My $100M Mistake + 6 Company Exit F**k Ups To Avoid

25:08And those layers of bureaucracy are actually a huge negotiating advantage that a startup typically doesn't have unless you're working with bankers and whatnot where you do have an intermediary that's able to do that for you. And so one of the most important things you got to figure out is who's actually buying this company. It's not a company that buys a company. There is a person in a company who needs something for their job. And you have to figure out who is that person and what is the fire under their ass? You know, what is the thing that, you know, are they in trouble for their job and they need to do something because the competitor is getting ahead?

25:44Are they super strategic and they had a dinner with somebody and they had an epiphany and And now they're Steve Jobs. They're a visionary and they're trying to make that vision come true. You need to fit that story. You have to figure out who is that person in the company and what is the fire under their ass if you want to have a chance of being able to sell a company. Because you're selling to that person, that champion alone, not to a multi-billion dollar corporation. Right. And so the buyer really matters and understanding what motivates them. A lot of times the people in CorpDev, they just want to keep their jobs and they want to look good.

26:17And so as the seller, you have to sell a company and you have to make them look great. You have to make it easy for them to look wonderful. You have such different incentives. They are just trying to not fumble the bag. You are trying to get your first bag and you are going to behave totally differently and you're going to value different things. And if they ever said to me something like, oh, this is kind of a rounding error or like, you know, this is we're huge. This is not this is not a you know, this is a small, small piece of it. I'd be like, cool. Round up. The price just went up 10 million then.

26:47Right. If this money don't matter to you, it matters a hell. Every dollar of this matters to me. And so maybe we have the price wrong, actually, then. Let's get the price right before we continue. All right. Like that is, and by the way, you saw this. We just renegotiated our deal with HubSpot. And like, you know, without going into the guts of details. Everything mattered. Everything mattered. And you saw how I approached that. Me and you have very different approaches to negotiation. What did you see or describe that? So this is like a Midwestern value thing, which is if I order a steak and you send me out a pizza, I'm just going to shut up and eat it and I ain't going to complain.

27:24The way that you did. This steak tastes different. Yeah, yeah. I love my steak with mozzarella and pasta sauce. This is exactly how I like it. You handled it differently. And frankly, that was an example when I learned from you. I think you said something great. You said, whoever can be most uncomfortable will win. And you needled these fucking guys for everything. And in my head, I was like, what? Why? Who gives a shit? And you're like, this word needs to be that. And I'm like, what are you doing? And you're like, it all matters. It all is really important. And frankly, you got your way, at least for the big important stuff.

28:05And when you got your way, I got my way to get the negotiation done. Both sides have to get their way. But you have to figure out what really matters to them and what really matters to us. and those two things are not going to line up and you need, like Sam Altman, he's on the news right now and he said something great about negotiation. He goes, I am not interested in binary negotiations. There's nothing interesting there where it's just a number and you want it to be lower and I want it to be higher. That's just a tug of war. That's like, you know, that's not interesting. That's not a sport.

28:34It's like slap fighting versus MMA, right? Like the slap league is literally just one guy standing there with no defense and one guy's going to slap him as hard as he can. it's kind of interesting to see but like it doesn't have the same uh it's not as satisfying to to to the sophisticated barbarian like us who likes you know ufc instead and so um the sophisticated barbarian cares about a um a non-zero-sum negotiation and so it's like how do i give them what's that french word je ne sais quoi what is that what is that are if i saying that right there's an art there and so you have to figure out what are the things they really care about that I only kind of care about.

29:11One of the things I really care about that they only kind of care about. How do we all get what we want in order for this to work? But you're right that I was willing to be more uncomfortable than you or maybe most people just because, I don't know, this is our baby and this is like one line item for them. But this is like the basis of what we do and it has potential to be like such an awesome part of our lives. Like, you know, I have to get this right. This is my kid. It's like, you know, my kid versus, you know, how my teacher, how, when they go to school, how a teacher is going to teach, treat my kid, like they care, but not the same way I do about my baby, right?

