M&A Considerations for Founders
What Happens When Your Company Is Acquired
by
Teddy Ellison
AI & Data Agreements
Summary
When your company is acquired, the price quoted in the announcement and the amount you take home are rarely the same number. Several key deal terms decide the gap between them.The founders who take home the most settle these terms when they have the most leverage, before signing the term sheet.
When a buyer makes an offer for your company, the headline price is often the most attention-grabbing figure. But that number rarely reflects what you take home. The amount founders get to keep post-acquisition depends on the actual deal terms, including the form of consideration, escrow, earnout, tax treatment, and the non-compete you sign as a seller.
The M&A considerations that decide a founder's real outcome are only negotiable up to a point. Once you sign the letter of intent, exclusivity can limit your leverage,. A 2025 change also made the QSBS tax break potentially far more valuable, so the structure you choose early on matters more than it used to.
The sections below walk these terms in the order a founder meets them, from the first offer to the wire.
What an offer puts in your pocket
When an offer for your business lands, your first move should be to work out what it would put in your pocket, and when. The headline number is the enterprise value, and your share of it often comes last.
In a venture-backed sale, the money runs through the liquidation waterfall in your charter. Preferred investors get paid first, the bankers' fees and any debt come off the top, and a working-capital adjustment trues the number up or down after closing. Whatever is left goes to the common stockholders, mainly you and your team.
Even a founder-friendly 1x non-participating preference doesn't change that order. It just means an investor takes its money back or converts to common, but can't do both. If the company sells at or below the total preference stack, the preferred is still paid out of the whole price first. You can own most of the equity on paper and walk away with almost nothing.
So model your own waterfall before the first serious conversation with a buyer. Pull the charter, list every preference, and run the math at the offer price and again at seventy percent of it. That tells you which offers are life-changing and which only look that way in a headline. Once you know what a deal pays you, the rest of the terms just decide how much of it you keep.
The letter of intent locks your terms
The letter of intent fixes the price and the structure, starts the exclusivity clock, and opens diligence, where the buyer's lawyers inspect everything and what they find can move the price back. Your leverage over all of it is strongest before you sign.
How the deal is structured decides how you’re taxed
A deal typically gets structured as a stock sale, a merger, or an asset sale, and that choice is usually settled in the letter of intent. A stock sale or a merger taxes you once, as capital gain, and gives you a cleaner break from the business.
Buyers often push for an asset sale instead, because it lets them take the assets they want and leave your liabilities behind. In an asset sale, you get taxed twice: once at the corporate level under Section 11 and again when the proceeds come out to stockholders. And it strands your QSBS exclusion, because Section 1202 shelters only the gain on your stock. The corporate-level gain gets no shelter at all.
A merger also needs a shareholder vote, but under DGCL Section 251 that is only board approval plus a majority of the outstanding shares, which a private company usually collects by written consent. A minority holder can't block it by refusing to sign.
A dissenter may have appraisal rights under Section 262 to sue for fair value, though most venture-backed companies waive that right in the stockholders agreements, and Delaware upholds those waivers.
Structure belongs on the table early and drives the tax result, which can dwarf anything your lawyer later wins on indemnity caps. Get a tax advisor in the room while the structure is still a choice.
What the letter of intent binds, and what it ends
The letter of intent is mostly non-binding, except for the exclusivity clause. That clause binds you. Once you sign a no-shop, you can't run a competitive process for a stretch of months, and the buyer knows you have nowhere else to go. A fiduciary out, which would let you take a better offer that shows up during that window, is rare in private deals.
That's why the price and structure in an LOI tend to stick. The buyer treats the number as a ceiling and chips at it as diligence turns up reasons. Sellers rarely move it back up, because the leverage that would move it is gone.
So get counsel involved before signing the letter of intent, while the exclusivity period, the fiduciary out, and the price are all still open. Signing closes all three at once.
The money you don't get at closing
Not all of your price arrives on the closing date. Some may sit in escrow against the promises you made. Some may depend on how the business performs after you leave. Both situations involve putting the money at risk and are negotiated in the purchase agreement.
What sits in escrow
In the purchase agreement, you make representations about the company, and part of the price may sit in escrow to back them. That escrow is your money, but its held for a set survival period against the chance that something you said turns out to be wrong.
