The Challenges of Sell-Side M&A

People are asking for more M and A Science, so we're giving it to you. We're increasing our production from once a week to twice a week. Look out for more M and A Science interviews this is a conversation with Russ Heddleston, co founder and former CEO of DocSend. He has successfully exited multiple times, with his most recent to Dropbox in 2021 for $165 million. Before DocSend, he co founded Pursuit, a social referral company that helped source referral candidates, which was eventually sold to meta in 2011. In this interview he'll share his experiences from these exits and common challenges of Sell side M and A. We discussed the considerations of selling a startup, how to balance stakeholder interests in an acquisition, the influence of relationships during negotiations, key factors for a successful exit, and preparing for post closing activities. This episode is sponsored by our very own Business Lines Firm Room in the world of M and A, data, security and compliance isn't optional. The best in M and A choose firm room for three simple reasons. 1. Top tier security while being dead simple to use. 2. No per page billing BS. We all know it's a scam. Don't fall for it even if the bankers try to trick you otherwise. 3. You can sign up in less than two minutes with a free trial and see for yourself why it's better than anything else out there. Get started with a free trial at firmroom. Com. Again, that's firmroom.com Hope you enjoy this conversation. I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Hello M and A Scientists. Welcome to the M and A Science.

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The latest insights and events. And that's mascience.com I'm your host Kisan Patel, CEO and Founder of M and A Science. Joining me today is Russ Heddleston, co Founder and former CEO of Donn. DocSend is a secure document sharing platform. Today we're going to talk about the challenges of sell side M and A. Russ, how are you doing today?

Doing great, thanks for having me on.

Hey, thanks for taking the time to share your experience.

I don't always get to hear from the sell side of these transactions. Maybe we can kick things off a little bit about your background.

My background is as a software engineer. I was at Stanford for undergrad and grad in computer Science. Graduated in 2006 from undergrad, 2007 from a CO term and I've worked at a bunch of tech companies over the years, as you might expect. Interned at Microsoft in undergrad. Decided maybe the big company thing wasn't right for me at the time. Out of Stanford, went and ran the engineering team at a ad network called graystripe. I started off kind of lowly down, but it got Battlefield promoted as one does at a startup, which was great experience. That company sold for about 85 million. I went back to business school out at Harvard, interned at Dropbox in 2010. Tracked down drew when there are 15 people and worked there for the summer, which is fun. Decided to start my own company which we raised some money for. Sold it to Meta as a talent acquisition. I ran product management for the Pages team at Meta. I got to see them go public. Left and started a company, DocSend with two co founders, friends from undergrad at Stanford. We ran that company for eight years. We sold it to Dropbox in 2021. I recently left to buy my next adventure.

You like check all the Silicon Valley checkboxes for startups. You have the engineering playing bingo.

I think I've got a lot of the boxes.

Microsoft, Meta, you got them all.

What was the original inspiration for starting Dakshin?

It came from a couple places. Sometimes people have a story about they at the age of four wanted to solve this problem. And me building software companies and creating software products is much more about understanding the utility of it. So for my co founders, Dave, Tony and I, we had a few ideas that we went through and sussed out and tried to kick the tires on and pretended to sell. And so it was less of a glamorous. We knew we wanted to solve this problem situation and the Docsend concept was one that we had on the list is attachments are dumb. Why are people sending attachments from interning at Dropbox, I knew that people do send attachments. Dropbox had a feature to send a link instead of an attachment. It made so much sense to send a link instead of an attachment, but people were still sending attachments. And so we were curious, like why? So our original hypothesis was that if we can 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. So it's very basic and we did a lot of interviews and asked people a lot of questions and talked to a lot of companies and we just thought, hey, this seems really useful and there should be a product that does this. And so that's how we started it. The very first iteration that we launched in 2014 was document analytics, very broadly defined.

So you started it in 2014?

2013 was the start year and we worked on it for about a year before we launched public beta.

Okay, so 14 launch. When was the year you exit?

We sold in 2021.

That's a pretty good timeframe. We got about seven years invested into it.

Yeah. Although if you look at our revenue graph, it looks like a perfect kind of hockey stick. Which is funny to me because it didn't feel like that at all going through the process of it. But yeah, it was about eight years from when we incorporated to when we sold almost to the day, March of 2013 to March of 2021.

When did you feel that you got the inflection point? Because you stay flat for a while and then it really picks up how far along into it before you found that?

I think 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 because the first couple years we were just totally self serve, bottoms up, viral product. It was free and then it was 10 bucks a month and that was not growing fast enough. So we then did phase two or ERA two of the company, which is selling up market into sales enablement, like enterprise sales, like outbound sales. That was not something I had a lot of experience with. So there was a lot of trial by fire and figuring that out as we went. We also learned a lot about competition and we were not performing especially well relative to the competition in the sales enablement space. So then the third phase of the company was actually pivoting back to the self serve part of the business, but doing it differently. Where I would describe that as DocSend is a horizontal technology that we market vertically and that performed really well for us. We made that switch in 2018 and so we ran that last part of the company for three years almost before we sold to Dropbox and that was performing really well. There was always something new that we were working on, but definitely the hardest part of it was that selling up market into enterprise accounts. Both because I didn't know how that worked at the time. And also we were building our product for the end user, not the economic buyer, which was a distinction I didn't appreciate for a while. So it was interesting the whole way through. That is for sure true. 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.

