One of the fastest ways to create wealth for yourself and your family is to start a successful business. The problem is, upon building a successful business, most of your wealth is on paper. You can’t actually spend it. To change that, you will need a liquidity event. The most frequent liquidity event is an acquisition.
If you read sites like TechCrunch, you know that acquisitions happen every day. While much is written about the terms of the deal, little if any is written about how the deal got done. That’s where today’s guest comes in.
In this episode, I talk with Neelan Choksi. Neelan is an entrepreneur that has been instrumental in the founding of three companies that were acquired by the likes of Amazon, VMware, and BEA Systems. During our discussion, we drill into why companies are acquired and how it all goes down. Enjoy!
Have comments, questions, ideas, or feedback? I want to hear it. Tweet me at william_griggs.
Topics Covered In This Episode
- Why do companies acquire other companies?
- What are the typical scenarios?
- What’s in it for the acquired company?
- What are the typical scenarios?
- How do companies get acquired?
- How do we ID potential acquirers?
- How do we connect with them?
- When should they connect with potential acquirers?
- Who are we trying to connect with? (Persona)
- What do we have to be careful of?
- What are the others steps? What can our audience expect?
- Who needs to be involved?
- Are there any books or other resources you’d recommend on the topic?
Startup Slingshot Radio’s audio transcription is done by GMR Transcription
Neelan Choksi: Thanks for having me. This is awesome. I now feel like my career is complete, I checked off an item on my bucket list. So, really, really excited to be joining Startup Slingshot.
William Griggs: You made it. You finally got to the pinnacle of your career getting on this podcast.
Neelan Choksi: Exactly. Honestly I’m not even sure I’ve been on a podcast before so this is actually, all joking aside, this is actually a unique experience for me.
William Griggs: Awesome. Well, we have a lot of entrepreneurs in the audience so I’ll give you a little overview. They view based on the emails, the tweets, the conversations, they view company acquisition as this black box. It’s like this mystery. It’s this magic. It’s this thing that you read about in Tech Crunch, you read about in Venture Meet, so and so got acquired for this much, so and so got acquired for this much, so and so is an acqui-hire. People are thinking about it. They’re reading about it. They just don’t know that much about it, not that much is really out there about how a deal actually gets done. Tt’s out there about the acquisition price and maybe the reasoning but how does the deal get done.
So, I want to dig into that in our time together today, I kind of want to open up that box, rummage through it in an effort to kind of educate the audience on the process. So, not only do they know kind of how it works when they read the Tech Crunch article but they can actually use the information that we’ll share in this podcast with them but before we do that, the tradition is always to dig into the guest’s background so they can tell us briefly about what they’ve been up to, what they’ve been working on and we don’t want the guest to be too modest, lots of people have come on the podcast, I’ve had some success I’ve worked on some interesting companies, we want to actually make it blatantly obvious for the person that’s listening to keep listening.
So, there’s so many things they can be doing, they can be out doing shots at a bar, they could be watching television, House of Cards season three is around the corner, they could be catching up on their House of Cards, there’s lots they can be doing. We want them to keep listening. So, can you tell us a little bit about your background and so it helps set the stage, set the credibility so they can keep listening as we dig into this important topic?
Neelan Choksi: Yeah, sure, my background and I always, when I talk about myself I always kind of talk, I have to start here because this is why I do what I do but I’m a dad of two, a husband who probably works too much work and maybe doesn’t do enough at home and that’s who I am at the end of the day but what I’ve done with my career in particular these last 15 years, I think it’s important for your audience to know the biases of the speakers you have because that affects things.
William Griggs: Sure.
Neelan Choksi: So, my background has been primarily in enterprise software with a little dalliance in the B to C software side of the world. I’ve always been on the business side in particular over the last 15 years. So, although I’m not – I can’t say I’m technical any longer, I do have a technical background. I was an engineer by education and frankly coded for a few years in my career but those days are long past me.
Tasktop, which is the company I’m at now which will give you a little bit of insight into the types of things I’ve done, I’m the president and COO which at Tasktop means all of the business functions roll up to me. So, to go to market parts of the organization sales, marketing bus dev. I was heavily involved in our fundraising activity where we raised $11 million from venture capitalists after bootstrapping the company. The company was bootstrapped for seven years. I was around for four and a half of those.
So, as far as what Tasktop does and again enterprise software, so, we produce very important but niche integration technology and real quick if you think about how big companies build software, there’s portfolio managers, developers, business analysts, scrum masters, testers, helpdesk people. This is a mass village of people that are used to build and deliver software for whatever reasons and what’s interesting is that all those people used different tools, the tools don’t talk to each other, the people sometimes don’t talk to each other. They’re geographically dispersed.
What our technology does is make the tools talk to each other but relevant to the topic at hand which is about acquisitions, my history has been I’ve been through three successful acquisitions where I was in a leadership role or the point person frankly for those acquisitions of the company I worked at so I’m really on the sale side and also went through a handful of scenarios where we didn’t make it to the finish line where even in some of those companies that eventually got acquired down the road as well as I’ve also been on the buy side a few times where I’ve been at companies where we’ve acquired other companies and even there, again, probably 10 to 20 failed attempts where we were exploring a potential, a possibility of looking at acquisition where it didn’t get to the finish line. So, I kind of have seen the experience from being acquired to acquiring companies and from not getting the job done as well.
