Ep 561 The $40M Earnout That Never Got Paid, and the One That Did - Rob Walling and Garren Hilow

Rob Walling Sure. So I started a software as a service company called Drip in, I guess we first line of code was 2012, but really launched it in 2013 and then sold it to a strategic acquirer in 2016 during the summer. And so, we had grown it to, it was bootstrapped and we had grown it to a couple million in ARR, annual recurring revenue, and sold it. And an earnout was attached to it because it was a full, you know, there were 10 of us on the team, including me and my co-founder. And I remember going into it, this was my first big exit. I'd had some small, like, they were still life-changing exits, but they weren't never have to work again exits, you know? And, and this was the big, my big, big one. And I really, like everybody, didn't want an earnout. And it just is kind of par for the course is what I found with exits that are this significant, you know, or acquisitions.

John Warrillow And are you able to share what proportion of the deal was tied to an earnout?

Rob Walling Yeah. So it was, you know, the original offer, like the first offer we got from the acquirer was 60% cash on close. And 40% after, I think it might've been 2 years and that was it. It was 60/40. So the negotiate, so that was a starting point. Then we came back. What we wound up getting eventually is 60% cash on close, 20% after 12 months, and then 20% after 6 more months. So it was 18. I got the full, we could leave at 18 and get everything. And we, and we

John Warrillow Did. To be clear, the, the, the original proposal, 60/40, was the 40 contingent on achieving a milestone or a goal or EBITDA goal or revenue goal? What was—

Rob Walling Yeah, it was, I can't remember. It was, it was pretty vague. I don't even think that was the first LOI and their LOI was very thin. And I remember I pushed back. I think we negotiated for maybe 6 to 8 weeks just on the LOI because I wanted to know my salary, my co-founder's salary. I wanted, like, I, I went really into detail to the where the acquirer started getting pretty mad at me and being like, do we really wanna do this? Like, but I was like, I want it locked in before we go exclusive, you know, before I sign this thing. So, it was, I think the initial one just said 60/40, and it was like, to be, you know, pending milestones that we discuss. It was something like that. And so, then I came out and said, I'm not doing profit milestones. I'm not doing revenue milestones, you know, and that was my demand. And so, During the LOI, I think we started saying, well, how about like some features that you launch? So it was because it's software, right? So it was like a couple of, well, I don't know what kind of milestones we would call those, but like feature, like product milestones, maybe that's what it wound up being. There were 2. And then even by the time, trying to think if I specced it out, I think I specced it out during the negotiation after the LOI. I literally went through and did a software spec. It was like 8 pages of all the bullets and every button and everything that would be it. And we had, we, that was in the APA of exactly what we have to build.

John Warrillow Just define APA.

Rob Walling Oh, the asset purchase agreement. So as folks who listen to your show know, you can have a stock purchase agreement or you can sell just the assets. So stock is when they buy the, basically the ownership of the whole company. Ours was an asset purchase agreement.

John Warrillow Got it. That's helpful. And so they started off with vague milestones to be determined. I'm so glad you didn't sign that.

Rob Walling I know, I know.

John Warrillow But then you got down to 60/20/20 tied to product release, achieving the product release milestones effectively. Yeah, right.

Rob Walling Like building some features. And we set it up where my co-founder was the lead developer. And I said, the first product feature, I said, how long do you think you could build this just you? Like if it was you and a laptop in a room, he's like, about 3 weeks. And I said, great, we'll do that for the 12 months. You know, it was that type of thing. I was trying, I mean, it's negotiation, right? And it, there's nothing nefarious about it, but I didn't want any milestones, to be honest. And that was, that was what we were doing.

John Warrillow Yeah. And did you ever get a sense of the motivation of the acquirer to include milestones as opposed to having you, you know, paying you 100%? Was it to keep you or was it in most, you know, in some cases it's because they don't want to pay the value you want until their profit goals are met or revenue goals are met. It doesn't sound like that was their motivation. What, what did you learn about it?