How much sits in escrow, and for how long, often comes down to whether the deal is insured. In SRS Acquiom's 2026 deal terms study, the median escrow on an uninsured deal was about ten percent of deal value. With reps and warranties insurance, that median dropped to 2.8 percent, and the 2025 ABA deal points study put the median indemnity cap on insured deals at a quarter of one percent.
So whether the deal carries insurance, and who pays for it, is worth negotiating as hard as the price.
Before you sign, check your survival periods, your liability cap, and the basket the buyer has to clear before it can claim anything. On an insured deal, your reps can end at closing and only the policy's retention stays in escrow. On an uninsured one, more of your money stays at risk for longer.
What depends on future performance
When the buyer and seller can't agree on price, they often bridge the gap with an earnout. Part of the payment gets deferred, and you collect it only if the business hits targets after closing. That target could be based on revenue,EBITDA or another milestone. In life-sciences deals tied to clinical trials or FDA approval, the earnout is often most of the deal. After closing, though, you often no longer run the business whose performance decides your payout. The buyer does, and the buyer sets the budget and keeps the books that measure the target.
Delaware's courts have spent decades on what happens next, and the pattern rewards sellers who drafted carefully. In January 2026, the Delaware Supreme Court held that Johnson & Johnson breached its "commercially reasonable efforts" obligation on the Auris Health earnout, and upheld a fraud finding worth hundreds of millions. Even then, though, it refused to imply a duty the contract could have spelled out once the named regulatory path disappeared, so you can only enforce what your efforts clause spells out. As a result, founders should tie their efforts to something a court can measure, like what a company with similar resources would do for a similar product. A vague promise to try gives you nothing.
Outside life sciences, earnouts have historically paid out around twenty-one cents on the dollar, so treat deferred money as money at risk. Negotiate who controls the levers, pin down the accounting, and get it in writing what happens if the buyer reorganizes, sells, or shelves the product before you're paid.
The terms that bind you after the sale
Two of the deal's terms reach past closing and follow you, the retention package you sign if you stay and the non-compete you sign as a seller.
If you stay on, your payout can vest all over again
The offer letter you sign with the acquirer can matter more to your outcome than the purchase price. Buyers often tie part of your proceeds to staying, either through a holdback that vests over your first years there or by re-vesting shares you fully vested years ago. That turns purchase price into a retention package you have to earn a second time.
So negotiate what happens to the unvested portion if the buyer lets you go without cause. The gap between forfeiting it and keeping it can be most of your take-home.
Your equity and your title get re-papered in the same stretch. A private deal often hangs on key employees signing new offer letters, and the founder is always on that list. The buyer usually won't assume your outstanding options either, so vested options get cashed out as wages and the unvested ones are handled grant by grant.
Negotiating your own package carelessly can cost you the whole deal. Delaware held Mindbody's founder-CEO personally liable for roughly forty-eight million dollars. He steered the sale toward the buyer that offered him the best job and liquidity, and hid those early talks from his board. Disclose every contact with a bidder, and let the board settle the price before your own package comes up.
The non-compete you sign as a seller
The non-compete you sign as a seller is not the employment non-compete you've been reading about. Employment non-competes are getting struck down in many states, but covenants tied to acquisitions are broader, last longer, and hold up far better in court. They came through the federal fight intact. The FTC's 2024 ban was struck down in Ryan LLC v. FTC, and even that rule had carved out covenants tied to a bona fide sale.
Even California enforces them. The state voids employment non-competes outright, but it still binds a selling owner under Business & Professions Code Section 16601, as long as the covenant is scoped to where the business operated. Courts back these because the buyer paid for the goodwill the covenant protects.
If the covenant reaches too far, some courts will throw the whole thing out rather than trim it down, and Delaware now does exactly that. In March 2026, its Court of Chancery refused to enforce a five-year worldwide non-compete against founders whose company had only operated regionally, and declined to rewrite it into something narrower, so negotiate the scope, the length, and the definition of the restricted business like a court will hold you to every word, because it will. Remember to watch for the same covenant showing up twice, once in the purchase agreement and once in your employment agreement, where the stricter employee standard can pull it down.
