10 ms·

A Classic Startup Horror Story

231 points by t3mp3st 15y ago

brooknam 15y ago
Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here. The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.
- rokhayakebe 15y ago
  Most likely, technology is only expensive to build the first time, or, at least, the cost decreases from there.
- ootachi 15y ago
  Very few startups these days are building a technology that isn't cheap to reproduce.
- roel_v 15y ago
  "The best defense is to build a technology that isn't cheap to reproduce." Actually that's the single worst defense. What can possibly be so expensive to produce that it can't be cloned, yet cheap enough to be possible to sell with profit? The fact of the matter is that most software is quite simple, and when it solves a particular problem in an innovative way, there is no way to capitalize on that because there's no way to enforce exclusive use (give or take a few counterexamples left or right, like a super special secret server-side recommendation algo or something like that, but those are outliers).
  - pnathan 15y ago
    Conceptually, if very smart people did it, and other very smart people say it can't be done... that's what you're looking for for a deep moat. Usually that's going to be some sort of new mathematical principle in software. It's excruciatingly hard to get funding if you do come up with that sort of idea, because the experts all say its impossible. ;)
    - idiopathic 15y ago
      "Conceptually, if very smart people did it, and other very smart people say it can't be done" Don't forget the third part, which is what the author described, i.e. "not very smart people say they can easily do it themselves". They do not have to be able to do it, they just have to be able to convince the CEO to spend $1 million in salary on the internal delivery time to try to do it.
- AznHisoka 15y ago
  This is not practical advice. Not many people here are building the cure to cancer. The best defense is to build a self-sustaining business where you don't need to sell it.
  - wyclif 15y ago
    This is true. The classic example IMO is Amazon: they didn't have "killer IP." Their "moat" was their mastery of fulfillment and distribution, and owning all the links in that chain.
- mirsadm 15y ago
  I can't really think of any recent companies that have killer IP. The difference might be an elegant solution vs someone from high school copying samples from codeproject/stackoverflow.
cienrak 15y ago
I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?
- true_religion 15y ago
  I'm having trouble following... how were they ripped off? There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone. It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does really?), so it might have been presumed that if you have X products, and Y infrastructure then you must have Z sales behind it. When they looked at the financials, they didn't see the sales figure they wanted so bailed.
  - karamazov 15y ago
    NDA's are normally written not only to prevent disclosure, but also to prevent the company receiving the information from using it to copy your product. If you're disclosing to a potential competitor, you don't want them sharing that information with anyone else, but you especially don't want them just stealing your codebase and using it themselves.
    - dmethvin 15y ago
      I went through this very same left-at-the-altar scenario a decade ago with a startup. It can be very difficult to prove that the company used the NDA information they had in their possession. Clearly the tech staff in the big company saw it, since this seems to be how they made the determination that they could do it in-house for less.
  - kgo 15y ago
    Megacorp decides to purchase KFC. As part of due diligence, they want to know what the secret recipe is. After all, you'd hate to find out one of the special herbs and spices is cocaine or arsenic. This is fine because MegaCorp signed an NDA. MegaCorp breaks off the deal. Their chefs decide that they can make their own chicken. After all it's not hard to combine these nine herbs and spices. The chefs only have this knowledge because you revealed your trade secrets under the protection of an NDA. They're not white box reverse engineering the recipe.
joedev 15y ago
That's not a classic "Startup" horror story. That's a classic "Built to Flip" horror story. One of many reasons why selling is not an desireable business-model strategy.
- j_baker 15y ago
  There are reasons to sell a startup aside from having built it to flip. It can even happen in a startup that the founders had every intention of building into a big sustainable business. Many times, it's because the founders and/or investors have "checked out" of the business and want a quick return on their time.
espinchi 15y ago
The key for a successful negotiation is to have leverage. In this particular case, it looks as if the founder of this startup needed the acquisition to happen. Otherwise, when The Company refused the official term sheet, or when they noticed any other smelly things down the road, they could've halted until that detail was sorted out, or even canceled the negotiations. The conclusion in the last paragraph of the (highly enjoyable, btw) story goes in this direction, but it's a bit optimistic: the real lesson learned is this: get your business to a level of success where you don’t care if the deal falls through. Get profitable. Get such amazing user growth you have investors begging to put in money. Well, I wish it was that easy!
outside1234 15y ago
if you want it to not happen again, you have to name names. otherwise, there's no downside to this company.
