The following is not meant to be legal or other advice, and is presented for information purposes only.
A New York Times article by Gary Rivlin on Friendster, Inc. dated October 15, 2006, hits an issue on when is the right time, and how, to exit a start up – should it be through a merger and acquisition, bankruptcy, IPO.
The New York article analyzes whether Friendster made a fundamental misstep in not selling early. Some view that it is the founder’s responsibility to have a sense of his/her strengths and weaknesses as a leader. Others view that it is not always obvious when deciding whether to be acquired when a start up has a good thing going.
Whether to sell may depend on whether it is a private – private transaction. Some believe that such a transaction may not be the best fit because it may be difficult to determine company value in private – private transactions.
What may be important for a founder when starting a company is to ensure that the founder he/she has board participation. Board control allows the founder to stay informed on strategic decisions, and to be a part of the negotiations in a transaction. In picking the people to lead a company, the founder might take care to choose the right people who will take care of the employees when the company is acquired.
Because of a concern on whether people will go long, there is a trend to cash out at each round of funding. There is also a trend on requests for option acceleration in the event of a change of control or termination. Many times when entering a start up, the employee does not know the worth of the number of shares granted. This is because of share splits and valuation changes in later funding rounds. It may be wise for the employee to ask for a dollar value of the company that the options represent when they are granted.
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