William Griggs: It sounds like the perfect set of experiences, both of the buy side and the sell side to kind of have that holistic approach and understanding of what’s going down, what’s inside that mystery box for our audience. Let’s dig into it. Why, why are companies acquired? We see a few different reasons in some of the Tech Crunch things and some of the Tech Crunch articles are related in media might be a concept of an acqui-hire or there might be intellectual property or – what are the main scenarios around why a company would want to hire or acquire rather another company?
Neelan Choksi: Yeah, so in my experience, most of the things I’ve been involved in have been very much about the strategic value, the synergies that where kind of one plus one doesn’t equal three or equal two, it equals three or four or five and that’s really I think where I’ve seen the most success with acquisitions. It’s where an organization is typically missing a piece of technology in their stack and to kind of achieve something that their customers want. They use an acquisition to kind of get there.
In general, it’s all about driving dollars for the acquiring company and ideally in a lot of the ones I’ve been involved in we didn’t have maybe the largest sales force but we had a cool piece of technology that at least a set of very loyal customers loved and the acquisitions in a lot of cases helped that company get its technology into a far broader market but it typically, at least in the stuff I experienced, it’s been very much about this idea of strategic value of one plus one frankly equaling five.
It can sometimes be about IP. That definitely is a part of it that again, an organization is missing a piece of technology and organizations worried about a strategic thing happening to them where one of their key partners has kind of built a similar product of what they’re offering and now they’re looking for another market to apply that technology to. So, the acqui-hires I’ve seen makes sense. It’s something I’ve seen a lot more commonly now then I have maybe even as five years ago, ten years ago and I actually think that has to do with a little bit of the fact that we see a lot of companies today that aren’t really companies. They are products that got some seed funding that maybe even got a series A round.
But they’re products, not companies and an acqui-hire model makes a ton of sense in that world where you can kind of take that thing that hasn’t quite hit the commercial success. You can get some really smart talented people and bring them in. Again, acknowledging my biases, I just haven’t been part of an acqui-hire either on the buy side or the sell side. I’m generally looking for something more than that.
William Griggs: Got you. So, yeah, that’s a great view. So just to kind of reiterate just to make sure they got it at home for all the people playing at home, it’s thinking through that strategy, it’s the one plus one equals five you talk about and that’s where it comes in to where the person who’s buying the company is thinking I have some options, right, I can either build what this company has or I can either buy what this company has and it seems like if I’m understanding when they’re able to buy it, they’re able to – assuming they have the stock or the cash on hand to do that, they’re able to get to the market a lot quicker and it seems like with a lot of these strategic opportunities where one plus one equals five, it means hey, this company is getting to where it has an amazing product and hey, the company that’s doing the acquisition has a sales force, has a customer base where they can start to plug that in and that’s how they get to five when they’re only adding one plus one. Is that along the same lines?
Neelan Choksi: That’s exactly it. So, if I think about the places – the times where I’ve been acquired for example, at BEA we’ve took MBA acquired solo metric. The technology actually, it was an interesting dynamic but the technology was actually put into the BA product to make it more valuable to make the data access layer in that particular case work better and the sales piece of it, we had four sales guys at the time wasn’t that important to them.
The revenue wasn’t that important. It was filling the gap in the technology. On a different side, the time to market was absolutely critical in the number of the acquisitions we did at Spring Source where we knew to get to where we wanted to get to and the whole plan throughout was IPO but to get to an IPO, we didn’t have all the pieces and we used acquisitions to add in – we had a very developer centric product, we needed to add some of the ops pieces, some of the monitoring pieces.
So, in that organization, we used the acquisitions to fill holes in our stack with the end goal of kind of getting to that IPO, it didn’t work out, we got acquired but the interesting part was in that particular case, the customers were absolutely critical and there were synergies both ways, we could sell the stuff we had at Spring Source to the set of customers of the acquired companies as well as have additional things to sell to our existing customers and the old adage is true where it’s a lot easier to sell something new to somebody you’ve already sold stuff to in the past than it is to find someone new to sell something to and there it was absolutely a case of one plus one equal five.
William Griggs: Very cool, yeah, so the time to mark in factors in like you’re talking about – we talked a little bit about the strategic side of things, the IP it seems like, one of the most relevant or recent was kind of like Google and Facebook kind of adding to their war chest the patents to protect themselves from each other, so that can be a strategic thing, not necessarily the one that most of our founders or most of the audience would be playing into. It seems like most of them will be shooting for potential IPO depending on their business model. If not, thinking about this more strategic path and then as they shoot for the, what is the saying, shoot for the stars and land on the clouds so an acqui-hire would kind of be a landing on the clouds in that example I guess.
Neelan Choksi: Yeah, exactly and again, I think at the end of the day, the acqui-hire model kind of implies almost definitionally that there’s something not quite right about the business model of the business being acqui-hired and maybe it’s a gap, maybe it’s I didn’t realize to get to commercial success, I needed two more rounds of funding, whatever the case might be but there usually is probably a hole there because most entrepreneurs I know love their business and will do the things necessary and fight as hard as they can and take loans and throw credit card debt and do all of these very difficult things to drive their baby forward and I do think sometimes an acqui-hire ends up being a acceptance that yes we built something great, we have a good team, just something is missing, either the product isn’t quite right, the market product market fit isn’t quite there, something’s missing that says ah, I’m gonna accept something that maybe isn’t a strategic multiple but one that I know gives me comfort and ideally hopefully the technology will be used.
