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Monday, December 5, 2011

Is a Bird in the Hand Worth Two in the Bush?

In a recent meeting, I asked company founders if they would take $10MM for their technology and just walk away.  The question was a bit of a trick question.  Any answer provided would be revealing valuable information about the team.  My intentions were to see if the founders thought of the company as a life style company; i.e. a place to do the kind of work they wanted but not to make money for investors.  In addition, any responses would show level of team commitment and possibly founders thoughts on company valuation. 

The team indicated they were not interested in selling at the $10MM level suggesting that they were committed to the technology and believed they could turn the business into a strong enterprise.  This part is good.  The bad part comes when one factors in the following parameters: 1) no investment has been made by the founders, 2) it will take several million dollars and 3-5 years to get the product to market, and 3) no risk has been drained from the company. 

This is not a trivial issue. The founders are firmly behind their technology and believe the company can become successful.  In today’s financial market the issue of raising capital and building a successful company is not a given.  The ability to walk away with $10MM pre-tax is nothing to sneeze at, especially when minimal effort has gone into the startup at this time.

Most first time founders tend to get lost in the value of what they may get in the future and forget what they can get now.  No investor wants to have a founder that sits on the company and never delivers an exit.  Likewise, the investors want a good exit when the opportunity arises.  Investors must be able to their funds out and derive a profit or they will not invest.  Founders should consider this option for themselves as well. 

Taking the $10MM in this case would have allowed the team to form a second company.  They could keep the profit from the first company and invest it.  The dividends would likely supply salary for the rest of their lives.  The family financial pressures during on future startups would be reduced and the team would only have normal pressures of the business.

So, is a “bird in the hand worth two in the bush?”  You really need to consider your options and do not take any opportunity for an exit lightly!

What would you have done?

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon