Why Personal Finance Pressures Can Affect Founder Exit Decisions

When founders seek advice on exit planning, the emphasis tends to be on operational and administrative excellence in preparation for the big event but perhaps prospective sellers should also be optimising their personal circumstances, particularly around income and financial security.

That’s the view of Matt Ford, CEO and co-founder of Sidekick Money, a financial services startup that styles itself as a wealth management platform for those who are “financially ambitious.” Ford sold his previous business – money and debt management app, Pariti – to Tandem Bank in 2018. Having experienced the exit process first-hand, he has channeled some of the lessons learned into the new venture.

And as he sees it, founders can find themselves making important and perhaps life-changing decisions at a time when they are facing personal financial pressures. Speaking to him on a Zoom call earlier this month, I asked what this means in practice.

As Ford recalls, his own exit from Pariti was opportunistic. Created to help customers not only manage their spending but also keep track of debts and secure better loan terms, the product was, he says, approaching break-even. “However, the business hadn’t taken off to the level we wanted. “In that situation, you have a number of options. Find new markets, find new channel partners or find a buyer,” he says.

Pariti chose the third route. “It came through relationships. I got to know Tandem founder Ricky Knox. We asked ourselves can we do something here? It felt like the right thing. It felt like a good mutual fit,” says Ford. Pariti was sold for an undisclosed sum with the functionality of its app folded into the digital bank’s operations.

Salary Matters

When I ask him about the lessons learned from the exit, Ford stresses the importance of founders being in a reasonably strong financial position themselves before embarking on negotiations that may well involve consideration of some tricky trade-offs.

In particular, he takes issue with the idea that founders should pay themselves low salaries – or perhaps even take no salary at all – as they build their businesses. The logic is, perhaps, that any money raised from investors should be spent on staff, technology and go-to-market plans rather than going into the founder’s pocket. In some respects, this keeps founders aligned with investors in working towards a big payoff rather than getting comfortable with monthly checks.

“I remember being asked at Pariti – can you justify your 35,000 a year salary,” says Ford. “The expectation is that you live on bread and water.”

In retrospect, he sees this as counterproductive. “Success in a startup is about hustle, but it’s also about making good decisions,” he adds. “If you are so stressed out and terrified about your situation that can be a challenge in terms of making good decisions.”

Decisions On Equity

And when the time comes to sell the company, there will be some big and potentially life-changing decisions to make. Ford cites the example of cash versus equity. Taking an equity stake in the acquiring company may result in a relatively small cash payment straight away but an opportunity to secure a much bigger return at a later date. But it’s not necessarily an easy decision to make.

“Equity might offer more, but only if the business achieves what you expect it to achieve,” says Ford. In addition, there are all the complexities of valuing the equity component. Not difficult if it’s a listed company but much harder if the buyer is privately owned.

“You have to understand the valuation. If you have a lot of weight on the equity component you have to be confident,” says Ford.

Equity Scenarios

And there are many pitfalls. Paulo Andrez, is an investor, serial entrepreneur and author of Zero Risk Startup (Forbes Books). As he sees it, buyers have to treat equity agreements with care, while also being aware of how the structure of the deal will affect their future wealth. As he stresses, not all equity deals are the same.

“Whether the sellers should take cash or equity depends on whether that equity is the buyer’s or from the sold company,” he says. If it is equity from the buyer – for example, a listed company – sellers should try to get a floor on the terms of the price of the share, meaning the acquirer must provide more shares if they fall below a certain percentage after the lock-up period.”

There is an alternative scenario if the equity is from the sold company and the sellers become minority shareholders. “Then there is a huge risk that the acquirer will not want to buy the minority shares at the correct value or that majority shareholders will block any sales of the shares to external entities,” adds Lopez All these possibilities need to be carefully assessed, he says.

Then there is the question of earn-out agreements under which at least some of the money due will be linked to performance targets at set milestones. “There is a risk with this – a load of gotchas and watchouts that you need to take legal advice,” says Ford.

Of course, the advice is available – there will be lawyers on hand – but ultimately the decisions have to be made by the founding team. Ford says they will be better able to do that if not under financial pressure to make a sale because they’re living on low salaries and desperate to cash in.

After the exit, the financial pressures should ease, but again, there are choicesd, not least what do you do with the money. That depends on how much cash there actually is. “With a smaller exit, it’s different,” says Ford. “The first thing I did was buy a house. It was all about security.

But many founders will have capital to play with. “Assuming the founder has received a substantial amount of money, there will be options available ranging from angel investing to starting another business. Their plans may depend on several factors such as age, family circumstances, entrepreneurial spirit and agreements with the acquirer,” says Andrez.

Whatever the sum, personal finance planning plays a part. Ford says exiting founders seeking to invest should look for tax-efficient vehicles, such as (in the U.K.) Venture Capital Trusts, the Enterprise Investment Scheme and the Small Enterprise Investment Scheme.”

Arguably the problem facing founders is a lack of sound financial advice before the sale. Once news of an exit hits the financial press, private banks and wealth managers are on the phone to newly enriched, offering their services. Before that, founders can feel like they are on their own. That’s where Ford’s own entrepreneurial venture comes into play, offering the kind of guidance through an app online on issues such as tax and investment. These, he says, would normally be the province of private banks.

The bigger point is, that personal finance planning has a role to play as founders make exit plans and sound personal finances could make for a better deal.

“