Why You Probably Won’t Get Rich When Your Startup Is Acquired

 

Condescending Wonka Startup Meme Why You Probably Wont Get Rich When Your Startup Is AcquiredBefore you leave your job to join a startup, consider this cautionary tale from a company that many would say “won” the startup game.

The first Bay Area startup to hire me was acquired last week. Financial terms of the deal were not disclosed. The company launched with plaudits aplenty, no business model and $2 million in venture capital from one of Silicon Valley’s most outspoken investors.

“Our investor gave us 18 months to figure out our business model,” the co-founder and CEO told me back in 2011. But at a recent meetup during the PR Summit, he commiserated to another startup founder how hard it was to get the same users who loved his product to pay for the premium version.

Time just ran out.

This post is part of a Startup Edition series on strategies for getting startup jobs http://bit.ly/18O0pqs

Being acquired–at least the way it probably went down–was not the business model the investors and founders had in mind. The acquiring company recently raised $11 million in VC, indicating the acquisition was in company stock, likely with a nominal cash payment for the investors and founders.

A “soft landing” is nothing to celebrate. The company almost certainly ran out of cash. Investors were’t ready to double dip, and the founders were extremely fortunate to find a buyer for their technology and user base, rather than shutting down.

In spite of it all, acquisitions of this type are extremely rare. The so-called acqui-hire is a graceful way for founders and investors to admit defeat without losing face.

As an investor you want your money to grow. VC is risk capital. Deal flow is about having early access to likely winners. The VC model rewards investors who get in on one of 12 to 15 blockbuster deals per year. Most startups fail. Three out of four startups don’t return investor’s money, according to Shikhar Ghosh, a senior lecturer at Harvard Business School.

Investors hate losing, but portfolio acqui-hires aren’t much better. It’s basically losing money. Just not as much.

Startup Equity Dos Equis Guy Why You Probably Wont Get Rich When Your Startup Is Acquired

Every investment has an opportunity cost. The money you put into one Deal A is money that can’t simultaneously be invested into Deal B. If Deal A goes pear-shaped and Deal B becomes Pinterest, you’ve ostensibly lost out on hundreds of millions of dollars in returns (possibly billions).

Acquired founders save face, walk away with some money and will have cushy jobs inside a much larger company. Their salaries are guaranteed, and, if the tech press is to be believed, their product will survive as a standalone offering.

But the employees who dedicated more than two years of their life to the acquired company are the real losers. There’s an opportunity cost for being at a startup. Employee equity (ESOP) is supposed to be a hedge against the long hours, stress an uncertainty of growing a startup. But just as investors can only put money into one investment, employees can only work for one startup. Money is replaceable. Time is gone forever. If their company was acquired for stock (as we’re assuming), then employees will have to invest more years of their life before the stock of the new company has any real monetary value. And it’s still possible for the acquiring company to fail.

Before you get too excited about working at a hot new startup, consider what happens to the “lucky” companies who pilot themselves to an acqui-hire. Most startups that fail don’t have the chance to paint over it with a better brush.

This post is part of a Startup Edition series on strategies for getting startup jobs http://bit.ly/18O0pqs

 

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