The Wise Exit

Today I have a special guest and friend who's been through an IPO and sold his last company to Microsoft.

Stephen Cox created his first success as an early employee at PurchasePro, a B2B eCommerce platform, which went public in 1999. Steven followed that up by building TakeLessons, an online music lessons platform to help other musicians and educators connect with students in person and online. By 2021, TakeLessons had become one of the largest live educational sites on the web and was purchased by Microsoft.

Show Notes

E8: Today I have a special guest and friend who's been through an IPO and sold his last company to Microsoft.

Stephen Cox created his first success as an early employee at PurchasePro, a B2B eCommerce platform, which went public in 1999. Steven followed that up by building TakeLessons, an online music lessons platform to help other musicians and educators connect with students in person and online. Steven, his team and his investors did not find instant success with Take Lessons, but they never gave up.

And 14 years later, having raised 19 million from 14 different investors in three rounds, his company TakeLessons became one of the largest live educational sites on the web and was purchased by Microsoft in 2021.

Steven Cox shares how he was able to earn, in his words, the emotional equity to convince his board to increase the equity share for some key employees and co-founders of TakeLessons who are not only instrumental in building the take lessons business, but who are critical in making the sale to Microsoft happen.

Today's episode is for founders who may find themselves needing to ask investors and their board for a bigger piece of the pie for key employees or themselves to get everyone aligned around the sale of a business.  I hope you enjoy my conversation with Steven Cox.


This episode is brought to you by Exitwise:

Exitwise helps business owners create the exits they deserve by assembling the best teams of industry specific, M&A experts, who will help maximize the sale of each business.

How Does It Work:

1. Schedule A Call:  Schedule a call with one of our M&A Advisors and we'll walk you through the entire process of selling your business, from market valuations to M&A expert fees and from due diligence to the signing of your purchase agreement. We're here to answer any questions you may have.

On this call, we'll want to learn about the history of the business, your financial performance, your management team and listen to your thoughts and requirements for selling the business so we can make sure to find the best M&A experts to help maximize your exit.

2. Review Top Experts:  Once we've had a chance to process all your business information, we'll share with you, our top choices for investment bankers, M&A attorneys, and tax accountants to help maximize the sale of your business.

We’ll present each M&A expert’s transaction history, estimated valuation range for your business and their fee structures. Then we’ll talk through the pros and cons of each choice to help you prioritize and make the best decisions.

3. Negotiate & Hire:  Finally, when we've narrowed it down to your top choices, we'll negotiate your engagement letter with each M&A expert to make sure fees and terms are fair for everyone. We know what to look for and we know how to keep everyone incentivized for your optimal outcome.

Once your M&A experts have been selected and you’re ready to move forward, we’ll collect signatures and get everyone to work.

What is The Wise Exit?

The Wise Exit is an open dialogue with fellow founders and former business owners sharing real stories and offering honest advice around selling their companies to some of the top acquirers in the world.

Beyond the entertaining and educational exit stories, host and M&A Advisor, Todd Sullivan is here to help demystify the Mergers & Acquisitions (M&A) process. For example:

- How much is my business worth?
- What is Net Working Capital?
- When should I get a Quality of Earnings analysis
- Should I hire an Investment Banker, M&A Advisor, or Business Broker?
- When do I talk to my Key Employees about a possible transaction?

We hope you enjoy... and learn a few things along the way!

Cashing Out Podcast | Episode 8 | IPO + Selling to Microsoft | Steven Cox

Todd: [00:00:00] Hello and welcome everyone. I'm Todd Sullivan and this is Cashing Out. This show is an open dialogue with fellow founders and former business owners sharing their stories and advice about selling their companies to some of the top acquirers in the world. Today I have a special guest and friend who's been through an IPO and sold his last company to Microsoft.

Stephen Cox created his first success. Early employee at PurchasePro a B2B eCommerce platform, which went public in 1999. Steven followed that up by building TakeLessons, an online music lessons platform to help other musicians and educators connect with students in person and online. Steven, his team and his investors did not find instant success with TakeLessons, but they never gave up.

And 14 years later, having raised $19 million from 14 different investors in three rounds, his company TakeLessons had become one of the largest live educational sites on the [00:01:00] web and was purchased by Microsoft in 2021. Today's episode is for founders who may find themselves needing to ask investors and their board for a bigger piece of the pie for key employees or themselves to get everyone aligned around the sale of a business.

Today Steven Cox shares how he was able to earn, in his words, the emotional equity to convince his board to increase the equity share for some key employees and co-founders of TakeLessons who are not only instrumental in building the take lessons business, but who were critical in making the sale to Microsoft happen. I hope you enjoy my conversation with Steven Cox.