- mcdavis 15y ago
  Any downside for the company would be so short-lived it wouldn't be worth it. Like most ragefests, it'd die down at the next controversy and be forgotten. They're not naming names because they value the lesson more than the temporary shaming.
  - propercoil 15y ago
    not if you are GoDaddy.. SOPA sticks like a mother f'er
casca 15y ago
Something doesn't smell right with this story. If a big company clearly breaks a contract, there's money to be had and the lawyers will work on retainer. NDAs are legal agreements. They can include terms that prohibit the creation of a similar product for a length of time. My favourite snippits are: "We shipped some amazing new products" and "Our systems handle load today that they wouldn’t project to have until 5 years from now, all on a minuscule startup budget". Shipping is easy. Selling is hard. And building something that scales to (optimistic) 5-year (!) projects seems like premature optimsation to me.
- duxup 15y ago
  That is assuming that the big company in fact did break a contract. All we know is the other company might do so based on a phone conversation. That won't keep little company afloat long.
- sowbug 15y ago
  It's possible the CEO didn't mean that his company intended to copy the technology, but rather that it would be easy to copy it, and thus that it wasn't worth anywhere near the figures being tossed around. In that case, this wouldn't have anything to do with enforcing an NDA; it would simply mean the parties disagreed on the value of the technology and couldn't reach a deal for that reason. The article didn't say whether the other company actually did try to copy it, which is why "It doesn't look so hard, we can build it ourselves" is at least a little ambiguous -- especially because it's unlikely that's a direct quote (might "can" have been "could"?).
j_baker 15y ago
You know, I started to get suspicious around the time I read the phrase "gentleman's agreement". I can't think of any good motivation a person could have for wanting such a thing aside from the fact that the lawyers haven't drawn up a contract yet.
rokhayakebe 15y ago
Dude, seriously, this isn't helping anyone unless you give some clues allowing people to figure out who The Company is.
- nkoren 15y ago
  The Company could be virtually anyone. I have seen this scenario play out multiple times in multiple industries. In this case, naming The Company would actually be less helpful, not more. If you go into a deal thinking "hey, I can trust these guys; they're not like those louts from ACME Crockpots Inc. that I read about," then you're setting yourself up for trouble. Much better to approach an acquisition deal thinking that these guys might be 'The Company', and taking precautions accordingly.
- archangel_one 15y ago
  Actually, I think the general lessons can be learned regardless. Naming The Company would turn it into mudslinging which would change the tone of the article, and IMO probably not for the better.
  - TDL 15y ago
    Agreed. The general case is much better in this regard. The drama from knowing who the players were would distract from the events and any lessons learned.
- Tossrock 15y ago
  Well, there are SOME clues. Mention of Silicon Alley means it's probably in New York. The fact that they were having dinner with the CEO means it's probably not Google-scale.
deleted 15y ago
[deleted]
jpdoctor 15y ago
> “If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies?” ... We agreed. It turns out that's an intelligence test: Anybody worth having a gentlemen's agreement with would be gentlemenly enough to put it down in writing. The correct answer is: Put it in writing. Edit: NDA's are another intelligence test btw. All of the entanglements without any of the enforceability.
- jonny_eh 15y ago
  So you're intelligent if you don't demand an NDA?
  - jpdoctor 15y ago
    Not quite. It's more like: You're not intelligent if you think an NDA is worth a damn (as the article shows.)
    - cturner 15y ago
      When good people sign a NDA it counts for something. When you're dealing with lying buggers though, it represents an option to sue. Insurance is similar.
      - S4M 15y ago
        Yeah, except when you are not in position to enforce the NDA which was the case of the OP.
        jacques_chester 15y ago
        Many lawyers will take cases on contingency. ie, they'll work for a percentage of any payout.
        nknight 15y ago
        Yes, but that doesn't always help. If your opponent is rich, they can hire an army of lawyers, and you'll generally need a correspondingly huge law firm prepared to invest their own time and money in countering that. The kind of law firms we're talking about are both few in number, and generally fully-engaged by well-paying clients -- clients like your rich opponent. The incentive to take on a case like this is pretty limited.
dctoedt 15y ago
