Hi everyone
Looking for some advice about what to do here. It feels like there is nothing straight forward in this startup journey :)
So we got offered to purchase our b2b saas platform for let’s say 1.7M now, with an earnout later. It is a great opportunity for us as they are leaders in our industry and almost completely derisk our earnout… it’s been a hard few years getting here.
The interesting part is the breakdown of funds for the 1.7M now.
Investor A invested 2 years ago with 500k, they now own approx 19pc. Investor B invested last year for 1M but said he wanted pref shares on liquidation. We never thought anything of it and put in shareholders agreement.
But… they omitted preference on sale of shares, ie preference shares. So there is no clause in our SHA covering preference for return of the first 1M back to them before the rest is split.
This means that in fact myself and cofounder do best out of this and clear about 450k each. While our investor B only gets 300k now and has to hope the earnout goes to plan, which it will! But that’s an aside.
But investor B is now arguing that he did in fact say this to us in person at the time… preference in sale or shares as well as liquidation.
We are unsure what to do, do we stick to our guns or agree some sort of compromise where we give a bit each to them?
What would or have people done here before?
at the time we barely understood what it meant to be honest and just deferred to the lawyer when it was asked for in the term sheet. the lawyer pretty much copy pasted the clause from the term sheet. Investor Bs mistake…
If it’s indeed as useful an acquisition to the buyer as it sounds, should you not be priced at higher than your last valuation - why are you priced lower?
This mis-pricing is what is causing investor B to lose.
Ideally you would sell at your last valuation plus some small increment so Investor B would get a “no-profit no-loss” deal with returns at least equivalent to the G-Sec rate, and later the earn-out would hopefully kick in for their reward in taking on the massive risk they took with you.
The earn-out is your reward for successful transition, handover and integration, it is in place as a risk-mitigation mechanism to avoid the firm dying out after acquisition.
Not saying this is the case here, but it’s very normal for companies to buy out smaller competitors to shut them down. A very famous example is the “face unlock” on Apple phones, which used to be a startup that used a grid of invisible infra-red laser dots to map a 3d object. This tech was licensed out, for example to the Kinect, and I even had a Lenovo laptop with this feature in the webcam, but once Apple bought them out they could no longer sell to anyone else, because Apple wanted to keep this feature exclusively for their phones only. So you never really know what happens post-acquisition.
Earn-outs are not part of the purchase price and should not be seen as such, much less sold to an existing investor in that way.