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Anonymous Exits - Pt. 3

Welcome to the third in our series of ‘Anonymous Exits’.

In our Anonymous Exit series, we meet founders and executives that have exited their Edtech business.

We want to make sure it’s as useful for you as possible, with founders and executives being as honest as they feel appropriate - so it’s anonymous. We will talk with people that exited at a range of valuations in a range of Edtech verticals.

In this edition, we are providing the perspective of an outgoing COO/ CFO - this person was not formally a member of the founding team and has since left the company.


Theme: Earnouts need to align incentives


A misty morning in London. I'm sat at home, the cat non-chalantly strolling across my laptop, as I see the exited exec's zoom name appear on screen. I hurriedly shift the cat... Not now... Not yet!

*Admit*... The exec enters the screen.




It's great to talk!

How would you like to run this?

We will chat through the questions and then double down on the areas that feel particular to this exit.

Sounds good! Let's begin!




Us: Firstly, congratulations on the exit! Could you indicate the approx. exit valuation?

a. $0-10M

b. $10-20M

c. $20-40M

d. $40-100M

e. $100-500M

f. $500+M

Us: How did your relationship with the company begin? 

I first came across the company when I was considering working with them from a previous role. 

I got to know and understand the tech, team, applications and points of difference very well which provided an amazing window of opportunity that most employees don’t get to access prior to joining a company. So, I certainly knew what I was getting myself into!  

Us: And how did you find yourself joining the company? 

I knew that I wanted to do a broad, strategic and commercial role, growing something in the B2B SaaS space. 

Fortunately, the stars aligned. It was an opportunity for me to go into an environment where a lot of the unknowns had been dealt with already and as mentioned, I already had a good idea of the potential of the business. 

Us: Were you and the founding team pleased with the outcome? 

The company had created an incredible reputation for itself. The tech was best-in-class but the education market was (is…) slow to adopt, so what we were doing as a team was balancing the pace of adoption and the associated risks against the amount of capital required to continue growing independently. 

We were able to end where we did because we had such a good reputation in the market and because all of the large potential customers in the market were either using us, talking to us or developing with us. As such, we were able to achieve a significant premium on exit, compared to what we might have done if we didn’t have deep existing partnerships with clients and leading technology. All of this is to say that, yes, we were happy with the outcome! 

Us: Were you angling for an exit?

We were not! We didn’t go out to sell the company, we got approached. The approach was immediately very serious, very credible and also aligned  strategically with the mission of the business. It also held the promise of expanding the reach of the tech over a 3-year time horizon which was of course attractive to our mission-driven founders. 

Hence, this option became a serious contender against the alternative of raising a round. 

Taking account of the potential to raise and continue to grow independently, as well as the collaborative nature of the acquisition discussions and fit with the company’s mission, we didn’t feel the need to pursue the sale of the business as a primary goal and run a full auction. But we did utilise the fundraise as the competitive tension against the process of the acquisition approach to ensure we were able to extract the full value that an auction process would likely have delivered. 

Us: Was the acquiror known to your organisation before the exit?

We had a relatively deep existing relationship. The approaching company had said that they either wanted to acquire us or be our best client. I think they decided that working through the acquisition process would help them decide which of these options made most sense. But either way, we got the feeling they had made the decision that the tech was strategically important to their roadmap- because we were best in class, they would leverage our tech regardless. 

Us: How successful was the parallel fundraise in creating competitive tension with the acquisition approach? 

We knew that we needed to create urgency – in order to do this, we needed to have access to a credible alternative. Until you have something that is clear and crystallised, no one has any urgency to move! 

I’d liken it to VCs fighting for the 1/100 deals for which rounds get competitive. You always want someone to lead and bring everyone else into line on terms as well as timeline. 

In our case, we already had clarity on what we considered to be a fair valuation as well as an idea of our desired terms, so this enabled us to pre-evaluate how compelling a termsheet in a round could be, relative to what had been shared by the acquiror. 

Us: Did you get to the point of having a termsheet from other investors for a round?

We ultimately never got that far because the verbal indications on acquisition pricing were compelling. 