Spent a lot of time figuring out the distribution model over figuring out the product it sounds like.

I think this is also different for different companies. Dave, Tony and I are all software engineers. We're all at Stanford. We spent undergrad taking classes on human computer interaction and design and oh my God, do we love usability. So we love building products that are usable and solve things for people and are intuitive and all those things are great. We didn't really know how sales works or how marketing works or all those other things. For me, the business school ended up being quite helpful in terms of me knowing a little bit about what I didn't know. For a lot of startups, especially when they're started by engineers, you build the product you want to build. Like that usually happens. It just doesn't get the traction you need for it to be a successful company. So we did, to our credit, eventually figure it out. Although it did take us a few iterations to get there.

Engineers can learn sales and marketing skills. It's the sales and marketing people that have tough time learning the engineering skills.

I think that's true, although I have seen it happen where engineers don't have enough time to learn the sales and marketing skills before their Runway runs out. Certainly for us, I feel very fortunate that we had enough time to figure it out. And for me, software engineer who ended up learning trial by fire sales and marketing skills sufficient for Docsend to make it. But same with Dave and Tony as well as a team, we had to figure these things out together.

It ends up becoming a dangerous combo. How do you think about the utility of selling your business?

As a founder, it's hard to know. I was very emotionally invested in Docsend and even for my first company, Pursuit, which we sold to Meta as a talent acquisition, you become very enamored with what you're building and especially in fundraising and building a product like you have to love what you do and you love it irrationally letting go of it is very hard in any context. So for Pursuit selling to Meta like, ah, it could have been so much more for Docsend as well. I have that feeling, but I Think that's just part of what comes with the territory. Starting a company, you care more than anyone else does. So taking off the founder hat and wearing just the CEO hat, there's a much more rational view of what's 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 sell, especially in a market right now, there are tons of companies that would love to sell if possible. If you have an opportunity to sell, usually you're doing something right. The question of is it the right time to sell? Who do you sell to? Becomes a harder one to answer to. And there are a lot of factors to consider in that. So I think for me, with the CEO hat on and fiduciary obligation, it was just always something in the back of my mind that do we consider it if it's an opportunity? You just 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 where they've built something of enough value that someone else wants to acquire it.

When does this thinking start? Do you do that from the very beginning and you're building your pitch deck with your potential acquirers in mind? Or does this stuff just come when you start seeing some real strong traction? Or does somebody investor the board of directors prompted and where does the thinking start?

I've seen so many different ways of approaching this. One thing I hear a lot is, oh, you should have an exit strategy. I for sure do not believe in having an exit strategy, but that's just me. And the reason I don't love that is you have to build something valuable to try to build what you think someone else wants to buy. Doesn't feel like a winning like approach. I think it's just a much safer approach to build something that you think adds value in the world and that users want to use or users want to pay for. And then if someone else happens to want to buy that company, awesome. Taking this a little bit further, like if you create a profitable company and let's say we don't care what it does, it just has free cash flow.

There's.

There's always value in that. You don't need to have an exit strategy if you have a profitable company, because you can always sell a profitable company to someone. It Started at the very beginning with Docsend, not because I wanted to sell the company. I was more interested, why hasn't someone else solved this problem? So I actually went to Dropbox, to Box, to Microsoft, to Google, to all the companies that I thought should build Docsen and just asked them, like, hey, here's this concept. I think it makes sense. Why don't you build this? Because you should build this and just trying to get answers back. And that was pretty interesting. People often said, hey, yeah, that makes sense. We might build this down the road, but it's like a couple years out. And a couple years out means they're probably never going to build it. We did get a couple acquisition offers even when we started DocSend as like a, hey, you're a talented team of engineers. We'd love to buy you to have you accelerate what we're working on. But I had just been through that with Meta, which is great and that works for a lot of people. But for us, we really wanted to go build the actual product. That's where it started for me. It was just sussing out, why hasn't someone else done this before? And then as we were building Docsend along the way, 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, just to figure out, like, who's doing what and is competition going to heat up or not, and just to stay in touch with the market that you're operating in. But that's not a lot of time. That's 5% of your time thing.

What was with Meta, you were part of a startup and sold pretty early. Is that what I got from it?

Yeah. There are just three of us, and as a talent acquisition, we had HR software and we had a beta and we had a few dozen companies using it and it wasn't going to work the way we wanted it to. So we were going to pivot to a next idea and Facebook was using it at the time when we were going to switch. We ended up talking to them and to LinkedIn about just working there instead of to talent acquisitions. That worked out well. We were either going to scrap what we're working on and start with a new idea, or we just went to Meta. And so that was a great outcome for us. We raised a smaller amount of seed funding, we just returned the money and it was great as an outcome, but that was specific to that situation where we hadn't hit product market fit the thing we were working on. It wasn't working. We weren't running out of money or anything. But yeah, it was very exciting to go to Meta and get to be part of that story and get to see them go public. So that was, I think in retrospect, definitely the right call for, for us.

Interesting. And then on this more recent d a couple things you mentioned the timing, the right person. The other thing I, I throw in there is the drivers. What really drives that exit in terms of, I guess it aligns with the timing w wise as well. How do you think through that? One thing I'm really interested in because I've seen like Isaac's tend to be a one time event and there's a, a timing view where you could do it too early, then you miss out on a lot of the upside growth, then you could be on the other end where if you do it too late, you're sort of flatlined and the business is really tapered off so you don't have that growth story to tell anymore. And then you start looking at the valuation very differently. How do you get a sense of that? When's that sweet spot and best time to really make an exit actionable?

