October 26, 2026
Selling a startup is a process, not a single negotiation: you get the company ready, choose a buyer and sign a short letter of intent, then spend weeks or months on diligence and a merger agreement before any money moves. The headline price is only the start of the math. Debt, expenses, escrows, earnouts and your investors' liquidation preferences decide what each stockholder actually receives, and the board, the stockholders and sometimes regulators have to approve the deal along the way.
Selling the company you built is one of the biggest moments of a founder's life, whether it's the outcome you've worked toward for years or the best path left on the table. We've been counsel to early-stage founders since 2008, and we've seen what separates a sale that closes smoothly from one that loses money at every step: preparation, a clear view of the numbers and a well-run process. This guide is the map of a sale from the first conversation with a buyer to the last escrow release. It explains each stage and links to our detailed pages on the LOI, diligence, escrow, earnouts, options and employees, so you can go deeper where your deal needs it.
Key takeaways
A sale usually starts in one of two ways: a buyer calls, or the founders and the board decide that selling is the best path. Either way, the question is whether a sale now is better for the company and its stockholders than the realistic alternatives, such as raising another round, growing on the cash you have, or a different deal later.
Signals include a strategic buyer that can do far more with your product than you can alone, a fundraising market that won't value the company at a level the team can live with, or a category consolidating around a few large players. Talk with your co-founders and your board early, before anyone is negotiating. Directors who learn about a deal after the LOI is signed tend to ask harder questions, and they're entitled to.
When a buyer approaches you, you're negotiating with one party that knows what it wants to pay. That can work, especially for a smaller deal, but with one bidder you have no market check on the price, and the buyer sets the pace. A run process means the company, often with an advisor, contacts a list of likely buyers, shares a summary under NDA, collects indications of interest and negotiates with the best one or two. It costs time and risks leaks, but competition is the most reliable way to improve price and terms, and it gives the board a record that it looked for the best available deal. A middle path is common: when inbound interest arrives, quietly sound out two or three other logical buyers before you sign anything exclusive.
An investment banker or M&A advisor builds the buyer list, prepares the materials, runs the process and negotiates price. A good one earns their fee by creating competition among buyers you might not reach on your own. Advisors matter most when several buyers could value the company strategically or the board needs a documented market check, and less in a small acquihire with one obvious buyer. If you hire one, have your lawyer and board review the engagement letter, especially how long a fee is owed on a deal with a buyer the banker introduced after the engagement ends, whether buyers who approached you first are excluded, and whether the banker has relationships with likely buyers it should disclose.
Sign an NDA before you share anything that isn't public. In acquisition talks both sides usually share information, so a mutual NDA is standard. If the buyer is a competitor, add a non-solicit of your employees and a clear limit on using what it learns, and stage what you disclose: enough to support a price early, and the full detail only once the LOI is signed. Keep source code and trade secrets out of the data room or limited to a small clean team, and have deal counsel set the rules before you share pricing with a competitor. See NDA: What It Means for Startups and Startup Acquisitions: The 3 Types of Deals.
A buyer's diligence is deeper than any investor's, and every problem it finds becomes a reason to lower the price, add a special indemnity or delay closing. Reconcile the cap table, so every share, option, warrant, SAFE and note ties to a signed document and a board approval. Confirm that every founder, employee and contractor who touched the product signed an invention assignment, and get the missing ones now, while people are cooperative. List your material customer, vendor, license and lease agreements and flag every clause requiring consent to an assignment or a change of control, because a reverse triangular merger avoids most assignments but not change-of-control clauses. Check that consents exist for every financing, grant and past transaction, that 83(b) elections and 409A valuations are on file, and that your books are closed. Then put it all in an organized data room. See Startup Due Diligence, Startup Data Room and How Do I Keep My Startup Legal Documents Organized?
Finally, decide before the first serious conversation what you want for yourself and your team: your role, how much you're willing to re-vest, and what the buyer must offer the people it hires.
There are three legal structures for selling a company, plus a commercial pattern, the acquihire, that uses one of them or a variation.
