The Challenges of Sell-Side M&A

Every owner loves their business. This makes selling their company even harder than it already is. But aside from the emotional turmoil that founders go through every exit, there are also a lot of intricacies included in the process. In this interview, Russ Heddleston, Co-founder & former CEO of DocSend, discusses the challenges of sell-side M&A and how to navigate them.

The Challenges of Sell-Side M&A

31 Jan
Russ Heddleston
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The Challenges of Sell-Side M&A

The Challenges of Sell-Side M&A

"You don't need an exit strategy if you have a profitable company because you can always sell a profitable company to someone.” – Russ Heddleston

Every owner loves their business. This makes selling their company even harder than it already is. But aside from the emotional turmoil that founders go through every exit, there are also a lot of intricacies included in the process. In this interview, Russ Heddleston, Co-founder & former CEO of DocSend, discusses the challenges of sell-side M&A and how to navigate them.

special guests

Russ Heddleston
Co-founder & former CEO, DocSend

Hosted by

Kison Patel

Episode Transcript

Starting DocSend

Well, the original inspiration came from a couple of places. Sometimes people have a story about how, at the age of 4, they wanted to solve a particular problem. For me, building software companies and creating software products is much more about understanding their utility. 

My co-founders, Dave, Tony, and I, had a few ideas that we went through, sussed out, tried to kick the tires on, and pretended to sell. It was less of a glamorous "we knew we wanted to solve this problem" situation. 

The DocSend concept was one idea we had. It was based on the thought that attachments are inefficient. Why are people sending attachments? From interning at Dropbox, I knew people send attachments, even though Dropbox had a feature to send a link instead.

Sending a link instead of an attachment made so much sense, but people were still sending attachments. We were curious about why. Our original hypothesis was that if we could add more value to the sender and make it really easy for the recipient, we could change behavior and get people to stop sending attachments.

It was very basic. We did a lot of interviews, asked many questions, and talked to numerous companies. We thought, "Hey, this seems really useful, and there should be a product that does this." That's how we started.

The very first iteration we launched in 2014 was document analytics, broadly defined. 2013 was the start year and we worked on it for a year before we launched public beta. We sold in 2021.

Although if you look at our revenue graph, it looks like a perfect hockey stick, which is funny because it didn't feel like that’s how it was going through the process. It was about eight years from when we incorporated to when we sold, almost to the day, from March of 2013 to March of 2021.

Identifying the inflection point to sell              

This is different for every company, but for me, I actually divide DocSend into three separate eras. I feel like I got three startups for the price of one. The first couple of years, we were just a totally self-serve, bottoms-up, viral product. It was free, then it was 10 bucks a month, but that wasn't growing fast enough. 

So, we moved to phase two or era two of the company, which involved selling upmarket into sales enablement, like enterprise sales, outbound sales. That was something I didn't have much experience with.

There was a lot of trial by fire and figuring things out as we went. We also learned a lot about competition and realized we were not performing especially well relative to the competition in the sales enablement space. 

So, the third phase of the company was actually pivoting back to the self-serve part of the business, but doing it differently. I would describe that as DocSend being a horizontal technology that we marketed vertically, and that performed really well for us.

We made that switch in 2018 and ran that last part of the company for three years, almost before we sold to Dropbox, and it was performing really well.

There was always something new that we were working on, but definitely the hardest part was selling upmarket into enterprise accounts. This was challenging both because I didn't know how that worked at the time, and also because we were building our product for the end user, not the economic buyer, a distinction I didn't appreciate for a while. 

So, it was interesting the whole way through, that's for sure. But it definitely felt easiest at the end, in the last couple of years when things were working, we had product-market fit, and the product was growing and performing quite well.

This is also different for different companies. Dave, Tony, and I are all software engineers. We were all at Stanford, spending our undergrad years taking classes on human-computer interaction and design. We absolutely love usability. So for us, building products that are usable, solve problems for people, and are intuitive is a passion.

However, we didn't really know how sales or marketing worked, among other things. For me, business school ended up being quite helpful in terms of understanding a little bit about what I didn't know. 

For a lot of startups, especially those started by engineers, you build the product you want to build, and that usually happens. But it doesn't always get the traction you need for it to be a successful company. To our credit, we did eventually figure it out, although it took us a few iterations to get there.

It’s true that engineers can learn sales and marketing skills, although I have seen situations where engineers don't have enough time to learn the sales and marketing skills before their runway runs out. 

For us, I feel very fortunate that we had enough time to figure it out. As an engineer who ended up learning sales and marketing skills through trial by fire, it was sufficient for DocSend to make it. Dave and Tony also had similar experiences. As a team, we had to figure these things out together.

Selling a startup

As a founder, it's hard to know when to sell the business because owners can become very emotionally invested in the company. For me, this was true with DocSend, and even with my first company, Pursuit, which we sold to Meta as a talent acquisition.