Us: Considering you exited after a Series A, the valuation was relatively high.

There are two ways of looking at it. Firstly, was it a good deal or not, objectively? And secondly, was it a good deal in the context of 2023 market?

When you address the second question, it was undeniably a great deal. Our challenge was never really whether we could raise or not, but more the multiples we could get for the valuation. 

It’s interesting because when you have no revenue, you can often attract a higher valuation than when you’re in early revenue days. 

When you have revenue in $M, then people can apply multiples. You can almost describe it as a valuation trough. When you have no revenue, the investor is making a bet purely on your potential. The multiple is infinite! Once you start to apply multiples to figures in the low/mid single-digit millions, then valuations suddenly become capped until those revenues really start to scale towards $10m and beyond. 

Us: You, with previous investing experience, had stronger knowledge than most of what are good terms and what are bad terms…What was your role in facilitating the exit? 

There was an element of explaining the value of the business to the founders in venture terms. One of the things I used to advise as an investor, partially for selfish reasons and partially not, was to not blindly follow the highest valuation you receive because it’s a double-edged sword: you have to beat it, ideally substantially, by the time of the next round. I also advised that one never really regrets taking more money - giving up a little more equity to give you security to invest in the business is ultimately a sensible decision. 

Us: With the benefit of hindsight, how is the company feeling about having taken on VC? 


The company never really committed to the VC route- the company had been very successful at augmenting equity capital with non-dilutive grant income. At its core, it’s an R&D company, focused on being patient and getting the tech right. The cultural fit of VC did not necessarily align in the earlier stages of the company’s development and by the time of exit in 2023, there was still a wariness regarding a purely VC funding route. We were at the point where we needed to do an investor round and move into hyper-scaling – we were confident that that the required 5-year growth was waiting for us, but we couldn’t be certain of when we would hit the inflection point at which we would reach venture pace of roll-out with customers. 

All of this said, there was an awareness that we could not build a tech company like ours without VC capital because building an AI-deeptech business that does something fundamentally different takes time and investment. You can’t build tech like ours by bootstrapping. 

As such, we necessarily had to take the boom or bust approach that VC entails – we knew we needed a technical team of 15 to build our MVP. This is particularly true in our case because it’s not like a typical B2C play in which you can scale gently over time, test as you go, and form effective feedback loops… 

Us: If not VC focused from the outset, what was the pathway of funding? 

In the early stages, it was a flow of: firstly, incubated in a university, then receiving grant funding, then receiving other sources of quasi-governmental funding, then shifting to impact VCs plus an angel network, then finally, generalist VCs including US-based VCs to help us with our expansion.  

Us: How did you approach the transition to new ownership?

To some extent, that’s on the acquiror. 

Some acquirors will have a great approach that they’ve used before. 

There are a couple of times where you can influence their approach to managing the acquisition. One is pre-deal - you can seek clarity around staff, continuity, product roadmap, reporting lines and more… This is really helpful if you want to remove some of the elements of uncertainty that will make people feel nervous during the process.

The other side is of course post-deal. This usually relates to cultural integration. You will typically either have a cultural template or you won’t but one thing is for sure, every organisation will be reluctant when it comes to cultural change. Typically, the acquiror will set the tone and provide the frameworks and then acquired company’s leadership will make it happen. A second area of post-deal transitions comes in the form of an extensive to-do list! For example, communicating the deal to our customers,ensuring continuity of service, aligning documentation, processes and controls, and establishing new ways of financial reporting.

Pre-deal is arguably more important. If you are clear on roles and responsibilities, then the rest is relatively smooth. Reporting lines need to be clear- team members need to know what they are doing and this needs to be communicated clearly. The messaging needs to be decided, as does the timing. Clarity is the priority.

Us: What were the terms you agreed on team retention and how did they receive the news? 

Given that our business was a deeptech business, the key to the deal was retaining the technical team, because they are the people that will deliver the value acquired… 

On communicating with the team, we took a balanced approach where we wanted to be sure on next steps before communicating, gradually bringing people in the process who were going to be involved in the DD process. By the time it was all sewn up, around 1/3 were aware before the main internal announcement. The other 2/3 found out around 2 weeks before the acquisition. This was possible because there was a high degree of trust in the leadership.  