In a stock purchase, the buyer buys the shares directly from each stockholder, which is simple with a handful of holders and impractical with many unless a drag-along brings in the holdouts. In an asset purchase, the company sells the assets the buyer wants and the buyer takes only the liabilities it agrees to assume, leaving your company behind to pay its creditors and wind down. In a merger, every share converts into the right to receive the merger consideration once the deal is approved, so the buyer doesn't need every signature. Most venture-backed startups are sold through a reverse triangular merger: the buyer forms a subsidiary, the subsidiary merges into your company, and your company survives as the buyer's wholly owned subsidiary, so most contracts, licenses and permits stay in place. An acquihire is a sale where the buyer mainly wants the team, done through one of these structures or as a license-and-hire, where the buyer licenses the technology and hires the people without buying the company.
| Stock purchase | Asset purchase | Merger (reverse triangular) | Acquihire | |
|---|---|---|---|---|
| What transfers | The shares; the company stays intact | Only the assets listed in the agreement | Every share converts into the deal consideration; the company becomes the buyer's subsidiary | Usually the team, plus IP through an asset purchase, a merger or a license |
| Liabilities | Stay with the company, so the buyer takes them indirectly | Stay with your company unless the buyer agrees to assume them | Stay with the company, so the buyer takes them indirectly | Depends on the structure. In an asset deal or a license-and-hire, your company keeps them |
| Contract consents | Only for change-of-control clauses | Needed for every contract that restricts assignment | Usually only for change-of-control and some anti-assignment clauses | As for the structure used, plus a license if the company stays behind |
| Approvals needed | Each selling stockholder signs; follow the transfer provisions in your stock documents | Board, plus a majority of the outstanding voting stock if it's all or substantially all of the assets, plus any preferred class vote | Board, plus a majority of the outstanding voting stock, plus any preferred class vote | As for the structure used, with extra care because founders are often on both sides |
Structure also changes the tax result for the buyer and for each of your stockholders, including whether any qualified small business stock benefit survives, so agreeing to the buyer's preferred structure can be something you trade for a better price. Have a tax advisor model it before you agree. Rights of first refusal won't stand in the way of any of these structures. The company's right sits in each founder's restricted stock purchase agreement, and the investors' ROFR and co-sale agreement binds founders and key common holders, not the investors' preferred, and neither lets anyone block a sale of the company. See Right of First Refusal (ROFR), Startup Acquisitions: The 3 Types of Deals, Being Acquihired and QSBS (Section 1202).
The letter of intent sets out the price, the form of consideration (cash, buyer stock or both), the structure, the escrow, any earnout, what happens to options and employees, the closing conditions and the exclusivity period. Most of it is non-binding, so either side can walk away or renegotiate after diligence. A few clauses do bind you: confidentiality, exclusivity (the "no-shop") and sometimes expenses.
Exclusivity is the most important term in the LOI, because once it starts you can't talk to other buyers and every week costs you runway. Keep it short, commonly 30 to 60 days, have it end automatically if the buyer lowers the price, and grant extensions only against milestones such as the buyer's first draft of the merger agreement. Whatever the LOI leaves vague, such as how working capital is measured or how much of your proceeds you must re-vest, tends to be settled in the buyer's favor later, so name those terms now, even briefly.
Ask for a payout model showing what each stockholder and option holder receives, and update it every time a term changes. See How Do I Read an Acquisition LOI? for the economics, and What Happens Between the LOI and Closing When I Sell My Startup? for the next stage.
Most LOIs state a price on a "cash-free, debt-free" basis, meaning what the buyer pays for a company with no debt and no excess cash. Debt is then paid off at closing, unpaid transaction expenses such as advisors' fees and a directors' and officers' insurance tail come out, and cash in the company is often added back. The result is the equity value, which is what the waterfall divides.
Cash at closing is the most certain value. If part of the price is buyer stock, ask how it's valued, since a fixed number of shares moves with the buyer's share price. Stock in a private buyer is illiquid, and the securities laws may lead the buyer to pay stockholders who aren't accredited investors in cash instead. Some stock deals can be structured to defer tax, which is a question for a tax advisor. See Getting Paid in Buyer Stock.