I think the answer is you just don't know. It's impossible to know. Some of the advice I got with Oxen when we sold was we were performing the best we'd ever performed. They bought us when we were at 15 million ARR for 11x ARR and Dropbox shared those numbers. We were profitable. Some of the advice I got was, hey, when things look really good, you should sell to your point, hey, it looks good. What if you flatline later and there's a scenario where you might work on this company for another five years and if your growth comes down a lot, maybe you'll sell for the same amount or maybe the market will change or who knows what'll happen? You could implode. And 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. And certainly for, for the company's Dropbox as an example, when I interned there in 2010, like Apple had tried to buy them and Drew came to the office and was saying, oh, Apple tried to buy us. Steve Jobs wanted to come by the office and everyone's like, oh, we wanted to meet Steve. And to Dropbox's credit, they shouldn't have sold. They stuck with it. And they're a much bigger company being independent. It's hard to know with these things because it's specific to the company, it's specific to the time, it's specific to the market and the product set specifically. You don't get to run the counterfactual for any of these and experiments. 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 and how risk averse are you and how risk seeking are you? I also heard from a lot of people 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. You look at all the factors and it's then a very personal decision.

What about other stakeholders when you have shareholders and things of that sort? Like how do you mix considerations there?

As the CEO, you're in the driver's seat. Yeah, you're considering your equity holders, you're considering your employees. They don't really get a vote in it, depending on the size of the acquisition. But for a real business like Docsend, you're not doing interviews of the employees, you're just looking at the business and you're talking to the exec team and for me, yeah, talking to our investors, their input matters a lot. The nuts and bolts of it are that your preferred usually has blocking rights on the acquisition, which is just what you usually get with your preferred shares. So if the CEO wants to sell and the preferred holders say no, you don't sell, that's for sure a consideration for docsun situation. We hadn't raised that much money and so it was over 3x what our last post money valuation was. So it was on paper a lot. It was an all cash deal, so it was locking in a win. And then yeah, for our investors at the time, like they were supportive of what we wanted to do and what we thought the right thing to do was. And for their situations it was good, it was good for them. So they were willing to support it. And then talking to co founders, we'd been at it for eight years, so it was a long time. We'd have a couple phases, we had some scares around, like things that didn't work. And then we found some stuff that was working at this moment in time around, hey, does this make the most sense? And the way that developed was that I had another inbound offer and then went and checked with Dropbox and they made Me another offer. And it happened very fast and so we just had to decide was this something that was interesting and would this be success for us? And a lot of things aligned and it makes sense. So we went with a deal.

I wanted to break apart the relationship part because one of the things you mentioned earlier is you basically reached out to all the big players in the space, the Dropbox, Google, and you said, hey, how come you haven't built this capability? And then you started building around it. Did those relationships come back as you the exit conversations? Does any of that stuff stem from those relationships that these companies came back with interest to do an acquisition?

It did, yeah. I don't know if they would have mattered though because what we built with Docs and was just a great business. So I don't think the relationship would have mattered all that much even if I wasn't the CEO of the company. Like it's really good performance, People love the product, just ignore the people. The product and the stats on the company are great, that's very acquirable. And at a certain scale the relationship just matters less. If you're going to spend 165 million on something, you got to like what you're buying independent of who's in charge of it. But having a relationship with who's in charge of the thing allows you to trust what they're saying and allows you to have faith in what's under the hood. Because what you don't know when you're buying a company is oh my God, what are the skeletons in the closet? Is this thing built as well as I hope it is? Is it going to fall apart tomorrow? There is a lot of trust that has to be there or there's just a lot of risk that is there. Or if you take on ownership of this other asset, is it going to be a nightmare for you or not for me? Having a relationship being a known quantity to a few of these companies allowed them to like trust what I was saying. And when they looked at our numbers and our business, for them to be like, yeah, I bet this is a really well run, well built asset. And so that took a lot of the risk out of it.

You would have gotten the radar of these companies regardless. Just because the company's doing well and their corp dev jobs doing their job, they would have figured it out and tracked you as an opportunity. And then those relationships you had helped facilitate the trust so that they're able to be very comfortable with what they're looking at and exploring in terms of the opportunity with your company.

Exactly. So with Dropbox, for Drew. Cause I had known him, it's easy for them to say and look at our numbers and be like, oh, yeah, this is a good product. This is what we think it is type of thing. And same with some of the other relationships I had where they were able to because they had seen me over time in our company. Over time. And when I check in with people and then we did what we said we were going to do, they're like, ah, okay, yeah, that. That makes sense. That they're doing what they say they're going to do. And it is what they said it was. So I can trust that this thing I'm looking at is as represent.

Do you think that relationship helped with negotiations?

I don't know. I could have gotten a competing term sheet for raising more money. I think it made the negotiation very straightforward. I think the relationship matters for trust in the asset, but I don't think the relationship matters for actual negotiating because that's with kind of corp dev. And so we had a banker and they had a banker, and so that feels more transactional. And the advice I got there was you don't want the negotiation to ruin the relationship, which I think is probably true. Like at a certain transaction size, you want to have a banker so that they can go back and forth and be cutthroat about the negotiations so that the people who are going to 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 you need to go get to rough terms.