All is not lost, and the start-up shouldn't despair, for a couple of reasons: 1. It's not unknown for acquisition deals to get put on the back burner for a while, even a year or two. That happened to my former company when it was acquired. (This history was publicly disclosed in my company's proxy filing with the SEC [1].) 2. The Company's lawyers are likely to tell them, forcefully, to be very careful about trying to redevelop the technology, precisely because of the NDA. Suppose that The Company didn't use completely different people (a "clean room" approach) to redevelop the technology. In that case, a jury might not believe they really did it independently. In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA with a small start-up company concerning circuitry for improving data transmission rates over analog cell phones. (Disclosure: I was co-counsel for Rockwell at the trial.) [1] (To be sure, The Company's engineers and executives might well convince themselves that they really did redevelop the technology independently, without using the start-up's confidential information. That could make it difficult to settle the case: The important decision makers might sincerely believe The Company didn't do anything wrong.) [1] http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=4002636-972-537833&type=sect&TabIndex=2&companyid=5687&ppu=%252fdefault.aspx%253fcompanyid%253d5687 http://google.brand.edgar-online.com/displayfilinginfo.aspx?... [2] Celeritas v. Rockwell, http://www.ll.georgetown.edu/federal/judicial/fed/opinions/97opinions/97-1512.html http://www.ll.georgetown.edu/federal/judicial/fed/opinions/9... [edited]
- jpdoctor 15y ago
  > The Company might well become very cautious about trying to redevelop the technology, precisely because of the NDA. I seriously doubt it. > In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA concerning circuitry for improving data transmission rates over analog cell phones. What fraction of revenue was that? For a semi firm, that sounds like small-cost-of-doing-business when compared to cell-phone revenues.
- kappaknight 15y ago
  NDA is not the same as non-compete, or am I wrong on this?
gyardley 15y ago
This is also a classic bigger-company horror story -- when the developers who said "this isn't so hard, we can do it ourselves" start working on it and run into all the tiny little gotchas that aren't evident in due diligence. Maybe I've just been exposed to a weird sample, but I've heard 'we can do it ourselves' at least a half-dozen times over my career and not once has anyone actually done it themselves.
- mkramlich 15y ago
  That suggests what might be a good rule of thumb for distinguishing a rock star programmer from the other kind. The rock star says they can do it, and mean it. Then they do it. Done.
  - j_baker 15y ago
    ...or the rockstar says they can't do it, and mean it. Then they don't do it. Not done.
    - tbsdy 15y ago
      Or the rockstar programmer says it can't be done, then he does it. And the big company looks at it and ignores it.
pg 15y ago
This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, probably decreases the chances of things going wrong. M&A guys can smell it when you really want a deal, and that makes them want it less.
- saturdayplace 15y ago
  > M&A guys can smell it when you really want a deal, and that makes them want it less. This seems perverse, but I'm guessing that there's some kind of economic intuition these guys have gained from being around deals all the time? Something like, "Wants a deal == needs it == a bad investment." This just seems to confirm that the best way to get money thrown at you is to not have a need for it.
  - jpdoctor 15y ago
    > This just seems to confirm that the best way to get money thrown at you is to not have a need for it. Law of the jungle: If it runs, chase it. If chased, run.
  - nostrademons 15y ago
    I was out with an investment banker at a social outing, and I asked him "What's the biggest mistake startups make during the acquisition process?" He said, "Buddying up with their potential acquirer. Once you express strong interest in getting bought, you've just lost all negotiating leverage. You've got to play coy with potential acquirers until the deal is signed."
    - larrys 15y ago
      "Once you express strong interest in getting bought, you've just lost all negotiating leverage. " Sure if you maintain that strong stance. But you can always change your level of interest and the opposite party will sense that and run to fix the deal. It's a game of chicken at that point but here's the thing. The acquirer is only looking at you and has decided they want what you have. If they didn't they wouldn't be attempting the acquisition. So look as eager as you want. And then stop being prompt and act as if something else is going on and watch and see what happens. The investment banker doesn't want to loose a deal.
alan_cx 15y ago
OK, I dont know much about start ups (I lurk here because of the quality of stories and comment), but here in the UK what I see often are start-ups who seem to rely on the idea that they will run at a loss, often large loss, in the expectation that they will either float or get bought up, rather than perusing a model where the start-up can be profitable on it's own. I've worked for a couple during ye olde dot com boom!!! OK, I understand that model and I can see the sense in it, but does it not set up a situation where the start-up is so dependent on some one buying them up that they can get over keen once potential buyers circle, resulting in them becoming vulnerable to the iffy behaviour of bigger businesses. Seems to be a critical point in the business, where the founders can run in to trouble, for reasonable human reasons. Perhaps some sort of help is required in this area?
patio11 15y ago
This happens all the time, even for acquisitions which eventually succeed. Eric Sink sold his company to Microsoft and mentioned at the BoS 2010 conference that the deal status was "Totally dead: neither party will take any more action regarding this opportunity" two separate times prior to them finally doing it.
onemoreact 15y ago