You become enamored with what you're building. In fundraising and building a product, you have to love what you do, and you love it irrationally. So, letting go of it is very hard in any context.

For Pursuit selling to Meta, there was a feeling of 'it could have been so much more.' And for DocSend as well, I had that feeling. But I think that's just part of what comes with starting a company; you care more than anyone else does.

Taking off the founder hat and wearing just the CEO hat, there's a much more rational view of your fiduciary obligation. What is the right thing to do for your customers, for your employees, for your investors? That is a tricky thing to answer, and it depends.

The utility of selling your business is one where most companies never have the opportunity to sell to begin with. Most companies desperately want to sell and cannot, especially in the current market. There are tons of companies that would love to sell if possible.

So, if there is an opportunity to sell, it means the company is doing something right. The question of whether it's the right time to sell, who to sell to, becomes harder to answer. There are a lot of factors to consider in that. 

For me, with the CEO hat on and considering fiduciary obligation, it was always something in the back of my mind. Do we consider it if it's an opportunity? You have to suss out at the time if that makes the most sense for you or not. But again, I think it's a pretty rare set of companies that have built something of enough value that someone else wants to acquire it.

Considerations in potentially selling a startup

I've seen so many different approaches to this. One thing I hear a lot is that you should have an exit strategy. I don't believe in having an exit strategy, and the reason is that you have to build something valuable. Trying to build what you think someone else wants to buy doesn't seem like a winning approach.

It's much safer to build something that adds value in the world and that users want to use or pay for. Then, if someone else happens to want to buy that company, that's great.

Taking this a bit further, if you create a profitable company, regardless of what it does, as long as it has free cash flow, there's always value in that. You don't need an exit strategy if you have a profitable company because you can always sell a profitable company to someone.

For me, it started at the very beginning with DocSend, not because I wanted to sell the company. I was more interested in why no one else had solved this problem. So, I went to Dropbox, Box, Microsoft, Google, all the companies I thought should build DocSend, and asked them, 'Here's this concept. It makes sense.

Why don't you build this?' Their responses were often, 'Yeah, that makes sense. We might build this down the road, but it's a couple of years out,' which usually means they're probably never going to build it.

We did get a couple of acquisition offers when we started DocSend, as a 'Hey, you're a talented team of engineers. We'd love to buy you to accelerate what we're working on.' But having just been through that with Meta, which is great for many people, we really wanted to build the actual product.

That's where it started for me, sussing out why no one else had done this before. As we were building DocSend, I think it's generally good as the CEO of a company to check in with other companies that you think should be building what you're building.

It's about figuring out who's doing what, if competition is going to heat up or not, and just staying in touch with the market you're operating in. But that's not a lot of time, maybe about 5 percent of your time.

With Meta, we were part of a startup and sold early. There were just three of us, and it was a talent acquisition. We had HR software with a beta version and a few dozen companies using it, but it wasn't going to work the way we wanted it to. We were planning to pivot to a new idea, and at that time, Facebook, which is now Meta, was using our software. 

So, when we decided to switch, we ended up talking to them and to LinkedIn about working there instead, leading to a talent acquisition. That worked out well for us. We were at a point where we could either scrap what we were working on and start with a new idea, or just go to Meta.

That was a great outcome for us. We had raised a small amount of seed funding and just returned the money. It was a great outcome, but it was specific to that situation where we hadn't hit product-market fit, and what we were working on wasn't working.

We weren't running out of money, but it was very exciting to go to Meta, be part of their story, and see them go public. In retrospect, that was definitely the right call for us.

Best time for an exit

As an owner, it’s impossible to know when to exit. Some of the advice I received when we sold DocSend was based on our performance at the time. We were performing the best we'd ever performed. Dropbox bought us when we were at 15 million ARR for 11x ARR, and we were profitable. 

The advice was, 'Hey, when things look really good, you should sell.' To your point, it looks good now, but what if you flatline later? There's a scenario where you might work on this company for another five years, and if your growth slows down, maybe you'll sell for the same amount, or maybe the market will change, or who knows what could happen. You could implode. So, when it looks really good, that's the time to sell.

Another way of thinking is, 'Oh my God, things look great. Don't sell. If you could sell now, just wait a year and you could sell for even more later.' For companies like Dropbox, for example, they were right not to sell early on. They stuck with it and became a much bigger company being independent. It's hard to know with these things because it's specific to the company, the time, the market, and the product set.

You don't get to run the counterfactual for any of these experiments. So, what you're left with as the CEO and the fiduciary is, at a moment in time, what do you think is probably the right thing to do? How risk-averse or risk-seeking are you?

I've also heard from many people that selling your business is a very personal decision, which I always thought was an odd answer and a bit of a cop-out. But in retrospect, I think that is true. It is a very personal decision. You look at all the factors, and then it's a very personal decision.