Us: Were many people let go as part of the exit? 


Us: How long did the process take from the point of first approach to close? 

All deals take 6 months…!

Us: How was the valuation calculated? 

There were a couple of variable elements, but these were mostly at the edges and involved specific asks from the acquiror that we considered additional. 

There was an ask from the acquiror at one point for something and we upped the value as a consequence. 

We don’t have great insight because it was their internal calculations. We only really have how we were thinking about it…which was on our revenue, the multiple we knew we could get on fundraising, the premium on that for a take-out and therefore triangulating between those three things to establish if the premium was enough. 

On their side, we can only assume that they evaluated the benefits of taking the tech inhouse and then assessing the impact in terms of cost reduction, pricing power in the market (increased contribution), and accelerated customer acquisition. Each layer gets a little more speculative, but each can flow into a DCF and stacks up to provide a baseline for the intrinsic value they may be willing to pay. 

Us: Could you expand on the DD process?

There were 3 areas of DD organised by the acquirors: 

  • Tech DD by external providers

  • Financial and tax DD by external providers

  • Legal DD that covered HR by external providers. 

These are typically managed externally if you don’t have an in-house acquisition team. The extent of DD partially depends on the acquiror’s owners and management – for example, if PE-owned, then the process will be quite involved and structured.

Us: Had they appointed advisors to act on their behalf or were you liaising directly?

We were liaising directly with the acquiror’s leadership team.

It was an important deal for them but not financially because they are a huge business and the acquisition wasn’t and isn’t ultimately a risk to their existence. 

Us: What was the headline structure of the deal?

The structure of the deal was to have a 60% chunk up front and then 40% in an earnout clause. 

Us: Did the founders have hard red lines around the headline terms? 

None of the red lines were particularly hard because we didn’t start from the position of ‘let’s get acquired’! As such, the terms were all developed on the fly which was helpful in some ways because there was never a particularly entrenched opinion that needed to be overcome. 

This said, from previous discussions in previous deals, it was clear that there were a couple of red lines, such as asking the team to relocate and earnout that required the founders to stay on board in a management structure they didn’t control for longer than they wanted. 

Us: Did you get the impression that the founders had already thought in detail about a possible exit or were learning on the hoof? 

Naturally, there are always instances in which you are learning but they were relatively au fait with typical structures. 

The main things that needed to be worked through carefully related to earnout. 

The terms of earnout vary so substantially based on risk and control. We needed to work through the earnout terms, understanding the risks, including how much control we would have over the delivery necessary to achieve the earnout. We were keen to make sure that incentives were aligned in the right way. It’s a bit of a minefield because you can get to the point where you think the incentives are aligned but they are not. Getting to the bottom of this requires quite a lot of time invested into understanding specific scenarios and the various factors in play that impact the delivery of the earnout term.  For example, you need to work through scenarios like: 

  • Can we have a technical roadmap earnout without a commitment to a capital investment that makes the roadmap happen? 

  • What happens if the business decides half-way through that it wants to pivot and the technical roadmap in the earnout isn’t part of the pivot? 

  • What happens if the earnout is dependent on the retention of technical staff but someone is underperforming and should be let go? 

  • What happens if we need to hit revenue or user numbers and in order to achieve those goals, we need a certain level of marketing spend? 

  • What happens if in order to reach the earnout, the team needs to put in place significant discounts that ultimately hurt the business? 

It can get uncomfortable, but you have to work through what is best for the business. 

Us: We get the impression you are semi-anti earnout. Is this fair? 

It’s a question of how you best balance risk between acquiror and seller. The seller is always anti-earnout and it creates uncertainty. The buyer is always for something that will de-risk their business case for making the investment. I’m not anti-earnout, it’s more a case of avoiding unintended consequences. 

Ultimately, once acquired, everyone should be pulling in the same direction. Ensuring sufficient flexibility to avoid the creation of perverse incentives that tie parts of the business to a specific path that may ultimately not benefit the whole is important.   

