Jonathan Sposato

How do you know when it is the right time to sell your startup company? I’ve been getting that question a lot lately in chats with Seattle entrepreneurs who are contemplating their next moves, an exciting but oftentimes nerve-wracking decision.

Let’s assume that you like your suitor and the buyout offer recognizes your company’s value. Beyond those key factors, there are some unconventional, non-business issues to think about when considering a sale. You won’t hear these in the board room. And it’s unlikely you’ll get this feedback from your investment banker or CFO.

But these human considerations are what matter to most business owners.  Long after the excitement of the initial offer fades, these are the things you typically think about. And, yes these are considerations that have certainly affected my own decisions to sell in the past.

Unconventional Reason #1: Where to park your money

We are multi-faceted individuals who are not defined just by our startups. We are also homeowners, stock market investors, parents, buyers of groceries, etc.

When one market is healthy, another may be lagging. One of the lucky breaks you can sometimes get, is transferring value from the healthy industry to the laggard.

Here’s a  recent example: The M&A market for tech companies is healthy (valuations are up and more deals are closing). However, commercial and residential real estate are still at historic lows.

One of my own reasons for selling Picnik to Google in March 2010 was precisely because I wanted to put more money into play (both in real estate and the stock market) during a time when tech valuations recovered, while real estate and the stock market were still at rock bottom.

We could have held out another year for the M&A market to afford say a 33 percent gain in our valuation. But the gain would have been offset by the now observed gains of greater than 33 percent in both real estate and the stock market. If you’ve got incredible opportunities for your money now, there is no such thing as ‘selling too early.’

Unconventional Reason #2: Your life chunk-size

(Photo via Anthony Easton)

One of my former Picnik business partners, Mike Harrington, had a great perspective on his entrepreneurial endeavors (which included everything from Valve to being a forest ranger).

During one of our early meetings, we discussed our financial goals clearly with respect to a specific timeframe. Mike offered some interesting insight, saying that he viewed his life in three to five year chapters. After that, he said, it’s simply time to move on to new challenges.

I agree 100 percent. Move on. Always be learning new things.

At a startup, it works the same way. If the upside on a pending deal makes economic sense and it has been about five years, it is probably time to tackle that next challenge.

Certainly, there are times when you need to hang in for the long haul (for your shareholders, for your team, your family). But, if those factors are largely absent and you’re getting an awesome multiple on your seed money/time, then you should follow the advice of my hero Warren Buffett who says it’s far better to hit a double or triple every few years than to go for the home run every 10.

Unconventional Reason to #3: Team Fatigue.

I actually don’t mean your fatigue as CEO or a co-founder (That actually goes without saying).  I mean the collective whole, and you entire team’s ability to turn the next important squeak points in the business to ensure greater success.

I just finished reading Zappos co-founder Tony Hsieh’s book Delivering Happiness. During the company’s rise, there were several key points where Hsieh stepped up in a big way to ensure his company’s ascent to the next tier.

Every successful startup encounters multiple “tests” of this kind, generally with each one harder and more painful. Of particular note, were the following two key moments in the history of Zappos.

  • When additional funding could not be raised, Hsieh took a bold step. He sold his primary residence at a steep discount, pumping the capital back into the company.
  • After righting the ship, labor costs still remained too high.  Hsieh made a decision to move the company from San Francisco to Las Vegas where cost of living (and thus salaries) would be lower by 30 percent. This ensured that Zappos could stretch its cash to the next milestone.

These are fairly extreme examples. But they nevertheless underscore the level of commitment that you and your founding team must have to truly go the distance. Folks who’ve taken their startups public will tell similar tales.

Smart entrepreneurs are constantly striving to find the correct balance of fanaticism versus realism, and most of us would have probably drawn that line far short of where Tony Hsieh did. If you don’t have the stamina to weather these moments of truth, then perhaps it’s time to take the offer on the table.

Unconventional Reason #4: When your wife [or spouse] wants to sell.

I’ve gotten applause from audiences when I’ve said the above.  They’re applauding the acknowledgment that — in order for any tech startup to succeed — there must be a strong spouse who is picking up the slack at home, being the emotional rock and feeling the high’s and low’s so deeply that they too are a de facto stakeholder.

If you’re in a startup partnership of three people, there are really six people in that boardroom.  Startups are all consuming. And it would have to be the most callous and uncaring spouse to elect to know nothing about the company’s affairs.

If you’re lucky to have “married up” like I have, your spouse can offer insanely sound advice on important life changing matters.

To be clear, I am not talking about day-to-day involvement. As a general rule, I discourage spouses from being actively involved in startups simply because very few business owners can manage that in ways that doesn’t cause supreme awkwardness for the employees.

But when it comes to a decision to hold or sell, the exit decision is one that you simply cannot excise your spouse out of. Nor would you want to. Hold or sell, you want your partner 100 percent bought in to the outcome.

Jonathan Sposato has sold two companies (Picnik and Phatbits) to Google, where he currently works. He’s an investor in GeekWire, and his guest columns on startups will appear here on occasion.

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  • Anonymous

    Great piece Jonathan – It’s important to remember the other factors at play in these situations, and the non-financial considerations of the entrepreneur.

  • Lewis Lin

    Jonathan, great article.  Thanks for the perspective, and I’m looking forward to the next 5 year chapter!

  • Holden Ng Sposato

    really appreciate the comments.  i thought it was important to spotlight some of the more unspoken things for folks going thru the m&a process.   glad you enjoyed the piece!

    • Jonathan Sposato

      ok i’ve been outed.  as you can see from the previous post, my 2 yr old toddler is actually my ghost writer. : )

      • Anonymous

        Holden’s language skills are really developing quickly! ;)

  • jordanmitchell

    Good post, Jonathan. One other perhaps unconventional reason, in my experience, is “market impact potential”. Start-ups spend so much time building momentum within a market in which they generally start with zero momentum. If the start-up is focusing on a specific market window of opportunity (as I have been in the past), and the satisfaction that goes with making a sizable impact within that market / ecosystem, then sometimes the opportunity to leverage a much larger distribution channel and momentum within a larger company becomes a reason to consider an exit as well.

  • Nichole H Bockner

    Thanks for giving voice to these very legitimate, but less talked, about motivators. Particularly #4!

  • Nichole H Bockner

    Thanks for giving voice to these very legitimate, but less talked, about motivators. Particularly #4!

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