Ask HN: Big company approached our stealth startup – what to do?

[throwaway__x]

We are a 3-person startup a few months away from a public launch. We got under the radar of a very big company in the same industry we are operating in. They have been looking at offering a service/product similar to ours and are now wanting to talk to us. We have an NDA in place and have already started preliminary discussions which are now intensifying. I’m not sure what their end game is. It’s not that they are being coy about it, it’s just that they first want to see if there’s room for doing something together in some capacity.

They seem to be interested in launching it under their own brand, so I think a simple investment is out of the picture. I think it’s going to go down as an acquihire of some sort. We are moving into the more detailed stage of a technical due diligence type discussion, and we're not sure to what extent we should allow that exploratory effort go. We don't really mind talking about our infrastructure and business aspects, but is it considered acceptable to let them explore the code in great detail? Again, it's a very big and reputable company, so I don't know if we should be so paranoid as to make them walk away.

Should we have in place a more specific NDA or a letter of intent of some kind? We are open to doing a joint venture or even an outright acquisition as they have the right resources to take our product very big very fast.

Any tips or suggestions?

[ChuckMcM]

Here is a suggestion, tell them to state their intentions or go away. Once they state their intentions tell them they have to sign a Memorandum of Understanding about what you're going to talk about and if they walk away it will cost them $X million (pick a number that would be able to resolve your debts and pay off any investors with a slight return).

What ever you do, do NOT be lured into thinking they are thinking about maybe a big exit for you, your interests are not aligned yet and you need to realize that. If there is any IP possible make sure you have provisional patents filed before you talk to them about anything. Even if you don't think it is patentable, force them to either buy you or risk infringing you if they go into competition with you.

Seriously, you have nothing to gain from this distraction if they aren't serious, and if they are serious they will put it in writing for you.

[mblevin]

As a former M&A guy and later a founder - It's not just that your interests aren't aligned in terms of financials or IP, your timelines aren't aligned and your desired outcomes aren't aligned.

There is ZERO hurry with a lot of BigCo acquisitions - there are layers and layers of board approvals, analysis, opportunity costs, competitor research, etc.

There may not be any actual interest in an acquisition of people or technology, but rather a curiosity about the space - e.g. "what are smart and hungry people in X space capable of actually building?" or "what does technology Y in the wild actually look like?"

It's all fun and games for the BigCo but can absolutely kill a startup with delays and 180 degree turns on the product roadmap.

[jbverschoor]

Yup.

Had a similar story here, but didn't have that in place.

Very educational and made some good contacts though.

In the end there was not a deal we could live with, so we ended up with no deal. But also with 6 months of almost 100% delay for us. Total loss of focus.

[feverishaaron]

Excellent advice. We lost a lot of time "working with" a large company, including building a detailed demo using part of their platform – and it ended up coming to nothing.

[bagels]

Right, so they're either trying to buy you, or trying to steal information. Seems like you'd want to establish which.

[x0x0]

Yeah, remember how best buy had to pay out $25m for stealing a startups IP -- http://techcrunch.com/2012/12/05/techforward-wins-27m-in-law...

[mbesto]

This. Focus on your launch.

Launch and then talk. Depending on how big the company is, it'll take them most likely at least 3 months to get a deal done.

[jwilliams]

Unfortunately only have one upvote. All the above is true.

[ecesena]

I'd also recommend provisional applications for patent. They don't cost much and they're an asset anyway.

If you're seriously oriented towards an aquire-hire, an option can also be to look for an experienced corporate dev to join you as an advisor or as part of the team.

[pnathan]

I would also add to this: lawyer up.

[adammichaelc]

This is excellent advice!

[tiatia]

Just stick to this advice.

[beachstartup]

i have never been in this situation but i like this answer.

what you're doing is forcing them to negotiate as soon as possible on something specific and concrete - someone who isn't willing to negotiate isn't willing to give you any money.