Balancing stakeholder interests in an acquisition

As the CEO, you're essentially in the driver's seat, considering your equity holders and your employees. Although employees don't really get a vote in it, especially in the case of a significant acquisition like DocSend, you're not conducting interviews with the employees; you're just looking at the business and talking to the executive team.

For me, talking to our investors was crucial, as their input matters a lot. The nuts and bolts of it are that your preferred shareholders usually have blocking rights on the acquisition. So, if the CEO wants to sell and the preferred holders say no, you don't sell. That's definitely a consideration.

In our situation at DocSend, we hadn't raised that much money, and the offer was over three times what our last post-money valuation was. It was an all-cash deal, so it was locking in a win. Our investors at the time were supportive of what we wanted to do and what we thought was the right thing. For their situations, it was good for them, so they were willing to support it.

Talking to co-founders was also important. We'd been at it for eight years, which is a long time. We had a couple of phases and some scares around things that didn't work, and then we found some stuff that was working. 

So, we were at this moment in time, considering if this made the most sense. The way it developed was that I had another inbound offer, then checked with Dropbox, and they made another offer, which happened very fast. We just had to decide if this was something interesting and would be a success for us. A lot of things aligned, and it made sense, so we went with the deal.

Relationship management in an acquisition

Some relationships came back during the exit conversations, leading these companies to show interest in an acquisition. However, I don't know if they would have mattered that much, because what we built with DocSend was just a great business. I don't think the relationship would have mattered all that much. 

Even if I wasn't the CEO of the company, the performance was really good, people loved the product. Just looking at the product, the stats, and the company, they are great and very acquirable. At a certain scale, the relationship matters less. 

If you're going to spend $165 million on something, you have to like what you're buying, independent of who's in charge. But having a relationship with who's in charge allows you to trust what they're saying and have faith in what's under the hood. 

When buying a company, you wonder about the skeletons in the closet, whether it's built as well as you hope, or if it's going to fall apart tomorrow. There's a lot of trust needed, or there's a lot of risk.

For me, having a relationship and being a known quantity to a few of these companies allowed them to trust what I was saying. When they looked at our numbers and our business, they could believe it was a really well-run, well-built asset. That took a lot of the risk out of it.

With Dropbox, for example, because I had known Drew, it was easy for them to look at our numbers and recognize, 'Oh yeah, this is a good product. This is what we think it is.' The same goes for some of the other relationships I had.

They had seen me and our company over time. When I checked in with people and we did what we said we were going to do, they were like, 'Okay, yeah, that makes sense. They're doing what they say they're going to do. It is what they said it was.' So, I can trust that this thing I'm looking at is represented.

How relationships influence negotiations

I don't have a ton of experience with this, but we didn't have a competing term sheet for raising more money. I think the relationship made the negotiation very straightforward. However, I don't believe the relationship matters much for the actual negotiating, because that's more the realm of corporate development.

We had a banker, and they had a banker, making it feel more transactional. The advice I received was that you don't want the negotiation to ruin the relationship, which is probably true for a certain transaction size.

You want to have a banker so they can handle the back-and-forth and be somewhat cutthroat about the negotiation. This approach ensures that the people who will have to work together afterwards don't create animosity.

So, no, I don't think the relationship necessarily matters for that negotiation. Although, I do think the relationship matters if the negotiation goes south or if you need to get to rough terms.

Relationships with bankers

A bit more backstory is required. As I mentioned, for the second phase of DocSend, we sold upmarket. It was going okay but not great. When we were at a certain ARR, it wasn't looking good in the sense that our cost of sale was very high, and our competitors had raised a lot of money. We didn't have the option of raising more money, nor did we have a buyer for the business in 2018.

So, we went back and changed our pricing plans and positioning, which then performed really well. We raised another $5 million in an up round to the previous round, which was modest but significant.

Our investors were like, 'You're okay, but not great.' Then we kept performing better, and when we passed $10 million in ARR, our investors suggested we should check in with people and maybe get a banker as more of a coach, because M&A would likely be the best exit path for us. So, I got a banker more as a coach, Mike Marquez at Code Advisors, to advise on potential transactions down the road.

We brought him on more for help with keeping up with people and what to do, but not with a transaction in mind. We didn't have a timeline to sell; we were just enjoying the business growth and execution.

Only a few months after bringing Mike on, we got an inbound interest for acquisition. I had to inform them that we were doing better than they thought, and thus would be more expensive than anticipated. Mike was very helpful in that conversation.

We didn't run a process but had two parties interested, and we talked between the two. In retrospect, I might open it up and run more of a process, but at the time, we were considering whether we had time for that or if we should just get to the finish line with one of these two parties.

Having a banker was very helpful for me as a founder and CEO, especially since this was a much bigger deal than my previous experience. There's a lot you can learn from someone who does this for a living. My situation was a bit different than the typical 'we're going to sell our company, so we're going to hire a banker to set up the sale and run a process.' We were not in that situation. The other company reached out.

Reaching out to DropBox

Well, I went to the board and said, 'Hey, we got an offer. I don't think we want to take it, but it's a pretty good offer.' So, I asked them, and they were like, 'Actually, it seems pretty good. If you can get a little better, maybe now's a good time to sell.'

I was surprised by their response. So I went to my co-founders and said, 'Hey, we got this offer. It's very flattering, especially from a company that we like.' For me, it felt real. I told them it wasn't quite there, but I checked with Dropbox and said, 'I'm not sure if we're going to sell, but I got this offer and it's close enough that I'm taking it seriously.'

They went internally and came back saying they would also like to make an offer. I was not expecting that.

The person from Dropbox was an exec there, not there any longer, but someone I had known. This is a relationship thing. Without that relationship, I wouldn't have been able to casually mention the other offer and gauge their interest.

So, having a relationship and being a known quantity makes it much easier. It's not like being a random company. It's more like, 'Hey, this company we've looked at for a while might be on the market, but they're not sure. Are we interested?' And they were like, 'Yes, we are.' Then they came back with another offer and moved very fast, which was very surprising for me.

Ultimately, we got the deal done at 11x ARR. We could have raised at a significantly higher multiple than that, like 300 million, maybe 20x ARR. 2021 was the peak craziness year, so we could have raised at a way higher valuation.

But as a private company, you sometimes get a discount for someone to pay all cash and acquire you. Valuations are kind of all over the place. So 11x ARR was more like a reasonable price to pay for a well-performing asset. At the time, it was kind of a public company multiple.

The total price Dropbox paid was 165 million. There was a hold back, which is a compliment to the founders. If the acquiring company wants to keep you, they'll try to incent you to stay in some way, which means they like you a lot.

It's generally viewed as a compliment. In our case, the hold back was higher. I can't share the specific number, but there was a significant hold back just for time, not for performance. As it turned out, they were super happy with the performance. So if we had had an earn out, we would have absolutely checked all those boxes.

The timeframe for the hold back was three years, working there. That means they liked us a lot and wanted us to stick around and help. It's generally a good sign. If they're like, 'Hey, we love your company, but we want you to leave immediately,' that's a bit of a diss. So it was a compliment that they wanted us to stick around.

Key factors for a successful exit 

One of the things I'm proud of with DocSend is that we built a good business. When you look at how we acquired customers, it was a hundred percent inbound and 95 percent self-serve. There was no big revenue concentration, with a thousand dollar ACV, and that go-to-market matched well with Dropbox's. 

They understood how we acquired customers and that looked similar to their business, which is one of the reasons they were comfortable acquiring the company. But I'm proud that it was a great business.

So if we didn't sell, we would have been fine. It would have been great. There's an argument that we could have left money on the table, but with these things, it's hard to know what timeframe to look at.

To answer your question, There’s always a market for a great company, with good products, real customers and cash flow. Whether it's an acquisition where there's a lot of synergy, or it's just a private equity player, or you just run a profitable company. 

That's the most certain thing for getting a good exit: having a great business where you have a lot of optionality. We had optionality for Dropbox.

When you're looking at things that are more like tech or team, or high growth but really unprofitable, you start to be in situations where you need an exit, or if you don't raise money, you run into a wall and run out of business. Those are scary places to be and situations where it's harder to line things up and know what you should do.

Having some competition is also helpful, as it helps create potential acquirers. During sell-side M&A, having multiple bidders gives sellers some sense of the market rate for the company, which is crucial. 

Impact of market conditions on M&A

When public company stock is up, they have that as a currency they can use to buy other companies, making it more attractive for them. M&A has slowed down a lot since the markets have come down, but transactions are still happening, just fewer of them.

To my point about optionality, if you have a profitable company, or it's just doing well, transactions still happen because there's more of a floor around it. Free cash flow is always in favor, and the swings in valuations of profitable companies vary less than the swings in valuations for companies that are unprofitable, high growth, but uncertain where they'll be in five years.

The unknowns of selling a business

There were a lot of big unknowns about selling a business. For us, as we thought about selling, what's happening on the buyer side, and what would happen post-close. There's a lot of trust on both ends for whether one plus one is going to equal three and what that's going to look like. 

In retrospect, I would have spent more time on the post-acquisition integration plan and fleshing that out more. You spend a lot of time getting to the close of the transaction, but then you realize that's just the starting line for what you need to do afterwards. 

In terms of unknowns, there weren't that many. I felt really confident that Dropbox was getting what they were paying for. Our business was going really well. We spent a lot of time leveling employees and figuring out how we were going to integrate people. We spent some time on what the synergy was going to be and what the plan there was. So I would have spent more time on that ahead of time.

