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Is merging two-early stage startups a good idea?

A few years ago I tried to bring on a tech co-founder, who had started his own company. He obviously lacked design or contacts into the fashion world and we bring that part. Felt like the right mix at the time. When asked to come on board, there was no interest and went back to his own start-up. I do not begrudge the choice. It's his baby. I get that.

In hindsight, I thought maybe I should have tried to merge. It didn't occur to me then.

My view is that a bunch of disparate entities working in the same direction but with compatible skill sets should consider working together or merging. This is particularly true of wearables and other hardware spaces where design, engineering, marketing, mechanical design, manufacturing and operations all must be in working order to succeed. I would like to know if other start-ups have merged early and how?

Is this something that comes later after or before funding? What are the barriers here?

10 Replies

Jacob Kojfman
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Jacob Kojfman Entrepreneur • Advisor
Experienced technology and corporate lawyer, focusing on SAAS
Hi Alison, If you're going to merge, you will need to carefully look at all of your legal agreements in place, i.e. articles of incorporation, any shareholders agreements, so you can determine if you are able to and how you go about doing it - will you need permission of shareholders, etc.
Dean Tucker
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0
Dean Tucker Entrepreneur
VP Sales and Marketing, North America at Beddit
Alison, Guy Kawasaki in his new book "The Art of the Start 2.0" has some good advice about founders and philosophy, and how cofounders need to have a balance of skills, but must agree on the vision and outcomes. Before you get to the Ts and Cs, you should be absolutely certain that the foundation of the merger is what both of you want. Think of this as a long term relationship, and you both have babies. Do you keep them? Or put one up for adoption?



Steve Simitzis
2
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Steve Simitzis Advisor
Founder and CEO at Treat
If:

- your visions are aligned,
- you each bring assets and skills that complement the other's,
- one of you is willing to let the other be CEO,
- you agree on which brand to retire,

Then a merger could be a great idea. I once proposed an early merger but the talks didn't go anywhere. Like you pointed out, it's their baby, and even if it makes sense on paper, people can be reluctant to give up their baby. The emotional barriers are not much different than asking someone to join you as a cofounder. Fortunately there's no shortage of amazing people to work with who are just as excited as you about your space.
Josh Cramer
1
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Josh Cramer Advisor
Internet Entrepreneur
One way to think about this is as an acquisition rather than a merger. In that sense, your company would be acquiring the assets (or stock) of the other company. You would make an offer to purchase this individual's company, perhaps in exchange for stock in your company.

The result would make you partners with this individual and it would functionally merge the two companies into one. If you were to think of this as a pure acquisition, you could break down what assets or items of value you would be acquiring from this person. Customer lists, contact lists, contracts, an agreement for the founder to work for your company for a given amount of time, perhaps attached to a vesting schedule for the stock purchase pay-out.

In this sense, I think it changes the conversation a bit and allows you to actually construct a tangible offer for the other founder to consider. Perhaps you would make this person your VP or put them in another executive position after the merger goes through, but they would clearly know what they are getting for what they are giving up. In the end, the resulting company should have a singular mission and everyone would be aligned underneath it. I think this type of offer clarifies the opportunity for all involved.

I think the issue of whether this person want to throw in with you or keep trying to make a go of it alone will still be the same, but a formal offer for acquisition puts some teeth to the concept of a merger and starts talking about exchanging value for value on the table more clearly.
Kevin Ready
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Kevin Ready Advisor
General Manager, CoStar Group, Startup advisor, and contributor at Forbes
Alison, I participated in something like this in 2010 for a startup in the online ecommerce space. That transaction took the form of a merger, where shifted our dev team and IP to the larger competitor in exchange for equity. This made sense in that we combined forces to achieve a single market goal. And it was a natural fit since they had more advanced logistics than us, and we had more advanced software and data management than them. Together, it made a more competitive company - a great fit. IMHO - Without natural fit and without emerging with a single aligned intention to tackle the market together, mergers of this type would not likely work out very well due to limitations in finances and leadership bandwidth. Investors will want to see a compelling talent story - having the right folks - and also confidence that everybody is rowing in the same direction. * * * * * * * * * * * * * * * * * * * * * * * * Kevin Ready [removed to protect privacy] http://KevinReady.com "Ready for Business" on Forbes * * * * * * * * * * * * * * * * * * * * * * * * *
Misha Britan
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0
Misha Britan Entrepreneur
CoFounder at Virtual Vizzit
I know about an M&A advisory firm based in New York, specializing in startup and emerging growth company M&A. It's called Global i Ventures, and their website is at http://www.globaliventures.com.
Kevin Gao
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0
Kevin Gao Entrepreneur • Advisor
Founder
Alison - Startup merger is an interesting topic but there was no much discussion.
Although compare to bigger corp, I think there are greater needs of startup M&A. The No. 1 startup failure reason is: team members, of lack of. If two compatible teams and resources can merge together, then survival rate should be higher (vs. big-corp M&A: The main goal is cut cost and do layoff.)
Even though there are such needs, but startup-M&A rarely occurs: Few entity facilitates this process because no money in it...(Lawyers can't collect much fees).
If someone can figure out a facebook-like site to make startup merger easier, take a few equity % as fees (vs cash) for the deal or other methods of monetizing, they may well create a new business model.
Dirk de Kok
0
0
Dirk de Kok Advisor
Founder and CTO Mobtest
Why not abandon the 2 old companies and start fresh with a new company?
Benedict Rodenstock
0
0
Benedict Rodenstock Entrepreneur
Entrepreneur
In theory it looks good to merge two startups with complementary assets and skillsets. I just doubt that in practice it will be reconcilable with human egos in most cases.
W. Bruner
0
0
W. Bruner Advisor
Founder & Director of Sales
Alison-unfortunately the short answer is no.

An individual (especially in the early stages of a business/venture) will always have an issue detaching from their unique vision/goal. Regardless of how similar the goals, between multiple start-ups, may initially appear at first glance-there will generally always be that slight variance that will create a rift.

As several others have previously said, fortunately there is no shortage of talent out there. With the advent of the internet, there are now countless complementary individuals readily at our fingertips. We only require direction on the best places to look for our specific venture.


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