[grellas]

Generally it is a bad idea to let a company probe deeply into your technical specs without having a good indicator in place that they are proposing some sort of deal that would be favorable to you. Usually that means an LOI stating the broad terms of what they intend to do, subject only to a definitive agreement and to satisfactory due diligence.

Don't be lulled that it is a big and reputable company. If they are doing their own independent development, it is relatively easy for them to claim that they developed whatever it is they later develop based solely on independent efforts and it is pretty hard for you to cut past that claim, especially when the only of doing so is to sue and spend many hundreds of thousands of dollars to try to win that suit.

It should be a staged approach. The deeper they want to probe, the more they need to declare themselves.

And, by the way, make sure that the NDA is very tightly drafted to severely limit the impact of potential weasel language, e.g., pertaining to independent development efforts - thus, for instance, make sure it says that such efforts must be capable of being documented by written evidence. On this point, though, it is impossible to advise in the abstract. See a good lawyer on this. Very important.

[fnazeeri]

This is a great opportunity....to raise $$ from investors. Every startup knows that they have to convince investors "why to invest" but fewer know that they also have to convince them "why now?" Having a company sniffing around the fringes is a big motivating factor for potential VCs. It also can be a serious motivator for the "big company" if there are VCs interested as well. They willingness to acquire you at a premium can be driven by their assessment of the probability of "taking out a well funded competitor".

So, a long way of saying, if you're going to talk with them in detail, make sure that you also talk to some investors at the same time (Google BATNA).

[kordless]

I love this. It's turning skewed/unknown expectations into a positive movement on an investment.

[greenyoda]

"Should we have in place a more specific NDA or a letter of intent of some kind?"

If you don't have a good lawyer to whom you could put this question, you'll probably get screwed in this negotiation.

[gregcohn]

There's some good advice here, but so far no one has said the most important thing, which is to clarify for yourselves what your other best option is.

(In MBA jargon, your "BATNA" -- Best Alternative to a Negotiated Agreement).

This is not just theory, it's dealmaking 101. You simply have no leverage to get what you want (fast closure, price, etc) unless you have an external forcing function you can credibly threaten to move forward with -- one that you must be prepared to accept if they call your bluff.

Based on circumstances -- it could be a term sheet, a public launch, a partnership with someone threatening to BigCo, etc. But figure out what it is, put a time frame on it, and make them aware of it.

Based on your questions, I'd also suggest bringing an advisor in who knows what they are doing to help you sort through what you should and should not reveal at this point. (Why would they want to review your code if it's an acquihire??)

[raverbashing]

Listen to this guy. Also read "Getting to Yes", the dealmaking 101 book

And OF COURSE Lawyer up, with a good startup lawyer.

Another tip. If there's money on the table TAKE IT. $BIGCORP wants to buy it for $SUM which will leave you with 6 or even maybe 7 digits in your pocket? Evaluate the deal with your lawyer, then sign on the line.

[chintan]

This is great advice!

Having gone through this -- a "BATNA" can shorten a deal time from months to weeks if you have the right "external forcing function"!

[johnnyg]

It sounds to me like you are getting worked. The way you have been approached is not how someone with good intentions does it.

Reject the "joint launch" proposal. Put together a Memorandum of Understanding with a break up fee that will cover you.

If they are serious, they'll take you up on this and if nothing red flags they'll buy you.

If they aren't serious, you'll see them show their teeth pretty quickly as you are now denying them what they sought for free.

I suspect you'll see their teeth. In that case, launch your thing, get traction and force them back to the table.

[WhitneyLand]

Assuming they are "getting worked" is probably a bit too cynical.

I've been though this also and would be more careful about massive time sink and distraction that is not serious inquiry.

[julianpye]

1. If the company has a track record of acquihires, talk to one of these companies. If they have not got a track record of working with startups, it is very rare that they can get it right the first time.

