Chapter 39What Not to Do
Here were some mistakes that I made personally when we were going through the M&A discovery process and ended up receiving no acceptable offers in 2022. These mistakes caused the company to waste valuable time and resources working on the wrong thing, key employees leaving, and a world of pain as a founder when all of it could be avoided.
1. I spent full time on M&A-related tasks and detached myself from the company day-to-days, resulting in an identity crisis when no deal happened. Instead, I should have still regularly contributed to areas that were enjoyable to me when it comes to company building.
2. We got too attached to the original thesis when the market signal is clear that it is no longer in fashion. Even though we have had a number of inbounds based on the original thesis, when the tide turned and the market was no longer interested in the creator economy thesis, we should have pivoted quickly, and gone back to the drawing board.
3. I was not being open-minded about what the joint venture would look like. Each acquirer had their own ideas on what the joint venture looked like, and there were instances when we were too insistent on our version of that future. For example, a company was looking to acquire us because of our expertise in building software tools, but we insisted that the future was all about community, which they were not interested at all and ended up passing up on us after a full due diligence.
4. We set up a carve-out bonus to the entire team prematurely in anticipation that a deal was imminent. We were really confident that we would be able to find a buyer before June 2023. When that date came and went and we had no acceptable offers, everyone was paid a one time bonus but also made aware that we could not find a buyer. This resulted in two key employees leaving voluntarily.
5. We told the whole team we were exploring M&A. This was the worst of mistakes. It gave everyone false expectations that we were going to be imminently bought for an insane amount of money. We actually had multiple employees who preemptively exercised their options anticipating that they would get better tax treatment from capital gain. The initial excitement for a week or two turned to anxiety and eventually despair. Every 1-1 with the employee was no longer about product building but ended up becoming I giving updates on the M&A. Also in a perverse way, it felt like the employees were no longer working for me but instead I was working for them. As soon as I told them that the company was going to be sold and the goal was to get everyone retained, certain employees got the notion that they became unfireable. So in any case, do not tell the employees that the company is for sale.
Here are a couple other mistakes based on anecdotes from other founder friends that you should avoid making.
1. I have heard countless stories of founders prematurely jumping into a term sheet without doing enough due diligence or properly discovering the market. What they did not realize is that term sheets are often non-binding and also exclusive. And instead of having done majority of the market discovery and due diligence, once a term sheet is signed, the potential buyer held all the cards, and oftentimes stopped responding to emails and purposely let the term sheet expire after doing some diligence and realizing that it was not a good fit. Instead, it would be much better to have alignment on the joint strategy, complete with all the necessary due diligence, and then jump into the term sheet, which improves the likelihood of the deal closing and also ensures that the maximum number of potential acquirers are involved in the process.
2. Rage quit when things weren’t going well. This is perhaps the worst thing a cofounder could do. It meant that the other cofounders or even the investors would have to step in and clean up the mess. This would be detrimental to one’s reputation and likely would result in the worst financial outcome. If anything, make sure the succession plans are all drawn out and think through this decision seriously before throwing in the towel.