The buyer will hold back part of the price to cover breaches of the representations you make about the company, such as that the cap table is accurate and taxes were paid. Without representations and warranties insurance, an indemnity escrow of around 10% of the price for 12 to 18 months is common, along with a smaller working capital escrow and an expense fund for the stockholder representative. Four terms decide how much you get back: survival (how long the buyer can claim), the basket (losses the buyer absorbs first, where a deductible basket beats a tipping one), the cap (ideally, the escrow is the buyer's only recourse for ordinary breaches), and the exceptions to the cap, usually fraud and fundamental representations such as capitalization.
Representations and warranties insurance, usually bought by the buyer, pays the buyer's losses from breaches instead of the sellers, and with it the seller escrow is usually far smaller, often under 1% of the price. The policy excludes known problems and fraud, so issues found in diligence still need a special indemnity or a price adjustment. If the deal is large enough for a policy and the buyer hasn't proposed one, ask. See Escrow, Holdbacks and Indemnification.
The buyer expects the company to arrive at closing with a normal level of working capital, its current assets minus its current liabilities, measured against an agreed target called the peg. A shortfall reduces the price dollar for dollar. The closing price uses an estimate, and a few months later the buyer's final calculation settles the difference, usually through the working capital escrow. Ask how the peg is set before you sign the LOI, because a peg set too high quietly lowers the price.
An earnout is part of the price paid later, only if the business hits targets after closing, such as a revenue level or a product milestone. It bridges a gap between what you think the company is worth and what the buyer will pay today. Earnouts are among the most disputed terms in private company sales, and the reason is structural: the buyer controls the business while you wait for the money. It can reassign your engineers, change pricing or allocate costs to your unit, and each move can reduce the payout.
Treat an earnout as upside, not price. Pick a metric the buyer can't easily move, use a sliding scale rather than a cliff, ask for specific operating commitments rather than a promise of good faith, and accelerate the payment if the buyer sells or shuts down the business. Delaware courts enforce earnout provisions as written, so the protections have to be in the contract. See How Does an Earnout Work?
Example. A buyer offers $42,000,000 at closing, cash-free and debt-free, plus an earnout of up to $5,000,000 if revenue hits a target in the first year. A press release might call it a $47,000,000 deal. The company has a $1,200,000 venture loan, $900,000 of unpaid transaction expenses and $400,000 of cash, and its estimated working capital is $300,000 below the peg. The merger agreement sets a $3,500,000 indemnity escrow (about 8% of the price, with no insurance), a $350,000 working capital escrow and a $150,000 stockholder representative expense fund.
| Step | Amount |
|---|---|
| Headline price at closing | $42,000,000 |
| Less venture loan paid off | ($1,200,000) |
| Less unpaid transaction expenses | ($900,000) |
| Plus cash in the company | $400,000 |
| Less working capital shortfall | ($300,000) |
| Equity value | $40,000,000 |
| Less indemnity escrow | ($3,500,000) |
| Less working capital escrow | ($350,000) |
| Less stockholder representative expense fund | ($150,000) |
| Paid to stockholders and option holders at closing | $36,000,000 |
So $36,000,000 is paid at closing, $4,000,000 waits on the true-up and the escrow, and up to $5,000,000 more depends on the earnout. How the $36,000,000 is split is the waterfall, worked through next for the same company.
The waterfall is the order in which the equity value is paid out, set by your charter, your SAFEs and notes, your option plan and the merger agreement. The buyer will usually make your company's allocation spreadsheet binding, so the split has to be right.
The market-standard liquidation preference is 1x non-participating: on a sale, the investor receives the greater of the amount it paid or what it would receive by converting to common. In a good sale, the preferred converts and everyone shares by the numbers. In a modest sale, the preferred takes its money back first and the common shares what's left. With several series, the charter says whether they're paid pari passu or in order of seniority. See Liquidation Preference.
A SAFE that hasn't converted by the time of the sale is paid under its own terms. On the YC post-money SAFE, a sale of the company is a "Liquidity Event," and the holder receives the greater of its purchase amount (the "Cash-Out Amount") or the amount it would receive if the SAFE converted into common stock at the valuation cap (the "Conversion Amount"). For the conversion, the SAFE's share count is its purchase amount divided by the liquidity price, which is the post-money valuation cap divided by the company's capitalization just before the sale, counting outstanding shares, granted options and the converting SAFEs, but leaving out the unissued option pool and any SAFEs or preferred stock that take their cash amount or preference instead. The form says the SAFE operates like standard non-participating preferred stock: its cash-out right is junior to debt and creditor claims, on par with other SAFEs and preferred stock, and senior to common. If it takes the conversion amount instead, it shares on par with the common, after any SAFEs or preferred stock taking their cash-out amounts or preferences. In a sale meant to qualify as a tax-free reorganization, the board may also reduce the cash paid to the SAFE holder, without reducing its total proceeds, by the amount it determines in good faith is needed for that treatment, applied pro rata to holders with the same priority.