Rob Walling Yeah, that's a really good question because the acquirer had raised $38 million in venture and they were doing, I don't know, $25, $30 million in annual recurring revenue at the time. So they were like, they had money, they had cash to spend, and they were much less worried about us generating revenue or profit because in the venture game, it really is, I guess revenue is important, but like profit wasn't, wasn't the issue. They really wanted to acquire us as the team and they put a lot of value on me and my co-founder because we had built one of the, we had basically bootstrapped one of the best marketing automation tools in the world. Frankly, we were in the top 10 and we bootstrapped it and the 9 ahead of us had raised between $50 and $300 million. And so we were this anomalous, like, 2 of us are pretty good at this, you know? And so they really, they wanted to keep us around for years. I mean, that was the motivation. And they wanted us to contribute both to their org and continuing to contribute to Drip internally. The product milestones, I remember at one point saying, hey, why don't we just make it a time? Just make it 18 months. Like, And that's it if you wanna keep us around. And one of them brought up a good point, which was, it was a COO at the time, and I think he said, well, then you could just come in and just phone it in and just show up every day and not do anything. And I was like, you know what? I'm not gonna do that, but that's fair. Like, I did see his point. There was something, they had to have some guarantee too. And they have a board and they had to show, I'm sure they showed the APA and I bet the board said you have to tie 'em to something so they don't just show up every day and sip coffee like you're in the office, you know?

John Warrillow Yeah. Yeah, no, for sure. And your co-founder had the same deal, 60/20/20?

Rob Walling Yeah. Yeah. I was the majority, like the super majority owner of, of equity. But we were, it was all just one lump. It was one APA. We were the 2 key people, the key man or key people as, as we say. So we, it was tied to both of us. What I hadn't thought about is we got like 6 months in and we were both kind of unhappy and I thought, you know what, if he leaves, I think we both lose the rest of the money. That wouldn't be good. And I, I had never thought to put, yeah, that was probably one. I didn't have many kind of oversights or things that I missed, you know, during the APA process. I was super meticulous to the point of it not being fun. But that was probably the one that I remember being like, man, he could really screw me. But he was like my best friend. And so he was, he was willing to stick it out.

John Warrillow So overall a positive experience, it sounds like you. Hit the milestones.

Rob Walling Yep. We stayed for—

John Warrillow You got 100% of the—

Rob Walling And we actually stayed for almost 2 years. I stayed after the earnout, which is unusual, but I was there for 22, 23 months. We did, you know what, there was one piece tied to uptime that I think we literally lost, like, I don't even know, a 10th of a percent of the purchase price or some like minuscule number, you know, probably tens of thousands of dollars, which sounds like a lot, but in the scheme of things it wasn't. But there was something about uptime and I don't even remember all of what it was and I don't even remember why we put uptime in. But yeah, so it was tied to these 2 features and having the site reliability basically just being up. So I would say we got 99.8% of the purchase price.

John Warrillow Yeah. Yeah. Uptime being kind of software lingo for the site's available and available and serving customers. Got it. Well, that's super helpful, Rob. Why don't we go to Garrett? What was your experience like? Maybe just remind us of the business and sort of how, how your exit all went down.

Garren Hilow Yeah, sure. Happy to. We could have used Rob on our team, I think. So we were a— my company is Abveris. I was one of the co-founders and we bootstrapped it as well. And we were a drug discovery service company. So we'd help big companies discover their drugs, making specifically antibodies. And we sold in 2021 when biotech was booming, right after we'd contributed to a number of different COVID vaccines. And our figures are public, so I can share them with you. We were bought by a public company. So our deal was $150 million upfront. And then a $40 million earnout on top of that. And the earnout was entirely based on revenue. And, you know, Rob's earnout sounds like it went great and mine went really poorly. We got to the way that it was structured as a $40 million earnout and we needed to achieve 75% of our projections to pay the earnout. And ultimately what happened is we got within, we're within 1%. We were at 99% of our revenue to pay out a $40 million earnout. And they said, you didn't reach it and refused to pay it and refused to give us the accounting behind it. 'Cause we were within an accounting error type payout for big money and they kind of just dared us to sue them. Ultimately, we didn't sue them, which was a regret of mine at this point, 'cause now enough time has passed that that's not worth it. And so, yeah, so our deal was— so it was like 20% of the deal was in earnout and the other 20% was rollover, which they also did not give us in like the nastiest way. they could come across. But this is about earnout.