2. Reduce the number of people on the other side interacting with you. In large companies too many people jump on these types of opportunities and will burn a lot of your time. Identify one senior person from the company that you have a good gut feeling about (preferably towards the end of their career) and make one of your team work on a plan closely together with them. Let the other two work ahead on your original plan.

3. You as a startup have one agenda - you want to make it big together - remember that in large corporations each individual comes with their own agenda, most often not aligned with each other. And also remember that large corporations, especially when struggling with innovative competitors, will try to belittle smaller companies and negotiate you down.

[bdcravens]

If the company has a track record of acquihires, talk to one of these companies.

I don't understand this statement. Doesn't that mean the "acquihired" are part of $BIGCOMPANY?

[trcollinson]

I have been on both sides of these sorts of negotiations and I have to say most companies are not out to steal your technology or IP. Certainly it has happened, but in all reality it's not easy to steal technology or IP.

For example, let's take the TechForward V Best Buy mentioned by another commenter. TechForward had an interesting but not terribly novel idea. They shared the idea with Best Buy and Best Buy stole it and recreated it with their own mathematicians, actuaries, and programmers. Was what they did wrong? Yes. Was it stealing their code from their repository and then just deploying with the Best Buy logo on it? No, not at all. The point being that if your idea is not really novel and could easily be rebuilt by a team that is bigger, smarter, or well funded, well you are probably in trouble.

With that in mind, the more common situation is that they actually think you are very skilled and would make an interesting addition to their teams, environment, and company. If you are open to an aquihire or joint venture because as you say they "have the right resources to take [y]our product very big very fast", by all means state YOUR desire. Generally when I have asked to see a companies code during due diligence on a product that isn't even released yet, it can be thought of like an extended technical interview. I would be happy 9 times out of 10 to hear from the potential aquihire-ies "Hey, we're in this project $x amount, we'd like an exit like $y with a job at the end that gives us ABCD". It would safe them and the company a ton of time, effort, and money. But, more often than not the startup hides behind a lawyer without making THEIR demands clear (or worse, never really knowing what they want in the end), and then no one ends up very happy.

* None of this is to say you shouldn't have a lawyer, just make sure that your lawyer pushes you towards a clean outcome and not just the infinite legal loop.

[jayp]

Have been through an acquisition before as a core/senior team employee at a startup.

The big company that acquired us didn't even ask to take a look at your code until after a deal was discussed, and intent signed, but before closing. (i.e., final due diligence... and they wanted it to scan for GPL violations, etc.). They evaluated our software/company by focusing their efforts on extensively using our software in various (stress) test scenarios prior to discussing the deal. They also asked us to add a few features on short notice to test our ability to execute.

In fact, they kept the competing implementers (read: engineers who would actually write code) away from the deep technical decisions (and they had a competing effort which they merged with us later). Most of the technical discussions were limited to the engineering director who ran the group. They took a very caution approach: they have much more to lose then us if the deal didn't went through and they did in fact end up launching the product (i.e., possibility of a failed startup suing them).

I think if it any reputable big company in the valley, they will probably follow the same protocol.

One word of caveat: you may end up working on a deal, but generally it will take a LOT of your time. So you should find out if the discussions are leading to something you want ASAP.

[orasis]

Absolutely resist the urge to dazzle them with your technical prowess. THEY WILL STEAL YOUR SHIT.

I will not point fingers at any specific companies since I have no interest in being sued, but I have had technologies stolen by 5 different public technology companies.

In my case, I even had patents filed. It won't save you because they'll take the customers in the mean time while you're waiting the years for your patent to be granted. If you've raised capital, your company will have long crashed and burned and the investors will have sold the patents for pennies.

Another set of worthless people to avoid are the folks from the "Labs" at any major technology company. They are in no position to make a major purchase and in the best case scenario will waste a ton of your time.

If they say that they're potentially interested in acquiring and want to do due diligence, DO NOT LET THEM SEE UNDER THE KIMONO. They can back out of a deal at any moment, and if nothing else, even if they are interested in acquisition, they'll use their knowledge as leverage to force you into worse price/terms.