Example. A company has 9,000,000 shares of common stock held by its founders, an unissued option pool, no granted options, and one $1,000,000 post-money SAFE with a $10,000,000 cap. If it's sold for $40,000,000 of equity value, the SAFE converts at a liquidity price of $1.00 into 1,000,000 shares, exactly 10% of the 10,000,000-share liquidity capitalization, because a post-money SAFE holder owns its purchase amount divided by the cap. It receives $4,000,000 and the founders receive $36,000,000. If the company is sold for $6,000,000, converting would pay only $600,000, so the SAFE takes its $1,000,000 cash-out and the founders receive $5,000,000. See Founder Guide: SAFE.
Convertible notes are debt, so the note decides. On a sale before the notes convert, note holders commonly get a choice: a cash payment of 1.5x to 2x principal, or conversion into common stock at the cap so they share in the sale proceeds. In a large sale the holder will choose conversion, and in a small one the cash multiple wins, if there's enough cash to pay it. See Founder Guide: Convertible Notes.
Shares reserved in the pool but never granted are cancelled at closing and get nothing, so their value goes to everyone else. Granted options are assumed by the buyer, substituted with buyer options of equal value, cashed out for the spread (the per-share deal price minus the exercise price), paid out over time as they would have vested, or, where the plan allows, cancelled, which is the usual result for options priced above the deal price. The plan and the merger agreement decide which. See What Happens to Stock Options When a Startup Is Acquired?
Unvested founder stock and options vest early only if the grant, the plan or an employment agreement says so. Double-trigger acceleration is the common protection: unvested equity vests if the person is terminated without cause, or resigns for good reason, within a set period after the sale. Single-trigger acceleration, on the sale alone, hands the buyer a fully vested team, and buyers often respond by asking for new retention equity or a lower price. See Single Trigger vs Double Trigger Acceleration.
Here is the company from the price example. Two founders hold 3,000,000 shares of common stock each. Employees hold 1,000,000 granted options with a $0.50 exercise price, and 500,000 shares sit unallocated in the pool. Seed investors paid $6,000,000 for 3,000,000 shares of preferred stock with a 1x non-participating preference. That's 10,500,000 fully diluted shares, and 10,000,000 shares and options that share in the proceeds once the unallocated pool is cancelled. Assume every granted option is cashed out for its spread.
At $40,000,000 of equity value, add back the $500,000 of option exercise prices and divide by 10,000,000, for $4.05 per share. Converting gives the Seed $12,150,000, more than its $6,000,000 preference, so it converts. Each founder's 3,000,000 shares are worth $12,150,000, and option holders receive $3.55 per option, or $3,550,000. The $4,000,000 of escrows and expense fund is allocated at $0.40 per share and per option, so at closing each founder receives $3.65 per share, or $10,950,000, the Seed receives $10,950,000, option holders receive $3,150,000, and $1,200,000 of each founder's $12,150,000 waits on the true-up and the escrow. If the earnout pays in full, it adds $0.50 per share, or $1,500,000 for each founder.
Now run the same company at lower prices.
| Equity value | Seed preferred | Founders (both) | Option holders (net of exercise price) |
|---|---|---|---|
| $40,000,000 | $12,150,000 (converts) | $24,300,000 | $3,550,000 |
| $12,500,000 | $6,000,000 (preference) | $6,000,000 | $500,000 |
| $5,000,000 | $5,000,000 (preference) | $0 | $0 |
At $12,500,000, converting would give the Seed only $3,900,000, so it takes its $6,000,000 preference. The other $6,500,000, plus the $500,000 of exercise prices, is divided over the 7,000,000 shares of common and options, or $1.00 each. The founders hold about 57% of the fully diluted shares and receive 48% of the equity value. In this cap table, the Seed converts only once equity value passes $19,500,000. Build this model before your first serious buyer conversation, and run it at every price you think is plausible.