Got it. So there's some areas where you can use some leverage, but it wasn't the whole basis of how you negotiated. Can we talk about the bankers? Did you get the deal lined up, then bring the bankers in? Did you bring the bankers in from the beginning? How'd that relationship unfold?

A little more backstory there is required. As I mentioned, for the second phase of DocSend, we sold at market. I was going okay, but not great. And so when we were at 4 million in ARR, it wasn't looking good in the sense that our cost of sale was very high. Our competitors have raised a lot of money. So then for me in the CEO role, we didn't have an option of raising more money and we didn't 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, which is pretty modest amount, but in an up round to the previous round. And so that's five at a 50 million post. And we got to like 5 million ARR. But our investors were kind of like, yeah, you don't look great, you're okay, but you're not great. And then we kept performing and we kept performing better. And then when we passed 10 million in ARR, our investors were like, you're doing better than anyone thinks you're doing. So you should probably just go check in with people and maybe get a banker as more of a coach. Because unless you're going to IPO, M&A is going to be the best exit path for you. Just make sure that people know you're doing well. So I got a banker more as a coach to me, Mike Marquez at Code Advisors, and they have this particular setup that's less about having a banker to get a transaction done and it's more about him being an advisor to if a transaction happens down the road. And it was interesting. So we brought him on more as just help for me around keeping up with people and like, what to do. But it wasn't with a transaction in mind. We didn't have a timeline to sell. We were just like, hey, things are working. We're having fun. The business is growing. This is great. We're like executing. We're like 60 people. Like, this is fun. Only a few months after we brought a Mike, we got an inbound for someone being like, hey, I actually want to buy you now. And then I had to be like, actually, we're doing better than you thought we were doing. And so we're actually going to be more expensive than you thought. And they're like, ah, this is true. Mike was very helpful with what to do in that conversation. And then going to Dropbox. And then we didn't run a process, so we just had two parties that were interested. We just talked between the two. I think in retrospect, I'd probably open it up and run more of a process. But at the time the thought was like, do we have time to do that or do we just get this to the finish line with one of these two parties? But having a banker for me was very helpful because as a founder and as the CEO, if you haven't been through this before, because this was different. This is a much bigger ticket size than the previous one I had. Yeah, there's a lot you can learn from someone who does this for a living. That was very helpful. But I think my situation's a little bit different than the we're going to sell our company, so we're going to hire a banker to set the thing up for sale, to run a process to put together the material. So we were not that situation.

Dropbox reached out first?

No, the other company reached out first.

The company reached out, got a bid. What prompted you to reach out to Dropbox?

I went to the board and I said, hey, we got an offer. I don't think we want to take it, but it's like a pretty good offer. And asking them and they were like, actually seems pretty good. If you can get a little bit better, maybe check, maybe now's a good time to sell. And I was like, oh, that's not the response I thought. So I went to my co founders and hey, we got this offer. Very flattering to get a real offer, especially it's from a company that you like. And for me I was like, oh wow, this is real. So I was like, yeah, it's not quite there, but went and checked with Dropbox and just said, hey, 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. And so they went internally and it came back and they said, actually we would also like to make you an offer. And I was like, oh, I was not expecting that.

Who is that at Dropbox? Is that like a corporate lead or is that somebody. A product lead or.

No, it was an exec there who's not there any longer, but someone also I'd known this is a relationship thing. If I didn't have a relationship there, I would not have been able to go to them and casually say, I got this other offer. Are you guys like interested or. I'm just curious. And so they're able to go ask internally. And I think this is the part where having a relationship being a known quantity makes it much easier. Not like 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. And so then they came back with another offer and they moved very fast. So that was very surprising for me.

You ultimately got the deal done at, what did you say, 11x ARR?

It was 11x ARR. Yeah, it could have raised at a significantly higher multiple than that, like a 300 billion. So maybe 20x ARR. Which in 2021, as the year progressed, that was the peak craziness year. So we could have raised it a way higher valuation than that. But you get a pretty big discount as a private company is what I learned. For someone to pay all cash and acquire you sometimes you get a premium, but sometimes you get a discount. And so valuations are all over the place. So 11x ARR was more like a. This is a reasonable price to pay for a well performing asset and it's at the time was the public company multiple that you would get.

So you'd have what, right around 150 or something.

The price that Dropbox paid was 165.

Million and then paid all cash though, no earn outs, nothing.

There is a holdback. So there can be an earn out sometimes we didn't have an earn out. There's a holdback which is a compliment to the founders. If the acquiring company wants to keep you as the founders, they'll try to incent you to stay in some way, which means they like you a lot. And so that's generally viewed as a compliment. So there was the holdback, but it wasn't tied to any performance numbers.

Was that like 5% or something?

No, in our case it was higher. I don't know if I can share the holdback number specifically. There was a significant holdback just for time, not for performance. But as it turned out they were super happy with the performance. So if we had a earn out, like we would have absolutely checked all those boxes.

That's interesting. So it wasn't tire performance, it was just basically a holdback. And then pretty significant percentage. What was the timeframe that you're on the hook for?