One unknown that I was happy with was we didn't have to worry about Dropbox's stock because it was an all-cash transaction. If they were a private company and it was an all-stock transaction, then a big unknown would have been the exit value of our business depending on the value of the stock of the acquirer. 

In our case, it was pretty straightforward. I think in the range of acquisitions, this had probably as few unknowns as you can get on both sides. They just paid cash, so we didn't have to worry about a lockout period or anything like that. When it's a public company using cash for stock, it depends on if they're holding it back. 

If it's a hold back in stock and you're going to get more of your stock in two or three years, there's a question of what that stock is going to be worth versus cash you get in two or three years. It can be good or bad, being cash or stock, depending on your faith in what's going to happen with the stock. 

Dropbox had and has a lot of cash on hand, so for them, they wanted to use cash. That was more straightforward. Some of this just becomes an accounting question. If they give you cash, you can always buy their stock. If it's a public company and they give you stock, you can sell it and just have the cash. So it's not as big of an issue when it's a public company.

Post-acquisition challenges and unknowns

I was just thinking about the other unknowns at the time. Questions like:

  • How aggressively are we going to grow this? 
  • What are the milestones? 
  • How independent or integrated is this? 
  • What does the post-sale integration plan look like? 
  • What's the cadence of executive team meetings? 

A lot of that has to be unknown because you just have to figure it out once you're on the same team working together.

There weren't that many unknowns in the deal itself. The deal itself was very straightforward because it was easy for them to audit all of DocSend's revenue. You'll usually have a hold back, an escrow account for any dings against you. 

One unknown could be, 'Is our IP what you think it is?' There are protections for the buyer that if things aren't as represented, they can actually take some money out of the consideration for the company.

As a small example, we knew we hadn't paid some of the state income tax that we were supposed to. Startups often deal with this, thinking they'll get to it later. But we knew this was a problem and had already started the work to pay for it. We flagged that for them, and later, a relatively small amount of money was paid off as state income tax and came out of the consideration for the company. 

That was a small unknown, but not a significant one. When the deal closed, the paperwork was very straightforward in terms of what they were paying for, what we were offering, and what all the terms were. We were quite buttoned up in that regard, and I felt pretty good about that.

Enhancing preparation for post-close integration

Preparation is situationally dependent. Slowing down the process to spend more time together to look at what that would be would be nice, but I don't know if that's realistically something that can happen with how these things seem to work. 

Certainly, spending more time with the people on the team and looking at what you're going to do together, how this is going to play out, figuring out who has organizational alignment is important. 

With bigger organizations, there are different incentives, and there's always a concern as the smaller entity being acquired that your priorities are not going to be the company's priorities. Or even if the top of the company wants something, lower down the organization, they might not bother to make time to pay attention to things. 

So, ironing out some of those important details ahead of time to get comfortable is crucial, because post-close it can be harder to prioritize some of that stuff. 

For me, I would have just spent a little bit more time on some of those details and getting those lined up and getting people to agree. But on the flip side, you often don't want to bring in too many people under the tent ahead of an acquisition closing, because then you're spending a lot of time on both sides, and if the deal doesn't close, it looks bad and becomes awkward.

So, you want to minimize who's involved with it until it closes. There are definitely pressures on being able to do some of this stuff ahead of time.

Tips for buyers for smoother integration

Especially for me, individually, I would probably figure out what my role would be more specifically. One thing I heard from other founders is that it's often not clear what the CEO is supposed to do post-close. I'm happy with the work I did; a lot of it's kind of a utility player or the chief cheering officer, just making sure everything comes together. But yeah, I'd probably do that for myself, just define my own role in a little more detail ahead of time. 

But generally, my concerns are the same as those on the buy side, which is probably nice to hear because my incentives were aligned with Dropbox's. We wanted this to be a successful acquisition, good for customers, for employees, and we wanted 1 plus 1 to equal 3. 

As long as everyone's aligned on those things, that's great. Dropbox was very pleased with the acquisition. It went well for them, and they got a lot of value out of it. So I would definitely put this one in the win camp in terms of acquisitions that went well. The acquirer is very happy with it. Like a lot of those things, there are always things we could have done better, but I think on the whole, it was a good acquisition for them.

Challenges of sell-side M&A

Deciding who are the right people to get involved in selling a business and how many was messy because one thing I did not want was anyone interviewing our engineers – absolutely not, that sounded like a train wreck. 

So it was just a few people, like my co-founders, our board (not our larger investor pool, just our board). Our investor pool wasn't that big; we'd only raised 15 million. So it was just a few people on the investing side who preferred to make sure they would be supportive of this. HR and our head chief of strategy were involved. 