At $5,000,000, the price is below the $6,000,000 preference, so the Seed takes everything and the founders and option holders get nothing. Deals still get done in that zone, because the buyer needs the team and the investors need the deal to close.
The usual tool is a management carve-out plan: a percentage of the proceeds, often 5% to 10%, set aside for a named group of employees and paid ahead of the preference, usually on condition that they stay through closing. With a 10% carve-out in the $5,000,000 deal, $500,000 goes to the plan participants and $4,500,000 to the Seed. The investors fund it from their own recovery, so it needs the board and the required preferred holders to approve it in writing before signing. Carve-out payments are compensation, not sale proceeds, which brings in withholding, the golden parachute rules and the deferred compensation rules, so have a tax advisor review the plan.
The other sources of value are retention packages the buyer pays on top of the price, which don't reduce what investors receive, and sometimes a partial waiver of the preference by investors who would rather close than wind down. Any of these needs a careful board process, covered below. See What If the Sale Price Is Less Than the Preference Stack?
The board approves the sale first, and in a merger it adopts the merger agreement and declares it advisable. Two rules matter most. First, when the board sells the company for cash or hands control to a buyer, Delaware expects directors to seek the best value reasonably available to the stockholders, often called the Revlon duty after the 1986 Delaware Supreme Court case. Best value isn't always the highest headline price: an offer with financing risk or a large earnout can be worth less than a lower offer that will close.
Second, conflicts drive how closely a court looks at the decision. A director designated by a fund that gets its preference back and a founder who gets a new employment package each have an interest the other stockholders don't share. In a leading 2013 case, In re Trados Inc. Shareholder Litigation, the Delaware Court of Chancery applied its strictest standard of review, entire fairness, to a sale approved by a board with investor-affiliated and management directors in which the preferred took most of the proceeds and the common got nothing. The court held that directors must generally put the interests of the common, as the residual owners, ahead of the preferred's preferences when they exercise judgment that affects both. The directors escaped liability only because the common had no value outside the sale, even though the court found the process unfair.
In practice, disclose every director's and officer's interest in writing, including each founder's package. Delaware's 2025 amendments to Section 144 protect a conflicted transaction approved, after disclosure of the material facts, by a majority of the disinterested directors (or a committee of at least two of them if they aren't a majority of the board), or by a majority of the votes cast by the disinterested stockholders, with stricter versions of these conditions for deals with a controlling stockholder. Then build the record: meet more than once, consider the alternatives, and make sure the minutes show what the board weighed and why. See Fiduciary Duties of Startup Founders.
A merger of a Delaware corporation needs approval by the holders of a majority of the outstanding stock entitled to vote under Section 251 of the Delaware General Corporation Law. A sale of all or substantially all of the company's assets needs the same majority under Section 271. Startups get it by written consent under Section 228 rather than a meeting, and the company must then promptly notify the stockholders who didn't sign. Buyers usually require consents and support agreements from enough holders to approve the deal at signing or shortly after.
Delaware law doesn't give the preferred a separate vote on a merger by default. The preferred's vote comes from the charter's protective provisions, which almost always list a sale of the company, so you'll need a separate majority (or the agreed percentage) of the preferred as well. Read your own charter. Some companies negotiated a price floor above which a sale doesn't need the separate preferred vote. See What Do Stockholders in My Startup Need to Approve? and Protective Provisions.
A drag-along in your voting agreement lets the holders who approve a sale require everyone else to vote for it and sign on the same terms. It works only if you follow its conditions. Westaway's recommended trigger is the board, a majority of the preferred and a majority of the common, so founders generally keep a vote. See Drag-Along Rights.
In a merger, Delaware gives appraisal rights under Section 262 to stockholders who don't vote for the merger or consent to it and who make a timely demand: they can ask the Court of Chancery to determine the fair value of their shares instead of taking the deal price. Asset sales don't carry appraisal rights by statute unless the charter provides them. Buyers often limit their risk with a closing condition capping how many shares can seek appraisal, and drag-along provisions often include an advance waiver. The notices and deadlines are covered in What Happens Between the LOI and Closing?
