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Showing posts from October, 2009

Strategic vs. Linear Acquisitions

Acquisitions are up from the same time last year, mostly because the economy had everybody holding their collective breath while they figured out how and where the failure of the economic system would kick them and how hard.

The exhalation started sometime in Spring and is about to accelerate--it's a perfect time for companies with cash reserves to pick up strategic targets. A friend on the West Coast has advised a few recent acquisitions, and his update got me thinking about it.

Note: These views are from an industry observer--I might have some of this wrong, but this is my take. The M&A experts will likely want to pipe in with adjustments and other perspectives.

So what makes an acquisition strategic?

Typically, a company is acquired by a complementary company for its team, its products, the revenue from those products, and its profitability (EBITDA).

Profitability is an obvious reason; take a company’s price/earnings ratio, add profit to it, and the stock price will likely incre…

Startup Valuation & Early Stage Deals

I'm going through the exercise of creating a deal document in anticipation of raising investment. In the past, I've used the convertible note with kickers for early risk as a way to simplify raising money without having to set a value for the company. The note simply converts into the first VC round, with a discount (20 to 50% is reasonable depending on timing, stage, etc) on the VC price.

This time around I'm going to set a valuation, though, and put a stake in the ground. The reason for this is initial valuation is relatively arbitrary; what matters is the percentage of ownership at the exit. 20% of a company at entrance  is meaningless at exit if there are liquidation preferences, and the sale is for less than any cap on the preferences.

I'll explain. (The numbers I'm putting forward are not for my startup--they just make the math easier.).
Say I'm raising $400k, at a post-money valuation of $2 million, ($1.6 pre-money value plus $400k),  with typical downside …

Pricing Employee Options

A startup I advise on occasion just repriced employee options 50% higher, while pricing preferred shares lower. On the face of it, it seems skewed, but when you really look at it, it's very skewed. Here's why.

Let's say employee options are priced at .15 cents, and preferred is at .40 cents.  We'll say there are 10 million shares, so that puts the value at around $4 million.

But there is $3 million invested, and the liquidation preferences are set at 2x, so Common won't see anything for any sale of the company under $6 million, and won't see the same price per share as Preferred until $12 million.

So Common = zero for anything under $6 million. And the current value as determined by the preferred share price is $4 million. So Common shares and option pricing should be not much more than zero.

Pricing options has gotten more complex since the introduction of 409A (See Brad Feld's posts about that here). But common sense tells us that you can't assign zero va…

New Startup: Sizing & Funding It

I've been working in stealth mode for the past two and a half months on new software that I hope will really help people. The closed beta starts sometime next week. I'll announce the software here and hope you'll give it  a try.

A question I've been pondering is something familiar to founders: should I raise money, how much should I raise, and what on what terms?

After starting three technology companies, two music companies, and a consulting business, I'm working on creating a worksheet to evaluate a number of things about how I'll build this one.

Like Chilisoft, I won't have co-founders, but will have a very small team that can get things done as I try to evangelize the products. I haven't thought too much about team composition, except that there will at least three developers, focused on three different parts.

A five-member team feels about right, and more than seven feels like too many moving parts. I will need some help with marketing tasks, so it'…

New Startup

I've been working in stealth mode for the past two and a half months on new software that I hope will really help people. The closed beta starts sometime next week. I'll announce the software here and hope you'll give it  a try.