Startups often face a tipping point - to borrow a term from Malcolm Gladwell - where they have developed their business past the initial startup phase and now need to expand in order to remain viable. Some entrepreneurs take that opportunity to sell and move on to a new venture. Others founders will need to bring on a new management team (whether the founder recognizes that or not) that can take the company to the next level. Still other companies will require a new infusion of capital from outside investors, even though they may have to give up control of the company to do it. But another option is entering into a strategic venture. We recently represented a client that was being acquired by a larger company. This was not a situation where the founder was 'cashing out' and giving the company to someone else to manage. On the contrary, in addition to a cash payment at closing, the founder received stock in the parent company, a board seat, and the ability to control his company going forward. (Some of the details of which are very interesting and will be the subject of a future blog post.) So the company that he founded would continue to build by leveraging the resources, management, and stronger platform of the larger parent, and all under his watch. A real win-win for the founder.
After the closing, the founder told me that the day before, he was just an entrepreneur trying to build a startup, but now he was "kind of a rich guy" who would be managing a growing business with a high profile company. By using this structure, he was able to cash out some of his equity in the company and continue to enjoy the growth of his investment while maintaining control as part of the larger organization. This could be a great alternative for many startups that need outside involvement but want to maintain control as their companies continue to grow.