Planning for your exit

Your exit might feel far enough away that it's not worth spending serious time thinking about. But the outcome you’re building toward can shape legal, operational, and financing decisions many years before an exit transaction is on the table. Whether you ultimately sell in two years or stay with the business for a decade, having some idea of what a possible exit looks like can save you time, money, and difficult conversations later. 

Elke Trilla is a corporate attorney and focuses on early-stage climate and tech companies. In the third part in a new series with the team at WSGR, we sat down with her to discuss  how founders can think about an exit early, prepare for acquisition diligence, and avoid some of the issues that can derail a deal.

Initial Considerations

 You don’t need to know exactly how or when you’ll exit. But there are three questions worth discussing with yourself and your co-founders early, then revisiting as the company grows. The answers and their evolution will serve as a useful yardstick when transactional opportunities arise.

Do you actually want to sell the company to someone else? 

Do you see yourself as a steward of your business forever, or are you okay passing it on to someone else?  The answer can influence how you capitalize the company, structure governance, and think about control over time. It’s also important that you and your co-founders are broadly aligned. If you want to run the business indefinitely and your co-founder sees it as a five-year journey, that’s a difference worth surfacing early.

What kinds of exits appeal to you?

It is worth understanding what “selling” a company can mean in reality.  The possibilities could include an aqui-hire to a big corporate, an M&A deal with a PE firm, a sale to a similar company, a sale to a competitor, or an IPO.  For example, a buyer might choose to buy only 51% of the company’s stock, becoming a majority owner but keeping the core team in place, or 100% of the stock of the company to become the sole owner, or purchase only certain assets, or purchase particular project or SPV rather than the parent company as a whole. There are a range of possible exit-transaction structures, each with their own benefits, complexity and founders and investors.

Your ultimate desired exit end-goal will also direct the operational rigor and transactional choices you need to focus on today. A company hoping to reach the public markets will be expected to have a much stronger history of corporate documentation, board minutes, approvals, and financial controls than a small privately held business preparing for a straightforward sale. Building those habits early is much easier than reconstructing years of records during diligence. 

What’s your price?

When you think about selling your company, what number do you have in mind? Think of it as an internal reference point rather than a prediction or commitment. You might privately decide that an individual $10M outcome within a few years would be meaningful to you, even while building the company toward a much larger opportunity. Your co-founder may have a materially higher number in mind, or perhaps wants to stay to build the company towards a later milestone. Thinking about these dynamics periodically will help align goals and incentives.  T

Agree on your boundaries before negotiations begin 

If an acquisition is anywhere on the horizon, come together with your co-founders to ask what would be a great outcome, an okay outcome, the lowest acceptable outcome, and an unacceptable outcome. Make sure you’re all in agreement from the outset, because negotiations happen too fast to get everyone’s buy-in. The same conversation then needs to happen with your board.

Preparing for a sale

Assemble your advisors early 

If a possible sale is becoming realistic, give yourself at least six months to prepare rather than waiting for an LOI to arrive. You are generally best served by bringing in outside advisors like lawyers, accountants, tax advisors, and, depending on the transaction, investment bankers well before the formal process begins.

Each outside advisor plays a different role. Your legal team will prepare the company for diligence and work through the transaction documents; accountants and financial advisors can validate historical financials and tax positions; and bankers may help position the company, identify buyers, and manage the sale process.

Treat unsolicited acquisition interest with some skepticism, particularly before sharing sensitive information, and have your advisors verify that the buyer and approach are legitimate.

Make sure your own interests are represented 

While your interests and the interests of your company have been on the same track for a long time, a possible exit transaction will require careful and distinct considerations for the company with other distinct considerations for the founders in their individual capacities. 

Company counsel represents the company, not you individually. Founders may need separate legal, tax, or estate-planning advice to understand issues like their personal tax exposure, QSBS eligibility, holding periods, or the consequences of different transaction structures. Those questions can materially change what you actually receive from the same headline purchase price.

Expect deeper diligence

In general, preparing for a sale, depending on the nature of the transaction, is more rigorous than preparing for a raise. If you’re an early-stage company that has never completed a preferred financing or gone through institutional diligence, assume you’ll need significantly more preparation time. This is another reason to start cleaning up the company months before a sale transaction is underway. This is especially true if you’re running out of cash, because every delay means a risk of things falling apart.Anything a buyer discovers late can become negotiating leverage and often used to lower the purchase price.  You’re much better off identifying any issues yourself, deciding what can be remediated, and explaining anything that can’t before the buyer finds it in diligence.