29:46It's different. There's levels to that. And so, yeah, you know, the party that's willing to be more uncomfortable generally will win, or the way my dad taught me was the more stubborn person wins in any negotiation. Can I tell you a dad negotiation story? Yeah. So I worked with my dad for about nine months, I think, in my life. And I'm really happy. And your dad does everything, right? He's like, he does projects. He started as an engineer, a lowly engineer, and he has like, you know, it's like office space or like Dunder Mifflin or something. He was sitting in his cubicle and he kept getting patents.

30:17So his wall had like 22 patents on the wall, but his salary stayed the same. And he's like, how come like, you know, the guy who dresses up nice, he works with me for six months, I get this patent, he gets promoted, I stay here? Like, wait am I in the wrong job so it took him 10 years to figure that out he's like maybe I should move to the business side he works at a he works at BP for like 30 40 years and he finally like leaves and he does then he started doing more entrepreneurial things one of which was we both worked together in this company in Australia and when we were working there I got to see my dad in action and like it's so funny like you see your dad at home and dads at home are just like these like totally different creatures when they're like done with work for the day I had to see him like interacting with other people, especially for an immigrant dad.

31:00It's like, oh, you have this level of polish. Why at home do you turn into just like a caveman? And so I got to see him just act totally differently. And one of the things that happened was they we were negotiating with this other party. The other party was the slick talking Australian guy who literally looked like Leonardo DiCaprio. This guy's on like the Australian CNBC every week. And he's super polished. just an amazing talker and i just think oh my god my dad's i'm gonna have to get watch my dad get beat up in this negotiation this guy's like mr mr charisma mr smooth everybody already loves him the decision maker loves him and they want one thing we want another uh my dad's you know this you know this indian guy who can barely you know he forgets to add the connecting words and sentences he's just gonna get walked all over this this thing and then they walk in and this guy's got binders of spreadsheets, presentation.

31:55He's got everything prepared. My dad has nothing. He doesn't even have a pen on him. That guy makes his case first. He passes it around. He's like, here's what I think we should do. I want to run the project and give me the funding and here's what we're going to do with it. It's going to be great. Everybody's like, this is super well put together. Thank you so much. Blah, blah, blah. And it's my dad's turn. And my dad basically kind of refuses to speak. And then he starts to speak. And I'm like, logical argument. He's not using any logic. He's just saying, no, I'm not doing that. I want to do this.

32:28And I'm not doing it if we're doing it that way. And then they're like, but Raj, we have this plan. It makes sense. Look, I know you're not getting the exact equity you want. You're not getting to run it, but this guy will run it. But this makes sense, right? And my dad's just like, foot on the table. He's like, I'm just telling you right now, it's not happening. Never. not happening and I'm like what are you doing like you're not even backing up your words you're just saying no and you're just refusing you look like such a stubborn idiot and he just acted the fool for like an hour and they were like this is going nowhere and they walked out and I was like dude you blew it and he's like no that went perfectly and I was like what do you mean and he's like oh I could never compete with that guy he's like you know super charismatic and he has all the facts on his side I was like, so what's your plan is what?

33:21He's like, oh, I'm just going to the most powerful word in any negotiation. No. He's like, I'm just going to say, no, I'm not doing it. I'm not doing it that way. And I'm not going to, I don't need to explain why I'm not doing it. And actually, I'm offended that it's going this way. I'm pissed off. And actually, I might blow this whole thing up. And he's like, you know, I only have one piece of leverage, which is that they need me to play along in whatever we're going to do here. Like, it's going to be hard for them to replace me in this thing. So I'm just going to say no. And I learned so much that day.

33:46he told me he goes the more stubborn guy did they come back yeah of course come back they came back and in fact the exact opposite happened by the end of the whole thing we negotiated this deal and like you know there's this kind of like okay let's take a break we'll go get the yeah yeah we what were you doing i was there i was where's the we moral support and um they leave the room to take like a break or they're printing out the papers or whatever and my dad turns to the middle man guy he goes so how what do you think he goes he goes i think we're playing poker but all the chips are on your side of the table now.