It was three years working there. Which again means they, they liked us a lot and they, they wanted us to stick around and help. Yeah. Which is generally a good sign. If they're like, hey, we love your company but we want you to leave immediately, then that's a bit of a diss depending on how you look at it. So it was a compliment that wanted us to stick around.

What would you say has to go right to have a good exit.

One of the things I'm proud of with Noxon is that we built a good business. And so when you look at like how we acquired customers, it was a hundred percent inbound, it was 95% self serve. There was no big revenue concentration. So thousand dollars ACV and that go to market matched well with Dropboxes. So 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. I think there's an argument that we left money on the table, but with these things, it's hard to know what timeframe to look at. So maybe with a long enough timeframe, who knows? But to answer your question, what goes well to sell is like building a great company, a good product, a good business, because then you've got real customers, you've got real cash flow. There's always a market for that. Whether it's I can acquire 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 thing that is the most certain for getting a good exit is having a great business where you have a lot of optionality. And we had optionality for Docsend. When you're looking at things that are more like tech or team or we have high growth, but it's really unprofitable. Suddenly you start to be in situations where you need an exit or if you don't raise money, you run into a wall and you run out of business. And those are scary places to be and those are situations where it's harder to line things up and it's hard to know what you should do.

Good business. Some of the competition was good too, because that sort of helped create a potential acquirers.

Oh, for sure, yeah. If you're selling your company, having multiple bidders gives you some sense for what's the market rate for your company, which I think is pretty important.

What about the market itself? I'm personally curious about this because we build a product for managing mergers and acquisitions, but I feel like we're in the slowest moving market. I'm always curious if it's the market. Overall growth has a big factor in the attractiveness as well.

Sure, when public company stock is up, they have that as a currency they can use to go buy other companies. And it's more attractive for them because they can M and A has slowed down a lot since the markets have come down. But you do see transactions still happening, just fewer of them. And my point about optionality, if you have a profitable company or it's just doing well. Yeah, like transactions still happen because there's more of a floor. Free cash flow is always in favor. And the swings in valuations of profitable companies very less than the swings and valuations for companies that are unprofitable but high growth. But we're not sure. Where they're going to be in five years.

Yeah, you're right. They do swing a lot more different ways. What were the big unknowns of selling a business?

Oh, there were a lot of them for us as we thought about selling. We weren't sure how it was going to go on the other side. There's a lot of trust on both ends for is one plus one going to equal three and what's that going to look like? I would have in retrospect spent more time on the post acquisition integration plan and fleshing that out more and figuring out what that, that looks like because you spend a lot of time getting to the finish line which is the close the transaction but then you realize that's just the starting line for what you need to do afterwards. So in terms of unknowns, there weren't that many. I, I felt really confident that Dropbox was, was getting what they were paying for. Like 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. And so I would have spent more time on that ahead of time going into it. Yeah. What were the unknowns? One unknown that I was happy with was we didn't have to worry about Dropbox's stock because one, it was an all cash and so that I thought was fine. They weren't a private company. I would have been very nervous if they were a private company. It was an all stock transaction because then a big unknown would have been like what is actually the exit value of our business depending on the value of the stock of the acquirer. So in our case it was pretty buttoned up, pretty straightforward in the range of acquisitions. This had probably as few unknowns as you can get on both sides.

So yeah, they just paid cash. I was going to say if they did stock, if there was like a lockup period or anything like that. No.

And when it's a public company using cash or stock, it just depends on if they're holding it back. So 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 two or three years versus that cash you get in two or three years is, is just going to be what it is. So it can be good or bad it 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. So some of this just becomes an accounting question. And if they give you cash, you can always buy their stock. If it's a public company, they give you stock, you can sell it and just have the cash. So it's a little bit of a, not as big of an issue when it's a public company. Where are other unknowns, like how aggressively are we going to grow this? What are the milestones? How independent is this? How integrated is this? What's that post sale integration plan look like? What's the cadence of executive team meetings? But a lot of that kind of has to be unknown because you just have to go figure it out once you're on the same team working together.

Yeah, a lot of the stuff that you described are really around post acquisition.

Yeah, there weren't that many unknowns in the deal itself. The deal itself is very straightforward because it was easy for them to audit all of Docsend's revenue. You'll usually have kind of a holdback where it's an escrow account for any dings against you. One unknown could be, hey, our ip, is it what you think it is? And there's protections for the buyer that if things aren't as represented, they can actually take some money out of the consideration for the company. So as a small example, we knew that we hadn't paid some of the state income tax that we were supposed to and like startups are often dealing with this and you're like, oh, we'll get to it later. But we knew this was a problem and we actually had already started the work to go pay it and so we flagged that for them. And then when we did the math later, there was some relatively small amount of money that we then paid off as state income tax and that came out of the consideration for the company. So that was like a small unknown but not a significant one. But yeah, when the deal closed, the paperwork was very straightforward in terms of what they were paying for, what we were offering and like what all the terms were. So we were quite buttoned up in that regard and I felt pretty good about that.

Yeah, it sounds like the big areas you mentioned were post close integration, planning the milestones, understanding the synergies, the go to market. I'm curious if you were to not necessarily revisit this particular experience, but go through this again, what would be maybe questions or things that you would ask to really learn more that would have prepared you better for all the post close activities.