It was just a few people on our side doing the diligence requests, but for our business, the diligence requests were pretty easy. We were pulling customer lists and revenue amounts, and we're built on top of Stripe, so it was straightforward to pull a lot of things they were asking for. 

Then on their end, we had an executive sponsor, we ended up switching to a different executive sponsor, and then they brought in a few other executives, their corporate dev team, and their finance team.

For me, it felt like their side under the tent was so many people, but for them, given how many people they have, it wasn't that many. It was logistically difficult for me to have to run around and do all this diligence and answer all their questions and go through this very non-trivial amount of work to get the deal done without telling other people at Docs what was going on and also still doing my day job.

It is a lot of work to go through one of these processes. I generally think you don't want to engage in it lightly because it is a lot of work.

People don't expect how much work actually goes into diligence and that it's distracting. If the founder needs to constantly run the business, the company can end up in a really bad spot, especially if performance starts to degrade. If the deal doesn't go through, then they will have to go back running the business, and it’s worse off than where they started.

Efficiently managing diligence 

Practically, it's all of your time at a certain point in the deal cycle. Again, depending on the stage of the company, for DocSend, we were about 65 people at the time of acquisition, and we had a few VPs. I just went to them and said, 'Hey, I'm working on a thing. I don't want to give you all the details, but I need you to do more, and I'm going to be absent.' 

The best way to handle the new diligence team is to make sure the company has strong leaders that the owners can trust to take care of the business. But in our case, diligence was only a couple of weeks, so it didn't drag out for a really long time. That worked out really well, and I was very thankful for being able to delegate and have other people run things for a little while. 

There's also a high correlation between being buttoned up internally on your own metrics. We were always a very data-driven company, and I think you have to be, especially if you're consumer-focused or, for Doxon, being a product-led company. At the time, we had 15,000 customers, 15 million in ARR. 

With that many customers, you need to be data-oriented and understand programmatically how you're performing. That means having good hygiene around data collection and being able to look at your own numbers. 

So if you can do that well internally, then it's much easier to do when you have to do an external request for information. It wasn't as hard for us as it might've been for another company to turn around and give all the answers that we were being asked for.

People involved from pre-LOI to close

We still didn't get the leadership team involved post-LOI. Although I'm not remembering specifically what timing we had in there, we didn't tell anyone really until it was closed. For me, that was about making sure it was certain. 

At the time, I was very confident in our business. So if the deal didn't go through, I was kind of ambivalent about that. It wasn't that if this deal doesn't go through, I'm going to be crushed. I was like, no, we're running a great company.

If this doesn't go through, it'll be fine. I'm not even sure that this is the optimal thing for us. I think it's a very reasonable thing for us to do, take this offer. It makes sense and it'll be a good acquisition for them and a good exit for us. That gave me a really good position post-LOI. 

At one point, Dropbox was asking for what I considered to be too much information. I said something to the effect of, 'We're not going to do that for you. This is sufficient. And if you want to not do the deal over this, then that's okay.'

I basically said no because there is a point where you're asking for too much and you don't need it. It's not material. It's not actually going to give you new information. The diligence was very fast for that reason. 

They were offering 11x ARR at the time for a profitable company growing at the rate we were, relative to the market and other startups. That was a great price they were getting. We weren't going to bend over backwards and do all of these requests for them. You've got all of our data. That should be enough. So it was very fast from LOI to close. 

Then when we announced it, there was a press release. We told the team, we had a plan that day. There were a bunch of announcements and celebrations. But at that point, everything was closed up and done and finalized.

Other challenges are hard to know. You're running a company, it's going well, you've got HR challenges, you're working on your next version of the product, messaging, positioning, marketing, your roadmap, your OKRs, your quarterly cadence, you're hiring all these engineers and people at your company. So there's a lot of stuff going on at your business. Then you have these other considerations that come in. 

So if you're deciding to sell, like in our case, as it happened, suddenly everything just becomes a lot. It's not like anything individually might be super complicated, but in total, it's a little overwhelming.

Also, with a decision this big, you're like, I don't know what the right answer is. You can ask around for advice, but the advice you get really varies a lot, depending on people's experience and the situations. A lot of it's just hard to know. 

So, one of the challenges in this is just keeping all the balls in the air, not dropping anything, coordinating, keeping everything aligned, and getting everything done is just a lot.

Part of me was very gratified to get to the end, to be like, okay, I can take a breath now. We've gotten through this. That's not answering something specifically that was super hard, but it was definitely in total a lot to juggle.

Post-acquisition team dynamics

We didn't have any churn on the engineering side, which was great. Dropbox has a fantastic engineering culture, and we leveled the people well. Without calling out fault or saying anything was wrong, our CMO left shortly after the acquisition, which was okay. 

