How Personal Finance Pressures Influence Founders’ Exit Decisions

When entrepreneurs seek guidance on exit strategies, the focus is often on operational and administrative prowess in anticipation of the event. However, potential sellers should also prioritize optimizing their personal situations, especially with regard to income and financial stability.

This perspective comes from Matt Ford, CEO and co-founder of Sidekick Money, a financial service startup aimed at those deemed “financially ambitious.” After selling his previous venture, the money and debt management app Pariti, to Tandem Bank in 2018, Ford has leveraged his experiences during the exit process to inform his current endeavor.

According to Ford, founders frequently face critical and potentially life-altering decisions during times of significant personal financial strain. During a recent Zoom call, I asked him about the implications of this reality.

Reflecting on his own exit from Pariti, Ford describes it as a timely opportunity. The app was designed to help users manage their expenses and keep track of debts while securing better loan conditions, and was nearing break-even. “Although the business hadn’t scaled to our expectations, we faced several choices: explore new markets, seek new partnerships, or find a buyer,” he explains.

Pariti ultimately opted for the latter. “This came about through relationships. I developed a rapport with Tandem’s founder, Ricky Knox. We considered whether we could collaborate, and it seemed like a mutually beneficial opportunity,” Ford recalls. The app was sold for an undisclosed amount, with its functionalities integrated into the digital bank’s operations.

Importance of Salary

When discussing lessons learned from the exit process, Ford emphasizes the necessity for founders to be in a stable financial position before engaging in negotiations that might involve difficult compromises.

He specifically critiques the notion that founders should draw minimal salaries, or forgo their pay entirely, while building their companies. This mindset suggests that any raised capital should be allocated to staff, technology, and market expansion rather than enriching the founder. This approach can align founders with investors focused on achieving a sizable payout rather than becoming complacent with regular salary payments.

“At Pariti, I recall being questioned about justifying my £35,000 annual salary,” Ford mentions. “There seems to be an expectation that you should survive on minimal means.”

In hindsight, he acknowledges this as counterproductive. “While hustle is essential for startup success, making informed decisions is equally critical,” he adds. “If you’re overwhelmed and anxious about your financial state, it becomes challenging to make sound choices.”

Equity Discussions

As the time to sell approaches, founders face significant and potentially life-altering choices. Ford highlights the decision between cash and equity. Accepting equity in the acquiring company may yield a smaller immediate cash payout in exchange for the potential for a larger return down the line, but this choice is not straightforward.

“Equity might promise more, but that potential is contingent on the business hitting performance expectations,” Ford notes. Furthermore, valuing the equity is straightforward if the buyer is publicly listed, but much more complicated for privately owned entities.

“Understanding the valuation is crucial. A heavy reliance on equity necessitates a strong confidence in that component,” he advises.

Equity Considerations

There are numerous pitfalls, as cautioned by Paulo Andrez, investor, serial entrepreneur, and author of Zero Risk Startup (Forbes Books). He emphasizes that sellers must approach equity agreements cautiously, recognizing how the deal structure will influence their future wealth. Not all equity arrangements are created equal.

“Whether to accept cash or equity hinges on the source of the equity—whether it’s from the buyer or the sold company,” he explains. If it’s from the buyer—like a publicly traded company—sellers should negotiate a minimum share price to ensure the acquirer must issue more shares if prices drop below a certain threshold after the lock-up period.”

If the equity originates from the sold company, and the sellers become minority stakeholders, there’s a significant risk that the acquirer may not honor a fair valuation for those shares, or that majority shareholders may obstruct sales to external parties,” adds Andrez. Each of these scenarios warrants careful scrutiny.

Additionally, earn-out arrangements can link portions of the sale price to performance goals at predefined milestones. “However, such agreements come with their own set of risks—numerous complexities and potential pitfalls from which legal guidance is essential,” warns Ford.

While legal expertise is available, the ultimate decisions rest with the founding team. Ford asserts that they will be better positioned to make these decisions without the burden of financial stress stemming from low salaries and urgent needs to cash out.

After the exit, while financial pressures may diminish, new choices arise, particularly regarding the utilization of the profits. The options often depend on the exit’s size. “With a smaller exit, the focus is different,” Ford remarks. “I prioritized security by purchasing a home.”

However, many founders will have substantial capital at their disposal. “Assuming a significant financial inflow, the founder may explore various options ranging from angel investing to launching a new venture. Their future plans could hinge on various elements such as age, family situation, entrepreneurial aspirations, and the terms previously established with the acquirer,” adds Andrez.

Regardless of the financial amount, personal financial planning becomes vital. Ford advises exiting founders considering investment avenues to explore tax-efficient options, such as (in the U.K.) Venture Capital Trusts, the Enterprise Investment Scheme, and the Small Enterprise Investment Scheme.

The crucial point here is that founders often lack effective financial guidance before the sale. Once an exit is reported in the financial media, numerous private banks and wealth managers vie for the attention of newly wealthy individuals. Before this stage, founders frequently feel isolated. This is where Ford’s own entrepreneurial initiative comes into play, providing essential guidance through an online app focused on issues like tax and investment—areas typically handled by private banks.

Ultimately, strategic personal finance planning should play a significant role in the exit preparations, ensuring that sound personal finances may lead to more favorable deal outcomes.