Understanding The Board’s Role When You Sell Your Startup

Stefan Palios

After selling his company to Intel in 2015, Fraser Hall co-founded Rhino Ventures. Since then, he’s sat on many boards for startups that have been acquired. Speaking with TechExit.io ahead of his conference panel talk, Fraser explained what every founder needs to know about the board’s role during an exit.

Key takeaways:

  • Your board can bridge the information gap between inexperienced sellers and experienced buyers.
  • Boards can be a sounding board, a due diligence hawk, and a boogeyman to support your sale.
  • Boards disband after the sale is complete, but some might stay on in a personal mentorship capacity for management. 

When you sell your startup, your board disbands completely. But until that moment, they are a critical part of your overall exit “team.” Fraser Hall, Partner at Rhino Ventures, knows this well, having been on multiple boards for startups that exited–and selling his own startup to Intel in 2015.

Speaking with TechExit.io ahead of his conference panel talk, Fraser shared more about the role your board should play when you sell your startup.

Understanding exit asymmetry

M&A is a “delicate” process, said Fraser, because of information asymmetry. In most cases, he explained, the individuals have vastly different levels of experience with acquisitions.

Buyers tend to know a lot about the M&A process, particularly if you’re selling to an enterprise, PE firm, holding company, or other strategic acquirers. They have done this before and tend to have a dedicated team focused solely on acquisition and integrating companies.

Sellers, on the other hand, are often inexperienced. If the company is founder-led, it might be the first time they’ve gone through an M&A process on either side of the table. Even if the person has some experience (e.g. they have acquired another company at some point or are a serial entrepreneur on their second venture), that’s still significantly less experience than a dedicated acquirer who is purchasing multiple companies per year.

This is where boards become an incredible “asset” to a company going through a sale, said Fraser. Board members tend to have more exposure to M&A deals, especially if that board member is also an active investor.

The role of a board during acquisitions

Board members are in a unique position because they are highly involved in an acquisition but get disbanded the moment the sale is complete. As a result, Fraser said there are three ways a founder can leverage and lean on their board during a sale.

1. A sounding board and sober second thought

Your board members can provide context from their own experience and offer access to their network of investment bankers and other M&A professionals.

This can be invaluable because board members often have more clout than individual founders. An investment banker, for instance, might see a founder exiting as a one-off transaction. A board member, however, might serve on multiple boards at the same time and be a strategic advisor to other companies, meaning more growth opportunities down the line.

Board members can also help get alignment with all stakeholders before accepting a purchase offer. This will help ensure the deal goes more smoothly and isn’t hindered–or the buyer doesn’t get spooked–by dissenting voices.

“Differing interests can really harm a deal both in terms of value and certainty of closing,” said Fraser. “I always try to make our companies very clean before an acquisition–no dissent on the board, no dissenting shareholders, making sure we’re all aligned.”

2. The due diligence hawk

Once everyone agrees to the high-level details of a sale, the board’s governance role comes out in full force.

While you’re trying to balance running the company and figuring out who you need to bring into the sale process, your board will be working hard to ensure:

  • You’re getting the best price.
  • You’re getting fair terms.
  • All shareholders are being treated fairly, especially if the board has to navigate issues like preferred shares or earn-outs.
  • Ensuring your employees are considered fairly during the deal.
  • Ensuring you can deliver on all of the promises you make (called “representations and warranties”).

These are questions a founder needs to think about as well, but the ultimate governance sign-off comes from the board.

“The founders I work with and the management teams I work with, they depend on me to be looking over their shoulder and making sure that these things don't come back to bite them,” said Fraser.

3. The boogeyman

The reality is that a founder–and any management or employees who stay post-acquisition–have to get along with the buyer. If there are tensions early on, not only is the deal put in jeopardy but the post-acquisition integration can be messy.

Yet… even good-faith acquisitions might have tense moments or the founder might have a valid concern.

This is where boards come in, playing the role of “boogeyman,” said Fraser.

“It doesn't matter that the buyer gets along with the board,” said Fraser. “A lot of the hard, hard negotiating and so on is something that either the board can talk about in another room or get introduced directly to hold the line on an issue. And it doesn’t damage a relationship between management and their buyer.”

A strange, bittersweet farewell

Once an acquisition is complete, the board’s job is done and the group is disbanded. After this, there is no formal role for those board members beyond finalizing tax credits like SR&ED or managing shareholder earn-outs.

Fraser said the whole process–even when you get a “dynamite” exit–is bittersweet. Some board members stick around in a personal capacity as a mentor, but even then, communication drops off significantly. And naturally, he said, everyone will ask the question about whether they should have held on for that next growth phase–though he added this is mostly for nostalgia rather than actual business strategy.

The important part, said Fraser, is to celebrate. Because once the acquisition is done, the warm feelings go away and the process simply ends. If you don’t celebrate, you miss out on recognizing you’ve gone through an entire experience and are closing out “the final chapter of a novel of a startup.”

“It's a powerful moment and it's a time to reflect upon what's been built,” said Fraser. “I love watching founders go through an exit because there's this ‘aha’ moment about how everything worked, from the first day of the idea all the way through selling it to someone else. It's packaged up so neatly.”