So, Steven, thank you for doing this. I am fired up that you're willing to do this. I, I know you like sharing lessons learned, but I think our fellow founders are gonna learn a ton from you because I think many of them will find themselves in a similar spot for if they're fortunate enough to find them in that spot, as you did with TakeLessons with opportunity to [00:02:00] sell to a major acquirer, you know, a, a name that some of us know - Microsoft.

So, thank you for being here to share that story. But I wanna first say, I was so excited when you decided to do this. I had no problem bumping Mark Cuban from this time slot just to have you on. So thank you. Thank you for being here.

Steve: All right, Mark, you could, I'll make it up to you later. Perfect.

Todd: Perfect. So you've been out in the news on YouTube, a lot of places where people can hear you talking and giving back to founders, giving your advice. The lessons learned. So we could walk a little bit through your career, which I'd love to do, starting with that kind of first IPO exit that probably gave you the what is possible in this world of entrepreneurship.
And then I really like to jump to TakeLessons, that journey. But let's really focus on the end, right? Cuz that's what we're about, is helping founders think through what that exit could be. How do they create the best possible [00:03:00] situation for themselves and their stakeholders? So, if you wouldn't mind, maybe just starting from the beginning and we'll steer the ship anywhere you want to go.

Steve: Sure. Todd, it’s great to be here with, uh, with you as well as all the founders listening. I, I, I always say that I think there's almost, uh, nothing that I can think of that I can do that's more noble than creating a company that a lot of people get to benefit from, whether it be the consumer side or just as important, if not more.

Uh, my employees and my team that, uh, kind of ride along shotgun with me. So yeah, I grew up in Ohio. Dayton, Ohio, not too far from Michigan. Yeah. Where, where you are. And, um, you know, Midwest guy and I grew up super poor. Um, and a family of, you know, four kids and lived on, you know, the typical government cheese and those big boxes of cereal, like white and black boxes that you get from, from, uh, from government agencies.

Um, and I think that sort [00:04:00] of, uh, environment growing up really, um, forced me to make a decision that, hey, I don't want my entire. To look like, uh, it did when I was growing up. So I learned that lesson very early on. And one, I, I was the kid. High school that was buying like these get rich quick magazines and looking in the back and cutting out the little coupons and trying to send in for the $5 book.

Um, just because I wanted out of this scenario where everything was a struggle for, for the family. So I, you know, I discovered college and went to college and, um, took finance in school. I figured that was a great place to learn how to not be financially struggling my entire life. But I was motivated very early on to.

To find, um, a path out of kind poverty if you. And so as, as this path kind of led me in through, through college, uh, first kid, my family to go to school and [00:05:00] graduate. And I was working a job at, uh, in, in Kentucky where I'd went to school and a buddy of mine called me and said, Hey man, um, I invested in this company out in Las Vegas, and the owner gambled away all the money, you know, crazy founder guy.

And we're gonna, we're gonna go take over the company. Do you want to go? And I was like, Well, uh, I just got this job, but you know, what's it do? And he goes, Well, we allow, we're gonna let people buy stuff over the internet. And this was in the first big internet, uh, crazy phase. And um, that was the Thursday and Saturday I had quit my job.

Um, Packed up everything I owned in a budget mini rental van, and booked it across the country to start what turned out to be a software company. Uh, one of the very first e-commerce ERP software, uh, companies, uh, that went from eight employees to 800 employees in a period of about two and a half years.

During this first. Uh, phase amazing. Uh, and kind of caught the right time. [00:06:00] No one knew what they were doing really, frankly, and, uh, but the, the markets were right for this sort of business, and it was, uh, it was very successful ipo. I think we went from a $1.32 a share to $180 a share. Wow. In about four months.

Fantastic. But as you and I know, as you and I know Yep. What goes up, comes down, especially if

Todd: it's. You were in that whole period. Yep. Yeah. So four months.

Steve: Four months and, and you know, I was able to sell a few shares, but within, you know, nine months it was back down to about a $1.32 or so. So, uh, you know, what I learned was that, um, yeah, there, there's nothing, nothing that beats cash and nothing that wrong with taking a few chips off the table, which I think is a great.

