There are lessons for ni firms in Ins tag ram founders’ walk-out

Belfast Telegraph - Business Telegraph - - News - By richard gray, Part­ner at law firm carson Mcdow­ell

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 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 merger and ac­qui­si­tion (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 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 pri­vate eq­uity (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 two to three 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 three to four 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.

Mark Zucker­berg is look­ing to In­sta­gram to boost Face­book’s fu­ture growth

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