Chapter 44More Negotiations with the Buyer

From experience, I've found it's advantageous to preemptively propose your own retention allocation plan to the buyer. Offering a well-thought-out draft based on the criticality of team members to integration and the future roadmap—rather than simply basing allocations on seniority—can serve as a strong foundation for further discussions. Make sure that retention payout as well as stock option schedules are structured evenly across the integration timeline, avoiding scenarios where team members might feel incentivized to leave prematurely or feel unfairly compensated if payouts are delayed too far into the future. Also avoid the situation where the founders get the overwhelming majority of the retention bonus, as this is often a function of the team's criticality to a successful integration and its size. Make sure to do ample research and talk to your bankers or advisors what a reasonable allocation should look like for your situation. An allocation that is skewed towards founders could lead to diminished trust from the buyer that the founders are greedy and also potential key contributors leaving from the perceived unfairness. In the worst case, a buyer could call off the deal.

Send over a spreadsheet of your entire roster along with their titles, areas of responsibility, current salary, and proposed retention bonus breakdown to the acquirer. Add a notes column that provides the justifications for why each person is getting what they are getting. Then schedule a meeting to walk through the spreadsheet together. Throughout this negotiation, understand that the goal of the acquirer is to ensure that all the key stakeholders are appropriately incentivized and ensure that they stay for the entire retention period.

Surprisingly, rather than immediate raises post-acquisition, acquiring companies may initially suggest pay cuts for certain employees or executives. The reason could be a number of things, but most likely it is because your existing salaries may be out of band compared to the acquiring company's internal payband, and this is especially true if the acquiring company is outside of Silicon Valley. It is essential not to take these proposals personally. Instead, calmly provide clear justifications for the current compensation rates of your team. Remember, every detail in this negotiation is open for discussion. Rather than accepting base salary cuts, propose a modest increase in base salary balanced by a slight reduction in retention bonuses. Psychologically, this approach often feels more palatable and respectful to your employees.

Acquiring companies are usually conservative in assigning titles to new employees, often down-leveling roles to maintain parity with their existing staff or as a reflection of interview performance. But understand this, being acquired and getting a return for all your stakeholders is the best title you will ever get in the startup business, so personally, I would not go to war if your title was previously CEO and post acquisition it is reduced to a general manager. There are rarely two CEOs in a company, and even rarer when the acquired company CEO steps in as the new CEO right away. However, if you genuinely believe in the potential of the acquiring company and foresee yourself or your team staying beyond the retention period, it can be beneficial to advocate for larger roles or more senior titles to better capture future upside and opportunities for advancement.

You should anticipate that the acquiring company will propose headcount reductions as part of team reorganizations. It's crucial to carefully evaluate and push back against proposed reductions if they could negatively impact business outcomes or integration goals. There will inevitably be roles that are redundant, but perhaps there are other areas in the acquiring company that could use the extra headcount, and you should do everything you can to explore those avenues. Communications regarding employee departures should not happen during the negotiation phase but should be strategically timed for the closing. Disclosing personnel changes before closing could lead to morale setbacks of the entire team, as key employees may even feel the need to preemptively leave in anticipation that they may be let go.

This phase is likely your final chance to leverage additional benefits or considerations. Beyond standard negotiation items, also discuss remote work policies, comprehensive benefits alignment, or specific personal needs or situations (ex. Work visas, planned vacations, maternity leaves, etc) for key employees, especially those critical for integration. This is your opportunity to negotiate improved terms on employee benefits coverage, or additional resources needed for the team's smooth transition.

In summary, while the headline terms may already be agreed upon, these detailed final negotiations significantly influence employee satisfaction, successful integration, and long-term outcomes for your business. Proactively engaging with the acquiring company, clearly communicating your rationale, and maintaining a collaborative yet assertive approach will help ensure a successful and beneficial outcome for all parties involved.