Simple Notification Service?

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.

If you were able to raise 1MM a year ago then your valuation a year ago then was definitely much above 1.7MM. So the question is, what happened in a year for you to agree to a 1.7MM valuation?

If the business is really in a bad shape with limited runway, then the existing investor should agree. Because getting their $1MM investment converted to $300k plus some potential earn-out is better than the business going down to zero.

But if the business is doing fine, you have the cash and the product, then you owe it to your existing investors to try to fulfil the story you sold them, or get a better valuation such that the investor B gets back at least 1MM plus the risk-free return rate in your area (~1.04MM). The earn-out is a bonus and should not be factored in for this.

There are all sorts of businesses, there are big picture VC-fundable businesses that exit via IPOs and there are lifestyle businesses that exit via acquisitions or turn into family businesses.

For AI wrapper apps the model seems to be to exit via an early sale to someone less hands-on with tech, who wants to run a business at what they see is the cutting edge but cannot get it off the ground. It will work until there are buyers who feel they can add their marketing skills to the mix, grow MRR and make a bigger exit to another buyer down the line.

Music works for tactical motivation in the moment

Isn’t it a lovely feeling!