John Warrillow Yeah. Well, talk to me about that. So you said 20%, so 100, so let me just see if I get the numbers right. $150 million sale price. On top of that, there was $40 million available in an earnout. Correct.

Garren Hilow $190 million deal. That was the press release number was $190 million.

John Warrillow Got it. So $190 million, that's how, so then of the, so the $40 million was tied to an earnout, or am I correct in saying $20 million of the $40 million was an earnout and $20 million of the $40 million was an equity

Garren Hilow So yeah, these get complicated. And John, you do a good job in your podcast making it clear. $40 million was the dollar amount for the earnout. So then of the $150 upfront, if you will, which was all paid in stock, it was an all-stock deal. 20% of my take-home and everyone's take-home was rollover, which was— I needed to stay for a year to earn half that and 2 years to earn the full rollover. And they terminated my employment contract at 11 and a half months in the nastiest way they could.

John Warrillow So, so, okay. So they terminated your employment agreement. And so you didn't have the choice to stay at that point. You were being terminated.

Garren Hilow No, no, I was fired for cause 11 and a half months in for things that I said about 6 weeks after they bought us.

John Warrillow Wow. And so what did you say?

Garren Hilow I said things in email that I just shouldn't have put in email. And they also went back into, you know, they owned our email, they owned our Slack. So they found Slacks that were internal Slacks that I'd written while we were in diligence. While we were on calls and they were asking us questions that I thought were stupid questions from people who didn't know what they were doing, they had their IT team go back and find our Slacks and use that as reason to fire me, you know, 18 months after those Slacks were sent. It was, it didn't end well between us and, you know, financially it was a life-changing deal for me. I walked away with a totally life-changing outcome, having founded and bootstrapped the company. But it's a cautionary lesson for people who think that they're going to get the money from their earnouts or their rollovers. 'Cause it's not entirely in your control, even if you get really, really close. Or maybe we did actually hit it.

John Warrillow I can hear, I can see Rob sitting on his hands. He's dying to ask a question.

Rob Walling Go. This is killing me. Oh my gosh. So, but just to clarify, was the $150 million, was it, did you say it was all stock or did you get some cash?

Garren Hilow All stock deal.

Rob Walling Yeah. It was all stock and they're a public company, so you were able to sell some of that stock and get cash out.

Garren Hilow Yeah. I mean, I was tied personally. I owned more than half of the business. Which was great. I was tied. I had to wait 18 months to sell most of mine, and the stock precipitated pretty. It was $118 when they bought us, and I sold a lot of my stock at $18, which was a pretty bad move because right now the stock is well above that. So anyway, even though we made a series of poor decisions in how I liquidated my shares, life-changing outcome. But yeah, no, it's still. I'm like less mad now, but for a long time I was very. very mad. That just didn't seem like it was how it should work. And now I've coached hundreds. I've spent the past few years coaching hundreds of entrepreneurs, wrote a book about my experience, like, and so I love helping people think about how to structure that and how to protect themselves. Rob, it sounds like you were much more, you know, it wasn't your first exit. You knew how to protect yourself far better. That was my first exit. And those were very expensive mistakes. So. Hope to help some others.

John Warrillow Yeah. Well, that's what today's all about. So that's helpful, Guerin, for sure. So let's just talk about the employment agreement. So you had an agreement that said, I'm going to, if I stay employed for a period of time, I will, that will basically unlock this additional tranche of equity and that employment was kind of a one-way deal and that's sort of, you had to show up, but, but that didn't mean they didn't have the rights to fire you.

