Should You Acquire or Make a Minority Investment in a Startup?

Not every buyer will or should require complete control to invest in a company. Some buyers will look at a technology or product segment and invest in four to five startups or up and coming businesses at various minority interest levels with options in the future to increase their stakes once the technology is proven. This strategy can allow buyers to prevent rivals from gaining access to the latest innovations while providing a plethora of options to select from. In essence, as the buyer you don’t have to have all your eggs in one basket in order to reap the rewards.

Creative deal structures give both buyers and sellers opportunities to find a deal that suits both parties. As I’ve discussed before, with minority investment, there are ways for acquirers to build in control by outlining it in the agreements exactly what you would like to control.

Often if a product is considered mission-critical or requires more guidance throughout the development phase, the buyer may want more control and may either choose to purchase the company and fold it into its existing operations or allow it to run as a separate division.

Still in other situations, a buyer may take an “acqui-hire” approach and be purchasing a startup for its talented engineering team. In this case, the seller’s employees would join the buyer’s team so purchasing all of the business would make sense.

As a buyer remember sometimes demanding total control can defeat the purpose of the acquisition. If you acquired a startup for its creativity, requiring approval for 100% of its activities may kill the very innovation you wish to capture.

If you’re thinking about investing in a startup, here are a few questions to help you determine the best deal structure:

  1. What is your strategy? Answering the “why” question before pursuing any deal with a startup is incredibly important. Understanding how the startup fits in with your overall growth goals and why you want to do a deal will help guide the entire process.
  2. What is your risk profile? Knowing your comfort level will allow you to seek out the right investment opportunities. If you are risk averse, you may want to invest smaller amount in a company that’s closer to your own operations to minimize any impact to your business. If you are open to more risk, you could purchase more or invest in less proven technologies fully understanding that these startups may fail. There’s no right or wrong answer, but being honest with yourself with save a lot of frustration down the line.
  3. What is the startup open to? Yes, you may wish to acquire 100% of the startup, but the founders may not agree with this. Would you be open to a minority stake if it meant you could capture the value of the startup?

As a buyer looking to grow through acquisition, fortunately there are many options available. We’re seeing a shift toward more flexible deal structures as both buyers and sellers consider what’s best for their businesses.

Learn more! Watch our webinar What Strategic Investors Want: Secrets to Making Your Startup Stand Out.

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