For many years I’ve been tutoring founders on ways to exit their startups. And each time I explained that there are three ways: going public, being acquired, or paying off your investors I felt a little silly offering the third alternative, as I’ve never heard of anyone doing that!
But the article Benching your VC: The employee buyout playbook by Yaacov Coehn co-founder and CEO of Harmon.ie is worth reading, even if your company is not currently in a position to be acquired.
The article is a case study in a management buyout of a venture capital-funded startup. Here’s the essence of the story in the first paragraph:
Grow or sell? It’s the ultimate dilemma for startups. This dilemma can become even more acute when you’re the CEO of a VC-funded startup. You want to develop your product, while driving sales and marketing, so that the business can reach its full potential, but your VC’s fund has reached maturity and they want you to sell your company to a larger firm. What do you do when your values as a business leader come into conflict with your investors?
Not only have three of my startups been acquired, but I worked on acquiring three companies when I was working for the Thomson Corporation (now Thomson Reuters). So I’ve seen both sides of this dilemma. Fortunately for me, our investors were tremendously supportive in all instances; we didn’t have to battle with our boards over deciding to sell the company. Although the VCs were far more aggressive in setting the asking price!
Yaacov Cohen takes you through his experience step by step as he negotiates a management buyout of his company. The obvious question in this situation is, “Where do you get the funding?” In this case, the capital came from three sources: management’s pension funds, friends and family, and a bank loan – which represented 75% of the purchase price.
I’m not going to reiterate Cohen’s story, but it’s worth recapping the happy ending to what was a difficult multi-month process:
No matter how you slice it, an MBO will drastically change a company and how it does business. Among our employees, we see a new sense of shared ownership and shared responsibilities. No longer “just” employees, the staff is motivated to go many extra miles to get things done, because they have a stake in the results beyond their paycheck. We were able to attract new talent to the company. We were able to attract new talent to the company including a VP of AI and an experienced GM for our North American business. We also leveraged the MBO to attract industry leaders to our newly appointed board of directors, so even as an employee-owned company, we are receiving top-notch guidance from an independent board.
Even the customers have been affected for the better:
Our customers have been impressed, too. Because the people they are working with are now owners, customers feel they are getting better service and results from their relationship with the company.
One of the sayings I use in my mentoring is “He or she who has most options wins.” Yaacov Cohen’s story proves that the third option for a company looking for an exit – buying out the investors – is not simply theoretical, it can and has been done successfully.