Garren Hilow Right.

John Warrillow They could have, presumably they could have, if they had fired you without cause, like under normal circumstances, they would've had to pay that. I'm assuming you would. But it, since it was for cause, which depending on the legal jurisdiction you're in, like I, I'm in Ontario and like you basically have to shoot someone for, to, to, for it to be cause. Like there is the, the, the bar for firing someone for cause is astronomical. It would never, like saying something negative in a Slack channel would never meet the bar in Ontario. But Garen, where are you located? What city? Massachusetts. Okay. So the bar must be somewhat—

Garren Hilow Definitely lower than Canada.

John Warrillow Got it. Okay. Got it. Yeah.

Garren Hilow And look, my lawyers were like, let's go, let's go. They're daring us to sue them. Let's go. And at that point, like I was extremely burnt out running the business for 8 years, a year worth of working for people that I had no respect for and disliked going to work every day. And then I was like, I'm out. Like, if I spend the next 2 years spending millions in litigation to potentially get the money, maybe that's a financially right decision. But for me, I'm going to just have this negative energy for the next 18 months. Looking back, maybe I should have just bucked up. And my lawyer was like, get a therapist and let's go to court. And I was like, I'm going to spend a year on my boat, man. No.

John Warrillow Get a therapist and go to court. Easy for him to say.

Garren Hilow Yeah, right.

John Warrillow $1,000 an hour or whatever.

Garren Hilow He's making millions, bud.

John Warrillow Just one, like, clarifying point. So with regards to the timing of your liquidation of your stock, had you gotten liquid enough by that point to finance the legal action should you have taken it? Like, had you, had you like, you know, sold enough stock that you had enough money to finance the litigation?

Garren Hilow Definitely. Yeah. I mean,

John Warrillow If you chose to, yeah.

Garren Hilow I owned more than half of the business. I write about this in my book. Like I should have made $60 to $80 million and I walked away with like $20 million, which you could be really mad because I left $60 million on the table or to realize that that's enough money for me not to have to work again and change my life and the life of everyone around me that I love. And so it's a great outcome and yeah, I could be mad, but like we had an exceptional outcome. And so Could I have spent $2 million to take them to court? Absolutely. Would that have been worth it for me? Probably not. I'm glad that I didn't.

John Warrillow But it is one thing for our listeners to remember that if they're given a good size cash upfront payment for their business, there is a disincentive for the acquirer to screw around like you're describing, because they've just written a giant check to you so that, you know, you have enough money to take them to court if that's what you choose. Whereas if you're downstroke, if your cash payment upfront is so small that they know that even if they totally screw you on the earnout, you're not gonna take them to court. You just don't have the money to do it in a material way. It's another reason to try to get as much cash obviously upfront so that the acquirer knows you could sue them if you had the appetite for that.

Garren Hilow That's a cool way to think about it. I had not thought about it that way. I just think about it like if you're gonna sell your business, you need to get Whatever you get upfront has to be enough. Whatever else comes, it's really not out of your control. Rob, you're talking about your co-founder had the potential to leave, like that's not in your control. And so you just have to be okay with whatever you got upfront is kind of what I generally coach people going through an exit.

John Warrillow Yeah. Yeah. Let's turn our attention to some of that advice. I think it's fair to say, and I've got some stats that we do assessments with business owners. I've got some stats around this idea that I think just a third of business owners say they'd be open to an exit. Like it's a very low minority of business owners that say they'd be open to, excuse me, an earnout in an exit. Yet for a lot of acquirers, it's kind of a mandatory thing. They want to lock you in or they want to make sure that you bridge the gap between what you want as the seller and what they want to pay. So they're a very common tool that that acquirers use. So I think it's fair to say all of our listeners will not want an earnout, and many of them will have to deal with the specter of an earnout. So let's talk about that, Rob. Maybe you could start. I know through TinySeed, you've invested like in hundreds, I think, of businesses. This question must come up a ton for your, you know, the people you invest in. What's your general Sort of advice around earnouts?