The scariest acqui-hires in my mind, at least as an entrepreneur are the ones that I’m being acquired, they’re going to toss my product out and they’re just going to employ me on something else. I’ve just taken a job and again, financially maybe the right decision but the baby that I’ve been working on for the last two years, one year, six months, five years, ten years, whatever it is doesn’t have the value that I thought it did and that’s, again, not a negative but it’s just that is the reality and accomplishing something – actually a fellow entrepreneur in Austin, Bret Hart once said, your IQ goes up 20 points after an acquisition, immediately after the acquisition and it’s a really valid point because you’ve won. You have something under your belt that’s saying look, I’ve proven myself and I’ve had a success. I’ve built something that in the ultimate score card I can put in the win column.
William Griggs: That’s what we want for the audience. So, before we dig into how does it all go down, how do companies get acquired, let’s think about the joyous moment of what’s in it for the acquired company and what does it actually feel like?
Neelan Choksi: Yeah, so it’s interesting, the acquisition process as you’ve described it, kind of magical or something like that, the reality is not that pretty. It really isn’t. There’s a long haul between the start of the process and the crunch base article, the Tech Crunch article. So, it’s kind of funny but at least in all the times I’ve been acquired, at the end of it, it’s almost – and I’ve talked to different entrepreneurs where I’m not the only one, it’s not this sense of euphoria and maybe that’s because I haven’t had a 2,000 X multiple – it’s a little bit more in the kind of the realistic kind of discipline range but it’s almost a sense of relief.
It wasn’t like I wanted to go out and party and not wake up the next morning type of scenario and it ended up being much more, oh wow, I got to the finish line like this is great. It’s a grind but it’s also in retrospect now I can look back at it and say the experience is awesome, what you learned through the process is incredibly valuable but what’s in it at the end of the day for the acquiring company is let’s start first and foremost the dollars, it is an exit and it tends to be real dollars. My family is more comfortable because I’ve had those three exits and that’s – at the end of the day, as a provider that has a tremendous amount of value.
The victory, that has been one of the things for me that has been incredibly valuable. The actual sense of I have worked, at Tasktop, I’ve been here now four and a half years but at some of my other startups it was four years, a couple of them, one was three years when the acquisition happened and that sense of at the end of the day, your options certificate as an example isn’t worth the paper it’s printed on until something like an exit happens.
It really is – at the end of the day that’s the reality of the situation in most cases and the sense of I’ve accomplished something and I’ve gotten this done and it doesn’t just apply for the president in my case, it applies down to the sales guy, it applies down to the developer, they were part of something that succeeded and they got some money that maybe allows them to live a little bit better life and that’s a big part of it.
There are other things that happened though too along the way. I know a number of friends who either the investors or the individuals – the best way to describe it is start up fatigue. Building the company is hard, especially if you’re a leader of it, it’s a pretty lonely place up there and it’s not a great reason but there are scenarios where the investors have been in something for eight or nine years and they’re like hey, when am I gonna see a return on my money and in a lot of cases, that’s where you’ll see an organization go out and get a banker and we’ll get into some of that a little bit later but get a banker and say hey, I’m gonna go pitch my company out there and see what it’s worth and see if this is something that we want to move forward with kind of ending it as an individual entity and getting an acquisition.
Then for a lot of companies there’s also a lot of stuff that also plays into account. It’s getting a breath that you didn’t have, getting a sales team as I’ve discussed earlier. The ability to be a part of a bigger picture, all of a sudden someone says hey, I’ve done something here in my startup that’s pretty valuable, that’s pretty cool and it can be even more. It can affect the lives of more people if I get acquired and those are all absolutely fabulous reasons for an acquisition and frankly it’s those scenarios where you have that ability to make – again, the one plus one equals five where you see the larger dollars, you feel that sense of accomplishment that’s greater than just the dollars, that’s greater than just the achievement of getting something to an exit.
William Griggs: Yeah and that’s a great overview from both the founder side, the executive side, the operator side as well as kind of the company side, what’s in it for the company, what’s in it for the individuals, how that feels, how that – how you think through that process. So, let’s dive right in, let’s start kind of unpacking how companies actually get acquired. You talked a little bit about hiring a banker and going out there. What do you think about or how do the discussions unfold around identifying potential acquirers?
Neelan Choksi: My experience has been you build a great business. You build a great business and the key part to that is the customers want whatever it is you’re selling. Whether it’s a software product, whether it’s services, whatever it is, the customers are passionate and love you and that in my mind is the key to almost every part of the activity of getting acquired. If you have that, then what you’re doing is kind of – it’s not necessarily ID-ing potential acquirers. It’s partnering with the right companies that drive the right behavior to maximize what you can deliver to your customers.
It involves – it’s the people you see at conferences and a lot of my companies, we’ve used thought leadership as one of our key marketing strategies and so we’re speaking at conferences. We’re talking to lots of companies. We’re influencing the industry and in the course of doing so, you end up talking to a lot of different companies and people and that generally is a key part of it.
Again, I’ve never been acquired by a customer but that’s another part is that you suddenly become so critical to an end customer that they’re like we need to make sure this technology is kind of part of our portfolio. So, in general it’s kind of what you do normally as a business to drive your business and the acquirers kind of fall out of that just out of natural relationships that you have.
There is the other option of course going out and getting a banker and generally it means you’re a certain size even if you were to go with a boutique banker where you put together a deck, they identify the 50 companies that you might be interesting to and you kind of work together to kind of get the word out there. That’s another equally good option. It’s just one that I haven’t followed typically in my career.