If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies? Hint: This is when you say I can do that for X months in exchange for Y breakup fee if this deal falls though. PS: You can still increase Breakup fee's later in the process, but this is little reason to stop talking to stop considering other offers without being paid to do so.
mekoka 15y ago
We are a company without the cash to try to enforce the NDA Then why disclose your trade secrets under such terms in the first place? On busy streets, I sometimes see an attitude amongst pedestrians, who like to casually jump in front of cars as soon as their light turns green. Their thinking is that they have the right to cross. There's a sense that drivers are under pressure by law to keep you safe, otherwise they'll be in trouble and people tend to mistake that as some sort of immunisation against accidents. But what if you get hit? Is the law going to give you back your legs? I think the valuable lesson here is that, even if the law protects you and provided you can afford it, there's no substitute for prudence.
- dmbaggett 15y ago
  No corporate development person is going to take a deal to the CEO without having gone through dilligence. So as the selling party, you're forced to subject yourself to this kind of process. However, you don't have to actually answer everything you're asked in this financial (and technical) cavity search. In one M&A process I participated in, the buyer asked the seller to "tell us your strategic vulnerabilities: if someone wanted to totally shut you down via technical, legal, or data means, how could they do it?" The sellers politely refused to answer this. Bottom line: there are no rules, and it often seems no one feels any shame doing the most utterly awful, unbelievable things during these M&A processes. NDA's don't mean jack, and if you don't answer enough of the questions, they simply cannot buy you. Choosing which questions to answer, and walking away from all the others, is key. And, as another commenter said: don't ever need to sell. If you really need to sell, you're probably already doomed.
goatforce5 15y ago
Worked for a start up that was in an extremely long period of due diligence with a big company you've heard of. The big company was giving our company money to meet payroll, so they knew our piggy bank was empty. Big company says thanks but no thanks. We all get laid off by the start up at lunch time. That afternoon our company lets it be known that they'll be filing a law suit asking for damages of a billion dollars (a similar company had recently sold for several hundred million and it was the dotcom boom days - a billion sounded not entirely insane). Big company has a change of heart late that night and decides to buy us for tens of millions of dollars. People called and told to come in to the office in the morning - the day had been saved! The next morning everyone was fired by big company and the little startup was shut down. Ooops.
- hga 15y ago
  Errr, where's the oops? Sounds like the big company really didn't want to buy and that was the definitive end of the startup, but after the threat of the lawsuit either someone got paid 8 figures presumably to avoid the lawsuit or the big company reneged on the payment, at which point no one is any worse off.
autarch 15y ago
This link goes to the second page of a two page story.
sriramk 15y ago
There's a non-zero possibility that the engineering org did report back to the CEO that they could build it. I've many a large company M&A scuttled due to NIH syndrome from engineering. And almost always they massively underestimated the effort needed to build something (including whether they had the talent or not). I know of atleast one case where it has resulted in long term serious strategic harm for BigCo when they refused to do a small acquisition (single digit seven figures) because of exactly this scenario.
- georgemcbay 15y ago
  The whole engineering/NIH/underestimate situation certainly rings true. OTOH, there also tends to be a vast underestimate on how difficult it will be to integrate an existing product (even if it is already built) into a new company. It is extremely rare that a product the company is acquiring for is exactly the product they need, it is usually 90% of the product they need, and they're still going to have to get the second 90% done while simultaneously working on all the culture issues that pop up when trying to bring two companies together.
mcgwiz 15y ago
The submitted link goes to the second page of the article. Here's the first page: http://venturebeat.com/2012/02/27/a-classic-startup-horror-story-the-ma-bait-and-switch/ http://venturebeat.com/2012/02/27/a-classic-startup-horror-s...
pconf 15y ago
All good reasons for NOT sharing your startup's IP with prospective partners, not with their CEO, not with anyone. This story could have been written about GO's negotiations with Microsoft almost 2 decades ago. When MS shined-on GO their lead in the tablet market, and many, many jobs, were lost. We must remember that large Corporations are looking out for their own interests in ALL cases, recognize when they would benefit by putting us little guys out of business, and act accordingly. If they won't buy us without a detailed look at our IP so be it.
commanda 15y ago
Luckily, the acquiree knows that "It doesn't look so hard, we can build it ourselves" is almost certainly a mistaken belief on the part of the acquirer. I've found that any system, no matter how complicated, when explained by a competent engineer who knows the system well and is a good communicator, sounds "not so hard, I could build it myself". I have to remind myself that it is probably hard, and I could probably not build it myself for less than the cost of the acquisition.

