Does Price Matter? | Hacker News Reader

Does Price Matter?

avc.com

48 pointscwan12 comments

Summary: More great advise from Fred, you're adding somebody to your family when you take on an investor not just getting a silent pile of money. So consider what else comes along with the money and don't always just take the highest offer -- look at the value of each. The same applies for a sale transaction.

Opinion: While this is somewhat self serving for him to get people thinking this way it is true. Consider this example: Investor A offers you 5M at 20M for 25% of the company but doesn't know or understand your market and investor B offers you 4M at 16M for 25% of the company but has built a successful business in your market before and can help you avoid costly mistakes.

The same applies on a sale transaction. If you think the acquirer doesn't understand your business then the maximum value you'll see from that transaction is on the day of it. If you believe they understand it and it'll continue to grow you can stay on board and create much more value of which you'll be rewarded for.

I'm sure the opposite also holds true: just because as an investor you can squeeze a low valuation, there can be such a thing as too low. So sure you may have won the round of negotiations, but you both lose when the founders lose interest and the co tanks.

It all comes down to "smaller piece of a bigger pie".

http://www.paulgraham.com/equity.html

I'm not sure I get it. From the perspective of the investors, the 300 million sale seems better. Are they not trying to maximize the return on their money?

The expected return is (probability of success) X (value at success). In practice, the probability is what matters far more, and so that's what you optimize for.

It doesn't matter what valuations/etc. are in place if the company tanks.

But this is a company being sold. It's an exit.

It depends on the type of "sale", but for most company sales, the acquisition isn't exactly like jumping out of rocket as it's taking off. (Where you wouldn't care if it makes it to space or not, because you've got your bag of money.)

It's not atypical for every investor at every stage to have to sign something like a 180-day lockup for their stock in the event that an IPO takes place, meaning that no large holder can just go sell everything (which would drive the price way down) for at least 6 months after an IPO occurs. So in the IPO case, which is probably what Fred encourages his companies to shoot for, even the VC's need the company to last a good, long while.

For smaller acquisitions, it's possible that everybody gets instant liquidity, but the founders will always have to hang around at BigCo for a while to make sure the transition is smooth, and most M&A deals probably have vested stock that requires certain growth numbers are met (somebody please correct me if I'm wrong here). In that case, this is good advice for the founders, because 1) life will suck if BigCo doesn't treat you well and 2) you have a financial incentive to make sure things keep going well.

The other case Fred refers to is for a company that is still growing, and doing a financing round, not an acquisition. For a company to ever have a "B" in it's valuation, it probably will have to do multiple large financings along the way, so everybody is in bed with one-another for years.

I'm under the impression that a lot of large sales have earn out clauses and portions in escrow, and bad chemistry in the sale could cause big problems getting all that cash. That may be a factor.

(I've never personally gone through an acquisition myself, on either side of the table).

great question

go check out the comment thread on the post

great discussion on that exact issue

The company might be more profitable in the long run if it has better chemistry with its acquirer, even they didn't make the highest offer.

This is predicated, of course, on investors taking a long term view. I think it's been shown that we don't tend to do that.

There is also responsibility toward employees, customers, and partners, and to leave a reputation for building great companies and products. It's only a pure exit if none of those things will carry on and the investors get only cash, which would almost never happen. These other responsibilities are unfortunately not respected by many investors, which is why founders try to keep control, a la Facebook and Google.

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