Letting go of the reins a tough discipline for company founders

02 October 2018

Author: Richard Gray
Practice Area: Corporate - M&A


There was much murmuring in the tech world last week when it was announced that the founders of photo-sharing app Instagram are to leave the business, amid reports of growing tensions between them and parent company Facebook.

Kevin Systrom and Mike Krieger sold up to Mark Zuckerberg’s social media behemoth in 2012 but had been able to keep the brand and product relatively independent from Facebook since then. But reports suggest Mr Zuckerberg is now looking to Instagram to boost Facebook’s future revenue growth and as such has been getting more and more involved in day-to-day activities.

Facebook paid $715m for Instagram six years ago and with more than one billion users, it’s a key driver of revenue for the company – so you’d expect Zuckerberg to want a big say in how it is run. But for the Insta-founders, the prospect of being more closely integrated into Facebook as, effectively, a product division probably told them their influence on the strategic direction of the business they started was likely to be significantly reduced in the future.

It’s a familiar story, albeit with bigger numbers, which we see time and again in M&A transactions involving owner managed companies in Northern Ireland and across the UK. It highlights the difficulties of remaining involved in a company that you have sold when someone else is making those strategic decisions.

Some buyers, particularly trade buyers, will want founding sellers to exit a business on sale, particularly where they have their own management in place. Others will look for sellers to remain available for a short transitional period, perhaps 6-12 months, to reassure customers and key accounts. Typically that is dealt with via a consultancy agreement. There may be an attraction to this for some founders where for example there is an element of deferred consideration, or “earn out” involved in the price. It allows them some visibility on what is going on in the business during that key period.

Other buyers, particularly PE buyers, may see the attraction in retaining the existing management team, including founders, and may want them to retain a stake in the business – in other words to “have skin in the game”. The logic runs that this is more likely to lead to an alignment of interests in maximising value.

The role for founders at least is normally time bound, typically 2-3 years. We have clients who regularly purchase businesses on this basis, leaving sellers with a share in the business and agreeing a mechanism to realise value in that retained shareholding via a ‘put and call’ arrangement. This gives both buyer and seller the comfort that they can bring the shareholding arrangement to an end on the basis of an agreed pricing structure. It is a collaborative model which relies on good relationships being maintained but it can work well and in some cases sellers have stayed on long after ceasing to hold shares.

However, invariably over the medium to long term buyers want to call the shots and that is difficult for many founders who build a business, create value and then realises that value. To be completely hands on and then have no more than an advisory or management role, can be tough.

But founders need to have a degree of realism when facing into a sales process and remember there is a reason they’ve chosen to sell. Whether it is competition, timing, age or just the size of the offer, they wanted the sale to happen and hopefully it delivers them a great return.

Both parties may want you to stay on board for a period and there may be a mechanism in the deal to ensure you remain bought in for the transition. But ultimately the buyer will want to take control.

There are, of course, serial entrepreneurs out there who are addicted to building and selling companies and always expect to “go again”. The opportunities to quickly scale tech businesses mean founders who are selling companies may be younger than in previous generations, so it may seem more normal to these entrepreneurs that they will have 3 or 4 business cycles in their lives.

With that in mind, you wouldn’t bet against the founders of Instagram coming back to the fore with another ground-breaking tech company in the future.