34:15And actually my dad made a mistake, which was that he negotiated it way too hard and took all the value in the end. And then they realized it and they were like, you know what? We let the stubborn idiot take the whole thing, the whole enchilada, like no. And they went back to no. And we actually ended up more like at a 50-50 deal. But if he had just given a little bit back, you always want to kind of give back at the end where they feel like they have something to lose. He took it so far. He won the negotiation so badly that they had nothing to lose in the negotiation and closing the deal. They're like, well, what do I have to gain by closing this deal?

34:51Nothing. It's just all the value is going to him at this point. And so he had taken a little too far, but I'll never forget that idea that, you know, in any negotiation, it is not the side that has the better argument or more logic. It's whoever has more leverage, number one. And then within that, that's like the substance. And then you have the style and the style is whoever's a little more stubborn and a little more crazy, a little more irrational. That is to your advantage in a negotiation. We got to have your mom and dad on the pod. I think we've heard a lot of stories about them. Well, guys, when it comes to banking, the only time I feel truly happy is when I'm using Mercury.

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35:57And the reason why is because it's a product that was not made by finance people. It was made by a founder, Imad. He's been on this podcast before. And he used tons of products as a startup founder. and this is the one that he wished he had. And I actually reached out to them to become a sponsor for this show because I'm such a big fan of it. So if you need a banking product for your startup, use Mercury. You will not regret it. It's amazing. For more information, check out mercury.com. Mercury is a financial technology company, not a bank. Check show notes for details. All right, we'll do one or two more.

36:28Here's a really easy and simple one. Never will I ever be disorganized. And I'll give you an example of that. we changed payrolls like three different times. It was like Gusto and then ADP and then like Zenefits and then Rippling. Because Rippling can track your computers, like when you give out computers or Gusto pays two days later so I can keep the cash for two days. It was so stupid. And here's why it's so stupid. When you're selling a company for$30 million and$300 million, it's the same thing, basically. As in, a lot of times when you sell a business, let's say, I don't know what that threshold is.

37:05It could be$10 or$15 million. But when you sell a company for$300 million and$15 million, they basically give you this Excel sheet. And it has 5 pages. And each page has literally 50 bullet points. And each bullet point is a big deal. For example, one bullet point will be under the HR tab. And it will say, show me the payroll for the last 5 years. Or show me every contractor you've ever hired. Yeah. Add the contracting agreement you have with every single contractor, including the confidentiality. It's like, we don't even have that. Yes. Yeah. And here's why it's a big deal. When you switch pay...

37:46Here's a very specific example. If you just use one payroll, that's easy. You just click export. That's easy. But I didn't. And then if it's been three years, you have to call Zenefits and be like, I don't have access to my account anymore. Do you guys even have these records? And I thought this was stupid. And I was like, I remember telling Kip, the CMO of HubSpot, I was like, Kip, I used Fiverr one time. I paid$150 out of my PayPal account. I even paid it personally. And I was like, why does this matter? And he's like, well, I can't hire bballer84 on Fiverr because that goes against Fiverr's terms of service.

38:22And that would be like, I have to make sure that everything was by the book because every little thing matters. And that made a lot of sense to me. But I was a fool and I was disorganized. I would use PayPal for some stuff. Every once in a while, I would just Venmo someone. I'd be like, here's 500 bucks. Thanks for the freelance. Or I wouldn't track confidentiality agreements. It was a fucking mess. I used Google Drive to store some stuff, Dropbox to store some stuff. It was a mess. And I'm telling you, when you're selling a company for what I sold it for, I only had 40 employees. And you can't tell anyone that you're selling the company.

38:53So it was basically me and Edie, this woman who worked with me. And we went through all of these documents. to find all of this shit. And it literally took three months to find documents. That's three months working every day for 12 hours a day. It is so hard to get all the documents. It is so challenging. And you don't want to give them anything that's messy. Otherwise, you'll look not buttoned up. And if you look not buttoned up, they'll say, what else are you missing? Or like, are you lying about something? And you need to present things in a really nice, orderly fashion. And so, start being organized from day one is really, really important.