Uh, lesson that I also tell founders in, in that sort of case, but that gave me the wherewithal a bit to try some new things out. I was, uh, you know, took two years off, joined a rock band for fun. Um, and that's really what drove me to learn about [00:07:00] TakeLessons, which was there are a lot of struggling artists out there trying to make a living, doing what they love to do, but we're taking these side jobs, you know, restaurants and these sorts of things, and office jobs because they had to.
In order to make ends meet. And I thought, man, wouldn't it be a great business to try to put together a marketplace where people can buy from each other and buy services in the arts as well as any sort of learning sort of service. And that's really where TakeLessons, it came

Todd: from. Yeah. That's fantastic.
You said at the very beginning, having a finance background in college. It's one of the things that I recommend to entrepreneurs, a lot of us are, we're visionaries, we're sales people at heart, but understanding the language of finance is really important when you're building a business, right? You're, you're building a business in Excel, you're building a business, right?
Creating that product market fit for sure. But those unit economics are so important to survival. If you don't understand [00:08:00] that, really you got two strikes against you, so thank you for pointing that out at the. Yeah, amazing run. Seeing that trajectory from eight to 800 employees, that kind of growth is staggering.

I can't wrap my head around that in two and a half years. And then seeing, yeah, it goes up, it goes down. But taking chips off the table, we've had some good advice for founders who think about, Hmm, should I maybe sell my business a year and a half from now? Oh, I gotta put a little more investment, take a little more dilution, and you just keep raising the bar for yourself.
Mm-hmm. . Being able to take some chips off the table or selling a business when the ROI is right for you. For me, I love kind of that kind of advice.

Steve: I'll add it to interject something that I learned along the way. I didn't know it when I first started TakeLessons. Uh, so we exited. Great. Yep. Couldn't be a better buyer in the world, frankly.
So we're very, very happy with that. However, what I will say is, before or right as I took my very first round, I [00:09:00] funded the business out of the gate. Yep. Um, didn't take a salary, that sort of thing. You know, struggled, defined product market fit, and, and we found it. And very early on, right, when we were taking and finishing our Series A, I had an option, I had a deal on the table.
And I was, what, three years in or so, and I could have taken that deal and moved on. I was discussing with my venture capitalist at the time who's like, Hey, listen, if you wanna take the deal and not take our money, I can't blame you for it, but I think you have a big run ahead of you. And I looked back and we're very, very happy.

We exited the way we did, however, Very early on, if we would've exited, then a couple things would've happened. First of all, recycled capital, as you know, so the ability to take that capital into something else. Second of all, there's a notch on your belt for getting a win, which makes it even easier down the road to raise capital.
Um, third, you're removing the risk of the what if. Right of, of maybe I would get a bigger [00:10:00] exit. Um, and I would never fault a person. In fact, I talked to a friend the other day who's never raised a dime and he's like, Well, they wanna buy my business. And it's like 8 million, but I think I can, you know, turn it to 50 million.

I'm like, Dude, it's $8 million. You, you're the sole owner. That is, I cannot tell you that that's life changing for 90, what? 98% of people? Um, unless you have a trust account or whatever the account, the, the, the, the thing is, but there is nothing wrong with exiting, um, and not holding. I will say that as well.
So it's, you just have to really have good people around you that's willing to give you advice based on what's right for the holistic picture versus what's just right for your investor or you, etc.
Todd: Yeah, that's really well said. I add sometimes, I think you touched on it, is the value of your time. What you could be doing right in the next year and a half, two years, the next [00:11:00] venture.
But yeah, you put a win on the board, and you're right, Raising capital is easier. Building a team is easier. You get to kind of not have the same day to day financial stress on you, and maybe you're making smarter decisions and the utility of the dollar after 8 million bucks. It's like, come on, right? Yeah.
We read about the big tech crunch. Unicorn exits, but that's not the world we all live in. So you build TakeLessons and very much. I'll step back for a second cuz I very much appreciate where you're coming from in building something that affects the lives of a lot of people, right? You see a problem personally and a friend and a band member.

And you wanna solve that problem and realize, Wow, I could be solving a real economic issue for the masses, right? So that's an unbelievable place to come from and I very much relate to that as a founder. And I see my fellow founders out there not understanding M&A at all. It is a black box. And I've been fortunate enough to go [00:12:00] through it four times now, and every time I am learning something.
So, we're really about take that class of people and educate them around m and a. So maybe we could kind of jump to that. You're 14 years you're building this business, and did Microsoft come to you? Did you execute a process? Can you tell me what was the impetus to going to sell the business and, and walk us through it.

Steve: Sure. And so I'll take a, I'll take a step back slightly a few years. Couple years anyway. Sure, sure. When you take venture, especially venture, probably even just friends and family money. They're not doing it for their health. They're doing it. And you are signing up to exit. You're signing up to win, right?
Yes. To get some sort of exit, uh, on the books. That's why people invest, especially at the, the venture level. So knowing that walking in the door from day one, the minute that you take money, you're [00:13:00] building and then you're developing a game plan for exit. That's what you should be doing, because you don't know when that will be.