Most of your tax bill is set before you sign
Everything above lands on a tax bill, and most of what sets its size can't be changed after you sign. That is the argument for bringing a tax advisor in early, while the letter of intent is being negotiating and while the structure is still a choice. Three things drive the numbers.
QSBS, and the 2025 split
Start with QSBS, because a 2025 change made it more valuable and split it in two. Section 1202 now draws a line at July 4, 2025.
Stock you acquired on or before that date keeps the old rules, a five-year hold and a ten-million-dollar cap. Stock acquired after it gets a graduated exclusion, fifty percent of the gain at three years, seventy-five at four, and a hundred at five, under a fifteen-million-dollar cap.
One founder can hold both kinds in the same company. Whether your shares qualify, and whether the structure keeps the exclusion intact, can be worth up to fifteen million dollars, so check it before anything else.
The golden parachute trap
The golden parachute rules catch founders precisely because founder salaries run low. If your change-in-control payments, say accelerated vesting plus a retention bonus, hit three times your average recent pay, Section 280G taxes the excess at twenty percent and costs the company its deduction.
A private company can clear the problem with a shareholder vote above seventy-five percent after full disclosure, but that vote takes lead time you may not have.
For how the 280G excise tax is calculated and the cleansing vote that clears it, see The 280G Golden Parachute Trap for Founders.
How deferred money is taxed
Deferred money is taxed differently. An earnout or an escrow release usually gets installment treatment, and part of each payment counts as ordinary interest. If you move states to lower the bill, that can take months to hold up.
All of this is a reason the tax advisor should be looped in before the letter of intent, not at the closing table.
A framework for founders
Some of this you can handle yourself, and some of it you shouldn't touch without counsel. Our Tech Founder's DIY Legal Guide draws that line for founder legal work generally. Here is how it falls for a sale.
What founders can handle themselves
Know your numbers. Model the waterfall at two or three prices, read your vesting and acceleration provisions so you know what the deal does to your equity, and check your stock certificates against the QSBS dates so you know which regime your shares sit in.
The diligence groundwork is yours too. Collect the signed IP assignments, reconcile the cap table, and flag the change-of-control clauses in your top contracts, because nobody does this faster than the people who run the company. Our post on SAFEs, 83(b) elections, and cap table hygiene covers that cleanup in detail.
Where it gets complicated
Scope the next set of questions yourself, but don't answer them alone. These are the ones where terms interact, things get complicated, and no single clause settles them. An earnout metric depends on the accounting that measures it. A holdback stacked on accelerated vesting can trip the golden parachute math. How much to roll into a sponsor's deal mixes tax and control. Each one rewards modeling before you take a position.
Where expert counsel becomes mandatory
Some of this you should not sign without a lawyer in the room. The purchase agreement's reps and indemnity, the 280G analysis and its cleansing vote, the seller non-compete, and the letter of intent itself were all drafted by the other side to be signed quickly.
Serotonin Legal works through this sequence for founders heading into a sale, from the first inbound to the wire. For more on which decisions founders can handle on their own and which call for counsel, we answer the questions tech founders ask us most.
Final Thoughts
A sale is easiest to get right early, before a letter of intent starts the exclusivity clock. Most of these terms are manageable on their own, but they get complicated when they interact, and complication is expensive. Use your leverage before exclusivity begins. The founders who keep the most look past the headline price to the terms underneath it, and they start before they sign.
If a sale conversation is live, get specific before the letter of intent. An offer you're tempted to sign, a rollover term sheet from a sponsor, or an earnout carrying most of your price is each worth a conversation first. Reach out and we will give you a clear read on where you stand.
Reach out to set up a free consultation.
Serotonin Legal advises technology founders on corporate, regulatory, and transactional matters at the intersection of AI, blockchain, and fintech. This guide is for general informational purposes and does not constitute legal advice. No attorney-client relationship is formed by reading this material.
FAQs
What happens to my stock options when my company is acquired?
Your options can be assumed, substituted, cashed out, or cancelled. In most private deals the buyer does not assume them. Which one you get is set by your equity plan and the merger agreement. A cash-out of vested options is taxed as wages, with withholding, rather than as capital gain. What happens to unvested awards depends on your acceleration terms. The common structure is double-trigger, which means vesting speeds up only if the deal closes and you're let go without cause afterward. The plan usually gives the board wide discretion over all four outcomes, so read your grant documents before the deal starts moving.