[WhitneyLand]

>I have had technologies stolen by 5 different public technology companies

No second thoughts after the 4th time?

[vonnik]

There are some large companies that get deep into technical due diligence, and go as far as signing letters of intent, only to take the ideas and implement the tech themselves. Watch out.

Also, NDAs are almost unenforceable. If you don't trust the people across the table, don't share sensitive information.

[grecy]

I'm remembering a post here on HN some time ago from someone that experienced that...

Demo'ed their tech to "big co" in the hopes of partnership/acquisition.. nothing came of it then 6 months later Big Co. released their own version of the exact same thing...

Be careful.

[hkmurakami]

This was my exact reaction. NDAs are effectively pointless unless you have the financial resources to go to war with it when it is breached.

[deeths]

I evaluate investments, M&A, and business partnerships for a big company.

Most of the "force them to do an NDA/MOU/make intentions clear" comments seem unlikely to work. Those comments assume that BigCo knows its intentions. Big Companies take a long time to reach decisions, so you have to give them time. Big companies have a lot of steps to reach internal consensus, and sometimes might take weeks just to get the right people in a room to make a decision, so trying to speed up their process could be like a "marry me or break-up" ultimatum too early in a relationship-- unlikely to result in what either party wants. The legitimate exception to that is if you're taking a big funding round or have external interest from another company. Overplaying that usually backfires though. The best approach is to share what you're willing to and stay engaged while limiting the amount of time the big company can take from your team. If they're taking forever to get to a decision, don't rush to have meetings: that limits your disruption while giving them more time to get to a decision. Don't hold up your roadmap unless they're committing to something or can give you a deadline of when they can commit.

Also, big companies typically won't use any NDA other than their own or sign a Memorandum of Understanding until well past the "seeing if there's room to do something together" stage.

Being too paranoid can make you seem like you're hiding something or just unpleasant to deal with and could kill a deal, but some paranoia is worthwhile. The key is being paranoid about the right things.

You should obviously talk to a lawyer to understand the protection the existing NDA gives you, but there's really no purpose in getting a stronger NDA until they've made up their mind what they're doing (because until then, they won't sign one anyway). Unless you've come up with something dramatically new in your architecture (as in you don't use Map-Reduce because you invented something much better), sharing the architecture can be a good way of building some trust and helping them understand how they might integrate without giving too much away. I don't see a big company doing things like changing their architecture or algorithms because they found a better way to do things-- there's just too much inertia to changing those fundamental things in a product if they're close to market, and they'll be sensitive to IP issues too. You should be more worried about them learning from your knowledge about effective customer/selling tactics or about them sizing you out as competition (which would focus on features instead of technology). You usually wouldn't protect yourself against that much in an NDA, so you need to be smart about sharing enough to impress them without giving them too much.

It's usually a bad idea to let them look at code at all until they have an agreement in place about their intentions (that's when the LOI or MOU comes in). They should be making a big effort to protect their own people from IP pollution at that point. If they're wanting to look at code and don't have formal agreements in place, you should wonder if you're really dealing with the corporate part of the company or just some random product team that isn't going through the process they should (which could innocently be because they don't know what process they should be following).

One good way to judge how serious they are is who you're dealing with. If you're just dealing with engineers or junior PMs, it isn't serious at all. If there are more than 2 levels of PMs involved, then they're probably really considering doing something.

Similarly, you can try to tell what direction they're leaning for the relationship. If the titles of the people leading the discussions are Business Development or Solutions, they're probably leaning towards a commercial arrangement, if there's Corporate Strategy or Corporate Development involved, they might be looking at M&A. Don't draw conclusions about the likelihood of M&A from the Corp Strategy or Corp Dev titles though-- it only tells you that's the direction they're looking at it, not how serious they are.

Rather than trying to force an agreement, you can test how much visibility the effort has by trying to get a meeting with a senior executive (someone who runs a product area or BU) and see if they make it happen.