Slowing down the process to spend more time together. To look at what that would be nice, but I don't know if that's realistically something that can happen with how these things seem to work. But certainly spending more time with the people on the team and like looking at what are you going to do together, how is this going to play out? Figuring out who has organizational alignment, because with bigger organizations there's just different incentives. 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 that lower down the organization, they're going to bother to make time to pay attention to things. I think those are some important details that you can iron out ahead of time to get comfortable with. 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 again, on the flip side, you often don't want to bring in too many people under the tent is what it's called ahead of an acquisition closing, because then you're spending a lot of time on both sides and what if the deal doesn't close? Then suddenly this looks bad. It's like weird, it's awkward. And so I want to minimize who's involved with it until it closes. So there are definitely pressures on being able to do some of this stuff ahead of time.

I'm curious. Most people I interview on this podcast are on the buy side and the biggest fallouts I always hear was we didn't plan integration well enough and then the execution went awry or the cultural mismatch. Like those are the two most common things on why deals go sideways. That's what I was curious. For your perspective, what are some of the lessons that could learn to help buyers make sure there's better alignment and that goes smoother?

I would probably figure out what my role would be more specifically. One thing I heard talking to other founders is that often it's not clear what the CEO is supposed to do with post close and I'm happy with the work I did. A lot of it's a utility player or the chief cheering officer or chief exuberance officer or just making sure everything comes together. But yeah, I'd probably do that for me as just my own role and defining that in a little bit more detail ahead of time. But generally my concerns Are what you mentioned the same as the concerns on the buy side, which is nice probably to hear because my incentives were aligned with Dropboxes. We want this to be a successful acquisition. We want it to be good for customers, for employees. We want one plus one equals three. So as long as everyone's aligned on those things, like that's great, I think. And as Dropbox has said, they're very pleased with the acquisition. It went well for them and they got a lot of value out of it. I would definitely put this one in the win camp in terms of like acquisitions that went well and the acquirer is very happy with it. There's always things we could have done better, but I think on the whole it was a good acquisition for them.

Let's talk about the big challenges or just common challenges that you encounter in selling a business. I know one of the things you started mentioning was people under the tent, like who are the right people to get involved and how many and things like that. How'd you figure that out?

Yeah, that one's so messy because one of the things I did not want to do was have anyone interviewing our engineers. Absolutely not. No way. That sounds like a train wreck. So it was just a few people. It was like my co founders, obviously 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's just a few people on the investing side were preferred to make sure that they would be supportive of this hr. I head HR head, chief of strategy. So it was just a few people on our side that were doing the diligence requests. But for our business, the diligence requests were pretty easy in the sense that, yeah, we just pull in customer lists and revenue amounts and we're built on top of stripe. And so it was pretty straightforward to pull a lot of things that they were asking for 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 and then obviously their corp 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 people. But yeah, it was logistically difficult for me to have to run around and do all of this diligence and kind of answer all their questions and go through this very non trivial amount of work to get the deal done without me telling other people at Docsend what was going on. And also still doing my Day job. It is a lot of work to go through one of these processes. You don't want to engage in it lightly because it is a lot of work.

I hear that often that people don't expect how much work actually goes into diligence and then that's distracting.

Oh, 100%, yeah. And if you're in a situation where you really need to keep your eye on the ball for running your business and you take your eye off the ball and performance starts to degrade, then you can end up in a really bad spot by distracting yourself. And if the deal doesn't go through, then you gotta go back to running your business and you're worse off than where you started.

Hypothetically, if you had to schedule time for yourself to work on diligence, given a timeline of deal, how would you have done that? Would it be certain amount of hours a week and would that fluctuate throughout the deal? Like I'm trying to wrap my head around how much time you actually spend intelligence.

It's just all of your time at a certain point in the deal cycle. So I think again, depending on the stage of the company. For docsend we're like 65 people, I think at the time of acquisition and we had a few VPs and so I just went to them and said, I'm working on a thing. I don't want to give you all the details of it, but I need you to do more and I'm going to be absent. So having leaders in place where you can delegate to them and then be MIA for a little while is really helpful to be able to make time and go through everything. But in our case, diligence was only a couple weeks. This didn't drag out for a really long time. That's good.

That worked out really well. It sounds like you had a good team of leaders to help support that as well.

Yeah, totally. That was something 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, where we were always like a very data driven company. You kind of have to be, especially if you're a consumer or for Docsend being a product led company where at the time we had 15,000 customers. 15 million ARR. With that many customers, you need to be data oriented and understand programmatically how you're performing. And 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. So it wasn't as hard for us as it might have been for another company to turn around and give all the answers that we were being asked for.

The people are intent. I look at pre Loi versus Post Loi, it sounds like pre Loi, you didn't have a lot of people at all involved. But then post Loi, did you get the whole leadership team involved or no.

We still didn't get the leadership team involved post Loi, although I'm not remembering specifically what timing we had in there. But we didn't tell anyone really until it was like closed. And for me that was just making sure it's certain. I at the time was very confident in our business. So if the deal didn't go through, then I was ambivalent about that. It wasn't that. If this deal doesn't go through, I'm going to be crushed because this was my one hope. I was like, no, we're running a great company. If this doesn't go through, it'll be fine. Like 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 and I think it makes sense and it'll be a good acquisition for them and it's like a good exit for us. That gave me a really good position post Loi. I think at one point Dropbox was asking for what I considered to be too much information and I think 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 at one point just said no because I think 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. It's not going to answer the questions you want to answer. And so the diligence was very fast for that reason because they were 11XAR at the time. For a profitable company growing at the rate that we were growing at relative to the market and other startups that you're looking at, that was a great price that they were getting. We're not going to bend over backwards and do all of this requests for you. You've got all of our data, that should be enough. It was very fast from Loi to close and then when we announced it, there was a press release. We told the team like we had a plan that day. And so there was a whole bunch of announcement and celebrating and everything. But at that point the everything was closed up and done and finalized.

