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Reap the Benefits of Success

by on August 11, 2016

Exit Sign

The whole purpose of being the CEO and/or Founder of a high growth software company is to benefit from the growth in value you’ve created.  While it’s possible to build a big company and create a “lifestyle” business, as I call it, where you have a comfortable living from the profits you generate, that option becomes less viable as more people, from employees to investors, have an economic interest in the business’s outcome.  All of them are expecting you to guide the business to an exit.The expectation on everyone’s part is that the company will have a “liquidity event” within 5-10 years of founding.  

Top talent will join the company for the stock options.  Investors raise money on the promise that the money will be returned , along with significant profits, within 10 years. That means a typical fund spends five years actively investing and the next five years encouraging their portfolio companies toward an exit.

That means that you are going to find yourself with one of three outcomes for your company within 10 years:

Outcome Likelihood
IPO 0.1%
Acquisition 40%
Out of Business 50%
Anything Else 9.9%

Going Public

Taking your company through an Initial Public Offering (IPO) process is the exit option most CEOs dream about.  If this happens, and you as the CEO/Founder continue to own a sizable portion of the equity, your ownership will now be liquid and can be converted into cash at any time, though there may be some restrictions (the devil is in the details, of course), just by calling your stockbroker.

The problem is that an IPO is an extremely complex process, costing an average of $3 million and requiring a large team of lawyers, accountants, and investment bankers, plus ongoing costs to be compliant with all of the legal requirements.  The biggest challenge, however, is generating sufficient interest from Wall Street investors, requiring a “road show” where you’ll present your company’s story hundreds of times in a number of different cities in a matter of days.

Then there is the matter of size.  In 2016 investors are not interested in software companies looking to IPO with revenues less than $100 million.


Given the odds against an average company doing an IPO the most common way a positive outcome occurs for a high-growth software company is through an acquisition.

Typically this means that your company’s product ends up being a natural extension of the acquirer’s own products, or provides traction in a market that the acquirer needs to enter.

Cash Deals

Pure cash exits are typically restricted to those cases where the acquirer is looking for value that the startup has already created, as opposed to people who will create more value in the future.  That could mean high-value users (for example, subscribers paying big dollars on an automatically recurring basis, as with mobile phones or cable television), monopolistic market rights (such as a transferable exclusive license to a patent, brand, or sales channel), or technology that would be expensive or time-consuming to replicate (such as a complex algorithm).

In the case of the vast majority of software companies acquired by large strategic buyers for something in the range of $10 million to $40 million, a large part of the acquisition interest are the people and talent of the seller.  The buyer wants the technology AND the people.  They want to bring the team, the ideas, the experience, and the knowledge to augment its own activities, or serve as the core for a new product offering or line of business.

In this case the buyer doesn’t want to give the management of the company “walking-away money” to put it nicely, but regularly referred to as “F-You money” in the industry, because the goal is to lock them into contracts with the company for at least 2-4 years.

There are also often earn-out provisions associated with these types of deals.  This is where pay additional value for the company at some point in the future upon the occurrence of some event performed by the locked up management team.

Stock Deals

Purchases for stock happen in one of two situations: either the buying company is very large (Google, Facebook, etc.) where the stock has real, determinable value and is therefore effectively the same as cash, or the company is a much smaller one, maybe only a bit larger than the target, where cash is tight and the stock it’s paying with is the one way it can do the deal.  In the second case everyone effectively becomes partners and is incentivized to help the combined company grow rapidly.

After the Exit

As the CEO/Founder of an acquired company you will forever have on your resume that you pulled it off: you built and shepherded to an exit a successful, high-growth company. Even better, you will have the extraordinary feeling of satisfaction that comes from having your vision realized and the value you created recognized and continued into the future.

If the acquisition was an acquihire, as the CEO you will have a highly compensated job with a larger, stable company for several years.  However, if you hit a home run, along with your new role may come a great deal of financial benefit in the form of cash and/or stock. You’ll dive into the task of integrating the team into the acquirer, you’ll take on the challenge of bringing new energy and vision to your parent company, and you’ll have a productive and interesting two years while you earn out your share of the acquisition proceeds.

And then?

Well, if you’re like 95% of the successfully acquired CEOs….. you’ll be looking for a new adventure!


If you’re wondering how you build a company that you can sell for a premium, contact me to discuss the Valuation Amplification Process.

I also invite you to download the white paper and learn the 5 step process on How to Quickly Increase Your Valuation: a Proven 5 Step Process.


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