Map who can approve the deal 

Before you assume a deal can close, map out who must approve the sale, or said differently, who has the right to block the sale of the company. How many approvals you need will depend on the rights negotiated in earlier financing rounds. Well-structured preferred financing documents will often establish approval thresholds so that once the required percentage supports a transaction, individual minority stockholders cannot hold up the entire deal. 

Once you know whose support you need, speak to key stakeholders individually rather than relying on one large group conversation. With the guidance of counsel, and at the right time, you share the details of the possible sale transaction and field any questions or concerns. 

Map your change-of-control requirements 

Your stockholders aren’t the only people who may need to consent to a sale transaction. Customer contracts, commercial agreements, permits, government funding, and regulatory programs can all contain assignment or change-of-control provisions.

Identify these consent or notification requirements early on in the process. Regulatory approvals in particular can have long lead times, and discovering that a major customer or agency must consent during a 30- or 60-day closing window can create a serious problem.

 AI can be useful for a first pass. You can use it to chart assignment and change-of-control provisions across your material contracts, then have counsel validate the results. It’s not a substitute for legal review, but it can help you spot where the work is likely to be.Historical and Current IP Ownership For many buyers, the IP is either the thing they’re acquiring or a significant part of the company’s value. They’ll want to see not only patents and public filings, but a clean chain of ownership showing that founders, employees, contractors, and other service providers properly assigned their work to the company. A missing assignment from someone who worked on core technology years ago can become a significant diligence issue. Buyers may respond by requiring additional indemnities or holding back part of the purchase price to protect themselves against a future ownership claim. Either way, a documentation gap that looked minor early on can materially affect your liquidity at exit.

Where acquisition deals get complicated 

Be careful with earnouts 

If part of the purchase price depends on hitting revenue, profitability, or other milestones after the acquisition, don’t negotiate the key performance indicators or milestones in isolation. You will want to negotiate and align on the resources you’ll have to achieve the milestones and what happens if circumstances outside your control make the original milestone unrealistic. Think through the scenarios that could prevent you from hitting the targets and address them in the transaction documents. Don’t rely on the assumption that you and the buyer will remain perfectly aligned once the deal closes.  

Don’t let deal fatigue lower your guard

Exit transactions can drag on long enough that, once the headline price is agreed, founders are tempted to stop pushing on the remaining details. But those details still matter. Earnouts, indemnities, employment terms, holdbacks, and closing conditions can significantly change the value of the deal you ultimately receive.

Keep running the business 

A possible sale transaction will, inevitably, consume an enormous amount of management’s attention, but the company still has to perform while the deal is being negotiated. If revenue slips or you lose a major customer during the process, the buyer may use that change to revisit the price or other terms.

Oftentimes, the majority of the company’s employees are unaware of the possible transaction for this exact reason. The senior leadership must make sure enough of the team remains focused on operating the business while a smaller group handles the transaction. A strong offer is much less valuable if company performance deteriorates before you reach closing. 

Plan for confidentiality without losing the team

M&A processes are typically highly confidential, and only a small group inside the company may know about the transaction until relatively close to signing or closing. Depending on the size of your team, however, maintaining that secrecy for months can become difficult.

The challenge is that employees may ultimately be critical to the value of the deal. If an earnout or integration plan depends on the team continuing to perform, surprising people at the last minute can create retention and morale problems at exactly the wrong moment. Work with your advisors on who needs to know, when they should be told, and how the communication should be handled without breaching your confidentiality obligations.

Elke Trilla is a corporate attorney formerly in the Boston office of Wilson Sonsini Goodrich & Rosati, where she advised high-growth technology companies on formation, venture financings, and mergers and acquisitions. Her practice has a particular depth in capital-intensive climate and energy businesses, including structuring blended capital stacks that integrate venture equity with non-dilutive funding sources. Elke is recognized for her work with underrepresented and emerging founders navigating early-stage capital formation, and has been named to the Boston Business Journal's 40 Under 40, Boston's 50 Most Influential Attorneys of Color, and the Hispanic National Bar Association's Top 40 Lawyers Under 40, among other honors.