231 points by t3mp3st 15y ago

Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here. The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.

rokhayakebe 15y ago
Most likely, technology is only expensive to build the first time, or, at least, the cost decreases from there.
ootachi 15y ago
Very few startups these days are building a technology that isn't cheap to reproduce.
roel_v 15y ago
"The best defense is to build a technology that isn't cheap to reproduce." Actually that's the single worst defense. What can possibly be so expensive to produce that it can't be cloned, yet cheap enough to be possible to sell with profit? The fact of the matter is that most software is quite simple, and when it solves a particular problem in an innovative way, there is no way to capitalize on that because there's no way to enforce exclusive use (give or take a few counterexamples left or right, like a super special secret server-side recommendation algo or something like that, but those are outliers).
- pnathan 15y ago
  Conceptually, if very smart people did it, and other very smart people say it can't be done... that's what you're looking for for a deep moat. Usually that's going to be some sort of new mathematical principle in software. It's excruciatingly hard to get funding if you do come up with that sort of idea, because the experts all say its impossible. ;)
  - idiopathic 15y ago
    "Conceptually, if very smart people did it, and other very smart people say it can't be done" Don't forget the third part, which is what the author described, i.e. "not very smart people say they can easily do it themselves". They do not have to be able to do it, they just have to be able to convince the CEO to spend $1 million in salary on the internal delivery time to try to do it.
AznHisoka 15y ago
This is not practical advice. Not many people here are building the cure to cancer. The best defense is to build a self-sustaining business where you don't need to sell it.
- wyclif 15y ago
  This is true. The classic example IMO is Amazon: they didn't have "killer IP." Their "moat" was their mastery of fulfillment and distribution, and owning all the links in that chain.
mirsadm 15y ago
I can't really think of any recent companies that have killer IP. The difference might be an elegant solution vs someone from high school copying samples from codeproject/stackoverflow.

cienrak 15y ago

I don't understand why they didn't try to fight this based on the NDA or no-use. Wouldn't a good lawyer be willing to take this on retainer, if they could prove their tech was being ripped off despite the legal protections they signed going into the deal?

true_religion 15y ago
I'm having trouble following... how were they ripped off? There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone. It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does really?), so it might have been presumed that if you have X products, and Y infrastructure then you must have Z sales behind it. When they looked at the financials, they didn't see the sales figure they wanted so bailed.
- karamazov 15y ago
  NDA's are normally written not only to prevent disclosure, but also to prevent the company receiving the information from using it to copy your product. If you're disclosing to a potential competitor, you don't want them sharing that information with anyone else, but you especially don't want them just stealing your codebase and using it themselves.
  - dmethvin 15y ago
    I went through this very same left-at-the-altar scenario a decade ago with a startup. It can be very difficult to prove that the company used the NDA information they had in their possession. Clearly the tech staff in the big company saw it, since this seems to be how they made the determination that they could do it in-house for less.
- kgo 15y ago
  Megacorp decides to purchase KFC. As part of due diligence, they want to know what the secret recipe is. After all, you'd hate to find out one of the special herbs and spices is cocaine or arsenic. This is fine because MegaCorp signed an NDA. MegaCorp breaks off the deal. Their chefs decide that they can make their own chicken. After all it's not hard to combine these nine herbs and spices. The chefs only have this knowledge because you revealed your trade secrets under the protection of an NDA. They're not white box reverse engineering the recipe.

joedev 15y ago

That's not a classic "Startup" horror story. That's a classic "Built to Flip" horror story. One of many reasons why selling is not an desireable business-model strategy.

j_baker 15y ago
There are reasons to sell a startup aside from having built it to flip. It can even happen in a startup that the founders had every intention of building into a big sustainable business. Many times, it's because the founders and/or investors have "checked out" of the business and want a quick return on their time.

espinchi 15y ago

The key for a successful negotiation is to have leverage. In this particular case, it looks as if the founder of this startup needed the acquisition to happen. Otherwise, when The Company refused the official term sheet, or when they noticed any other smelly things down the road, they could've halted until that detail was sorted out, or even canceled the negotiations. The conclusion in the last paragraph of the (highly enjoyable, btw) story goes in this direction, but it's a bit optimistic: the real lesson learned is this: get your business to a level of success where you don’t care if the deal falls through. Get profitable. Get such amazing user growth you have investors begging to put in money. Well, I wish it was that easy!

outside1234 15y ago

if you want it to not happen again, you have to name names. otherwise, there's no downside to this company.