Section 280G of the Internal Revenue Code applies to payments contingent on a change in control to a "disqualified individual": someone who performs services for the company and is an officer, a more-than-1% stockholder or one of its highest-paid people. If those payments reach three times the person's base amount, their average annual taxable compensation from the company over the prior five years, the amount above one times the base amount is an excess parachute payment. The recipient owes a 20% excise tax on it under Section 4999, and the company loses its deduction. Accelerated vesting, retention bonuses and carve-out payments can all count, and founders who paid themselves little have a low base amount.
A company that would qualify as an S corporation is exempt, but one with preferred stock or venture fund stockholders won't qualify. A company with no readily tradeable stock can instead exempt the payments with approval by more than 75% of the voting power of its outstanding stock entitled to vote immediately before the change, after adequate disclosure of all material facts to every stockholder entitled to vote. Stock held by the people receiving the payments doesn't count, the vote has to decide whether the payments are made at all, so each affected person first waives them unless stockholders approve, and the vote must be separate from the vote on the deal. Whether anyone crosses the threshold is a calculation for a tax advisor to run before you sign. The mechanics and a worked vote count are in What Happens Between the LOI and Closing?
Usually not. Under the Hart-Scott-Rodino Act, a deal must be reported to the Federal Trade Commission and the Department of Justice before closing only if it's large enough. For 2026, deals valued at $133.9 million or less aren't reportable, for transactions closing on or after February 17, 2026. Between $133.9 million and $535.5 million, a filing is required only if the parties also meet a size-of-person test, and above $535.5 million, a filing is required regardless. The thresholds are adjusted every year. A reportable deal can't close until a waiting period ends, normally 30 days after filing, which opens a gap between signing and closing. Most startup acquisitions fall below the thresholds. The antitrust laws still apply to deals too small to report, though, so if the buyer is a competitor, follow your deal counsel's rules on sharing information and don't let the buyer direct your business before closing.
If the buyer is foreign, the deal may be reviewed by the Committee on Foreign Investment in the United States (CFIUS), and a filing is mandatory for some deals, including certain acquisitions of US businesses that develop critical technologies. Some regulated businesses, such as those holding certain licenses, also need regulators' approval or notice before a change of control, so check your licenses early.
The buyer will usually make the acceptance of offers by a short list of key employees a condition to closing. Keep the list short, set the threshold below 100%, and describe in the agreement the minimum terms the buyer must offer. Ask early for the retention budget, who gets it and on what vesting, and whether it comes on top of the price or out of it. In an asset purchase, your company terminates everyone and the buyer rehires the ones it wants, and the people who aren't hired remain your company's responsibility. See What Happens to My Employees in an Acquisition?
Your own deal with the buyer deserves its own lawyer, because company counsel represents the company and on your package your interests can diverge. See Why Your Startup's Lawyer Is Not Your Lawyer. Negotiate your role, narrow definitions of cause and good reason, severance on a termination without cause, and what happens to anything you re-vest. Keep money for your stock and money for your work separate. Purchase price goes to every holder through the waterfall, retention pay goes only to those who stay, and shifting value from one to the other is the conflict your investors will watch for.
Westaway's position is that employees shouldn't sign non-competes, and that includes you as the buyer's employee. If the buyer needs a founder non-compete, it goes in the purchase agreement as a covenant from a seller, limited to the business you sold and for a fixed term. Non-competes given in the sale of a business are treated differently from employee non-competes and are generally enforceable, including in California, but courts still expect them to be reasonable, and in 2022 Delaware's Court of Chancery refused to enforce one that reached the buyer's other businesses rather than the business it bought. Resist a second, broader non-compete in your employment agreement. See Non-Compete Clauses.
Signing and closing. Signing is when the parties sign the merger agreement. Closing is when the conditions are satisfied, the certificate of merger is filed and the money moves. Many private startup deals sign and close the same day. When a filing or consent needs time, you must run the business in the ordinary course in between and get the buyer's consent before material changes.
The money. The funds flow memo lists every wire at closing. Stockholders are paid through a paying agent after returning a letter of transmittal, and cashed-out option holders usually through payroll. Check the allocation spreadsheet against your own model, and confirm every wire instruction by phone with someone you already know.