Is a letter of intent binding?
Typically no, with one exception that matters more than the rest of the document. A letter of intent lays out the price and structure the buyer proposes, and those terms are usually non-binding, so neither side is committed to closing on them. One clause does bind you, though. It is the exclusivity clause, sometimes called a no-shop, and it stops you from talking to other buyers for a set period. That ends the competition that gave you leverage. Read that clause and any break-up fee closely before you sign, because it is the part of the letter you are committing to.
How long does an acquisition take to close?
It depends on the structure and complexity, but for a private company, plan on a few months from a signed letter of intent to the wire. Diligence, drafting the purchase agreement, and collecting third-party consents fill most of that time, and a deal that needs an antitrust filing or a financing contingency runs longer still. The stretch between signing and closing is also where deals slip, because that is when the buyer's counsel finds the gaps in your records. You can shorten it by getting your cap table, contracts, and IP assignments in order before the process starts, so diligence has nothing to snag on.
How are you taxed when you sell your startup?
A stock sale is generally taxed once, as long-term capital gain, and qualifying QSBS can exclude much of that gain depending on when you acquired the shares and how long you held them. An asset sale by a C corporation is taxed twice, at the corporate level and again on distribution, which is why founders resist selling assets instead of stock. Deferred money, like an earnout or an escrow release, usually gets installment treatment, and part of each payment is taxed as ordinary interest. Founders who stay on can also face the golden parachute excise tax if their change-in-control payments run high against their salary history. Bring a tax advisor in before the structure is set, because most of it can't be fixed afterward.
Can I be forced to sign a non-compete when I sell my company?
No one can force you, but the buyer can make signing a condition of closing, so refusing usually means walking away from the deal. Sale-of-business non-competes are enforceable almost everywhere, including California, where Section 16601 allows them for a selling owner within the area the business operated in. Negotiate the scope, the duration, and how the restricted business is defined. All of it matters, because courts enforce these covenants as written. An overbroad covenant can still backfire on the buyer, though, since Delaware courts have started throwing out the ones that reach too far rather than trimming them down.
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M&A Considerations for Founders
What Happens When Your Company Is Acquired
by
Teddy Ellison
AI & Data Agreements
Summary
When your company is acquired, the price quoted in the announcement and the amount you take home are rarely the same number. Several key deal terms decide the gap between them.The founders who take home the most settle these terms when they have the most leverage, before signing the term sheet.
When a buyer makes an offer for your company, the headline price is often the most attention-grabbing figure. But that number rarely reflects what you take home. The amount founders get to keep post-acquisition depends on the actual deal terms, including the form of consideration, escrow, earnout, tax treatment, and the non-compete you sign as a seller.
The M&A considerations that decide a founder's real outcome are only negotiable up to a point. Once you sign the letter of intent, exclusivity can limit your leverage,. A 2025 change also made the QSBS tax break potentially far more valuable, so the structure you choose early on matters more than it used to.
The sections below walk these terms in the order a founder meets them, from the first offer to the wire.
What an offer puts in your pocket
When an offer for your business lands, your first move should be to work out what it would put in your pocket, and when. The headline number is the enterprise value, and your share of it often comes last.
In a venture-backed sale, the money runs through the liquidation waterfall in your charter. Preferred investors get paid first, the bankers' fees and any debt come off the top, and a working-capital adjustment trues the number up or down after closing. Whatever is left goes to the common stockholders, mainly you and your team.
Even a founder-friendly 1x non-participating preference doesn't change that order. It just means an investor takes its money back or converts to common, but can't do both. If the company sells at or below the total preference stack, the preferred is still paid out of the whole price first. You can own most of the equity on paper and walk away with almost nothing.
So model your own waterfall before the first serious conversation with a buyer. Pull the charter, list every preference, and run the math at the offer price and again at seventy percent of it. That tells you which offers are life-changing and which only look that way in a headline. Once you know what a deal pays you, the rest of the terms just decide how much of it you keep.
The letter of intent locks your terms
The letter of intent fixes the price and the structure, starts the exclusivity clock, and opens diligence, where the buyer's lawyers inspect everything and what they find can move the price back. Your leverage over all of it is strongest before you sign.