William Griggs: Got it. So, you talked a little bit about a customer could potentially acquire you because they find what you’re doing so integral or interesting to their business. You talked about going out and finding partners maybe through bus dev or corp dev to develop those partnerships. You talked about leveraging thought leadership and how do you get your company out there but it sounds like the crux of it is continuing to build that valuable business, these are some of the ways that you’re doing it and from there the relationships will be birthed. Is that correct?
Neelan Choksi: Yeah, that’s exactly right. When Lexical got acquired by Amazon, Lexical, we built an e-book reader called Stanza for the iPhone. From the outside it probably looked like a competitor acquiring a competitor but again we had built a really credible product that was popular. It was no. 1 in the book category, in the app store, the first year of the app store and it attracted some attention. We were out there talking at conferences and just being out there. Even then it was us operating our business in the best way we could that got us noticed and in that particular place it wasn’t any of the things I described as a partner, as somebody who attends conferences, as any of that stuff. It was just us doing a good job and being noticed in this particular case would most people would’ve called, would’ve been a competitor of ours.
William Griggs: Yeah, it seems like that as you’re out there in the market, as you’re going to this conferences, as you’re connecting with people it seems like I don’t know, maybe the veil has lifted. You start to see more, you see a bigger picture, you see how you fit in. You feel it out and get to know the people as far as who would be a potential acquirer and would you want them to acquire you based on your interactions with them and their company culture and such.
Neelan Choksi: Yeah, that’s exactly right, again, the way I described it is it’s pretty natural. It’s not that we’re thinking oh, this guy’s going to be an acquirer, you’re thinking, oh, this guy is critical to my business to do X or Y or Z. We had approached Amazon a few times about hey, how do we get Kindle books on our iPhone now? This was the early days of e-books before they had their own app in the app store and that’s how we at least got to know some of them, the folks.
We never thought that would lead to an acquisition. It was more of look we were thinking about how do we build the best product and the best business and make our customers that happiest in that particular scenario we needed content, we needed the books, we had a great app? We needed the books and I don’t know if that one for one eventually turned into the acquisition offer but it definitely wasn’t something where we – that was the goal, it was a natural part of us doing business and being out there.
William Griggs: Got it, so our audience can get back to their core business. They can know that as they’re building this building something of value that it’s gonna be kind of a natural outcome, right?
Neelan Choksi: That’s been my experience and frankly I think that’s why the acquisitions have made sense, the ones that got done made the most sense frankly and even the ones that didn’t get done, there was something there, it wasn’t that great a fit, it wasn’t a perfect fit and it’s been really – my experience of how it’s happened, it’s been very, very natural.
William Griggs: Got it and as far as the banker example, what sized company typically would hire a banker to do this kind of deal?
Neelan Choksi: So, you can find kind of boutique bankers even when you’re in the $3 or $4 million revenue business. I think anything below that and the minimums and the value there isn’t gonna amount to what you’re looking for. Even in the $3-4 million business, you’re talking about something that’s gonna have a multiple that’s going to be interesting or relevant.
So, we got an offer, at Solo Metric we got an offer and we hired the banker almost after that and we were talking about them for a while but we didn’t actually put pen to paper until after that and so we used the banker a couple of times not to necessarily run the process of going out and putting a book together and pitching it but more to help us manage the process of getting acquired and to go out there and to see are there alternates for us but it was kind of a little more reactionary to an inbound offer that was serious that we were taking more seriously than maybe the ones that have come prior to that that just didn’t – we knew were a good fit.
William Griggs: So you took that inbound offer and then you wanted to kind of test the market to see what others would potentially bid or offer for the company and so then you hired kind of a boutique banker or some type of banker to drive that so you can get comparable terms?
Neelan Choksi: Yeah, it was honestly, it was we knew who the players were that would be interested so it wasn’t like we needed 50. We were like okay it’s three, that makes sense or five that might make sense, here they are, we actually have contents of most of them because again it was a natural part of our business and it kind of just said alright, let’s see if it makes sense or not, we shopped it around a little bit. Again, if you get to a letter of intent situation, you don’t have a lot of time to shop it around.
So, you have to kind of – it’s the balancing act of from the point in time where the initial kind of hey we’re interested and it’s a verbal kind of interest but before the letter of intent comes in that you have a little bit of ability to kind of say is this something I want to move forward, do I want to sell my company and if so is this something – do I want to shop this around or is this the ultimate acquirer and I wanna go with these guys?
That’s all kind of part of the process but a banker makes sense, again, they take a percentage of the deal, they have minimums so you’ve got to kind of make sure that the math works for you on that process and then the two roles the banker plays is kind of putting your book together and figuring out whether or not who the potential players are that could acquire you.
I’d never had to deal with that part of it. I’ve really used bankers to help support me through the negotiation process and in a little bit to kind of maybe see if there’s a couple other players out there that would make sense.
William Griggs: So for the audience thinking what type of book are you talking about? Can you elaborate on the concept of a book and what the banker puts the other?
Neelan Choksi: Sure. It’s essentially kind of the overview of your business. It has some of your financials in there. It’ll have a description of the business. It’ll have wide strategically valuable and to what companies, what type of customers. It’s kind of a summary of the business per se and it’s essentially the thing that usually with an NDA will get sent out to hey, are you interested in a company that does this type of work? Yes? Okay, please sign this NDA, we’ll send you this kind of – it’s kind of a business plan. It’s kind of just a summary of your business and then kind of a little bit about the future where you’re taking it but it’s something that would say okay, I can make a go, no go decision on whether I wanna continue conversations with these guys or not based on – it’s that level of depth.
