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The Case for an Early Buyout

Being acquired by a bigger company early in your venture's life cycle can be a sweet deal in its own right.
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I know everyone dreams of being the next Mark Zuckerberg, fending off huge buyout offers on the way to becoming a billionaire. But the faster alternative--being acquired by a bigger company early in your venture's life cycle--is a sweet deal in its own right.

Case in point: Mobile e-mail manager Mailbox was acquired last spring by file-sharing service Dropbox for a reported $50 million-plus in cash and stock, a mere one month after the Mailbox app was made available to the public. The 13-member Mailbox team is continuing to build out the app as its own product under the Dropbox umbrella. In acquisition terms this is a win-win: They enjoy a nice payday and get to work on a product they're passionate about. Plus, they no longer have to worry about cash flow and can instead tap into the financial and operational strength of their parent company.

There's an even better reason for company founders to consider an early acquisition: They usually end up with more dough than they would if they'd cycled through several investment rounds. This has to do with the dynamics of "pre-money" and "post-money" valuations. A company worth $5 million pre-money that raises $5 million of outside capital has a post-money valuation of $10 million, but the original shareholders won't get any of that additional value. The new owners will take it. Meanwhile, the founders have to continue along, hoping for a bigger payday, which will now be more complicated and smaller, percentage-wise, than before.

But let's say that our relatively new $5 million company is looking for an additional $5 million in funding and receives an acquisition offer of $5 million instead. In this case, the founders--and their original investors--reap all those dollars and will still likely have an opportunity to pursue their vision.

Furthermore, early buyouts tend to come with lucrative consulting gigs and noncompete compensation for the founding team--especially if the new parent company is committed to retaining the talent and keeping the acquired company plowing forward after the deal is closed. And that's on top of the cash and/or stock on the table.

If you care more about your net worth going from $500,000 in the red to $5 million in the black than about jumping from $5 million to $50 million, an early acquisition is something you won't regret. (I have yet to meet an entrepreneur who thought he or she sold too soon.) Ideal candidates are young or first-time business owners, who are likely to get ousted from the helm as the number of investors grows anyway, or serial entrepreneurs who are already dreaming of their next project.

And if you're worried that lightning won't strike twice--don't. It never ceases to amaze me how even a small win inevitably leads to bigger and better things.