Everyone should act in their own best interest. That meant for me, though, that I jumped in and ran the marketing function for DocSend as we were figuring out the integration. So, I was kind of our acting CMO. That ended up being fine; I like marketing. We had to deal with a couple of people turning over on the marketing team and there was a lot to figure out there.

So yes, it did feel post-close like there were a lot of new challenges, but it wasn't an exodus, like everyone left over it. A lot of the work we did involved leveling people and making sure that for each individual employee, it was good.

People underestimate that you're not just negotiating the sale of your company; you're also negotiating per employee. You're going through your list of employees and determining what we're leveling them to, how much they're getting paid, what their job function and title will be. 

DocSend is still a product and a standalone thing that you buy and pay for, and it has a dedicated team at Dropbox. But in the leveling, there was a negotiation per employee. Because of the time we spent there, we kept everyone, which was great. 

Luckily, we didn't have any blowups like you're talking about, where the whole team storms out or something happens. DocSend continued to perform super well, and the acceleration curve we were on kept going. That all went well.

Evaluating alternatives to selling

Like if we weren't going to sell the company, what in my mind was the alternate path? And that's really important for your audience to consider because when they're talking to a company that's doing well. What do they think about that? 

Most of the time corporate people get a company that's saying, 'Hey, we're running a process. Here's the banker,' and you kind of think that they're desperate. And like their other option is to die, to go out of business. And so relatively few companies sell from a position of strength, but those are often the companies that you want to purchase. 

Because DocSend was a stable business and doing well as a business, it performed well, it's easier to capture synergy. It's easier to capture upside. Just keep the stable core asset there. It also gives you faith that they're solving something real as a business. 

So yeah, to answer your question, the other alternative for me. We were profitable, we were growing, like we started off in document analytics, but then really became more of a secure document sending product where works great for an individual document. We got into data rooms, we're getting into e-signature, we kind of had a roadmap ahead of us. 

And being profitable, we didn't need to raise more money, but it's always good to raise more money if you can to market to market. So I probably would have raised another round of funding at a significantly higher valuation. We would have deployed some of that, but we would have kept growing headcount at the rate we wanted to, rather than at the rate we could have. 

And that's more of a personal preference where I think if you hire engineers too fast, no one really knows what they're working on. It becomes confusing and chaotic. And for us, the bets that we would have made would have been around data rooms and e-signature. And so it would have been one of those things where we just keep running a good business and we keep trying to accelerate the hockey stick.

But when you're at 15 million in ARR, IPO is a long way away. Like a lot of things have to go right to get to a hundred million in ARR growing 50 percent year over year. That's a crazy high bar, you know, especially with the IPO markets cooling off now and it being even harder to go out like it's, you know. That's a long road between 15 and a hundred, and you have to have a lot of things go well.

So if we had said no, we would have been signing up for a long period of time, probably of continuing to build DocsEnd and just make it a great business. And we were in a fortunate position that we didn't need to raise more money. We're default live as a business. But yeah, you have to think forward:

What's the likelihood that we get there?

What's the likelihood that someone's going to compete with us?

I didn't think that would happen, but you never know. DocSend still doesn't have a great alternative. And so it's interesting and gratifying to see that it has good staying power as a value proposition. But yeah, there are all these open existential questions for the business.

Another challenge for us specifically, and with a lot of product-led growth companies, is that we weren't spending money to acquire more customers, which is great from a cash flow perspective, 100 percent inbound, 95 percent self-serve. It's a challenge in that it's hard to put money to work to grow faster.

So you're reliant on a combination of good content marketing, good SEO, the product spreading itself, making good product bets, getting into new areas. Can you find channels and partnerships to help you grow faster? And so that's a bit tricky to figure out how you do that more.

So yeah, if we had kept going alone, I think it would have been fine, but that's why I say it was a very reasonable thing for us to take the offer from Dropbox. Like a reasonable multiple.

I think they announced it because they were proud that they didn't overpay in their opinion for a company. On our end, our investors gave us some good advice around, 'If you're not sure, and this is a good offer, and you think it might take you a long time, maybe now is a good time to sell.' 

But on the flip side, you might argue it from a different perspective. Like, 'Hey, you're in a great position. Just keep going. Keep going for a few more years. You're on the hockey stick. You could get there and then it'd be huge.'

And that could have been true too. But for us, we've been at it for a while. And so we had a good business. There's good synergy there. There's a lot of overlap with Dropbox.

And so that's why I say it's hard to know with these things. So I wouldn't have been sad to go it alone. I kept going on our own. We would have done that. It would have been fun and interesting, but you know, we took the offer with Dropbox and that was a good deal too.

It is hard to know what the right answer is, but part of it, the personal decision part for me, is that it's really fun to build software and work on these things. Having done a couple of them now, and having worked at Dropbox early, I like wearing my CEO fiduciary hat, like what's the right thing to do?