mcdavis 15y ago
Any downside for the company would be so short-lived it wouldn't be worth it. Like most ragefests, it'd die down at the next controversy and be forgotten. They're not naming names because they value the lesson more than the temporary shaming.
- propercoil 15y ago
  not if you are GoDaddy.. SOPA sticks like a mother f'er

casca 15y ago

Something doesn't smell right with this story. If a big company clearly breaks a contract, there's money to be had and the lawyers will work on retainer. NDAs are legal agreements. They can include terms that prohibit the creation of a similar product for a length of time. My favourite snippits are: "We shipped some amazing new products" and "Our systems handle load today that they wouldn’t project to have until 5 years from now, all on a minuscule startup budget". Shipping is easy. Selling is hard. And building something that scales to (optimistic) 5-year (!) projects seems like premature optimsation to me.

duxup 15y ago
That is assuming that the big company in fact did break a contract. All we know is the other company might do so based on a phone conversation. That won't keep little company afloat long.
sowbug 15y ago
It's possible the CEO didn't mean that his company intended to copy the technology, but rather that it would be easy to copy it, and thus that it wasn't worth anywhere near the figures being tossed around. In that case, this wouldn't have anything to do with enforcing an NDA; it would simply mean the parties disagreed on the value of the technology and couldn't reach a deal for that reason. The article didn't say whether the other company actually did try to copy it, which is why "It doesn't look so hard, we can build it ourselves" is at least a little ambiguous -- especially because it's unlikely that's a direct quote (might "can" have been "could"?).

j_baker 15y ago

You know, I started to get suspicious around the time I read the phrase "gentleman's agreement". I can't think of any good motivation a person could have for wanting such a thing aside from the fact that the lawyers haven't drawn up a contract yet.

rokhayakebe 15y ago

Dude, seriously, this isn't helping anyone unless you give some clues allowing people to figure out who The Company is.

nkoren 15y ago
The Company could be virtually anyone. I have seen this scenario play out multiple times in multiple industries. In this case, naming The Company would actually be less helpful, not more. If you go into a deal thinking "hey, I can trust these guys; they're not like those louts from ACME Crockpots Inc. that I read about," then you're setting yourself up for trouble. Much better to approach an acquisition deal thinking that these guys might be 'The Company', and taking precautions accordingly.
archangel_one 15y ago
Actually, I think the general lessons can be learned regardless. Naming The Company would turn it into mudslinging which would change the tone of the article, and IMO probably not for the better.
- TDL 15y ago
  Agreed. The general case is much better in this regard. The drama from knowing who the players were would distract from the events and any lessons learned.
Tossrock 15y ago
Well, there are SOME clues. Mention of Silicon Alley means it's probably in New York. The fact that they were having dinner with the CEO means it's probably not Google-scale.

deleted 15y ago

[deleted]

jpdoctor 15y ago

> “If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies?” ... We agreed. It turns out that's an intelligence test: Anybody worth having a gentlemen's agreement with would be gentlemenly enough to put it down in writing. The correct answer is: Put it in writing. Edit: NDA's are another intelligence test btw. All of the entanglements without any of the enforceability.

jonny_eh 15y ago
So you're intelligent if you don't demand an NDA?
- jpdoctor 15y ago
  Not quite. It's more like: You're not intelligent if you think an NDA is worth a damn (as the article shows.)
  - cturner 15y ago
    When good people sign a NDA it counts for something. When you're dealing with lying buggers though, it represents an option to sue. Insurance is similar.
    - S4M 15y ago
      Yeah, except when you are not in position to enforce the NDA which was the case of the OP.
      - jacques_chester 15y ago
        Many lawyers will take cases on contingency. ie, they'll work for a percentage of any payout.
        nknight 15y ago
        Yes, but that doesn't always help. If your opponent is rich, they can hire an army of lawyers, and you'll generally need a correspondingly huge law firm prepared to invest their own time and money in countering that. The kind of law firms we're talking about are both few in number, and generally fully-engaged by well-paying clients -- clients like your rich opponent. The incentive to take on a case like this is pretty limited.

dctoedt 15y ago

All is not lost, and the start-up shouldn't despair, for a couple of reasons: 1. It's not unknown for acquisition deals to get put on the back burner for a while, even a year or two. That happened to my former company when it was acquired. (This history was publicly disclosed in my company's proxy filing with the SEC [1].) 2. The Company's lawyers are likely to tell them, forcefully, to be very careful about trying to redevelop the technology, precisely because of the NDA. Suppose that The Company didn't use completely different people (a "clean room" approach) to redevelop the technology. In that case, a jury might not believe they really did it independently. In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA with a small start-up company concerning circuitry for improving data transmission rates over analog cell phones. (Disclosure: I was co-counsel for Rockwell at the trial.) [1] (To be sure, The Company's engineers and executives might well convince themselves that they really did redevelop the technology independently, without using the start-up's confidential information. That could make it difficult to settle the case: The important decision makers might sincerely believe The Company didn't do anything wrong.) [1] http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=4002636-972-537833&type=sect&TabIndex=2&companyid=5687&ppu=%252fdefault.aspx%253fcompanyid%253d5687 http://google.brand.edgar-online.com/displayfilinginfo.aspx?... [2] Celeritas v. Rockwell, http://www.ll.georgetown.edu/federal/judicial/fed/opinions/97opinions/97-1512.html http://www.ll.georgetown.edu/federal/judicial/fed/opinions/9... [edited]

jpdoctor 15y ago
> The Company might well become very cautious about trying to redevelop the technology, precisely because of the NDA. I seriously doubt it. > In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA concerning circuitry for improving data transmission rates over analog cell phones. What fraction of revenue was that? For a semi firm, that sounds like small-cost-of-doing-business when compared to cell-phone revenues.
kappaknight 15y ago
NDA is not the same as non-compete, or am I wrong on this?

gyardley 15y ago

This is also a classic bigger-company horror story -- when the developers who said "this isn't so hard, we can do it ourselves" start working on it and run into all the tiny little gotchas that aren't evident in due diligence. Maybe I've just been exposed to a weird sample, but I've heard 'we can do it ourselves' at least a half-dozen times over my career and not once has anyone actually done it themselves.

mkramlich 15y ago
That suggests what might be a good rule of thumb for distinguishing a rock star programmer from the other kind. The rock star says they can do it, and mean it. Then they do it. Done.
- j_baker 15y ago
  ...or the rockstar says they can't do it, and mean it. Then they don't do it. Not done.
  - tbsdy 15y ago
    Or the rockstar programmer says it can't be done, then he does it. And the big company looks at it and ignores it.

pg 15y ago

This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, probably decreases the chances of things going wrong. M&A guys can smell it when you really want a deal, and that makes them want it less.

saturdayplace 15y ago
> M&A guys can smell it when you really want a deal, and that makes them want it less. This seems perverse, but I'm guessing that there's some kind of economic intuition these guys have gained from being around deals all the time? Something like, "Wants a deal == needs it == a bad investment." This just seems to confirm that the best way to get money thrown at you is to not have a need for it.
- jpdoctor 15y ago
  > This just seems to confirm that the best way to get money thrown at you is to not have a need for it. Law of the jungle: If it runs, chase it. If chased, run.
- nostrademons 15y ago
  I was out with an investment banker at a social outing, and I asked him "What's the biggest mistake startups make during the acquisition process?" He said, "Buddying up with their potential acquirer. Once you express strong interest in getting bought, you've just lost all negotiating leverage. You've got to play coy with potential acquirers until the deal is signed."
  - larrys 15y ago
    "Once you express strong interest in getting bought, you've just lost all negotiating leverage. " Sure if you maintain that strong stance. But you can always change your level of interest and the opposite party will sense that and run to fix the deal. It's a game of chicken at that point but here's the thing. The acquirer is only looking at you and has decided they want what you have. If they didn't they wouldn't be attempting the acquisition. So look as eager as you want. And then stop being prompt and act as if something else is going on and watch and see what happens. The investment banker doesn't want to loose a deal.

alan_cx 15y ago

OK, I dont know much about start ups (I lurk here because of the quality of stories and comment), but here in the UK what I see often are start-ups who seem to rely on the idea that they will run at a loss, often large loss, in the expectation that they will either float or get bought up, rather than perusing a model where the start-up can be profitable on it's own. I've worked for a couple during ye olde dot com boom!!! OK, I understand that model and I can see the sense in it, but does it not set up a situation where the start-up is so dependent on some one buying them up that they can get over keen once potential buyers circle, resulting in them becoming vulnerable to the iffy behaviour of bigger businesses. Seems to be a critical point in the business, where the founders can run in to trouble, for reasonable human reasons. Perhaps some sort of help is required in this area?

patio11 15y ago

This happens all the time, even for acquisitions which eventually succeed. Eric Sink sold his company to Microsoft and mentioned at the BoS 2010 conference that the deal status was "Totally dead: neither party will take any more action regarding this opportunity" two separate times prior to them finally doing it.

