8 ms·

Hearing many horror stories over backing out at last minute, I wonder why breakup fees and escrow are not more popular in startup world. E.g. if you would like

Hearing many horror stories over backing out at last minute, I wonder why breakup fees and escrow are not more popular in startup world. E.g. if you would like to acquire for $5mln you need to deposit $100k. If you walk out, this is a breakup fee. If startup bails it also have to pay same amount to the acquire.

stevespang 7y ago
At least something to pay the lawyers . . .
rolltiide 7y ago
I've seen million dollar deposits get forfeited, people are insane! It might honestly be a good business model on its own.
- pc86 7y ago
  Losing a million dollar deposit makes total sense if the alternative is losing more than a million dollars.
monsieurbanana 7y ago
A company sales can go wrong for many reasons, how do you differentiate between a legitimate reason to not proceed to the sale and a "last minute backing out"? I assume that's what a LOI (which is all that the founder had) is for: it comes before any legally binding agreements and allows both parties to be sure they get what they want without bad surprises.
- wolco 7y ago
  Usually happens in steps. You provide some info they decide to proceed to next phase. Price get attached then.
mrkurt 7y ago
The companies getting purchased usually don't have enough leverage to get a breakup fee.
jacquesm 7y ago
The typical terms sheet has an 'out' in that any surprises during DD are grounds for annulment without compensation.
- LeifCarrotson 7y ago
  Similar to a home purchase...and I imagine that even with an immaculate company or home you can always find something to satisfy that clause and give you an out.
  - jacquesm 7y ago
    Beware of terms that require the target to pay for DD if the deal goes sour.
  - aidos 7y ago
    Unless you’re in England, where people can drop out or change their price on a house sale or purchase at any time, even after months of legal red tape.
    - ricardobeat 7y ago
      What would you spend months on when buying a house? Over here (NL) a buyer inspection is a 30 minute affair. Then you sign a purchase contract straight away, three days to back out.
      - jacquesm 7y ago
        In NL as well. It is not rare at all to do a 'bouwkundige inspectie', that is definitely not a 30 minute affair depending on the kind of building. People doing their own inspections tend to overlook important things.
      - RHSeeger 7y ago
        If my inspector was done in 30 minutes, I'd tell him to go home and hire a different one. That being said, it depends on where you are. Some places it can take a week to go from first seeing to buying, other places it can take months. Some places, closing costs are a few thousand, some they are 15k. There's a lot of variety across places even in the same state in the US.
paxys 7y ago
It is standard in bigger corporate M&As, but a tiny startup isn't going to have the leverage to pull it off.
- fludlight 7y ago
  A contract is only worth as much as you are willing to pay to enforce it. It makes sense to pay an army of lawyers for years to pursue a $100m breakup fee. For $100k, not so much. Quod licet Iovi, non licet bovi
  - boulos 7y ago
    The solution though is escrow. Upon agreement, you have them wire the money to an escrow agent. If they back out, the escrow goes to you. There's no need for follow-on lawyering. (And no, no escrow agent worthwhile is going to be pressured easily into giving a large corporation their $100k back).
mbesto 7y ago
This is why reputations in M&A matter.
- jessaustin 7y ago
  Most high-reputation firms wouldn't hesitate to leave a poor founder swinging in the wind. What's she going to do, sue them? Any lawyer capable of handling that case, the M&A dudes already have on retainer.
tectec 7y ago
Apparently something like that is done sometimes: https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-forget-to-do-your-merger https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-...
hinkley 7y ago
Part of any acquisition is getting a look at your books. Now the buyer knows exactly how much runway you have left and all they have to do is drag their feet until you get desperate to make a deal. Either you have to be cashflow positive, or keep at least two buyers on the hook past whatever disclosure phase nets them this sort of information. I think maybe one company I ever worked for was clever and healthy enough to do this. And even on that one, things went a bit touch and go. One of the worst kludges we ever did, it came out later, was worth a month of payroll, which got us through that acquisition without bouncing checks. (Still the longest single method body I've seen a human create, and from someone I thought would never write code like that.)
- deleted 7y ago
  [deleted]
- jessaustin 7y ago
  Wow I'm struggling to imagine how a too-long method could keep the wolf from the door for a month. More details please, if you can.
  - hinkley 7y ago
    Horrible messy business logic to fulfill a short term contract. It's been a long time, but if memory serves it was used for data ingestion. The file was 6000 lines, the worst method was over a third of that, closer to half. It never really worked, as some of us predicted while the project was being ramped up. Without going into too much detail (most of which has gone from my head anyway), the speed of light won and we used a different architecture which obsoleted most of that code. However, if I and the other people who said it couldn't be done had gotten our way, that sale would have gone much worse for us. Decisions from incomplete data and all that jazz. It went live and the customer and we cashed the check with less than two months of operating capital left, while the lawyers were still futzing around with term sheets. The irony is this was also the owner who thought he was rallying the troops and instead filled us with existential dread every time he tried to give us a speech. Why I wasn't aware we were scraping bottom of the barrel until six months later, I'll never know.