How the deal is structured decides how you’re taxed
A deal typically gets structured as a stock sale, a merger, or an asset sale, and that choice is usually settled in the letter of intent. A stock sale or a merger taxes you once, as capital gain, and gives you a cleaner break from the business.
Buyers often push for an asset sale instead, because it lets them take the assets they want and leave your liabilities behind. In an asset sale, you get taxed twice: once at the corporate level under Section 11 and again when the proceeds come out to stockholders. And it strands your QSBS exclusion, because Section 1202 shelters only the gain on your stock. The corporate-level gain gets no shelter at all.
A merger also needs a shareholder vote, but under DGCL Section 251 that is only board approval plus a majority of the outstanding shares, which a private company usually collects by written consent. A minority holder can't block it by refusing to sign.
A dissenter may have appraisal rights under Section 262 to sue for fair value, though most venture-backed companies waive that right in the stockholders agreements, and Delaware upholds those waivers.
Structure belongs on the table early and drives the tax result, which can dwarf anything your lawyer later wins on indemnity caps. Get a tax advisor in the room while the structure is still a choice.
What the letter of intent binds, and what it ends
The letter of intent is mostly non-binding, except for the exclusivity clause. That clause binds you. Once you sign a no-shop, you can't run a competitive process for a stretch of months, and the buyer knows you have nowhere else to go. A fiduciary out, which would let you take a better offer that shows up during that window, is rare in private deals.
That's why the price and structure in an LOI tend to stick. The buyer treats the number as a ceiling and chips at it as diligence turns up reasons. Sellers rarely move it back up, because the leverage that would move it is gone.
So get counsel involved before signing the letter of intent, while the exclusivity period, the fiduciary out, and the price are all still open. Signing closes all three at once.
The money you don't get at closing
Not all of your price arrives on the closing date. Some may sit in escrow against the promises you made. Some may depend on how the business performs after you leave. Both situations involve putting the money at risk and are negotiated in the purchase agreement.
What sits in escrow
In the purchase agreement, you make representations about the company, and part of the price may sit in escrow to back them. That escrow is your money, but its held for a set survival period against the chance that something you said turns out to be wrong.
How much sits in escrow, and for how long, often comes down to whether the deal is insured. In SRS Acquiom's 2026 deal terms study, the median escrow on an uninsured deal was about ten percent of deal value. With reps and warranties insurance, that median dropped to 2.8 percent, and the 2025 ABA deal points study put the median indemnity cap on insured deals at a quarter of one percent.
So whether the deal carries insurance, and who pays for it, is worth negotiating as hard as the price.
Before you sign, check your survival periods, your liability cap, and the basket the buyer has to clear before it can claim anything. On an insured deal, your reps can end at closing and only the policy's retention stays in escrow. On an uninsured one, more of your money stays at risk for longer.
What depends on future performance
When the buyer and seller can't agree on price, they often bridge the gap with an earnout. Part of the payment gets deferred, and you collect it only if the business hits targets after closing. That target could be based on revenue,EBITDA or another milestone. In life-sciences deals tied to clinical trials or FDA approval, the earnout is often most of the deal. After closing, though, you often no longer run the business whose performance decides your payout. The buyer does, and the buyer sets the budget and keeps the books that measure the target.
Delaware's courts have spent decades on what happens next, and the pattern rewards sellers who drafted carefully. In January 2026, the Delaware Supreme Court held that Johnson & Johnson breached its "commercially reasonable efforts" obligation on the Auris Health earnout, and upheld a fraud finding worth hundreds of millions. Even then, though, it refused to imply a duty the contract could have spelled out once the named regulatory path disappeared, so you can only enforce what your efforts clause spells out. As a result, founders should tie their efforts to something a court can measure, like what a company with similar resources would do for a similar product. A vague promise to try gives you nothing.
Outside life sciences, earnouts have historically paid out around twenty-one cents on the dollar, so treat deferred money as money at risk. Negotiate who controls the levers, pin down the accounting, and get it in writing what happens if the buyer reorganizes, sells, or shelves the product before you're paid.
The terms that bind you after the sale
Two of the deal's terms reach past closing and follow you, the retention package you sign if you stay and the non-compete you sign as a seller.