And what do you think is a reasonable outcome? And I think it was, and it's always hard to balance that with caring a lot about what you work on because you have to, to keep working on it, but knowing what the right thing to do is.

It is fun for me, and I'll go build another one. It was a great exit. Another thing to keep in mind too, with this is how much money you raise is really important, and it's hard to know who makes money when you sell a company. If you've raised a ton and you sell, depending on the terms of your financing, oftentimes the founders and employees don't walk away with much.

So, because we had been pretty capital efficient with our company, it was a great outcome for everyone involved. That gives a lot of us that have worked on DocsEnd a lot of freedom to go work on whatever we find interesting.

And so there's an argument to be made as well. If you've worked on something for 8 years, maybe it's a good time to try out something new, explore new options and opportunities because life is more than just working on one particular startup forever. That's fine for some people, but there are a lot of other ways to look at it as well.

Fundraising strategies to minimize dilution

What I usually tell founders on this one is, don't raise a down round if you can avoid it. Obviously, you want to avoid that, but that's where you kind of get really diluted. And it's less about the terms of an individual round and it's more about how many rounds you raise. So if you raise a lot of rounds, you get incrementally diluted a lot.

And then there are obvious things like, if you can avoid it, don't do 2x liquidation preferences. That's where you run into a tough spot or participating is preferred. So there are some terms that are coming back into style now that investors have more leverage where those terms can really bite you as the founder, later, depending on how your company goes.

It's also an argument in favor of not raising at the highest valuation possible. Like if you're raising money from investors, there is something that's fair there for how much money they are making and how much money you are making. And there are situations that can feel unfair, but they can happen in both directions.

So, for DocSend, our funding rounds were clean, straightforward 1x liquidation preferences, but we beat the IRR of all the funds that invested in DocSend. We were a good single or a double in VC land, we weren't a home run.

We did well for our earliest investors, but for the later ones, we were okay. It's not what you aim for in a venture, but it's still a good outcome for them. And so, yeah, I'm proud that everyone made money on the deal, which is not always the case.

Advice for acquirers seeking successful acquisitions

I think the key is to acquire companies that don't necessarily need you. Some of it is about being proactive and following people who are really thoughtful about the space you're in and spaces you're adjacent to. Then, probably be relationship-oriented. Figure out what founders want and what they care about. 

There are a lot of great acquisitions that can happen when there's trust on both sides, and when, as an acquirer, you can see someone perform over time and get to know their business.

It gives you more faith that what it is is real and if you can understand their motivations. There are times when founders are either tired, don't like it, don't get along with their investors, or they're coming up on a round of funding but would rather exit.

It's very hard for founders to feel like they can be open with CorpDev or an acquirer because they feel like they're negotiating from the get-go and anything they give is going to come back to bite them later, which is sometimes true.

But that is really a hindrance in terms of understanding if there's real value to be created if an acquisition happens and what a fair price might be and what that might look like.

So, my advice for acquirers is to be proactive with the startups you like and try to understand their motivations for what they want with their business. Some startups just don't want to be acquired, so don't try. Others would love to, but only under certain conditions. 

Figuring out what the founders want is really important, in addition to understanding if there's good synergy with that asset. Building that relationship over time is something that can be very helpful for figuring out if there's good timing on one side or both sides and if that acquisition can really accelerate and accomplish everyone's agendas.

Effective strategies for corporate leaders to engage with founders

I think information sharing is key. Say something like, 'Hey, we want to trade notes with you. We just want to hear what you're doing.' Also, stating that you're not competitive is important. Express respect for what they're building and clarify that you're not going to chase it down, but you love what they're doing and it's adjacent. 

Maybe partnering would be great, but you'd love to just understand where they're coming from and trade some notes on it. Ask if they would be willing to make time for that and bring in an exec to share some notes. What are they seeing and why? Why do they like that? You have to de-escalate it because you don't want them to think you're just hitting them up for information to copy them.

Making it feel open, trusting, and just trading notes is key. Founders are generally pretty open to that because they want to learn. It feels flattering to them, but they want to feel like it's safe in some way. That could really give you a sense of how you're all thinking about it, trading notes, and seeing if there's alignment there.

I think it helps to bring in an exec, especially for the first call. If you're in corp dev and your goal is to acquire companies, you don't want to force it, but you would love to have it happen if possible. You are trying to get your execs to do a bit of company dating here.

Would you take a meeting with this founder to trade some notes and see if you can both learn something and see if there's alignment there?

If there's a corporate person, you can create that connection and enable that to happen. That's what happened for me at Dropbox. I went to an exec and let them know what was going on. Then they went off internally.

As a corporate person, you would love to see that happen. If you're able to create that connection between an exec and a founder at a company that's adjacent to you, and if down the line that turns into both sides being willing to do a deal and have you acquire them, then that would be fantastic for you as a Corp Dev.

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