And what I learned along the way is, and Todd, you know, we've, we've never been the, the tech crunch darling that, uh, and frankly, probably most of the people on this call won't be either. Uh, there's, uh, and, and that's fine. We had our ups, we had our downs. And what I learned along the way is that, um, there are times we were in a marketplace's business and there were times.
When the marketplaces businesses were super hot and you could sell that business during that time, there were other times where no one gave a shit about marketplaces. And it doesn't matter how successful you were, you were not going to sell that business at some sort of reasonable price. So we walked through.

I can distinctly remember Todd, two or three, three of these cycles where marketplaces got hot, you [00:14:00] read about it everywhere. Um, it was in the news. And then next thing you know, you know, issues with Uber or Lyft can't get approval for whatever. And then you get bucketed into this marketplaces thing and no one will touch you.

And you're seeing it currently right now in cryptocurrency, right? Cryptocurrency is hot and four months later, no one's willing to touch it. So what I learned at that time is a make sure, back to your point with cash, that you are preserving your cash for these downturns because they will come and one of the jobs of the CEO is to notice when the upswing is happening.

And in our particular case, we went through a couple of these cycles. I was ready to sell when the market wasn't ready to buy. Um, but then what I realized during Covid, first of all, we had a great year before Covid. And during Covid we had an even better year. So for our business it accelerated the number of people who were [00:15:00] A, had time to learn, and B, willing to do so online.
So that acceleration of our business, um, put us in a position where, you know, Zoom was going through the roof as far as valuation, um, Peloton, another uh, component. But there were these businesses that, um, frankly they got overvalued, as we all know, But what it told the market was, Hey, this is, this is something that we should get involved with.

And so we noticing that change in the marketplace. I went to the board, and this was in November of ‘20. So 2020. Yep. And I said, Guys, now is the time. Not two quarters from now. Now, now is the time we've, we're gonna have a great year. We're gonna have a great year next year. And so we, uh, started looking, we've had lots of conversations with bankers over the years.
We looked at another group of bankers. They're actually the banker that we went with. We decided to go with a banker and it's called Titan Partners and they [00:16:00] specialize in educational companies. Awesome. So the first thing I learned when you're looking at for an investment banker is, If you can find one that specializes in a business that you are in and has sold to companies that you would like to sell to, that is a tremendous advantage.

Right? Yes.

Todd: Huge. Sounds obvious, right? When you say it, it sounds obvious, but you figured it out. You figured it out. Yes.

Steve: Yes, Exactly. And so they have had the, uh, Titan has sold two to three companies. I think it was three to Microsoft prior, and they knew our business. They could talk about unit economics, the way we talked about it.

They knew what churn looked like. Uh, they were comfortable with micro marketplaces as well. And so we teamed up with them, started our process in, uh, at the beginning of the year. So January, 2021. Uh, and within, you know, three to four weeks we had talked with 40 to 50 companies, got genuine interest from quite a few of them, including private equity firms who were, uh, kind [00:17:00] of had looking at the space as well.

Um, and, uh, you know, and Microsoft was interested as well. Um, something else that I learned along the way was just in, in, well, why is Microsoft interested? Exactly. Okay, so this is the key. I found that it's much more beneficial if you were looking for someone that you're exiting to, that they already have an internal thesis that you fit into versus your banker or you trying to convince someone.
That you are a fit into their business. So we talked to, um, an let's, I'll just call them another, um, Fortune 500 company that was a highly a, a tech company and they were kind of fiddling with this idea of maybe doing some marketplacey something. Um, but we were coming in and having to try to convince them first of all, of the market size and opportunity and then that we were the right.
[00:18:00] Whereas Microsoft, they had already, um, made a decision that this sort of space was a space that they wanted to be in. And so we didn't have to try to convince them of that. We were then aligned towards whether, you know, they were the right fit for us and we were the right fit for them. So that was a couple good learning lessons along the way.

Market hot, take advantage of it. Second of all, try to, you know, hire an investment banker who's done what you need them to do, not can do, but has done. And third, try to find a company who already has an internal thesis that you match. And by the way, that's not only for exits, that's also for venture capital fundraising.

Sure. As you know. Yep. Um, Eric Chen from Crosslink who raised, uh, he was our lead investor. After I finished talking with him, he called me back and he goes, We've been looking for you. Right? Yep. The world difference in you trying to convince the, you know, the eight partners that you're the, you're the, you know, [00:19:00] The person that they want invest in.
So, uh, that works on both ends, both for in receiving money as well as exciting.
Todd: So maybe I'll tie some of those things together with what we see in the m and a space is you did exactly what you need to do, which is define an investment banker that understands whether it's ed tech or marketplace or both, and has sold your type of company five times before in the last couple of years, right?