If you stay on, your payout can vest all over again
The offer letter you sign with the acquirer can matter more to your outcome than the purchase price. Buyers often tie part of your proceeds to staying, either through a holdback that vests over your first years there or by re-vesting shares you fully vested years ago. That turns purchase price into a retention package you have to earn a second time.
So negotiate what happens to the unvested portion if the buyer lets you go without cause. The gap between forfeiting it and keeping it can be most of your take-home.
Your equity and your title get re-papered in the same stretch. A private deal often hangs on key employees signing new offer letters, and the founder is always on that list. The buyer usually won't assume your outstanding options either, so vested options get cashed out as wages and the unvested ones are handled grant by grant.
Negotiating your own package carelessly can cost you the whole deal. Delaware held Mindbody's founder-CEO personally liable for roughly forty-eight million dollars. He steered the sale toward the buyer that offered him the best job and liquidity, and hid those early talks from his board. Disclose every contact with a bidder, and let the board settle the price before your own package comes up.
The non-compete you sign as a seller
The non-compete you sign as a seller is not the employment non-compete you've been reading about. Employment non-competes are getting struck down in many states, but covenants tied to acquisitions are broader, last longer, and hold up far better in court. They came through the federal fight intact. The FTC's 2024 ban was struck down in Ryan LLC v. FTC, and even that rule had carved out covenants tied to a bona fide sale.
Even California enforces them. The state voids employment non-competes outright, but it still binds a selling owner under Business & Professions Code Section 16601, as long as the covenant is scoped to where the business operated. Courts back these because the buyer paid for the goodwill the covenant protects.
If the covenant reaches too far, some courts will throw the whole thing out rather than trim it down, and Delaware now does exactly that. In March 2026, its Court of Chancery refused to enforce a five-year worldwide non-compete against founders whose company had only operated regionally, and declined to rewrite it into something narrower, so negotiate the scope, the length, and the definition of the restricted business like a court will hold you to every word, because it will. Remember to watch for the same covenant showing up twice, once in the purchase agreement and once in your employment agreement, where the stricter employee standard can pull it down.
Most of your tax bill is set before you sign
Everything above lands on a tax bill, and most of what sets its size can't be changed after you sign. That is the argument for bringing a tax advisor in early, while the letter of intent is being negotiating and while the structure is still a choice. Three things drive the numbers.
QSBS, and the 2025 split
Start with QSBS, because a 2025 change made it more valuable and split it in two. Section 1202 now draws a line at July 4, 2025.
Stock you acquired on or before that date keeps the old rules, a five-year hold and a ten-million-dollar cap. Stock acquired after it gets a graduated exclusion, fifty percent of the gain at three years, seventy-five at four, and a hundred at five, under a fifteen-million-dollar cap.
One founder can hold both kinds in the same company. Whether your shares qualify, and whether the structure keeps the exclusion intact, can be worth up to fifteen million dollars, so check it before anything else.
The golden parachute trap
The golden parachute rules catch founders precisely because founder salaries run low. If your change-in-control payments, say accelerated vesting plus a retention bonus, hit three times your average recent pay, Section 280G taxes the excess at twenty percent and costs the company its deduction.
A private company can clear the problem with a shareholder vote above seventy-five percent after full disclosure, but that vote takes lead time you may not have.
For how the 280G excise tax is calculated and the cleansing vote that clears it, see The 280G Golden Parachute Trap for Founders.
How deferred money is taxed
Deferred money is taxed differently. An earnout or an escrow release usually gets installment treatment, and part of each payment counts as ordinary interest. If you move states to lower the bill, that can take months to hold up.
All of this is a reason the tax advisor should be looped in before the letter of intent, not at the closing table.
A framework for founders
Some of this you can handle yourself, and some of it you shouldn't touch without counsel. Our Tech Founder's DIY Legal Guide draws that line for founder legal work generally. Here is how it falls for a sale.
What founders can handle themselves
Know your numbers. Model the waterfall at two or three prices, read your vesting and acceleration provisions so you know what the deal does to your equity, and check your stock certificates against the QSBS dates so you know which regime your shares sit in.
The diligence groundwork is yours too. Collect the signed IP assignments, reconcile the cap table, and flag the change-of-control clauses in your top contracts, because nobody does this faster than the people who run the company. Our post on SAFEs, 83(b) elections, and cap table hygiene covers that cleanup in detail.
