Startup acquisitions: the 3 types of deals and how a sale works

What are the three types of startup acquisitions?

A team buy (acquihire) is mainly about hiring your people. The buyer may shut down your product, and much of the value often goes to the team through new employment packages and retention grants rather than to stockholders. Recent large AI deals have also used a “license and hire” model, where the buyer licenses the technology and hires the team without buying the company. If your investors are getting little and your team is getting offers, that’s the pattern, and it raises real questions about fairness between stockholders and employees.

A product buy is about your technology or product, which the buyer will keep running, fold into its own product or replace with something it builds on top of yours. Price tracks how much the product saves the buyer in time and engineering cost.

A strategic buy is about something the buyer can’t easily build: customers, a network, data, a market position or a competitive threat removed. These deals produce the highest prices relative to revenue, and they’re the hardest to predict.

Asset sale, stock sale or merger?

The legal structure matters more to your lawyer than the commercial label.

Buyers often prefer asset purchases because they can leave unknown liabilities behind, and the tax treatment differs for buyers and sellers in each structure. Because the structure changes the buyer’s tax result too, agreeing to the structure the buyer prefers can be something you trade for a better price. Talk to a tax advisor before you agree to a structure, since the same price can produce very different after-tax results. A stock purchase is impractical once you have many stockholders unless your drag-along can bring the holdouts in, which is why most venture-backed exits use a merger.

Most venture-backed sales use a reverse triangular merger. The buyer forms a new subsidiary, that subsidiary merges into your company, and your company survives as a wholly owned subsidiary of the buyer while your stockholders receive the merger consideration. Because your company stays the same legal entity, most of its contracts, licenses and permits stay in place without being transferred, which is a big reason buyers favor this structure. Still, review each key contract for anti-assignment and change-of-control clauses, because a contract that needs the other side’s consent can hold up closing.

What does a letter of intent commit me to?

A letter of intent (LOI) or term sheet sets out the price, structure and key terms. The economic terms are normally non-binding, so either side can walk away or renegotiate after diligence. A few clauses do bind you: confidentiality, an exclusivity or “no-shop” period during which you can’t talk to other buyers, and sometimes who pays expenses.

Treat the no-shop as the most important term in the LOI. Once you sign it, your leverage drops, so keep it short and make sure it ends automatically if the buyer changes the price. Don’t sign an LOI that makes the price binding on you but not the buyer.

What is the timeline for selling a startup?

A typical private sale runs in stages: early conversations under an NDA, then negotiating and signing an LOI, then the buyer’s diligence and drafting of the definitive agreement, which often takes two to four months. Signing and closing often happen on the same day in private startup deals, unless a regulatory approval or third-party consent requires a gap. See What Happens Between the LOI and Closing When I Sell My Startup?

Part of the price is usually held back in escrow or as a holdback to cover breaches of the seller’s representations, often around 10% for 12 to 18 months, though representations and warranties insurance can reduce it. If you and the buyer disagree on value, part of the price may be paid as an earnout tied to future milestones. Earnouts are hard to collect, so value them at a discount. Prepare for diligence before you start talks. See Startup Due Diligence.

How do I protect confidential information if the buyer is a competitor?

Selling to a competitor means showing your playbook to the company you’ll be competing with if the deal falls apart. Sign an NDA before you share anything that isn’t public. When the buyer competes with you, add a non-solicit of your employees and a clear ban on using what it learns to go after your customers. See NDA.

Then stage what you disclose. Early on, share enough to support a price, with customer names, pricing and contract terms redacted or summarized, and open the full detail only once the LOI is signed and the deal looks likely to close. Set the data room to view-only, with downloads and printing turned off and watermarks on, and keep track of who has access. Keep your most sensitive material, such as source code and trade secrets, out of the data room entirely, or show it only to a small clean team made up of the buyer’s outside advisors or people who don’t work on sales or pricing. Sharing current pricing or customer-specific terms with a competitor can also raise antitrust issues, so have deal counsel set the rules before the data room opens.

What happens to my equity, options and SAFEs?

The money flows through the waterfall in your charter. Preferred stockholders get their liquidation preference first if it’s worth more than converting, and common gets what’s left. See Liquidation Preference.

Unvested founder stock and employee options don’t accelerate unless the grant says so. Double-trigger acceleration (a sale plus a termination) is the common protection. See Single Trigger vs Double Trigger Acceleration. Options can be assumed, substituted, cashed out or, in some cases, cancelled, depending on the plan. See What Happens to Stock Options When a Startup Is Acquired?

SAFEs that haven’t converted are handled by their change-of-control clause. On the standard post-money SAFE, the holder gets the greater of its money back or what it would receive by converting at the valuation cap. Buyers also commonly ask founders and key employees to accept new vesting on part of their proceeds or new grants as a condition of the deal.

Who has to approve the sale?

The board must approve any sale. A merger, or a sale of all or substantially all of the company’s assets, also needs approval from the holders of a majority of the outstanding voting stock under Delaware law, plus any separate class vote your charter gives the preferred. Stockholders who don’t vote in favor of a merger may have appraisal rights. A drag-along can require the rest to vote yes and sign. See What Do Stockholders in My Startup Need to Approve?

Directors also owe fiduciary duties in a sale, and conflicts between preferred and common (for example, when the preferred is paid in full and the common gets little) are where sale litigation usually comes from. See Fiduciary Duties of Founders.

What should I do before I talk to a buyer?

Clean up the basics first: a current cap table, signed IP assignments from every founder, employee and contractor, board and stockholder consents for every equity issuance, and your key customer contracts with any change-of-control clauses flagged. Run an open-source scan of your code, close and reconcile your books through the latest month (and ask whether the buyer will expect reviewed or audited financial statements), and confirm that the licenses and permits you rely on survive a change of control. Buyers will also ask about contractor classification, data security and export rules, so fix known problems before they show up in diligence. Decide what you want for yourself and your team (roles, retention, how much you’re willing to re-vest) before the LOI, because those terms get harder to change once you’re exclusive. And bring in deal counsel before you sign the LOI, not after. For the whole process in one place, see our Founder Guide: Selling Your Startup.

For winding down instead of selling, see How Do I Wind Down My Startup Gracefully? If you’d like help with an acquisition, contact us.