So they're fresh, they know who the buyers are. If you like Microsoft as a buyer, yes, it'd be great to see that they've sold to Microsoft before, but having that experience going in, they know how to talk about your business. They also know who the buyers are and what those buyers are looking for. So we often hear when we get to the right investment banker, you will hear.
I already know the top five buyers for this business because they have an internal thesis. They're talking about at their board, they've allocated dollars to grow this side of the business. And that kind of [00:20:00] insight makes M&A really work for all sides. And that's part of the kind of black box that founders don't get to hear.

And you navigated that on your own. Well, you found the right firm to transact this deal to the right. It's just very difficult to do, so. That's awesome. Yeah.
Steve: That came from, we had ran a very mild light process before this, a few, couple years earlier. Yep. And the investment banker that we ended up, you know, I think we ended up paying 'em 50 or 80 grand, whatever the case was.

Yep. Um, they didn't know the buyers. They were a good name, good name, bank. Yep. But didn't know. And so they were, I was bringing to them, the people for them to call. And that's always, um, You. You should always have a banker that's bringing you better ideas than you can find yourself. Agreed. Agreed. So I echo your comments.

Todd: I think the other downside to some of that is a lot of businesses, they want to go to market, but they wanna keep that private from [00:21:00] employees, from competitors, from. You know the world and when you're working with a bank that has to come to you for wireless, they're also hitting send to 120 names and hoping name, you know, hands will raise.
And that is not a great way to keep control of the, the confidentiality of, of the process. All right, so the bank has identified buyers right off the get go cuz they know your space really well. You start to get into these conversations. Can you walk me through that whole exit process, right? Because the bank is doing a ton of work, but you have to run and grow a business while going through what management meetings, due diligence, a variety of things, and, and managing your team around expectations of what this could mean.

Can you talk to me about that process? Sure.

Steve: There are a few things I will talk in generalities. Yep. Uh, around, as you know, there's some, uh, non-disclosures that I'll be tied to with, with Microsoft. So the, once there was a [00:22:00] general interest in both parties, um, there is this. Kind of getting to know dating period.
That, that, uh, we went through and we're dating three or four different folks. We went down from, you know, the list of 30 to 40 to, you know, four or five that we're genuinely interested. And eventually they will whittle themselves down to, you know, one or two. And, and hopefully there's a, there, there are multiple people that you can kind of go to, to a, a letter of intent with.
So during that process, Um, you know, Microsoft is one of the world's best buyers as well. They have a team of people, um, called the, um, MAVS, which is Mergers and Acquisitions, Venture, Success business, And there are negotiators, lawyers, um, accountants, um, anyone and everyone you can think about that's on that.

And what their goal is, first of all, is to, first of all, sniff out the b. . So limit the amount of [00:23:00] time that the BS is there. Second of all, see if it is a fit between the, uh, operating group and the companies that they're interviewing. And from there, then start running the actual negotiation and a process.
Um, it's, I think some founders walking through think that the, that the, uh, exit process really has to do about your purchase price. That is a. Minute, smaller piece, less than 50% of the entire sort of holistic view of the, of the, of the acquisition. So the, the first thing that had to happen is they had to get comfortable that we weren't BSing on our numbers.

Second of all, they have to understand whether the projections that are being given is [00:24:00] also falsified or, or they somewhat reasonable. Um, third, they. The, their team of operators started talking to our team of operators wondering how we thought about the business, how we thought about our past, how we think about our current, how we think about growth.
And they wanted to get comfortable that with our team, that we thought and were aligned in a somewhat similar manner to how the culture at Microsoft and this particular team might work moving forward. And that was a big component of it, that the, you know, how, how the team and the kind of the key employees also thought about that as well.

And it's their job as the kind of the negotiators, not the operations guys, but the negotiators. Their job is to eventually try to weed out as quickly as possible, right? It's No, no, no, no. They say no a thousand times that they say a yes to. Um, and there's just hurdles to jump through each time. [00:25:00] And the more astute and larger the company, the more hurdles there are to jump through.
In our particular instance, we had, uh, there were only three of us that knew that there was a transaction going on, so it was myself, my CTO, and then my, uh, senior VP of finance and ops. So I relied on them and to, to get this deal done.

It was excruciating. Harrowing. Yep. Extremely difficult because we're trying to, as you mentioned, Todd, run a business knowing that the numbers can't all of a sudden fall. No. Right. You can't take your eye off the ball and you have to be ready to pull double, triple time in order to a, protect the team. So they're not, um, they're not, they don't take their eye off the ball and.
And, and worry about an [00:26:00] acquisition or that sort of thing. So it's your core team. First of all, they have to buy in. And then second of all you, they have to know the extreme amount of time that it is going to take in order to get a a deal done. I cannot begin to tell you the details of just how hard that, diligence list was.