[davismwfl]

I'd say you should talk to an attorney. I'd want a more specific letter of intent or NDA covering your startup in case they decide to play in the space. Letting them get to far into the technical due diligence before they have committed to something seems like a bad idea to me. They may be large and reputable, but that doesn't mean they won't steamroll a small company to get into a market they feel is compelling.

Trust your gut, your asking the question because you have doubts as to their intent. So make them spell out their intent clearly. If they walk away, you know they never had a genuine intent, other than to steamroll you and pay you as little as possible, if anything.

[harryh]

The most important suggestion is to ignore nearly all the advice you are getting in this forum unless it is clear that it is coming from someone who has been there before and not just someone who is guessing about what the best plan might be. People in this forum will vastly overestimate the value of the technically nitty gritty of whatever it is you have built because most people in here are coders that think that code is the source of all value. I can't say for sure (more on that later) but I have a very strong suspicion that this company cares a lot less about your code than they do about you and your team.

You need to find someone (or some people) who have been in a similar situation before and had a successful outcome. If you don't know anyone like this then ask for an introduction to someone you don't know. It's a small world. If you work at it you get get to someone knowledgeable.

Then you need to give them much more detail than you gave in this post because the specifics are going to matter a lot. It's perfectly understandable that you didn't want to get into the weeds with a public post but without the details it is literally impossible to give quality advice.

[Animats]

They get a demo. They do not get to see the code in detail or know your trade secrets without a tight contractual agreement. You need a lawyer experienced in startup acquisitions. If you're in Silicon Valley, it's not hard to find one.

This is when you need a patent.

[bbunix]

"hey have been looking at offering a service/product similar to ours" - that's called a competitor... and they can do whatever they want with your IP - patents or not - you're gonna sue them? Good luck with that, they'll bury you.

I'd finish the product, launch, then talk. Your value isn't going down between now and then, and this is just a distraction.

Just say 'see you on launch day, bring a check".

Background story - we sold our 2 person company (Big Brother) to BigCo (Quest Software)... little did I know that our free product was killing the sales of their $50K a pop product... ohhhh... so that's why they were so interested....

[dmfdmf]

This is the best answer so far. Tell them, politely, to get lost and take it as a sign you are on the right track. It is time to damn the torpedoes, full-steam ahead. They are either ahead of you or behind you and that is what they are trying to find out. If they are ahead and you have no unique tech then you are toast anyway. If they are behind they are weighing buying you to jump the line for Y dollars or investing X dollars to catch up. Why help them make that calculation? Make them sweat.

If you have any confidence in what you are doing then stick with it and don't be distracted by BigCo.

[kordless]

Figure out if you are talking to a decision maker. A good way to do that is simply ask the person you are talking to "Are you the decision maker?". If you aren't talking to the decision maker, you are wasting your time.

[WhitneyLand]

Possibly a less offensive question is "how high would this deal have to go for final sign-off"

[veermishra0803]

If the MnA team of that XYZ company is willing to take the talks forward, just take things forward. People who have been through MnA can tell you easily that such processes like Acquihire or an Acquisition takes time. So keep at it, but also maintain a strictly professional relation with them in terms of paper work (Make sure you get an MOU signed before they talk investments/Acquisitions).

If they have something else in mind, openly ask them what is it that they want to explore with your company & see if it works & even if it doesn't works, launch your product anyway.

Best of luck for your launch.

[jwatte]

The one thing I'd like to emphasize in addition to the good advice here is that they are costing you big bucks in opportunity cost. Your main goal is to launch! They don't seem to be helping with that.

[Patrick_Devine]

You need to have a Letter of Intent in place, and you should talk to an attourney as others have suggested. It's disproportionately expensive for your company in this process, so there should be a monetary component which protects your company if any kind of deal goes south. For a 3-person startup, I'm sure you guys are getting absolutely nothing done right now, so if they're serious about talking to you, they shouldn't have any problems putting some cash on the line.