Exit Strategy Options
Your startup might not reach IPO. That's fine. But your exit options vary wildly in founder economics. Here's what acqui-hires, acquisitions, and asset sales actually mean.
Most startups don't go public. They get acquired or they die. Acquisitions are your Plan B. But "getting acquired" can mean very different things: you get $5M for your company and $4M goes to investors, leaving you $100K. Or you get $5M, you get $2M, and investors get $3M. The structure matters.
Founders often don't negotiate exits well because they don't understand the options. You need to know what you're negotiating for.
The Core Math
Exit proceeds get paid to preferred shareholders first (via liquidation preferences), then common (founders and employees). Know your cap table. Know the preferences. Know what you get.
Three Types of Exit
Each has different tax and economic implications:
1. Acqui-Hire
What it is: Buyer acquires your company primarily for the team, not the product. They may shut down your product immediately.
Typical deal: $5-20M total, split between:
- Payroll (your team for 1-2 years)
- Signing bonuses for key people
- Retained earnings paid to equity holders
Founder economics: Usually poor. If deal is $10M split 70% payroll, 30% equity, and you have 2x liquidation preference investors, they get paid first. You might walk with $200K while a $10M acquisition sounds huge.
Tax: Partial W-2 income (payroll), partial capital gains. Parachutes can trigger golden handcuffs (clawback agreements).
2. Strategic Acquisition
What it is: Buyer wants your product, customers, or technology. They keep the business running (sometimes as separate division, usually folded into acquirer).
Typical deal: $20M-$500M+ depending on revenue and growth. Structured as:
- Base purchase price (90% of deal)
- Earnouts (10% contingent on hitting targets post-close)
- Sometimes retention bonuses for key people
Founder economics: Better. You're selling an operating business with customers. Fewer liquidation preference issues if sale is big enough.
Tax: Typically capital gains (preferable to W-2 income). Earnouts can be ordinary income.
3. Asset Sale
What it is: Buyer acquires your assets (code, customer list, IP) but not the company. Usually means employees don't transfer and company is wound down.
Typical situation: Company is failing. Buyer wants specific tech or customer list to integrate.
Founder economics: Variable, but usually poor. Buyers know you're desperate. They low-ball. And asset sales trigger different tax treatment (potential recapture of depreciation on assets).
Tax: Complicated. Different assets taxed differently (capital gains vs. ordinary income). Often worse tax outcome than stock sale.
Founder Economics Depend on Timing
Your exit price is meaningless without knowing your preferences. Here's a realistic example:
Cap Table Example
If acquired for $30M (good outcome):
Even at 30% ownership, you get $10M split among 3-5 founders. That's $2-3M per founder before taxes and vesting clawback.
If acquired for $15M (bad outcome):
At $15M, preferred investors get paid in full. Common shareholders get zero. This happens to founders regularly.
Know Your Preferences
Before you negotiate an exit, know the liquidation preference stack. If Series A has 2x and you're raising Series B, you need clarification on whether Series B is 2x participating or 1x non-participating. This affects your waterfall.
Negotiating Exit Terms
When an acquirer approaches, you need to optimize for founder outcome (assuming you care about this more than investor preferences). Here's what to push for:
Founder Earnouts
If you get $30M now but could get $35M in 2 years if you hit targets, fight for earnout terms that let you pursue it.
Retention Incentives
Negotiate for retention bonuses for key team members (vests over 2 years). Better for morale than clawback agreements.
No Clawbacks
Avoid liquidated damages clauses or indemnification caps that eat into your proceeds. Fight these hard.
Founder Roles
If you'll stay post-acquisition, negotiate your role, title, and reporting. Affects retention bonus vesting.
Exit Negotiation Mistakes
1. Not Understanding Your Waterfall
You get a $30M offer and think you're getting rich. You don't know that Series A has 2x preference and Series B has 1x. You get $0.
2. Negotiating on Headline Price Alone
$20M with 50% earnouts is different from $20M all cash. Earnouts are risky (you have to hit targets post-close, no guarantee buyer cooperates).
3. Ignoring Tax Impact
Stock sale (capital gains) vs. asset sale (different treatment per asset) vs. merger (tax-free reorganization possible). Talk to your tax advisor before signing.
4. Not Fighting for Your Share
Investors might push you to accept low exit price (better for them due to preferences). You should push for higher price to get your share.
5. Accepting Clawback Provisions
"If you fail to hit post-close targets, repay part of your proceeds." This is common in acqui-hires. Avoid or cap it. You don't control post-close execution.
When to Pursue Each Exit Type
Pursue Acqui-Hire When:
- Product-market fit is elusive but you have a strong team
- Market is saturated (better to join a big platform than compete)
- Series C is unlikely and you're burning cash
- Technology can accelerate buyer's product roadmap
Pursue Strategic Acquisition When:
- You have product-market fit and customers
- Revenue is $500K+ ARR
- A larger player wants to buy you instead of build (time-to-market value)
- You want to continue your work (product stays alive)
Asset Sale:
Usually a last resort. Only pursue if acqui-hire or acquisition won't work and you're running out of runway. Expect lower valuations.
Planning an Exit?
Eagle Rock CFO helps founders understand exit options, model outcomes with different structures, and negotiate from a position of knowledge.
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