Rob Walling Yeah. Yeah. I'm invested in 241 SaaS, mostly SaaS companies. And the general advice is, look, if you're, if you're selling for parts, you're selling just the tech and you're gonna walk away, usually that's a 6-figure exit for, for us, for my type of company. It's like, yeah, you're probably not gonna have an earnout. If you're selling for net profit multiples in our, in our world, 'cause SaaS usually sells for revenue, you might be able to walk away within a few months, but Generally, you're gonna have an earnout. Like, that's what I tell people. If you were having a great exit, if this is a high 7-figure, 8-figure exit or higher, 'cause we've had entrepreneurs sell anywhere between $3 million and almost $50 million in cash, and they mostly are all cash deals, you're generally gonna have one. So, that's the first thing I say. They do want you as the founder. That's one of your superpowers is that you bring that. The rule of thumb that I tell folks is, if you were to sell to Facebook or Google or a big name, like FAANG, I know it's not FAANG anymore, but a big name company, you're probably—

John Warrillow Amazon, Tesla, whatever. Yeah.

Rob Walling Yep. You're probably going to have about a 3-year, they usually, the standard there is a 3-year lock-in. If you're selling to a lesser known company like I did, you're looking at 2 years. And if you can get it down to 18 months, you're probably doing pretty well. The, and then I talk about milestones of the worst that I've heard of are profit milestones and slightly below that are revenue milestones and slightly below that are product milestones. These in terms of, when I say below, I mean these are a little better for you. And then slightly below that is no milestone. It's just a ticking clock. And so that's what I basically say is like, I would never do profit milestone because you're not in control of that. And I would really struggle with revenue milestones because what if they fire my entire team and it's just me and one other person trying to hit these revenue milestones? But yeah, exactly. They can screw with you, right? So that, that's my general, that's like the 2-minute version of, of the first advice I give founders who are thinking about selling.

John Warrillow Garen, you were nodding. What was it that Rob said that you—

Garren Hilow Yeah. Well, I just wish I'd done so much more differently. One of the things that my buyer did was to take— I'd been, I was a CEO for my company for the first 6 years. And then I put a woman, Tracy, in as our CEO. She was exceptional. She was like Michael Jordan for the Bills, like for the Bulls, you couldn't— the best player on the team, like far and away MVP. And 6 weeks after they bought us, they took her out of our organization Had her move across the country to run another portion of their organization because their COO resigned. And I threw a hissy fit and I was like, what do you mean? Like, we have to hit our earnout and you just took away our best player. She drives most of our revenue. And they were kind of like, meh, we can do it. Doesn't say we can't. And I continued to push. They were like, all right, well then technically she's still in charge of that, but she's mostly in charge of this $100 million new facility we're building. And so I was like, what a doofus thing for me to do. I just agreed to a deal where they could pretty much take our best player and take her off the team and go. And they made a number of decisions that were just terrible decisions that may have just, may have been altruistic or may have been deliberate to make sure that we don't hit the earnout. Who knows? We also had no right to see our reporting. Like according to our revenue numbers, we hit the number. And according to their revenue numbers, we didn't hit the number. And I didn't have the right to see that, their numbers. It's like, how stupid of me to agree to that deal. But at the end of the time, with everything moving, it was like, well, of course there's gonna be a number. Like, how can my numbers say we hit it and their numbers say we didn't hit it and I don't get to see their numbers? Like, that's a mistake.

John Warrillow Garrett, just go further a little bit for folks. Again, our listeners, you know, they're about to get their first letter of intent. They've never seen the language that's associated with an earnout. And so they'll be looking at it for the first time. time, it may come as a shock or surprise to them to learn that they no longer control their bookkeeping and accounting, which is how you know what your sales are basically. And just walk through like why that is. Like what was it in the language in your deal that forced you to lose control over the reporting function?