So usually the executive summary gets sent out without an NDA and then the full book gets sent out with your full financials and things like that gets sent out with an NDA.
William Griggs: Got you and if people were interested, let’s say they’re at the $3 to $4 million or plus revenue market. They’re interested in kind of at least exploring this path or maybe they’re in the situation like you are where they’re getting some inbound offers. They need to validate those. What are like names of some sample banks that they could research or look into?
Neelan Choksi: Man, my data is so old. I haven’t used a banker in probably six years, seven years maybe.
William Griggs: So when they’re looking for it, is there a certain type of bank? Is this an investment bank? What kind of bank is it?
Neelan Choksi: Yeah, so what you’ll see out there, there’s different kinds of things. There’s brokers. There’s bankers but it’s not your typical investment banker. It’s typically we use [inaudible][00:32:27] in one of our deals and then I used frankly a buddy of mine who I just kind of said hey, do you mind if I just call you up every so often to just say this is what’s going on in the deal, this was on the second acquisition, you can just kind of help me you know, on point type scenarios because I’d been through it once?
The banker was incredibly valuable the first time through so what ends up happening, they intend to be local. You may end up with someone in Silicon Valley but they tend to be local. They’re people you’ve met at events locally before and they’ll get, again, my experience has been they kind of got to know me over multiple years. There wasn’t a formal relationship but you know, the knowledge was hey, this is a guy who can potentially help me and that wasn’t frankly the connection when we used that first banker back then.
So that one was Pagemill. They’ve grown pretty dramatically. They’re not doing as many early stage type things as they were back then. Might be they actually were acquired recently but that was, we’re talking about over 10 years ago. The names probably are different but the boutique investment banks, the boutique M&A shops are the ones that you’re looking for that can help with this.
William Griggs: Got it, very cool. So we talked about using a banker. Let’s dive into kind of what are the steps? So we kind of talked about being natural. We talked a little bit about inbound. What are kind of the steps after you either approach someone that you’ve been doing business with where there’s a partner, customer, they approach you, what does that actually look like?
Neelan Choksi: You know, the approach is pretty interesting. It’s when they approach you which is what I’ve experienced most of my career, it’s been a scenario where hey, we’re kind of interested in what you’re doing, we’ve watched you in action for a couple of years and we think your product’s important and we think you’ve built a great business and would you be almost always the words are, would you be interested in a more strategic relationship?
I think they teach certain language skills for the corp dev type folks but you know, in a lot of cases what it ends up being is right and this is the interesting part, the types of people. It’s corp dev usually in a bigger company who ends up doing the acquisition but it’s prompted by somebody in the line of business, somebody who’s tasked with building out, who has a problem they’re trying to solve and ideally the acquisition solves that problem for them.
What it almost generally almost always seems to happen is there’s either an expression of interest by that guy and would you be interested in talking to, about a more strategic relationship and that’s usually where corp dev kind of comes in and then starts to talk about again tries to get your pulse on are you interested in being acquired?
In a lot of cases, you get that first call and you’re like you know honestly, we’re pretty excited about what we’re doing in our business plan, this isn’t the right time and it stalls out. In some cases, you’ll go through it and you’ll be like yeah, we’re not against the idea. This is something we consider. Obviously if everything makes sense and the synergies are there and frankly the price is right, what ends up happening is you go through a learning process between the companies and discover for whatever reason along the way you know, this isn’t what I wanna do, this isn’t – I didn’t envision the company being turned that way or in that direction. The number wasn’t right and as someone who’s being approached, it’s okay to say no.
It’s perfectly okay to say you know, this isn’t right for us prior to the LOI and even sometimes after the LOI. If you sign the LOI early, you may discover that this isn’t the right thing and there’s absolutely nothing wrong with saying no, sorry, this isn’t what we had in mind.
So that’s kind of the process when somebody approaches you. I’ve never really gone out and attempted to get my company acquired. It’s generally come to me and then I run a process. They run a process. Historically, I think the old adage that almost he who blinks first, it becomes very much like dating. Some of the advice I’ll give people is don’t look too desperate. Even if you’re being approached, theoretically you should still have a business you’re running and it probably sucks up a lot of your time so that’s also not to day don’t be standoffish either.
The analogies to dating are actually very real here. An organization or frankly a person you’re trying to date will sense desperation like it’s a really bad odor and in general, nobody wants to date someone that’s desperate. Nobody wants to frankly acquire a company that’s desperate. So you should be happy, you should love what you do and fortunately again in my career, I have but that’s again, so I generally don’t go out and approach companies.
There are times where I’ve kind of said wow, look at how much we’re accomplishing as partners, envision what could this potentially look like if we were even more closely tied together? That’s probably the closest I’ve come to kind of hinting at an acquisition.
William Griggs: Got it. You’re talking about kind of the feeling out process of the offer and saying are you interested, are you not. It seems like you know, one of the punches drove home as don’t be fearful of saying no because no, if you handle it right and if you approach the right with a no, it doesn’t mean, you’re not shutting it off forever. You’re shutting it off for the immediate term.
Neelan Choksi: Yeah, I mean I’ve been in scenarios where I said no and got acquired by that same company three months later frankly because the situation changed, the offer changed, the scenario changed. They listened to what we had to say and adjusted based off of that and that’s not just about price. That could also be about what the role is of the acquired company in the larger entity or the acquiring company. It can be a variety of things but you know, there’s been – I know I’m not the only one. A lot of my colleagues have talked about how an acquisition can fail three, four, five times before it goes through along the way and there can be multiple no’s along the way and things can change as well.