There were times on the calls, I remember, and this won't be the case for everyone, but there were times on the calls where they had more lawyers on the calls, and we have people in the company Yep. And they're looking for a reason to say no. Yeah, I do know. Yeah know. Yeah. Yeah. So it's, um, I think just founders, you know, it's, it's worth it on the other side.
But don't kid yourself that it's, that it's easy or it's a walk in the park or it's no big deal. It is a huge, it is a very, very large undertaking.

Todd: Yeah. Thank you for all of that. I wanna circle back to a [00:27:00] couple of things. So Titan right is your A player in the investment banking side, but you're talking to Microsoft's MAVS team, which has got a whole arsenal of A players.

And you touched on the single point and probably one of the most important points, which is having your numbers right, where there is no BS in those numbers. Not only historical financials, but projections. So what we like to teach people is it's one thing to find that miraculously find the best investment banker in the world to help sell your business, but you need to be armed with a team.
So the best M&A attorney. Sell side Q of E, making quality of earnings, making sure that the numbers that you present are accurate, because the second that you show something that isn't accurate, they question everything that you say going forward. And yes, I agree with you. This stuff happens. Founders were sales people were super optimistic, and we present maybe GMV as [00:28:00] revenue, right?
So you're telling a story that you think is acceptable in your industry and know that is not accurate from an accounting perspective. So then you went to key employees, which is really where I want to end up in that. You brought them in, you really lean on these key employees. You let them under the curtain.
And they've gotta execute their day jobs and go through this excruciating period of time where everything is being scrutinized and they're being asked for data that hopefully they have, but it's gonna be arduous presenting it. Those people also have to be really motivated, right? To get. Something done.
So I'm guessing you have to have very clear conversations of what this means to those people, including yourself, and that's what I was hoping to get to here. Is as founders think about their own exits, we often look at the percentage of ownership that we have in a business after taking on [00:29:00] dilution from raising Capital and saying, Well, if this is the number, then I get X.

And what does that mean to the co-founder and the CFO and all down the line? And sometimes after a long period of time and taking on money, that can be discouraging if that's just the straight math. It's almost never the straight case. There are always earnouts, there's always success fees. There are always ways to compensate the team that is driving the actual sale and then the value beyond.
Can you talk a little bit about how you experienced that or thought about that with your team?
Steve: Yeah, those are great points, Todd. So I've always approached startups as a team sport. I've always looked at it and thought that it's never good enough for me to do well if my team wasn't there to ride with me.

I think life's about incredible experiences with incredible people. And so I [00:30:00] wanted to have a win, but experience that win with my team. Yeah. And as we set up the company, I was very transparent along the way that we're here to build a world class organization and that at some point there we believe there will be an exit and it will take care of itself if we do our job.
Um, and. That was kind of just the, everyone kind of knew that and understood that along the way, one of our core values of a company is act like an owner, and we've instilled that within all of our employees, which basically means that there's a piece of trash on the floor. You pick it up because that's what owners do, right?

You treat this business like you owned it. And part of our, um, coming to the table and putting our money where our mouth was, was making sure that all of them had stock in the company.
And that's obviously very, very important thing to do as well. So [00:31:00] as I walked through this sort of, uh, Sort of process. First of all, everyone had, you know, an upside in the business. And as a founder, hopefully that exit puts you in a position where you're gonna earn good money. And again, that's great, but it's really important that you're taking care of those key employees along the way because frankly, there's many times where the deal doesn't get done unless those people ride along with it.
Um, in, uh, you know, our particular instance, Todd, , we didn't have those big down rounds, so our dilution wasn't, um, wasn't, uh, a consideration. We, we did okay with that. Uh, but what we found is not everyone, when you're kind of start pulling people in and you're working on this exit, not everyone is pumped that you're gonna have an exit, right?

Yes. Some people like things the way they are, and especially depending on the buyer. Um, They may or not may or may or may [00:32:00] not be pumped. Let's say, I'll use an example, so I don't use Microsoft. Um, let's say you're exiting the meta. There are people who will look at you and say, you know, use your expletive.

I'm not working for those dickhead, right? And they really feel that because of just the way their, maybe their politics is, or, or whatever the case is. So you have to understand that, um, That's gonna be one hurdle to get over. Uh, the second hurdle is that, you know, there may be clauses in your deal terms either that, uh, certain employees or groups of employees have to ride along with the entire, uh, group, uh, and have to come along, or there is no deal.