39:26And not like being a maverick and being like, I'll just here, I got 20 bucks. I'll pay you for this. I'll use PayPal for this. Like, it's a mess. Well, I got to drink to that because I made that same mistake. No surprise. I'm like the most disorganized guy on earth. And, you know, I made mistakes like I thought, you know, hey, startup, you just got to move fast. Don't waste time incorporating and getting trademarks and doing all that. And, you know, that could be the difference between long term capital gains or short term gains or having to you know explain why you know the ip is over here but it should be over here um or you know we made a mistake of um did you mail in your 83b i one year i did and for one company i just didn't do it and i was like i was like oh i gotta like go to the post office and i just didn't do it now luckily that company failed and i didn't have to pay the price of that but like you know the 83b election basically but for anybody doesn't know is like a, you can basically get shares in a company and you can tell the IRS, hey, tax me now this year on the gain of these shares because I'm going to exercise them now.

40:32And it's like$100. I'm going to exercise these shares now. Tax me now. So it's like the original strike price was one cent and then they're valued at one and a half cents. And so you're like, tax me today on that gain so that I've exercised the shares at this price so that when I sell, I don't have to pay this huge markup on the exercise. And you only have like 30 or 60 days to mail it in. And you basically literally have to write a letter. Is it 90 days? You have to write a letter and you want to like postmark it. And then you want to like, you write in the letter, like send me a receipt of this.

41:03It's like a really manual process. And you're like, dear IRS, please send me proof that you received this. And you have to store that in your records in case you'll ever get audited. And I think now that's like, I think there's some automation around this, but yeah, I was messy about that. You know, I had this great meeting when I wanted to sell my company. I didn't know how. And I went and I met with five people who had sold multiple companies. And I was like, okay, hey, I don't know what the fuck I'm doing here. Can I explain to you what I'm currently doing? And then you tell me what I'm doing.

41:31Which parts, point out the dumb parts. Okay, can you do that? Because I was like, if I just ask you for your advice, who knows what you'll say. But if I draw you a picture of what I'm doing and you can point to the ugly part, that'll help me. And so that's what I did. I had lunch with this guy, Fouad. And he's the CEO of this company called Array. now. He had sold, I think he sold like five companies or some shit like that. And he pointed out two mistakes that I was making. Number one, he goes, he's like, oh, wow, you got like, okay, you have an actual offer on the table? And I was like, yeah, dude, it's been so hard, such a long road.

42:05You know, even though it had only been like 40 days, but I was like, dude, yeah, it's just been ups and downs, but finally we're here. And I was talking like I arrived at some destination. He goes, he's looked at me, he's like, this is not over. Actually, you just reached the starting line. Now it's time to sprint. And I repeated that advice to so many people of now it's time to sprint because so many times this happened. Let's say you're fundraising for a company and you've spent three months trying to fundraise. You finally get money in the bank and you're so happy. So that's so satisfying. Your whole body just wants to relax.

42:36It's like, oh, you know, welcome to the start of the race. Now that's time to run. You ready to run? And like the work starts, especially true when it comes to closing M &A. it's like when you have the what a lot of people don't realize is it it takes from getting the offer to actually getting the money that can take six months that could take exactly for me it took they emailed me and they emailed me in september or october i got paid in february yeah exactly three months six months is very common and so you um yeah that's the time to smooth the harness the second thing he said was he goes um show me your data room and i was like oh uh we have a google drive but like it's kind of messy right now and he goes um he goes you're selling your company think of it like a product on amazon how does amazon sell a product i'm like they have like a page and a one like a one click buy he goes exactly you need to turn your entire company into a giant buy button and i was like what is that he's like you need to like answer all the questions now get it all organized now put it all in place now so that when they look at this stuff, they are ready to one-click buy.