It’s again, do it with respect. Do it with, understand that it’s a serious commitment of time on both sides and be respectful, be early when you know it’s not working. Don’t wait a week to let the other side know that and in general, again, like anything in business, as long as you do it with respect, you usually – and explain why it didn’t work. It can be as simple as we really believe in our business plan. This doesn’t make sense. This doesn’t fit for us. We’re all in on what we believe in and that’s a very reasonable answer.
William Griggs: Okay. So we talked a little bit about letters of intent. You mentioned that previously, lots of our listeners are familiar with the concept of due diligence with regards to raising funds. How are those steps, what are the steps, a little bit more specifically, you’re having the conversation, the numbers are sound, they go, the initial interest is there for both parties. How do things kind of proceed?
Neelan Choksi: Yeah, so I’ve had multiple experiences on this front. One is kind of a letter of intent comes early without a dollar number and says hey, we’re locking you up for 30 days to figure out what the dollar number’s gonna be. That typically is when the 800-lb. gorilla is acquiring you. More commonly what I’ve seen is hey, here’s a letter of intent, it’s got a dollar value on there. A letter of intent does come up with a no shop part of it which essentially says if you’re gonna shop this around, if somebody else approaches you during this period of time, you will notify the potential acquirer at that time but essentially it takes you off the market.
It kind of says we’re officially dating that we’re not married yet and that’s really kind of the purpose of the letter of intent. There’s, most of the terms in the letter of intent are not binding on the person doing the acquiring. There’s a number of things that are binding on the person being acquired so signing a letter of intent is a pretty serious declaration especially of you’re the one being acquired.
Most of the companies I know generally if they’re gonna get to a point of a letter of intent, they’re pretty serious about an acquisition so they’re gonna learn more. There’s a lot more to do but they’re pretty serious about an acquisition. You can take that as a reasonable intent to acquire you.. After a letter of intent is signed, what ends up happening is you go into a due diligence period and during that period of time, they’re really digging into your business, your IP, your, everything you could imagine about your business is being dug into.
Essentially they’re trying to determine whether or not this really makes sense or not. In some cases I’ve had an interim step in between that due diligence and a letter of intent where there’s a learning more process and again making sure it’s the right thing before you really start sharing every single contract you’ve ever signed, every piece of financial information.
The final step kind of as you’re, a lot of stuff happens in parallel to diligence and getting to the stock purchase agreement if you’re doing a stock purchase is the stock purchase agreement tends to be this 100-page document minimally. It can get pretty long beyond that and you get tons of reps and warranties. You’re kind of saying hey, these are all the shares that are outstanding in the company. Everything you can imagine about the business, you’re repping and warrantying to.
That process is painful. It sometimes feels like you’re baby’s being called ugly and some of the best advice I got around this is – and again this is where that third party can really help you, that banker type because if they’re the one hearing about how your baby’s ugly, as an entrepreneur, your reaction is let me defend my baby. That’s not the case and at the end of the day, that’s – having an independent party sometimes kind of gets that emotion out of the way.
William Griggs: You talked about repping and warrantying, can you pack that a little bit?
Neelan Choksi: Sure, and catch me whenever I tend to use three-letter acronyms and all those stuff so catch me on that. So essentially when a company’s being acquired, they wanna know that the IP is yours. They wanna know that you haven’t signed any contracts that kind of give away the farm. They wanna know that your business is your business. They’re not gonna be caught down the road because take an example of Amazon acquiring Lexical.
We were a little three-person company that got acquired by Amazon. Amazon obviously big public company, huge amounts of value and cash there, the reality is nobody was gonna ever sue Lexical about anything but Amazon’s a far more attractive candidate so in that world, we’re not, you are part of Amazon or you’re part of the acquiring company. They kind of wanna know that what their buying isn’t gonna get sued, isn’t gonna, you’re not gonna have a disgruntled shareholder come out, disgruntled individual come out of nowhere saying Neelan promised me two million shares and I should get a piece of the acquisition price.
They kind of wanna know the business is the business. So you make representations and you warrant that the state of the business, I’m putting it very simply, it tends to be five, eight pages of very detailed warrants and representations but that you have the right, the IP is yours, you didn’t steal it. The business is yours. You have a right to do what you’re doing. The cap table is the cap table as it stands and there isn’t somebody who’s gonna come out of the woodwork that you promised a million shares to.
You kind of name it but it’s really helping the company know that they’re protected and what’ll often happen is there’ll be a hold back in your acquisition so yeah, let’s pretend the acquisitions, let’s use a round number as a $50 million acquisition, 20 percent of the acquisition price may be held back for 18 months, for 24 months to make sure nothing comes out of the woodwork that suddenly would affect the price points.
William Griggs: Got it. So that’s where the reps and the repping and the warrantying comes in. That makes a lot of sense.
Neelan Choksi: Yeah, and again, there’s other stuff that’s worse than that word. So there’s stuff that’s in escrow and then there’s other things like fraud and stuff like that where they’ll go above and beyond the escrow amount that’s held back. So you know, again what I tell people from the beginning, run a tight business, be organized, and you can get through this stuff pretty easily. Where you find yourself in trouble is where you’re not organized, you haven’t kid of kept good records. You’ve kind of signed up for all kinds of crazy risks and along the way that’s where this stuff kind of really gets a light shone on and during the due diligence period and frankly if you haven’t run a tight ship, that hold back amount may become quite large.
William Griggs: Got it and as far as if you take one step back, first that letter of intent, you said some come with dollar amounts, some have no dollar amounts. What’s the strategic purpose or the reason behind that?
