1--Confidential

The Decision: When to Sell?(and how)

Jeff BussgangGeneral Partner

Flybridge Capital Partners

2--Confidential

Context For My Perspective

• General Partner at Flybridge Capital Partners, early-stage VC firm based in Boston

50+ active portfolio companies, Fund III: $280M, 5 GPs

• Former entrepreneur Cofounder Upromise (acquired by SallieMae),

VP at Open Market (IPO ‘96)

• Entrepreneur-in-Residence at HBS

• Author: Mastering the VC Game

3--Confidential

Passion

Belief

Economics

Dilution Risk

Team

Five Considerations

4--Confidential

Exit Considerations: Who, What, When, and How

• Early on, ask yourself, “If we build this, who would buy it?” or, even better, “If we build this, who MUST buy it?”

• Get on the radar screen of relevant executives of potential acquirers as early as possible via business development partnerships, competitive wins, & conferences

• Have transparency and trust between you and your investors – constant dialog about “your number”

• And, transparency and trust between you and your team (professional team and “personal team” – i.e., spouse/family)

5--Confidential

Reasons Not to Sell Reasons to Sell

• Will lose control of decision making• Will lose chance to build further value,

then sell at a better price• May not be able to preserve startup’s

culture• May not gain financially if investment

terms (e.g., liquidation preferences) mean founders won’t share in exit payments

Eroding Prospects for Startup:• Adverse market changes or dangerously low cash• Founder burnout or rising tensions between founders• May soon lose control of exit decision and termsAttractive Post-Acquisition Possibilities:• Achieve wealth goals• Use as stepping stone to become serial entrepreneur• Gain resources to build startup• Work for attractive parent company

Why Sell? Why Wait?

Ultimately, this is a decision based on RELATIONSHIPS, EMOTION, PERSONAL PRIORITIES and other factors…not

just economics

Ultimately, this is a decision based on RELATIONSHIPS, EMOTION, PERSONAL PRIORITIES and other factors…not

just economics

Source: HBS Professor Noam Wasserman, Founding Dilemma (2012), forthcoming

6--Confidential

M&A Tactics

• Have a solid funding alternative when talking to acquirers

• Nothing spurs a prospective acquirer like walking away – and it only takes two parties at the table to create an auction

• Market windows come and go – valuation inflection points need to be mapped and considered carefully

• Negotiate carefully: It can unwind as quickly as it winds – don’t let it distract the company and demoralize the team

“Great companies are bought, not sold.” “Great companies are bought, not sold.”

7--Confidential

Taking Money Off the Table: Aligning Interests

• Entrepreneurs have a life-changing, binary outcome and everything at stake, whereas VCs have a portfolio effect

• Why does allowing founders to take some money off the table align interests?• Takes enough day-to-day financial pressure off the entrepreneur

to allow them to “swing for the fences” alongside the VCs

• Otherwise, risk is that founders take the first good offer and don’t have the courage, patience and fortitude to build for the long haul

• $2-3 million seems to be the right sweet spot number - enough to pay down the mortgage, tuck away college money, and feel comfortable taking some additional risk, but not enough to be complacent

“Once great entrepreneurs get a taste, they get hungry for more.”

“Once great entrepreneurs get a taste, they get hungry for more.”

8--Confidential

• The company balance sheet needs the money and fund raising isn't a slam dunk (which is case for most companies)

• It’s an early stage round – not enough value has been created

• Founders have only been in the company for a few years

• The company doesn’t have break-out potential

• Founders are unwilling to commit to staying for a certain period of time

• Founders are not key employees going forward

• The founder has already earned their millions in past (rationale is to align incentives)

When Not to Take Money Off the Table

9--Confidential

“An IPO is nothing more than a financing event”

Exit Consideration:IPO

• Gail joined as CEO in 1999 and led company IPO in 2007

• All four of her VCs had different mindset: 2 wanted to put more money in and step on the gas, 2 people were nervous and wanted more proof points

• 2X revenue to $15m from previous year, and projected to double again in 2006, but still no decision about additional funding

• One investor believed company should sell when it has between 25 and 40m in revenue - “That’s when you’re the prettiest, and whole new risk in scaling up to next level.”

• In 2007, the business felt like it was at the right scale, mature enough, and had the full executive team

$107m IPO, price jumped 75% next day!

Today: $700m market cap, $200m revenue

We had too much passion around

what we wanted to do. Nobody was in a

hurry to sell.

10--Confidential

Is exiting the best thing for the product?

“Only exit if you’re done.” - Jack Dorsey of Twitter

The best entrepreneurs don’t focus on money, they focus on their passion and dream for the business

Final Thoughts

11--Confidential

The Decision: When to Sell?(and how)

Jeff BussgangGeneral Partner

Flybridge Capital Partners