43:41The more questions they have to ask you, the more you have to go dig stuff up, the more half or incomplete information you have to give them, the more reasons that this deal could fall apart. Turn your company into a giant buy button. That's the other advice I'm given, which is like, what are all the ducks I can line up here so that this just becomes an easy-to-understand, easy-to-consume process for them? and like it was the one you know 30 day period of my life where i became marie kondo i organized the shit out of my company i took everything i was like look this thing needs to be bulletproof and uh i'm so glad that i did because it was it was extremely necessary do you want to do one last one yeah oh by the way i have one never will i ever uh run my company like a personal piggy bank so uh i made this mistake before and i have a story of a friend of ours who made this mistake before.

44:35So what a lot of people do when they run their company is you start to make some money and then you're like, oh, I have to pay taxes. And then they're like, fuck, taxes suck. And you're like, what can I do to reduce my... Spend it all. I think smart people have tax stuff they do. So let me start doing some tax stuff. I was like, okay, what's the tax stuff? And they're like, oh, let me... We talked to a guy recently that was like, oh, I created my own captive insurance program. And then I bought this property that we're using as like a office. And I'm like, what are you doing? You're trying to save like 200 grand of taxes.

45:09And what you're doing is actually you're ruining your books. So like when I looked at his business, the business looked like it had no profit. And he's like, you know, so happy that he has this like shitty margin, shitty net profit margin, because in that year it saved him on taxes. But the reality is, if you're building a company that you want to sell, you need to take some short term pain of having clean, simple books that you pay legit taxes on in order for you to have a big exit at the end because they're going to see a track record of multiple years of solid profits that you're going to sell on the end.

45:42That is just generally better. There's, of course, exceptions to both cases, but generally, that is a better approach. And if you don't want to sell, there is a bullshit category on QuickBooks that you can put stuff into. But that is not ideal if you're trying to sell. Yeah, exactly. is if you're trying to sell, you want to be able to show a track record of success versus like, I had a friend who would go to the bank on December 30th and take out a bunch of cashiers' checks that they were going to use to pay vendors. And it's like prepay vendors for the next year. And then the next year, they're like, I want to quit this vendor, but I've already prepaid them.

46:17Or they'll take two of the checks they never even paid and put it back in the bank a month later and hope nobody notices. It's like, dude, just don't do this shit. Don't treat your company like a personal piggy bank. if you want to sell this someday because nobody wants to buy your hot mess. And you can't undo that. You can't really unwind that. It's in the history books. Every year that you're doing that, you're adding a bunch of asterisks to your own books that you need a buyer who's willing to go and do a bunch of ad backs and try to figure this out in order to feel confident that they should buy this business.

46:52When Dave Portnoy sold, he sold Barstool Sports a couple of times, But the first time he sold it, he was like, I was an idiot. He's like, I owned a racehorse that I bought through Barstool Sports. And so Barstool Sports owned like two racehorses, a trailer for the racehorse. They owned like the house I was in. Like he said, all this stuff that the business owned. And he's like, we got docked so hard. 3 ,000 liters of gin that we acquired. Yeah. That's what he said. But he's like, Churnin didn't want to buy Skippy the racehorse. But the business owned it. And it was really hard. When he first sold that business, he sold the first portion of it.

47:36And at the time, Barstool was a big deal. He only sold it at a$15 million valuation. Crazy. When it was worth way more than that. And it's probably because he was just sloppy. A lot of it was sloppy. And he was like, I also made so much profit. And I didn't put any of the profit back into the company. I just would buy horses and shit like that and gamble. He's like, we gambled like crazy because it was content. Is that it? I got one more. Never will I ever just stay at home when there's a deal to be closed. So this is the rule of just get on a plane. Go meet people in person. Don't do Zoom calls.

48:14Or if you're doing Zoom calls, add in the in-person afterwards. The in-person meetings are so important. And I'll tell one story, which was just a deal we closed recently. One deal that we didn't close that I got on a plane for. And for me, the running joke on the spot is I don't leave my house. And that's true. I really don't leave my house. I don't like to do that. I got little kids. And I don't know. It's for our family life. It's very disruptive to travel if I leave the house for like five days or whatever. But I did for this one deal. The deal didn't go through. But I could sleep easy at night because I'm like, I did everything.

