Exits and alternatives
Mergers and acquisitions
How acquisitions work: motives, process, consideration, the waterfall and what happens to employee equity.
Most venture-backed companies never IPO. They shut down, limp along, or get bought. An acquisition is the common "success" path that is not going public: another company (or a financial buyer) pays cash, stock, or both for the startup. The headline number in the press is almost never what founders and employees take home.
If you hold options or stock, M&A is how paper wealth often becomes — or fails to become — cash. The same liquidation preference math that felt abstract on a term sheet shows up as a wire-transfer schedule.
Concepts in this section
| Step | Concept | What it answers |
|---|---|---|
| 1 | Why companies buy startups | Talent, product, customers or defense — and why acquihires pay retention, not common. |
| 2 | The acquisition process | When to open talks, and what LOI, diligence and close actually are. |
| 3 | Cash, stock, earnouts and escrow | Which pieces of the headline are real money? |
| 4 | The acquisition waterfall | Who is paid, in what order, with a $40M example. |
| 5 | Equity in an acquisition | What happens to unvested options, and how to read the deal. |
Do not open a process unless you intend to sell. M&A distraction is extreme and often irreversible. Keep building until cash hits.
As an engineer evaluating offers, "we got acquired for $X" without waterfall context is not information. Ask for purchase price, prefs outstanding, proceeds per common share, escrow %, and unvested treatment. Separate equity proceeds from retention.
Common mistakes
- Trusting the press headline. Model fees, escrow, preferences, then common.
- Opening talks to "see what we are worth." You often end up with neither a deal nor a healthy company.
- Blurring retention with purchase price. Retention is pay for future work.
- Ignoring unvested treatment. Assume, accelerate, or cancel is a negotiated term.
Key takeaways
- Motive predicts structure and who gets paid. Acquihires often zero the equity waterfall.
- Headline price ≠ employee outcome.
- Earnouts and buyer stock transfer risk to sellers; prefer cash at close when you can.
- Unvested equity treatment is first-class, not a footnote.
- Read the merger agreement, not the blog post.
Further learning
Dalton Caldwell and Michael Seibel (YC) on how selling a company actually works, including why acquihires dominate deal volume:
The Founder's Guide To Selling Your Company (Justin Kan)medium.comRelated
Liquidation preferences and waterfalls
Who gets paid first in an exit — the map of 1× non-participating, participation, multiples and stacked seniority.
Employee equity
Options vs RSUs, strike prices and 409A, vesting and exercise windows, and how to evaluate a startup offer with ownership math.
IPOs and going public
The map of listing — traditional IPOs, lockups, preferred conversion, direct listings and why companies stay private longer.