Garren Hilow Good question. So The way they recognized revenue was very different. And so the contract, it just said revenue, we needed to hit whatever, $20 million in revenue or whatever the number was. And we would recognize revenue more quickly than they recognized revenue. So we had a 6-month project. Most of the value is done in the first 3 months. Most of the billing is the last 3 months. The last 3 months of the project is just like Tiddly stuff as we're getting stuff out of the freezer and shipping it to them. So we would recognize the revenue kind of as there was value by phase, if you will. There was a value at the end of each phase. They decided pretty late on in the year to change the way they were recognizing our revenue, to backload a lot of it. And they took a lot of our revenue. So like in the year, they took a lot of the stuff from the end of the year and put it off to next year. And in the beginning of the year, they took a bunch of revenue right after the deal closed. We did a ton of revenue and they said, you know what? We're going to recognize this as revenue for the year past, the year before. So they did very, they did that. It's a legitimate way to do accounting. I'm not trying to say there was anything fraudulent or anything, but they just chose the least favorable way to count revenue for us as possible and then wouldn't let us see it. So I would be very particular about not just saying hit this revenue number, but exactly how revenue is going to be calculated. And to make sure that we have some sort of— it would have been great if I had a monthly report. If on a monthly basis or quarterly basis, they were like, here's where you're at. And then we could have talked about it along the way instead of it being like at the end. And they, we thought we hit it and they thought we didn't. And, and I had no real recourse to go back. I would've had to go, it would've cost me millions of legal dollars for me to even get to see their accounting basis. And that's something that could have been avoided with proper wording upfront. What that wording is, I don't know, ask your lawyer, but those are, those are issues that can be, can be avoided.

John Warrillow Good point. None of us are lawyers on the call to my knowledge. I don't think you got a legal degree, Rob, did you?

Rob Walling No,

John Warrillow None of us are lawyers. So don't take any of this for legal advice. Please get a good lawyer, but it's good to know at least that strategic level, what are some of the issues? One of the things though, if I'm reading between the lines, Geraint, is that you lost control of the accounting. So when you were an independent company, you did your own accounting, you had an accountant and did your— and then when you were a division of another company, they did the accounting. And that's a fundamental difference in most acquisitions that you lose control of the accounting function. Rob, you're nodding. Have you had experience with that as well?

Rob Walling Yeah, it was the same with us, but it didn't matter, right? Because the revenue, like, I still cared, but I didn't have a vested interest. I didn't lose any money if the, if they pulled bookkeeping shenanigans. So.

John Warrillow And your, your big draw though was the ability to release these product features. And then what you came to realize later was, oh geez, like I'm pretty confident my co-founder can, can release them if he wants to, but if, if he leaves or if they were to fire him, or make life so egregious that he left on his own accord, that would've risked or put at risk potentially your account.

Rob Walling Yeah. Yeah. We also, like Karen, we had, it was with cause. It had to be with cause. They couldn't just let us go. But I don't, and I don't know, I had just moved to Minnesota that literally for the deal. So I don't know what cause is here, how hard it is to, you know, to get or, or prove cause. One thing I wanna jump in with is I think we, they made it pretty, they made it really good for us. Like they liked us as people. They liked what we were doing with the product. They respected us. They gave us all the resources we needed. They wanted us to be successful. It almost sounds like Aaron's relationship was the opposite, like on all fronts. And I think one of the ways, I don't know if it's, if it's a size thing, but like we were 10 people, the acquirer was 180 people. So I dealt directly with the CEO and the COO the whole time and the CFO during the deal. And we closed, they were the ones who had made, you know, there were some verbal things that just, you can't put in a contract like that. We're just not in the contract about, hey, I was like, I think we're gonna hire like 5 engineers in the next year. I need the resources to do that. And they're like, yeah, no problem, whatever. You can hire 10. Like they were just like, let's go, let's go. That kind of stuff. And, and to give us a nice office space and to give us all the resources we needed. I don't take that for granted. I know that not every acquisition happens like that. And, and I, again, I don't know if it's the public company versus the 180-person startup or what it, or if they're just They were just ethical, nice people and genuinely wanted, you know, the deal to go well. But that was it. It also wasn't $40 million of an earnout, right? It was a much smaller number on the, you know, the 20% and the 20% that we got. But they just, I remember at one point saying, you know, you guys could screw me. You could screw us. I said that to one of them. And the CFO was like, we wouldn't do that. You know that. And it was a trip. It was like we had a relationship. Like they were just ethical, good people. We hung out, had happy hours on weekends. Like, so it was a very different, Maybe a Cinderella story for an earnout. You know what I mean? Like in terms of it.