48:50I made multiple offers on this deal. I got on the plane. I met them in person. We did everything that we could do. We did what was in our control. With a deal that we just recently did, the other party was like, cool, after the initial conversation of interest, they were like, cool. We'd love to just next chat. We'd love to do it in person. I'm happy to fly out to you wherever you are. Let me know which day works. I'll fly in same day, fly out same day. It'll be easy. and I was like I respect this person and I trust doing business with this person because they understand this principle of like you just got to get on a plane and you got to go meet somebody and you should be willing to do that when we sold the milk road I had a similar situation where we remember I told you about the high offer the fair offer we had said no to the fair offer took the high offer that I read it so we went back to the fair offer months later and we were like I was like you know what I want to see what those guys are up to and see if there's a deal to be done here and uh i kind of called or emailed it was sort of like we just had like a quick i texted i think and it was like it really wasn't an opening but i was like hey i'm gonna be in the city tomorrow um you know for my niece's soccer game um so i was like i'll go see my niece's soccer game but i'm gonna i'm really doing this to meet you but i made it sound to him like i was going to the soccer game and i was like uh you know we'd love to catch up he's like yeah great let's do it and so we drive into the city um car breaks down on van ness and my car literally just shuts off in the middle of the road your car breaks down car literally shuts off i don't know what happens car stop stop driving and i like and the momentum to let me just get it to the side of the road but i'm there with my don't you have like a brand new escalade this is the bmw before that so um this is you know i'm with my wife my two kids are in the back in the car seats cars broken it down i got this meeting in you know 10 minutes and um i'm like shit uh i guess i gotta cancel this meeting you know whatever who like who knows well if this meeting anything would have even come of it anyways but like whatever we'll wait for triple a and my wife is like no you gotta go you told you've been telling me all morning how this is important meeting like you think that you have a feeling that you could be able to get this deal back on like you know go and um i was like i'm I'm just not going to leave my wife and kids on Van Ness in the middle of San Francisco in a broke down car.

51:11And she's like, just go. We'll be fine. I was like, okay, you don't have to tell me twice. And so I hop out and I literally run. I run down Van Ness like a mile basically. Get to the coffee shop. Meet the guy. Deal comes back to life by the end of that coffee meeting. And we ended up selling to them. And I'm like, I think I'm actually 100 % sure if I hadn't gone to that coffee meeting, that deal doesn't happen because in that meeting we were able to clear up some things that were not as exact transactional but what his fears were and what our hesitations were and really kind of suss it out and get comfortable with each other in person so yeah insane insane that that happened this is like an anti-ad for B &W yeah don't trust them yeah don't trust them they'll ruin your deals well that's sick hopefully people dig this we did a little Q &A for this episode except on one topic I think we're going to keep doing these every other Tuesday right yeah we're trying to come up with great topics that we can kind of shoot the shit on and share maybe you know either our answers or stories that we've been through so I think that's good I think people will like this one but let us know let us know in the YouTube comments what you think alright well we'll end there and that's the pod I feel like I can rule the world I know I could be what I want to.

52:35I put my all in it like my days off. On the road, let's travel, never looking back.

52:44Hey, let's take a quick break because there's a quote that I love I want to read you. It's that we shape our tools and thereafter, they shape us. And as an entrepreneur, if you're using a bank that was built in the 90s, you're operating like you're in the 90s. And trust me, I've been there. Clunky portals, random holds on your money,$50 wire fees, and then being told, please visit your local branch. Well, that's why I switched to a different type of banking solution, Mercury. It turns your financial chores into a smooth workflow. You can do wires, invoices, cards, reimbursements, two clicks, and I'm done.

53:14If you're already using Mercury, respect. If you're still using one of the old big banks, I got questions for you. So go visit Mercury.com and give it a test drive. Mercury is a financial technology company, not a bank. Banking services are provided through Choice Financial Group, column N8, and Evolve Bank & Trust members, FDIC.