Any other challenges?

It's hard to know you're running a company. It's going well. You got HR challenges, you're working on your next version of the product, you're working on messaging, positioning, you're wearing a marketing. There's like your roadmap, your okrs, your quarterly cadence, you're hiring all these engineers and people at your company. So there's like a lot of stuff going on at your business and then you have these other considerations that come in. And so if you're deciding to sell it, in our case, as it happened, suddenly everything just becomes a lot. So it's not like anything individually might be super complicated, but in total it's a little overwhelming, I would say. And then also with a decision this big, you're like, I don't know what the right answer is. And so 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. One of the challenges in this is just keeping all the balls in the air, like not dropping anything, coordinating, keeping everything aligned and getting everything done is just a lot. Part of me was like just very gratified to get to the end, to be like, okay, I can take a breath now. We've gotten through this.

Do you need blow ups? I always hear about the post close, hey, this engineer wasn't happy or didn't never wanted to go work for Dropbox. You know, anything like that. You had some churn or any kind of big challenges post.

We didn't have any churn on the engineering side, which was great. Dropbox has a fantastic engineering culture and we leveled the people without calling out fault or saying anything was wrong. Had our CMO leave shortly after the acquisition, which was okay and 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. There were a couple people that turned over on the marketing team and there was a lot to figure out there. So yeah, it did feel post close like there were a lot of new challenges that happened, but it wasn't like everyone exodus, like everyone left over it. That was a lot of the work that we did like leveling people and making sure that for each individual employee it was good. And I think that's something that people underestimate is the you are not negotiating the sale of your company, you're also negotiating per employee, but you're going through your list of employees and saying what are we leveling them to? How much are they getting paid? What is their job function and title? Docsend is still a product and a standalone thing that you buy and pay for and has a dedicated team at Dropbox. But in the leveling there was a negotiation per employee and because of the time we spent there, we kept everyone, which was great. And so luckily we didn't have any blowups like what you're talking about, where the whole team storms out or something tragic happens. DocSend continued to perform super well and like the acceleration curve we're on kept going and it all went well.

I had this question at the time of exit, were there other possibilities that you're considering besides a pure exit play?

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. Yeah, how do they think about that? Most times corporate people get a company that's saying, hey, we're running a process, here's the banker. And you think that eh, they're desperate and like their other option is to die to go out of business type of thing. 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's 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, like we were profitable, we were growing like we started off in like 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 had a roadmap ahead of us being profitable. We didn't need to raise more money, but it's always good to raise more money if you can to mark to market. So I probably would have raised another round of funding at a significantly higher valuation. We'd 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. 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 50 million in ARR, IPO is a long ways away. A lot of things have to go right to get to 100 million in ARR. Growing 50% year over year, that's a crazy high bar. Especially with the IPO markets cooling off now and it being even harder to go out. That's a long road between 15 and 100 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 fortunate position that we didn't need to raise more money. We're default alive as a business. Yeah, you have to think forward and be like, hey, 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. Dachshund still doesn't have a great alternative. And so it's interesting and gratifying to see that it has good staying power like 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 like a cash flow perspective. 100% inbound, 95% self serve. It's a challenge in that it's hard to put money to work to grow faster. So you're kind of reliant on this combination of like 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? That's a bit tricky to figure out how you do that more. If we had kept going it alone, I think it would have been fine. But that's why I say I think it was a very reasonable thing for us to take the offer from Dropbox. Very reasonable multiple. I think they announced it because they were proud that they didn't overpay in their opinion for a company. And I think on My end. On our end, our investors gave us, I think, 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 from a different perspective. Hey, you're in a great position. Just keep going, Keep going a few more years, you're in the hockey stick.

You.

You could get there and then you'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, like, sad to go it alone and kept going on our own. We would have done that. It would have been fun and interesting. But we took the offer with Dropbox and that was a good deal, too.

Thanks for sharing that. It's one of the toughest things to really think through the whole business life cycle. And it's. It's one of those irrevocable decisions, too. So it makes it extremely difficult.

It is hard to know what the right answer is. But the personal decision part for me is I think it's really fun to build software and to work on these things. Having done a couple of them now and having worked at Dropbox early, I like wearing my, you know, CEO fiduciary hat. 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 the caring a lot about what you work on because you have 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. And it was a great exit. And 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, because if you've raised a ton and you sell and depending on what the terms of your financing are, 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 worked on docs and a lot of freedom to go work on whatever we find is interesting. And so there's an argument to be made as well. If you've worked on something for eight years. Maybe it's a good time to go try on something new, try out something different, go explore new options and opportunities. Because life is more than just working on one particular startup forever. That's fine for some people. There are a lot of other ways to look at it as well.

Do you think there's anything particular that you would really emphasize in negotiating to protect yourselves from getting overly diluted? Or is it more about just having the right lawyers to work with?

Oh, for fundraising, yeah.

