How much do you want to sell for?

As our portfolio matures, I increasingly see the importance of the question “how much do you want to sell for?” From initial investment decision, to bringing on new follow-on capital partners, growing teams and ultimately exiting, this is a critical question for founders and investors to ask each other at each step to optimize ultimate liquid outcomes.

Some say, ”focus on building a really big business and worry about how much you sell for later.” The problem here is everyone has a different definition of “big”, so how do you know you are aligned with the investors and talent you add along the way? The “how much” question is akin to asking “how many kids do you want?” when courting your spouse! Better to address these life changing questions early.

Asking “how much” engenders valuable discussions between founders, investors and potential investors. It surfaces views on how much each party thinks the company is worth now, how much they think it can be worth, whether incentives and goals are aligned and discovery of everyone’s risk disposition. I think of risk disposition as a founder or investor’s willingness and perceived self-capability to bring a company from what it’s worth now to something bigger or much bigger later. These variables inform the conversation differently, depending on the stage of a company:

At early stage, first investment: I was recently meeting with an entrepreneur who had done a phenomenal job launching his company and getting to nearly $1M in revenue run rate. Given the dynamics of the market and the vibes from the team, it wasn’t clear they believed they could (or wanted to?) build a really big business. For simplicity in venture, I’d call a really big business one that gets to at least $25M in revenue and has the potential to sell for $250M. So I asked them. “What do you want to sell for?” One founder said, “well, I think this round will be valued at $10M, so if someone offered me that, we would seriously consider it.” The other founder nearly choked on his tongue.

These two founders had not discussed how many kids they wanted to have, and the discussion revealed big differences in belief and risk disposition. The first founder thought his business was worth $10M now, and he was open to cashing in versus trying to make something bigger – clear risk aversion. The other founder felt differently. The answer also made clear to me that the first founder questioned either the market potential or his own potential to build a big company. Both make the opportunity a non-started for us, and nor would they want us involved if a small exit is their goal. Why sell 20-30% of your equity if you think you might exit the company soon for a modest number? We would also have welcomed the question being flipped – it is surprising how rarely entrepreneurs ask us what we are trying to achieve in outcomes.

When bringing on your next investor: Inevitably, follow-on rounds bring up the discussion of what a business is worth now since valuation is a key metric in fundraising. But asking the “how much” question is even more important than in your first round, simply because there are soon to be more and more parties that can get misaligned. For example, a company doing $10M in ARR doubling each year may have several types of choices for a new investor. A multi-stage venture fund may be looking for a 10x opportunity, put in 25M on $100M and want to sell for >$1B – and be willing to take the extreme growth and scaling risks to achieve that. A growth stage fund might instead be looking to do $25M on $80M (with another $20M in secondary) and in order to achieve 3-5x via a $400M exit. This is a much less risky path that also allows early founder and investor liquidity. If your existing board is aligned with the first more aggressive partner but chooses the second instead for nice liquidity, expect a lot of pushback at your first board meeting to planned spending and ramp. In reverse, the first investor will quickly tire of a management team that does not prove to execute aggressively enough. Often these financing decisions will be further complicated by a potential acquirer suddenly making the “how much” question very real…

When approached by an acquirer: This is where the rubber meets the road – creating value is critical, but capturing it is how you get paid. Whether near a financing event or otherwise, how a board manages a potential acquisition must start by asking “how much do we want to sell for?” This will reveal any recent changes in founder and investor views and help define a reservation price at the bottom and reach goal level at the top. We have seen management teams engage deeply with acquirers on valuation before this type of board discussion, a huge mistake that puts the management team out on a limb in negotiating with the acquirer, risking having to backtrack.

There are other important realities and insights surfaced when asking “how much” at each of the stages outlined above:

• Peoples’ answers are always changing, so you need to actually ask the question and not make assumptions during “life events”. Most people’s answers will continue to go up (sometimes rapidly!) when things are going well. When things are going poorly, investors’ answers drop much faster than entrepreneurs’. This latter point creates tension when it comes time to “finding the company a home” or “recovering capital”.

• Asking “how much” gives you more variables to play with in reaching a favorable financing or acquisition deal. Basic negotiation theory says the more variables you have to move, the more optimal a deal can be for more people. For example, in a situation where a company is deciding between being acquired or raising another round of financing, asking the sale price question may surface investors who have a lower price expectation (perhaps actually lower expectations for the company) and can be offered liquidity via a secondary in a financing. That leaves the believers left to keep building towards the larger outcome. Likewise, if you find a founder’s takeout price is lower than investors, it may be a good time to discuss some founder liquidity to increase their willingness to take risk or increase openness to hires that can take the company even further.

• There is often confusions among entrepreneurs why an acquisition price now is usually higher than a financing price now. In other words, if the acquirer is offering me $100M, why are investors only giving me a pre-money of $60M? There is plenty of economic theory on this – liquidity preference, control preference, etc – but the bottom line is it is the case most of the time, so don’t be surprised.

While discussing sale price should only be a rare distraction from building a company, there are times when it makes all the difference in the world. Happy building and happy selling!