In this third episode of the five-part series on Exits Strategies, Basil Peters explains why every company should have an exit strategy. Far from being the last item an entrepreneur considers, in fact, the exit strategy should be the first item on the agenda at startup. The exit strategy drives the business strategy and is a tool to ensure that all the stakeholders are working towards the same goal. Innovative equity vesting plans can also drive alignment.
This Exit Strategies workshop was first presented at the Golden Triangle Angel Network in Waterloo, Ontario on May 8, 2015.
KEY POINTS FROM PART 3 – EVERY COMPANY SHOULD HAVE AN EXIT STRATEGY
We have all heard the adage: “if you build a better mousetrap, the world will beat a path to your door.” Or how about this one: “Just focus on the business and the exit will take care of itself”. Both myths are demonstrably untrue, but worse, following them can destroy significant value for the shareholders. In the worse case, they can cause the company to fail altogether.
To the contrary, the exit process should be carefully thought through and planned, like any other business process. Indeed, the exit process should drive all the other business processes. If the exit process is paramount, then it forces all other processes to support it, achieving alignment throughout the company. Importantly, the exit strategy forces all of the stakeholders to align behind the goal and forces any reservations and dissensions to the surface so that they may be resolved.
In these hot financial markets, strategic investors and investment companies are searching for acquisitions. One may call you. This may be someone beating a path to your door, but it may not be good news if you open it. Negotiating an exit with a single buyer and no back-up often means that your investors receive less at exit. Far better to work to a considered exit plan with buyers in competition. You can manage the cold call into the process.
No company should embark on an exit unless all of the stakeholders are aligned. If they are not aligned there is a high probability that the exit will fail and often take the company with it. A fundamental misalignment often arises between the founders and angels on one side, and venture capital investors on the other. Founders and angels are often content to take an early exit at a lower valuation while VCs invariably want to wait for the highest valuation possible even if the execution risks kill the company in the meantime. Developing the exit strategy at the outset will force the entrepreneurs to confront the issue before the financing strategy is taken.
Your employees and managers also need to be in alignment with the exit. Incentive equity plans are a useful tool if used carefully. Most companies vest their equity awards linearly over 3 – 5 years, which means that in the last year or two, employees have vested most of their equity and the remaining unvested portion is not enough to keep them motivated. As a radical alternative, consider having 50% of the equity vest only at exit. With half of their upside continually at risk, employees will remain better focused on the end game.