I feel like that's an important thing. I've seen some people do extremely well where they preserved a lot of their wealth just the way they've negotiated the terms as they took on capital versus others that didn't do so good. And they, as you mentioned, didn't have much to show for it at the end of the day.

Yeah. What I usually tell founders on this one is don't raise a down round if you can avoid it. Like, obviously you want to avoid that, but that's where you get really diluted. 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's 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 preferred. So there are some terms that are coming back into style now that investors have more leverage, where those terms can really value 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. If you're raising money from investors, there is something that's fair there for like how much money are they making? How much money are you making? And there are situations that can feel unfair, but they can happen in both directions. For DocSend, our funding rounds were clean, straightforward 1x liquidation preferences. But we beat the IRR of all the funds that invest in Docsend and 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 later ones we were okay. Not what you aimed foreign venture, but it's still a good outcome for them. I'm proud that everyone made money on the deal, which is not always the case.

What's advice you'd give to acquirers that are looking for a successful acquisition?

Yeah, you want to acquire the companies that don't necessarily need you. So some of it's like being proactive and following people who are really thoughtful about the space that you're in and spaces that you're adjacent to and then probably be relationship oriented. Figure out what founders want and what they care about because 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 you get to know their business, it gives you more faith that what it is real and if you can understand what their motivations are. There are sometimes where founders are like they're either tired or they don't like it, or they don't get along with their investors or they're coming up on a round of funding, but man, would they rather exit. It's very hard for founders to feel like they can be open with corp, dev 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 is there real value to be created if an acquisition happens and what a fair price might be and what that might look like. My advice for acquirers is to be proactive with the startups that you like and try to understand their motivations for what they want with their business. Because some startups just don't want to be acquired. Don't try. Other ones would really love to, but only in certain conditions. Figuring out what the founders want I think is really important. In addition to understanding is there good synergy with that asset. Building that relationship over time is something that can be very helpful for figuring out is there good timing on one side or both sides and figuring out can that acquisition really accelerate and accomplish for everyone involved their agendas.

So as a corporate leader, what would be my best pitch to get in the door, get the conversation going to start building that relationship with you as a founder.

Information sharing, hey, we want to trade notes with you. Also saying we're not competitive. I've got a lot of respect for what you're building. I don't think we're going to chase it down, but we love what you're doing and it's adjacent and maybe partnering with you would be great, but we'd love to just understand where you're coming from and trade some notes on it and talk to an exec. Would you be willing to make time for that and bring in an exec to just share some notes on it and what are you seeing and why do you like that? And but I think you have to de escalate it because you don't want them to think you're just hitting them up for information so they can copy you. Right, you're going to copy them. So making it feel open, trusting and just trade notes. I think founders are generally pretty open to that because they want to learn. It feels really flattering to them, but they want to feel like it's safe in some way. And I think that could really give you a sense for how you're all thinking about it and trading notes and seeing if there's alignment there.

Let's make the intro. We're in adjacent industries. There may be some potential opportunities to partner. Let's get together and compare notes, something along those lines.

And I think it helps to bring in an exact versus just like just a frontline BD person, at least for the first call. Especially if you're in corp dev and you are, you're trying to get your execs to shop because you need an exec sponsor if you're going to do a deal. And especially when you're a corp dev and your goal is to acquire companies, you don't want to force it, but you certainly would love to have it happen if possible. You are trying to get your execs to like do a bit of company dating here around. Hey, 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 and if there's a corporate person you can create that connection and enable that to happen. Because that's what happened for me at Dropbox. I went to an exec and I just let them know what was going on and they went off internally. And so as a corp tip person, you would love to see that happen. If you're able to create that connection between an exec and like 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 corp dev, what's the craziest thing you've seen in M and A?

Well, I haven't been in that many deals. I will say one thing that I wanted to share that's funny about the With Dropbox, I was giving Drew a demo of Docsend and some of the stuff we had built in the last couple years since he'd taken a look at it and it just didn't work because my Internet connection and so it was really funny. It was just awkwardly on a call and I felt like a salesperson and Drew made some comment around sometimes the demo gauge just. Just don't smile on you. But it was just funny that he's acquiring the company and I'm trying to demo the software for him and it's not working.

Yeah, the one time, it's not even a sale pitch. It's a little.

I'm like, you've got 15,000 customers. This must work. It works all the time, every day. It's fantastic. And it's not working right now. I have heard other crazy things happen where deals fall apart at the last minute, or there's all sorts of things that trust breaks down or things are misrepresented or there's a lot of crazy stuff that happens from like a negative perspective. So I think a lot of times people being cagey, it's for good reason. But yeah, there are a lot of good stories from M and A Land. To your point, though, that you don't have a lot of founders on your podcast, it's because a lot of times people either legally can't talk about them or just don't want to talk about them. So there are just a lot of crazy stories that likely remain behind closed doors, both good and bad crazy stories.

That's right. It's getting there. The industry's warming up a little bit. We're trading notes and trying to learn lessons from each other, and I think people don't know when to nomatize certain stories, but we're getting there.

Yeah, that's great, Russ.

This has been great. Thank you so much for taking the time to have this conversation. I learned a lot and you've helped me become a better M and A scientist.

All right, thanks, Isan. Thanks for having me on.

Hey, those of you still with us.

Thank you for sticking through. Until next time, here's to the deal.

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