The stockholder representative. After closing, someone has to act for all the former stockholders on claims, the true-up and escrow releases. Since 2024, Delaware law has expressly allowed a merger agreement to appoint a stockholder representative with that authority. A founder can take the role, but once you work for the buyer you'd be negotiating against your employer, so many deals use a professional representative paid from the expense fund.
Post-closing adjustments and releases. The buyer prepares a final closing statement, usually within 60 to 120 days, and any difference from the estimate is settled. In our example, if final working capital comes in $150,000 below the estimate, the buyer takes $150,000 from the $350,000 working capital escrow, and the other $200,000 is released at $0.02 per share, or $60,000 to each founder. If no indemnity claims are made, the $3,500,000 escrow is released on schedule, commonly 12 to 18 months after closing, and each founder receives $1,050,000. If the representative spends $50,000 of its fund, the other $100,000 comes back, or $30,000 to each founder. Each founder ends up with $12,090,000 of a $12,150,000 gross share, and $13,590,000 if the earnout pays in full.
Earnout tracking. Calendar the earnout dates, reporting deadlines and objection windows the day you close, read every earnout statement against the agreement, and keep your own copy of the closing documents, because you'll lose access to the company's systems. See What Happens Between the LOI and Closing? and Escrow, Holdbacks and Indemnification.
A small exit done well can still be a good outcome for the team, the investors and your reputation.
Acquihires. In an acquihire the buyer prices the deal around the people it wants, often as a budget per engineer, and splits it between the purchase price, which goes to stockholders through the waterfall, and team packages, which go only to those who join. The split decides what non-joining stockholders receive, and founders getting packages are interested in the deal, so let disinterested directors negotiate it and disclose every package in writing. If the buyer takes only assets or a license, make sure the price leaves enough cash for your company to pay its creditors and wind down properly. See Being Acquihired.
Selling below the preference stack. The carve-out plan, the buyer's retention packages and a possible investor waiver are the tools for getting something to the team. Make the case to investors with numbers: what they recover with the team's cooperation, and what they recover if the company shuts down instead.
Winding down. If no buyer will pay enough, or the only offer leaves nothing for creditors, a wind-down may be the better path. Decide early, while there's cash to pay employees and creditors. A Delaware dissolution needs board and stockholder approval, a certificate of dissolution, payment of franchise taxes, and payment of creditors before anything goes to stockholders, with SAFE holders and preferred stockholders paid on their terms before common. A company that can't pay its creditors may need an assignment for the benefit of creditors or bankruptcy instead. See How Do I Shut Down My Startup? and Am I Personally Liable for My Startup's Debts?
Most of the money founders lose in a sale is lost in a few predictable ways. They negotiate the headline price and ignore the definitions of debt, expenses and working capital that take it apart. They sign a long exclusivity period with the important terms left vague, then concede them under time pressure. They start diligence with missing IP assignments and an unreconciled cap table, and pay for each finding in price or escrow. They count an earnout as part of the price. They negotiate their own packages from the board seat without disclosing them. They remember the golden parachute rules too late to run the vote properly. And they stop paying attention at closing, when the true-up, the escrow and the earnout still decide how much of the price they keep.
Every one of these is avoidable with a few weeks of preparation and good advice before the LOI. If you're still building toward a sale, our Founder Guide: Avoid 10 Rookie Legal Startup Mistakes covers the clean-up that makes a company easy to buy.
If you've just received an offer, start with How Do I Read an Acquisition LOI? and Startup Acquisitions: The 3 Types of Deals. Once the LOI is signed, read What Happens Between the LOI and Closing When I Sell My Startup?, Startup Due Diligence and Escrow, Holdbacks and Indemnification. For your team, see What Happens to My Employees in an Acquisition? and What Happens to Stock Options When a Startup Is Acquired? If the price is close to your preference stack, read What If the Sale Price Is Less Than the Preference Stack?, and for how your SAFEs and preferred stock got there, see our Founder Guide: SAFE and Founder Guide: Series A.
This guide is education, not legal or tax advice. Westaway has been counsel to founders since 2008, and helping a founder through the sale of the company they built is some of the most meaningful work we do. If a buyer has called, or you're thinking about whether it's time, contact us before you sign the LOI. We're rooting for you.