There are not any hard and fast earnout terms that work reliably – we’ve run through a number of queries and scenarios above, but the most common is for the earnout to be based on time. If the earnout is just based on time, you are creating a disincentivising trap as the person is there because they have to be there, not because they want to be, acting as if the business is holding them hostage.  

I think the best approach is to maintain as much of the founders’ position as possible for the transition period. Most frequently, the founders want out after this period and so there is effectively a cliff edge. Before they are allowed to leave, it makes sense to make the earnout dependent on the development and execution of a handover plan with clear goals and outcomes, which is ended when all parties are satisfied the goals and outcomes are met. You might also include a 6-12 month notice period of sorts - but then everyone is aligned and understands that the founder is leaving but only when the business is in a good place.  

You don’t want anyone in place much longer than they want to be in place. The way I think about it is: imagine having someone in the business that is so de-motivated that they are willing to give up $6m in earnout just to be able to leave. Imagine the damage this can do to the wider team… A grey area in the middle, in which it’s too much money to give up but not enough to motivate, also isn’t much help. 

Us: How did you handle earnout conversations with the acquiror?

There was a collaborative discussion around the goals of the earnout period, with the overarching ambition of making sure the business is set up for success during the 2-3 year period that followed the acquisition, delivering on its promise and the broader reasons for the acquisition. The product roadmap needs to be viable in this scenario, the team needs to be committed to achieving the roadmap and accountable for its delivery. 

Us: Were they any hurdles beyond earnout that you encountered during the deal process? Were there specific terms in previous rounds you wished you’d formed differently? 

With the benefit of hindsight, there are always terms that we could have perfected, on equity structures, CLNs and others. 

I also think that we might have done things a little differently had we always been aiming for the exit time horizon that materialised. 

But, broadly, there were no real roadblocks related to previous rounds. The conversations  were very constructive and structured. There were no real moments of ‘downing tools’ in which people say we had to take a step back, go away and think about things and then look to reform aspects. Trust in each other grew over time.

Us: Were previous investors on the same page regarding the exit? 

Yes, broadly!

By the time of a typical Series A or B, you end up with a cap table that has different people with varying amounts of equity, including historic investors that were important in previous rounds but have dropped down the table yet remain high maintenance. There are one or two difficult shareholders on every cap table, more vocal relative to their small ownership that feel at liberty to query certain aspects without having meaningful sway over any real change to deals. This was also the case in our deal… 

For the sake of allowing everything to run smoothly, I think it would have been helpful if we could have thought through how communication and information rights are handled following investment rounds, so that those rights reduce with time/ following future rounds. 

There are also always investors that think it is the company’s role to give them tax advice. In these situations, you just have to pass the question over to them – it’s their issue to solve. 

Us: And now two final questions on your role: firstly, what did you commit to do following the exit? 

I committed to a 3-month transition period with a drop-dead date. 

I was immediately aware that I did not want to work for the acquiring company in the long run. I personally don’t enjoy working in big companies. My role would have been diminished in the new entity. As such, I was very quick to decide my long-term future. There was a desire for certain transitional activities to happen around customer and finance management, so it has largely been a case of working through these areas and making myself available for transitioning these areas to their new owners. 

Us: How are you going to decide what to do next? 

The nice thing is that it could come from anywhere! You go through a steep learning curve when you join a new sector and a new company with different tech. I enjoy this fast-paced learning environment.  One thing I have sorted is a coach that I can use as a sounding board to help me reflect on matters most to me in a new environment. 

I’ve always been quite sector agnostic because I think you can learn a sector quite quickly and when you go into a business, the founder, CRO, CPO, and others should really understand the space. The disciplines I bring are more generalist, focused on structuring for growth, instilling a culture in a company that is data-driven and focused. This involves helping the company understand: where does this company want to get to and how can we accelerate the process? 

I really enjoy being involved at inflection points. It may be that we need to go from 0-10 with our tech or we have found product market fit and we want to go from 10-50 as quickly as possible… Whichever it is, I’m excited to find it. 


The cat returns, looking like he enjoyed listening to the conversation...


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