onemoreact 15y ago

If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies? Hint: This is when you say I can do that for X months in exchange for Y breakup fee if this deal falls though. PS: You can still increase Breakup fee's later in the process, but this is little reason to stop talking to stop considering other offers without being paid to do so.

mekoka 15y ago

We are a company without the cash to try to enforce the NDA Then why disclose your trade secrets under such terms in the first place? On busy streets, I sometimes see an attitude amongst pedestrians, who like to casually jump in front of cars as soon as their light turns green. Their thinking is that they have the right to cross. There's a sense that drivers are under pressure by law to keep you safe, otherwise they'll be in trouble and people tend to mistake that as some sort of immunisation against accidents. But what if you get hit? Is the law going to give you back your legs? I think the valuable lesson here is that, even if the law protects you and provided you can afford it, there's no substitute for prudence.

dmbaggett 15y ago
No corporate development person is going to take a deal to the CEO without having gone through dilligence. So as the selling party, you're forced to subject yourself to this kind of process. However, you don't have to actually answer everything you're asked in this financial (and technical) cavity search. In one M&A process I participated in, the buyer asked the seller to "tell us your strategic vulnerabilities: if someone wanted to totally shut you down via technical, legal, or data means, how could they do it?" The sellers politely refused to answer this. Bottom line: there are no rules, and it often seems no one feels any shame doing the most utterly awful, unbelievable things during these M&A processes. NDA's don't mean jack, and if you don't answer enough of the questions, they simply cannot buy you. Choosing which questions to answer, and walking away from all the others, is key. And, as another commenter said: don't ever need to sell. If you really need to sell, you're probably already doomed.

goatforce5 15y ago

Worked for a start up that was in an extremely long period of due diligence with a big company you've heard of. The big company was giving our company money to meet payroll, so they knew our piggy bank was empty. Big company says thanks but no thanks. We all get laid off by the start up at lunch time. That afternoon our company lets it be known that they'll be filing a law suit asking for damages of a billion dollars (a similar company had recently sold for several hundred million and it was the dotcom boom days - a billion sounded not entirely insane). Big company has a change of heart late that night and decides to buy us for tens of millions of dollars. People called and told to come in to the office in the morning - the day had been saved! The next morning everyone was fired by big company and the little startup was shut down. Ooops.

hga 15y ago
Errr, where's the oops? Sounds like the big company really didn't want to buy and that was the definitive end of the startup, but after the threat of the lawsuit either someone got paid 8 figures presumably to avoid the lawsuit or the big company reneged on the payment, at which point no one is any worse off.

autarch 15y ago

This link goes to the second page of a two page story.

sriramk 15y ago

There's a non-zero possibility that the engineering org did report back to the CEO that they could build it. I've many a large company M&A scuttled due to NIH syndrome from engineering. And almost always they massively underestimated the effort needed to build something (including whether they had the talent or not). I know of atleast one case where it has resulted in long term serious strategic harm for BigCo when they refused to do a small acquisition (single digit seven figures) because of exactly this scenario.

georgemcbay 15y ago
The whole engineering/NIH/underestimate situation certainly rings true. OTOH, there also tends to be a vast underestimate on how difficult it will be to integrate an existing product (even if it is already built) into a new company. It is extremely rare that a product the company is acquiring for is exactly the product they need, it is usually 90% of the product they need, and they're still going to have to get the second 90% done while simultaneously working on all the culture issues that pop up when trying to bring two companies together.

mcgwiz 15y ago

The submitted link goes to the second page of the article. Here's the first page: http://venturebeat.com/2012/02/27/a-classic-startup-horror-story-the-ma-bait-and-switch/ http://venturebeat.com/2012/02/27/a-classic-startup-horror-s...

pconf 15y ago

All good reasons for NOT sharing your startup's IP with prospective partners, not with their CEO, not with anyone. This story could have been written about GO's negotiations with Microsoft almost 2 decades ago. When MS shined-on GO their lead in the tablet market, and many, many jobs, were lost. We must remember that large Corporations are looking out for their own interests in ALL cases, recognize when they would benefit by putting us little guys out of business, and act accordingly. If they won't buy us without a detailed look at our IP so be it.

commanda 15y ago

Luckily, the acquiree knows that "It doesn't look so hard, we can build it ourselves" is almost certainly a mistaken belief on the part of the acquirer. I've found that any system, no matter how complicated, when explained by a competent engineer who knows the system well and is a good communicator, sounds "not so hard, I could build it myself". I have to remind myself that it is probably hard, and I could probably not build it myself for less than the cost of the acquisition.