Yes. So making sure that there're properly incented and motivated, um, will be necessary along the way. In our particular case, Microsoft made our deal contingent. Certain key employees as well as a certain percentage of the entire company [00:33:00] coming on board. So it wasn't just one or the other, it was both.

And that was a really important, How many people did you

Todd: How many people did you have at that point?

Steve: Uh, we had 48 people. Okay. Yeah. And I, I can't remember the percentage. I probably better not to tell exact deal terms anyway, but it was a high percentage of folks that needed to sign on and say, Yes. We're, we're coming on board with the, with the.

Todd: This is real, right? So this isn't anything founders are gonna think about in an m and a process that a percentage of the employees are gonna have to come over to the acquirer and stay for a period of time and perform. That's just the general population. But some of the key employees are gonna be integral to the success of this transaction.
So it sounds like you had incentivized these people. Throughout by giving equity, but do you have anyone that you feel like you have to treat in a special way? Anything that wasn't kind of cookie cutter in that scenario?

Steve: Yes, so we had [00:34:00] one particular employee who in, after reviewing the entire cap table, it was obvious that their contribution to the success of the business was not commensurate with the amount of stock that they had.

Meaning they had, they just needed more stock. And I went to the board and, and I basically said, Listen, this particular person, um, a, we don't get the deal done without them. Second of all, you can see - look at the cap table. They should, they should have more equity in this company. They need at least X dollars on this exit or it's, it's not going to be right.
And so my board or my investors chipped in and I chipped in because it was the right thing to do. Right.
Todd: That’s great. So you didn't, you didn't have a struggle with that at all. Right? You identify the issue, you bring it to the board, It's a collaborative solution. Were, were there [00:35:00] any people kind of fighting.

Steve: Well, uh, in this particular instance, no, because this person was critical to the success moving forward of the deal. Yep. And the dollar, you know, the dollars that we're talking about were, you know, few hundred thousand, which don't get me wrong, that's a tank load of money. Yep. But in the big scheme of the entire, uh, transaction.

Wasn't that much per, you know, per contribution, I would say. So, um, it was probably easier to get that deal done, um, than to, you know, then someone playing hardball as a, as a matter of fact, or I'm sure that that happens as well. Um, I'm sure that that would leave distasteful feelings amongst the group. In our case, in our case, it worked out very well.

That being said, I had also, and this is key for a founder, I had also made many, many, many emotional deposits in that board's bank account. [00:36:00] Right. I didn't ask them for things that I didn't need. I ran, the business, did such a degree that they would want to do business with me again, and so when I came to them with an ask, they knew that it was serious and meaningful and um, and important to getting the deal done.

And I, I think I had enough deposits to where I could then make this emotional withdrawal, uh, as well without being overdrawn, as I like to say, from, from, from that. So, um, I, that, that's something else. I'd say. You have to think about these things, Todd, as you know. Years ahead of them happening. Yep. You have to be the type of CEO that when push comes to shove and you need to ask for something, you've built up enough credence and and character that people will ride alongside of you.
And the only way to do that is, I don't know, be that person can't really fake it. Right. You just have to, You have to. You have to be that sort of a person.

Todd: So thank you for sharing that because we recently sold [00:37:00] a business where, Exit wise had to go to that board, that set of investors and say, in order to make this transaction happen, there is an owner of this business that is not being compensated correctly for the amount of work she is going to have to do to get this deal done and what she's gonna have to give up.

Over the next period of time to make sure all investors get their money. And we've been very pleasantly surprised in that type of scenario that investors get it. So I get that you've spent years developing the relationship where you can look them in the eye and say, Hey, when I come to you for something like this, it's important and this gets a deal done.

And they trust you. We've been in that position many times, and so we've kind of developed a little bit of a playbook of how to help founders make that ask and how we've asked on their behalf. So thank you for sharing this. It's a very real thing that that cap table can get [00:38:00] adjusted at the goal line to make the right deal happen and the right people compensated fairly.

Steve: Yeah, I'll add to that. Well, I remember in this particular situation, talking to my banker before I talked to my board, I'm like, Oh man, mad I, I'm not sure how they're going to respond. And now that, now that you said that, Todd, I remember. Matt telling me, he said, Yeah, most of the deals we do, there's some sort of give and take among the board.

Absolutely. And it's almost like the, especially professional investors, they're sort of used to it. It's not a, it's not a novel sort of approach.

Todd: I think one interesting thing to know is it can go the other way as well. We've had deals where there'll be a minority investor that doesn't really want the $30 million exit.
They're in it for the $300 million exit to be meaningful to them in any way, and so to make them happy. I have seen situations where a little bit of additional equity gets filtered over in order to have [00:39:00] unanimous voting. On a transaction, even though maybe a minority shareholder can't truly affect the outcome, it's about getting everybody aligned and feeling like, Look you, you treated every investor fairly.