Neelan Choksi: So the no dollar amount, the way it was explained to me and I’ve one experience with this was it was a 30-day lockup saying you’re not gonna pitch this to anyone else and that 30 days, we’re gonna talk and share enough information so that the acquire could determine what that dollar amount was and as much as I didn’t like the fact that it was structured that way, it was 30 days and we minimized the amount of time and at the end of it, they did what they said they were gonna do. They produced the number.
Frankly it wasn’t a number we’re interested. We actually said no but we were locked out for that 30-day period talking to, or shopping around the company but again it was one where we were pretty comfortable with that but most of the time the company has kind of dumbed the work ahead of time to figure out the evaluation, to figure out up to a certain, with a certain degree of confidence, they’ve watched you, the other two, in particular the Solo Metric acquisition, we had been talking and partnering with BEA who’ve eventually acquired us for over three years.
They knew us as a business pretty well. They needed to get a little bit of information up front to kind of know what our actual numbers were but once they have that, it was easy for them I believe to put a number together and to put a letter of intent that we could sign and we knew we were going into due diligence pretty quickly.
William Griggs: Yeah, it sounded like a little bit earlier you talked about how it’s a little bit of a risky proposition as far as you’re signing this no shop for30 days but I also know that word gets out quick that if there are any bad actors, if there are any people that are kind of using this against startups and other companies, venture capitalists find out. They get up, a huff and a puff, as do angel investors, all sorts of stuff so it seems like as long as you’re working with a good actor in the space and someone you have connections with and dialogue with in the past that you can help mitigate kind of that risk around the no shop.
Neelan Choksi: Yeah, exactly and I mean it is again think about from the acquirer’s perspective. They’d done the work. They wanna move forward and they also wanna know that if they do, as much work as due diligence is for the company, it’s equally as much work for the acquiring company and again, most people, most good actors as you put it and most organizations are good actors, don’t wanna get through the due diligence process and some may say you know, I’m checking out. They just spent a ton of money on lawyers going through that process, a ton of time, effort of their people, kind of saying this is something, thinking about how the business is gonna look with this company in there.
In general, people wanna get through it and get through it successfully. Now, things happen along the way and that’s kind of life but again if you’re as you put it the mitigation strategies, if you’re honest, if you’re reasonable, if you’re going into this with your eyes wide open and the other side is also doing the same and you know, again, there’s gamesmanship and there’s other things along the way there but in general, you kind of know and like you said, if you have DCs, if you have investors, they also know who are the tougher players out in the acquisition space and who are the ones who maybe ding you in due diligence based on things they see and others who are generally kind of you end up at the number that was on the letter of intent and the reputation – bankers know that.
The reputations precede these people in these organizations and you generally have a pretty good idea of what’s going on and even if you’re working with someone who you know dings people in due diligence based on what’s in there, you kind of say all right, the offer is X. By the time I get through due diligence, it’s gonna be 70 percent of X. Am I comfortable with that and you make your decision.
William Griggs: Right, that’s good advice. Before we dive into like who needs to be involved in this process, you touched a little bit about escrow. Could you talk about where that comes into play?
Neelan Choksi: Yeah. So again what do you mean by that, where that comes into play?
William Griggs: Well, as far as you know, you talked a little bit about the repping and the warranties and you talked a little bit about the whole back of the deal. Is that where the escrow account comes into play?
Neelan Choksi: Yeah, exactly. So let’s say 15 percent of the proceeds are held back. Let’s say that’s $1 million. In some cases you would say oh, we’re gonna – most companies will say we’re gonna put this into a third party escrow so that again, there’s no, the case has to be proven that money needs to be pulled out of the escrow and then it ensures that on that 18-month anniversary or whatever the time frame is, the remaining amount gets paid out pro rata according to the shares or in a lot of cases and in some cases, the escrow’s only held back to the officers and the executives of the company because they’re really the ones who are responsible for the representations and warranties. They’re the ones who are technically making those reps and warranties and again that’s part of the deal
In all my companies we kind of gotten through it and actually I’ve had all the amounts paid out to me and I think that’s the norm. I think it’s the exception when something really bad happens that somebody they’re like we’re gonna pull money out of that escrow account because – generally you’ve done something wrong as the entrepreneur. It may not have been your fault. You may not have known about something but something has happened along the way that you thought you were repping honestly towards and something comes out of the woodwork.
William Griggs: Got it. So we’ve talked a little bit about some lawyers, talked about your fellow execs. We talked about a board of investors. Who else needs to be involved in the process?
Neelan Choksi: That’s primarily it. My experience has been when you’re potentially being acquired, this is not something early on or even kind of letter of intent stage. You wanna necessarily announce that the company be – you definitely don’t wanna the first conversation, you wanna tell your company about because you’ll distract the heck out of your company so you kind of, there’s probably a subset of people that really needs to know about it and that subset grows as maybe you get into, you sign the letter of intent and you get, that subset really grows when you get into due diligence because it affects a lot of people.
Based on what stage you are in the process, you wanna kind of keep it relatively limited and then there potentially will be a technical due diligence. There potentially will be other aspects along the way that you’re gonna have to bring other people into the mix to kind of have the conversations and things of that nature. So really – but it’s the core people who really are, it’s kind of the exact team. One of the things I generally tell the senior execs in the organization I’m working at is you should generally at least once a year kind of update your biggest number you’re gonna say no to and your smallest number you’re gonna say yes to.
