses) - The only reason I have seen companies walk away from deals is because the interviews did not go well. - Company morale - Confidentiality Bad news - you do not have much of a choice - Start with senior technical folks, founders, CTO, Chief Architect before term sheet then the others. - You could keep the team in dark saying we are evaluating a commercial partnership that could turn into an acquisition. - Set expectations with team about the deal falling thru for any number of reasons.

Talent / IP acquisitions - you have decided to sell How can you help? - Be as open as you can about the teams strengths and weakness - Share resumes, skills and your perceptions - Become part of the interview process, get and provide information on who may be the best interviewers The M&A team want's to help? - Sensitize our interviewers - Let them know that the stress level may be high (people are interviewing to keep jobs) - We like to get deals done, not rewarded for deals falling thru!!! What does the buyer want out of this exercise? 1. Make sure they are buying the real deal 2. Identify key employees 3. Enables distribution of stay bonuses (backend of purchase price)

Term Sheets (everything is negotiable!!!)

Basically 3-5 page document that lays out the key terms (punch list)
Price and breakdown (Frontend versus Backend)
example $5M purchase price - $2M upfront and $3M in retention paid over 2-4 years or milestones. (detailed example next)
Any clawbacks.
Type of deal - stock versus asset purchase - this has tax implications, stock deals usually result in smaller capital gains versus asset sales.
No shop clause - only binding term - negotiate for as small a term as possible (~30 days)
Escrow (10% for 1 year to 20% for 3 years) - negotiate for as small an amount and term as possible
IP indemnities - research the company's acquisition history and be realistic about your product IP, this may or may not not be a point you want to care about.

Example of purchase price split:

Four person company (3 founders, 1 employee)
Founders (40%, 40%, 5%)
Employee (0.30%), Employee option pool (14.7%)

Two angel investors (convertible debt)
Investor A put in 30K @ a cap of 4M i.e. for any deal or acquistion valuation >4M this investor gets 0.75% equity
Investor B put in 50K @ a cap of 3M i.e. for any deal or acquistion valuation >3M this investor gets 1.667% equity
$10M purchase price ($4M upfront and $6M backend retention)
Investor's get paid:
Investor A 0.75% = 75K, Investor B 1.67% = 167K from the front end $4M, we are left with $3.758M + $6M (backend)

Pro-rata of remaining equity Founder 3 and Employee 1 are superstars that we want to absolutely retain : we negotiate with the key founders and this is what the final resolution may look like. The above retention is in addition to a regular employee package **above example is illustrative only

Diligence and final agreement

The buyer will go thru all your formation docs, financing docs, commercial documents, code, any IP, patent filings, employment arrangements, leases, privacy policy. Problem areas and how to avoid issues.

Hiring and firing (job, no-job and fixed terms, stay bonuses)
you will be making a lot of judgement calls regarding employees salaries, titles, stay bonuses, be fair and open with your team and the acquirer.

Commercial agreements that you have in place - issues that cause problems
exclusivity
termination rights
audit rights
and change of control clauses.
You may not have much choice when you sign these as a start-up but be cognizant of the fact that these may bite you during an acquisition
Open Source - GPL, LGPL licensing, documentation

Diligence and final agreement (contd.)

Employment agreements and non-compete.
If the terms seem very onerous, have an employment lawyer take a look at this and get their advise, generally ask for specifics and avoid broad language around type of industry that you cant work in.
Privacy policy and PII gathering
Dealing with paying customers.
Transition services.
All of these depend on the future product plans.
In most talent acquisitions the products in its existing form is killed so you need to have a 30-90 day transition in place for customers.
Usually refund the pre-paid customers or some other monetary benefit for goodwill.
PR and messaging.
insist on some kind of PR (blog post etc.)
if acquirer is reluctant to do a big PR push (usually they are for acqa-hires) you can still get the word out thru email to customers or a blog on your website.

Again everything is negotiable, depends on the situation.

Overall pointers

It is a good idea to have the services of a good corporate lawyer in these transactions.
You should always make the business decisions and calls, have the lawyer for advice and to understand the jargon.
Before you sign the term sheet is probably where you have the most leverage.
The technical / product team championing you is probably your best friend in sticky situations - they can push from within.
Almost all transactions come to a point where both sides are willing and want to walk away, but the transaction does happen.
It is an emotional roller-coaster especially for first time founders.

Takeaways

Never start or optimize your start-up with an acquisition in mind (it should be an afterthought, fallback).

Hire great people, be generous with equity to real talent - talent attracts talent and their network is your way into larger companies.

Build awesome features that compliment / supplement product gaps in companies offerings and they will find you.

You can screw your employees big time if you are not careful and its never a good idea.

Appendix (Convertible debt)
Investor A gives 30K with a $4M cap -what does this mean

Basically start-up is too early to put a valuation at this time, so when the first serious financing occurs if
pre money valuation is < 4M then investor A gets a pro rata equity share say $1M valuation then 30K / 1M = 3%, at $2M its 1.5% and so on upto $4M
pre money greater than or equal to $4M, investor A gets 30K / 4M = 0.75% of equity.

I would like to demystify mergers and acquisitions, specifically in the web/consumer internet space. Proposed Agenda 1. What are companies in the consumer internet space looking for? 2. How do they find targets? 3. What could you do to become a target if you so desire? 4. Talent and product acquisitions versus others acquisitions. 5. To sell or not to sell? 6. What to watch out for? 7. Negotiations, Term Sheets - what should you care and what should you not care about? 8. Talent interviewing by acquirer, purchase price splits and emotional issues around employment 9. Avoiding diligence trip-ups - commercial contracts, open source, employment non-competes, PR. I was formerly with the Google Corporate finance and Corporate Development team (7 years) and did over 15 acquisitions. Would propose an hour with Q&A as we go along to make it interactive.

http://n0tw0rthy.wordpress.com	771
http://en.wordpress.com	1
http://68.166.223.4	1

Mergers & Acquistions in Consumer Internet

by Ashish Kelkar on Oct 12, 2011

Accessibility

Categories

Tags

Upload Details

Usage Rights

3 Embeds 773

Statistics

Mergers & Acquistions in Consumer Internet — Presentation Transcript