So, after years of hard work and sleepless nights, a major investor has offered to buy your startup. It’s a great offer; there are more zeros than you’ve seen in your life and you’re ready to jump for joy. However, before you accept there are some questions you need to ask. As tempting as that first offer might be and as “standard” as that shrink-wrapped contract the potential buyers might appear, there are still some important points to hash out to make sure this dream opportunity doesn’t become a nightmare. Let’s go over some of the finer points regarding how and when to accept an offer for your startup. 

1. Timing is Everything: There are a few red flags that are bigger and brighter than indeterminate dates for closing the deal on your startup. A reasonable closing date should always be proposed, preferably at the start of the negotiations. This gives everyone a reasonable timeline to follow for getting things done. It’s likely the proposed date will need to be changed but there should always be one and the longer the closing date is postponed, the more problems arise. Failing to give hard dates is a sign that the other party does not have their ducks in a row or is not taking this deal seriously. Being coy with dates might also be a negotiating tactic to make you rush to accept less favorable terms. If your startup is healthy and growing, there are few circumstances where accepting terms with a lower return for the sake of a particular closing date is worth it. 

2. Late Game Liability: Most issues about liability should be patched out by the time you are ready to close. However, there are some areas that might still need addressing later in the process depending on the deal. If the deal for your startup involves a change in directors and officers, director and officer (or D&O) insurance that will last after the deal is closed is a necessity. If the deal involves the company changing hands or merging with another entity, the current insurance policies will likely end. New D&O policies designed to outlive the company’s current arrangements will need to be acquired to make sure the company is protected in the event a disgruntled shareholder, contractor, or government officer comes after one of your directors for events that occurred before the deal closed. Other areas of late-game liability include ensuring enough working capital to continue operations after the deal. If there is not enough working capital and the buyer has to supplement the company with extra cash, a penalty could be assessed as an offset, and proceeds from the deal could be lowered by quite a bit. 

3. Get Everyone on Board: Depending on your startup’s size and the specific deal, you will need different consents—i.e. documents saying your directors and officers have permission to carry out the deal. If you have a small limited liability company and you are the only member, this will be a simple step. But if you have many directors and many shareholders, and there are multiple steps to the deal, getting the consents signed and in order can potentially become a mad scramble. No matter the deal, a well-drafted agreement should spell out what company consents are needed for the deal. But consent from third parties might also be needed; for example, many leases require written consent from the landlord to continue the lease if the lessee is bought or sold. Ensuring that all parties involved have been properly identified, consulted, and signed the appropriate consent is a critical step in selling your startup or any other business. 

4. Know When to Hold ‘Em, Know When to Fold ‘Em: Until the check is in the bank, the deal has not closed. As such, you’ll need to consider what happens if the deal for your startup doesn’t go through.. For example: have you made substantial changes to reach certain numbers the deal requires and are these changes sustainable if the deal does not happen? Have you made any agreements or arrangements that depend on the deal happening that you could be liable for if the deal falls through? What information about your startup has the other party learned that could be used against you? In a perfect world, everything from the letter of intent to start negotiations to the time negotiations end is covered by a nondisclosure agreement that everyone happily obeys but the court records are full of cases where a larger party looked at a contract and ignored it anyway knowing they would be able to simply bully the smaller party out of existence with the oppressive legal costs that come with litigation. Even with the above consequences, you should not be afraid of walking away from a bad deal; you’ve put in too much effort to watch a careless or possibly even malicious buyer squander what you’ve built. The fallout of a bad deal could follow you for years, making attracting future partners and investors difficult through no fault of your own.  

No deal is going to be perfect. There are always going to be last-second issues and areas where you regret giving up ground. When it comes to selling your startup, only you can make the decision to accept a deal or to move on and look for better opportunities. At Bagchi Law, we recognize that every deal is going to be different, just as we recognize that every client is different. More than a law firm, we offer a full spectrum of business, financial, and legal solutions for businesses, entrepreneurs, and startups. We’re here to offer the guidance and advice you need to succeed on your professional journey, so schedule a consultation today, and let’s begin the conversation.