The other critical criteria like I wanna operate independently for a couple of years, the things that make a difference in what you’re gonna do so that you kind of know when somebody approaches you, whether it’s you can quickly dismiss it in the ideal world or move it forward if it makes sense.
William Griggs: Got it. I think that’s a good place to wrap up. We talked about how to kind of hold it back a little bit from the team until it kind of firms up, get the senior execs on board. Obviously lawyers are gonna be in and out throughout the deal, board investors, etc. We’ve covered a lot this episode. I really appreciate your time. We’ve covered a lot of things. I’ve learned a lot. I know the audience has to. Are there any books or resources that you really like on this kind of topic of acquisition or is this kind of something to where there aren’t that many resources other than just talking to other founders?
Neelan Choksi: Yeah, you know, I don’t know of any books out there that are on this topic. I also haven’t looked. I do think what I have seen though in a lot of different organizations, I’m actually in Vancouver this week for a board meeting at Tasktop but last night at the Vancouver Enterprise Forum. They did a great panel on M&A and those are, it’s those local organizations that I’ve seen where you can get some really valuable information and you know, the panel last time had a lawyer on there, kind of a founder, a guy who had done it multiple times on there and just you know –
I think just listening to those war stories and hearing the reality of it is probably the best bet you can get and then having good people who have been through it before, again I mentioned in my first acquisition, I reached out to Bret Hart a couple of times and he gave absolutely great advice and having than when you’re in the middle of it is the other key I think is that knowing people who have gone through it before and ideally both successfully and unsuccessfully, when I was talking to Bret, he had never done an acquisition but he had gone through a couple attempts at it.
Having his experience from what went wrong was probably more valuable than any advice I’d ever been given from people who went through it successfully.
William Griggs: Yeah, makes a lot of sense so that’s where advisory board comes in. That’s just where being a good actor in the community networking, going to these events, it sounds like as well as they listen to this podcast, so getting like a good overview, a good foundational knowledge, it sounds like what you’re suggesting as well is go to that local meetup, go to those local individuals so you can get kind of that regional, that specialized knowledge around specifically maybe potential bankers in the area, lawyers in the area or if you’re in something like Austin where you have lots of marketplaces or B2B businesses knowing a lot of people intel might know the potential acquirers as well.
Neelan Choksi: Absolutely and again at the end of the day, it’s a people business and the networking has an awesome value of frankly I go to a lot of these events and listen to the speakers and they’re awesome but you get the side benefit of rubbing elbows and chatting with somebody and building relationships with folks that again may provide value. I also reached out to a number of my colleagues from business school as an example when I went through the first one just to get kind of their experience, what they had seen.
There are resources available to you from different walks of your life that can help you and look; sometimes it’s worth paying for those resources as in a banker or a broker. Sometimes it’s, you can kind of just have a quick half an hour conversation with someone but you find it’s timely, too. You take advantage of events like the Vancouver Enterprise Forum, like some of the Austin meetups to kind of learn along the way and hopefully when that moment comes, you’ve got people to reach out to that can help you.
William Griggs: Yeah, for sure. It seems like it’s one of those things that builds up over a career. It’s not something you just snap your fingers and you got lifelong relationships. You’ve got to build it up over a career so you can have those go to people. Neelan, this has been amazing. I really appreciate your time. If people wanna connect with you or learn more about the company Tasktop, how can they do that?
Neelan Choksi: Yeah, so you can find me online on LinkedIn. I think my twitter ID is Neelan, my first name, tasktop.com always is a, you can kind of learn more about my current venture right now at tasktop.com so I’m around and happy to chat with folks and share experiences, whatever social seems to be kind of what the cool kids are doing these days so I’ll start, we’ll go with that. Then the only other, the best piece of advice I can give you and the thing I will tell people if you don’t remember anything else from the conversation, just be yourself. Be what you are. Build a solid business and again don’t be a fool on the way.
Don’t do things that can hurt your value but don’t sign up for contracts that you know, you give away the farm for $2 million but at the end of the day be smart, build a solid business and have passionate customers and most of the stuff falls into place after that.
William Griggs: Perfect. It’s a great time to wrap up. I’ll put all those links in the show notes below the interview. Neelan, thanks for joining us today.
Neelan Choksi: Appreciate it, thanks a lot.
Neelan Choksi’s Bio
Neelan Choksi is the President and COO of Tasktop Technologies where he manages sales, marketing and business development for a growing open source software infrastructure provider. Neelan has extensive technology management experience and recently served as the Chief Operating Officer of Lexcycle, the company behind Stanza, which became the most popular ebook reader for the Apple iPhone and iPod Touch. Lexcycle was acquired by Amazon (NASDAQ: AMZN) in 2009. Prior to Lexcycle, Neelan served as the COO of SpringSource, the venture backed open source infrastructure software company behind the Spring Framework. SpringSource was acquired by VMware (NYSE: VMW) in 2009. Before joining SpringSource, Neelan served as co-founder and President of SolarMetric, a leading object relational mapping provider, which was acquired by BEA Systems (NASDAQ: BEAS) in 2005. At BEA, Neelan was instrumental in the open sourcing of the acclaimed object/relational mapping tool Kodo as OpenJPA. Prior to SolarMetric, Neelan worked for Andersen Consulting Strategic Services (NYSE: ACN) and Exxon Research & Engineering (NYSE: XOM).Neelan is a graduate of MIT (and was part of the often-publicized MIT Blackjack team) and holds graduate degrees from Stevens Institute of Technology and the University of Chicago Graduate School of Business.
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