So I think it can happen both ways. We see it a lot more with founders and founding teams. You know, at that goal line, the right decision needs to be made for everybody. And, um, it's not usually the struggle that you'd anticipate. So thanks for sharing that. Cause I think that that hasn't really come up in our conversations and I knew you had that experience, so I appreciate it.

Sure. Is there anything else? There's a lot to learn from when you talk, right? What I admire a lot is, you know, where you started from, right? That, that this was a personal problem for a friend. You started this business to solve an issue for a friend that could help the masses. Anything else that you would wanna share?

Steve: Todd, as I was thinking about it, uh, a little bit earlier as you, you were talking about the, the getting the key employees in involved and getting the right number for them. I, I think the role of the CEO. In my view, it's not only to get them the right number, I think that's the beginning component of that.

But alongside of that, it's also making the entire deal better for the employees. And so what that means for me is, um, going to bat. For that team and especially those key employees with respect to, with respect to non-competes as an example, or respect to their [00:41:00] employment agreements and what that looks like.

Um, in our particular instance, we as a company hired a, an employment attorney to look at those non-competes that specialize in that matter on our dime. So our key employees didn't have to negotiate themselves. Fantastic. And that, those sorts of things. Um, Uh, were really important as we walked through the transaction because it showed my employees, Hey, I said, I'm here for you now.
We're in the midst of things. I'm going to go to bat for you all the way to the end. And that set was sort of trust, I think is really needed in order to get a deal done, because as you. Things fall apart at the last minute more than we care to admit. Yes. And it's, uh, you go through all of that, one goes through all that sort of, um, struggle only to see, you know, someone not trust someone at the end.
And then the whole deal falls, falls apart. So I'd say that's one key. Uh, second of all, [00:42:00] I know you mentioned earnouts a little bit earlier, and I'm sure you tell your clients that earnouts are hard.
Uh, and so what I would say is that if as you're negotiating, um, the more upfront, the better mm-hmm. . Mm-hmm. , you know, that's always a, a key component. And again, we lucked out. There are certain buyers, um, in certain instances, and Microsoft being one of them, and I'm sure some of the larger tech companies are as well.

They're all cash buyers. And those sorts of, um, those sorts of relationships are, are great for investors as well as the kind of the founding team as well. So when you're looking at the deal itself, it's not just a matter of price, it's also a matter of, you know, what do those non-competes look like? What do those employment agreements look like?
What are the [00:43:00] terms of cash and when you earn that cash versus when you don't? All of those are, are critical components in making sure that you're align. Your team and yourself to, to the best exit possible.

Todd: I love that you said that you hired an employment attorney to review those employment agreements, right?

Because those are the people that got you to the promise land, right? You wanna make sure they're taken care of. And it's more than just the number, it is the terms, the things that they're signing up for, including that non-compete. So, um, that's great.

Steve: Yeah. I would just say one last.
If you as a founder don't know or have the expertise in this, in this sort of instance, I would highly advise, you know, that you partner with a group who does . It's, it is harrowing. It is harder than you think. And just having someone that you can, um, that you can talk to even through this, [00:44:00] that, uh, has. Has been through it many times and can in essence sometimes coach you off off the ledge.
It's really important. I can't stress how important that is. It is. It is a, as much of a financial issue, but it is highly emotionally charged and you need that voice of reason from someone who's just a step removed who can help you kind of get to that promise land, as you said.

Todd: Thank you. I appreciate that.

Right. That's obvious. Our mission. That's what we vehemently believe, that we add just a ton of value. We take a lot off of founder's shoulders. We have helped them avoid a lot of mistakes and the promises that we help maximize their outcome by bringing real specialists to the table. But I think the thing you said that resonates is I'm often called their deal Sherpa, right?

Because it is such an emotional endeavor. So that 9:00 PM call at night. Banker's not really taking that, I'm [00:45:00] taking that whether you're, you know, walking somebody off the cliff or uh, you know, giving them advice of what's going on with their family. Cuz families are a big part of these, uh, transactions. Yeah, we feel like having that support is incredibly important.
It is a very difficult thing to go through. So I appreciate you saying that. Listen, thank you. This has really been great. Absolutely.

Steve: Happy to. Happy to help.

Todd: Thanks again for listening to the Cashing Out podcast.

For more Founder Exit stories, please subscribe to the Cing Out Podcast on Apple, iTunes, Spotify, or wherever you listen to your favorite podcasts. And please remember, exit and the cashing Out podcast are for entertainment purposes only. This should not be relied upon as the basis for investment decisions.