Where it gets complicated
Scope the next set of questions yourself, but don't answer them alone. These are the ones where terms interact, things get complicated, and no single clause settles them. An earnout metric depends on the accounting that measures it. A holdback stacked on accelerated vesting can trip the golden parachute math. How much to roll into a sponsor's deal mixes tax and control. Each one rewards modeling before you take a position.
Where expert counsel becomes mandatory
Some of this you should not sign without a lawyer in the room. The purchase agreement's reps and indemnity, the 280G analysis and its cleansing vote, the seller non-compete, and the letter of intent itself were all drafted by the other side to be signed quickly.
Serotonin Legal works through this sequence for founders heading into a sale, from the first inbound to the wire. For more on which decisions founders can handle on their own and which call for counsel, we answer the questions tech founders ask us most.
Final Thoughts
A sale is easiest to get right early, before a letter of intent starts the exclusivity clock. Most of these terms are manageable on their own, but they get complicated when they interact, and complication is expensive. Use your leverage before exclusivity begins. The founders who keep the most look past the headline price to the terms underneath it, and they start before they sign.
If a sale conversation is live, get specific before the letter of intent. An offer you're tempted to sign, a rollover term sheet from a sponsor, or an earnout carrying most of your price is each worth a conversation first. Reach out and we will give you a clear read on where you stand.
Reach out to set up a free consultation.
Serotonin Legal advises technology founders on corporate, regulatory, and transactional matters at the intersection of AI, blockchain, and fintech. This guide is for general informational purposes and does not constitute legal advice. No attorney-client relationship is formed by reading this material.
FAQs
What happens to my stock options when my company is acquired?
Your options can be assumed, substituted, cashed out, or cancelled. In most private deals the buyer does not assume them. Which one you get is set by your equity plan and the merger agreement. A cash-out of vested options is taxed as wages, with withholding, rather than as capital gain. What happens to unvested awards depends on your acceleration terms. The common structure is double-trigger, which means vesting speeds up only if the deal closes and you're let go without cause afterward. The plan usually gives the board wide discretion over all four outcomes, so read your grant documents before the deal starts moving.
Is a letter of intent binding?
Typically no, with one exception that matters more than the rest of the document. A letter of intent lays out the price and structure the buyer proposes, and those terms are usually non-binding, so neither side is committed to closing on them. One clause does bind you, though. It is the exclusivity clause, sometimes called a no-shop, and it stops you from talking to other buyers for a set period. That ends the competition that gave you leverage. Read that clause and any break-up fee closely before you sign, because it is the part of the letter you are committing to.
How long does an acquisition take to close?
It depends on the structure and complexity, but for a private company, plan on a few months from a signed letter of intent to the wire. Diligence, drafting the purchase agreement, and collecting third-party consents fill most of that time, and a deal that needs an antitrust filing or a financing contingency runs longer still. The stretch between signing and closing is also where deals slip, because that is when the buyer's counsel finds the gaps in your records. You can shorten it by getting your cap table, contracts, and IP assignments in order before the process starts, so diligence has nothing to snag on.
How are you taxed when you sell your startup?
A stock sale is generally taxed once, as long-term capital gain, and qualifying QSBS can exclude much of that gain depending on when you acquired the shares and how long you held them. An asset sale by a C corporation is taxed twice, at the corporate level and again on distribution, which is why founders resist selling assets instead of stock. Deferred money, like an earnout or an escrow release, usually gets installment treatment, and part of each payment is taxed as ordinary interest. Founders who stay on can also face the golden parachute excise tax if their change-in-control payments run high against their salary history. Bring a tax advisor in before the structure is set, because most of it can't be fixed afterward.
Can I be forced to sign a non-compete when I sell my company?
No one can force you, but the buyer can make signing a condition of closing, so refusing usually means walking away from the deal. Sale-of-business non-competes are enforceable almost everywhere, including California, where Section 16601 allows them for a selling owner within the area the business operated in. Negotiate the scope, the duration, and how the restricted business is defined. All of it matters, because courts enforce these covenants as written. An overbroad covenant can still backfire on the buyer, though, since Delaware courts have started throwing out the ones that reach too far rather than trimming them down.
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