stevespang 7y ago

At least something to pay the lawyers . . .

rolltiide 7y ago

I've seen million dollar deposits get forfeited, people are insane! It might honestly be a good business model on its own.

pc86 7y ago
Losing a million dollar deposit makes total sense if the alternative is losing more than a million dollars.

monsieurbanana 7y ago

A company sales can go wrong for many reasons, how do you differentiate between a legitimate reason to not proceed to the sale and a "last minute backing out"? I assume that's what a LOI (which is all that the founder had) is for: it comes before any legally binding agreements and allows both parties to be sure they get what they want without bad surprises.

wolco 7y ago
Usually happens in steps. You provide some info they decide to proceed to next phase. Price get attached then.

mrkurt 7y ago

The companies getting purchased usually don't have enough leverage to get a breakup fee.

jacquesm 7y ago

The typical terms sheet has an 'out' in that any surprises during DD are grounds for annulment without compensation.

LeifCarrotson 7y ago
Similar to a home purchase...and I imagine that even with an immaculate company or home you can always find something to satisfy that clause and give you an out.
- jacquesm 7y ago
  Beware of terms that require the target to pay for DD if the deal goes sour.
- aidos 7y ago
  Unless you’re in England, where people can drop out or change their price on a house sale or purchase at any time, even after months of legal red tape.
  - ricardobeat 7y ago
    What would you spend months on when buying a house? Over here (NL) a buyer inspection is a 30 minute affair. Then you sign a purchase contract straight away, three days to back out.
    - jacquesm 7y ago
      In NL as well. It is not rare at all to do a 'bouwkundige inspectie', that is definitely not a 30 minute affair depending on the kind of building. People doing their own inspections tend to overlook important things.
    - RHSeeger 7y ago
      If my inspector was done in 30 minutes, I'd tell him to go home and hire a different one. That being said, it depends on where you are. Some places it can take a week to go from first seeing to buying, other places it can take months. Some places, closing costs are a few thousand, some they are 15k. There's a lot of variety across places even in the same state in the US.

paxys 7y ago

It is standard in bigger corporate M&As, but a tiny startup isn't going to have the leverage to pull it off.

fludlight 7y ago
A contract is only worth as much as you are willing to pay to enforce it. It makes sense to pay an army of lawyers for years to pursue a $100m breakup fee. For $100k, not so much. Quod licet Iovi, non licet bovi
- boulos 7y ago
  The solution though is escrow. Upon agreement, you have them wire the money to an escrow agent. If they back out, the escrow goes to you. There's no need for follow-on lawyering. (And no, no escrow agent worthwhile is going to be pressured easily into giving a large corporation their $100k back).

mbesto 7y ago

This is why reputations in M&A matter.

jessaustin 7y ago
Most high-reputation firms wouldn't hesitate to leave a poor founder swinging in the wind. What's she going to do, sue them? Any lawyer capable of handling that case, the M&A dudes already have on retainer.

tectec 7y ago

Apparently something like that is done sometimes: https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-forget-to-do-your-merger https://www.bloomberg.com/opinion/articles/2019-03-15/don-t-...

hinkley 7y ago

Part of any acquisition is getting a look at your books. Now the buyer knows exactly how much runway you have left and all they have to do is drag their feet until you get desperate to make a deal. Either you have to be cashflow positive, or keep at least two buyers on the hook past whatever disclosure phase nets them this sort of information. I think maybe one company I ever worked for was clever and healthy enough to do this. And even on that one, things went a bit touch and go. One of the worst kludges we ever did, it came out later, was worth a month of payroll, which got us through that acquisition without bouncing checks. (Still the longest single method body I've seen a human create, and from someone I thought would never write code like that.)

deleted 7y ago
[deleted]
jessaustin 7y ago
Wow I'm struggling to imagine how a too-long method could keep the wolf from the door for a month. More details please, if you can.
- hinkley 7y ago
  Horrible messy business logic to fulfill a short term contract. It's been a long time, but if memory serves it was used for data ingestion. The file was 6000 lines, the worst method was over a third of that, closer to half. It never really worked, as some of us predicted while the project was being ramped up. Without going into too much detail (most of which has gone from my head anyway), the speed of light won and we used a different architecture which obsoleted most of that code. However, if I and the other people who said it couldn't be done had gotten our way, that sale would have gone much worse for us. Decisions from incomplete data and all that jazz. It went live and the customer and we cashed the check with less than two months of operating capital left, while the lawyers were still futzing around with term sheets. The irony is this was also the owner who thought he was rallying the troops and instead filled us with existential dread every time he tried to give us a speech. Why I wasn't aware we were scraping bottom of the barrel until six months later, I'll never know.