Garren Hilow That's great though. That's a, that's, I was a 40-person company. They're a 1,000-person company. I never met the CEO, not once in all of the diligence did the CEO come out, not until the deal was closed. And even then for just like a hot minute. And I just assumed that we would be welcomed into the organization. And I just lost the politics game. I'd never been part of a company that big. I'm a founder. I like the, Frankly, 50 people was a little big for me. I liked it when it was little. And so as soon as we joined, I was like, oh my goodness, the sales team, like we'd been the company who bought us. We were just like crushing them for deals left and right. So I was like, all right, we're going to teach you how to do better deals and the whole organization is going to do better. And I like went into this collaborative nature. And what I realized was like the other people on the commercial team who my team was joining just wanted to crush us politically. Like, like I didn't even realize that there was politics going on until we'd absolutely lost the politics game. So 18 months on, our entire sales team had quit and left. So like we, we were just pushed out. They, we didn't, I didn't confirm what our commission plan would be. And our people went from getting almost half their comp from commission To an impossible commission plan. And so our salespeople lost 40 to 50% of their compensation the first day that we were bought. And like, why would you do that? Like that, they would— me pushing back on that and giving my commission to the team was one of the reasons that I was ultimately fired for later on. I did that very publicly in a way that I probably shouldn't have, but there you go. So the politics and the people are really important, Rob. I think you pointed to an important thing there.

John Warrillow That's actually a really interesting insight because Rob, in your case, you're, you're the acquirer in your case was run by a group of entrepreneurs, venture-backed. It had entrepreneurial instincts and entrepreneurial sort of genes. The gene pool was very entrepreneurial. It sounds like in Gary, your case, it was very corporate and, and, and, and you did not have a direct relationship. And that's really interesting. Like corporations, if you just think by their very nature are run by managers who run by playbooks and they, there's T's and C's and things are, this is the play, this is what it says. This is, we're going to agree to. And, and you can see how, how those, those worlds are so different. It's a really interesting insight. I had never sort of reflected on it before.

Rob Walling Yeah, I would have lost the politics game too, Garen. That, I mean, it's just like, you don't know how to function in an org that big. I mean, in our, our, you know, our company, whatever, was 180 plus 10. So I think we were around 190 when we got acquired. And I remember being like, whoa, there's a little bit of politics here. But the founder, this founder and CEO who acquired us, was really trying to keep them. He didn't want any politics. He wanted a very flat org. And I think that, that made it a more amenable, it was still culture shock. Oh my Lord. Getting acquired and being suddenly being in a Slack with 180 people, it was like running through water. It was like, we, I need to talk to 6 people to get a decision. And they were, and they were a good org, like they were well run, but it's just, it's just the more people, the more connection points and all that.

John Warrillow It's a really good point. Let's, let's turn our attention to surviving an earnout. So as I said in the beginning, the reality is in particular for service businesses and, and Rob, your case for, you know, larger SaaS companies are going to sell to one of the big enterprise SaaS companies, they're going to have an earnout of some description, and, and I'd love to know your advice to them for surviving, not necessarily achieving, because that's going to be very dependent on whatever they signed up for, profit, revenue, whatever, but surviving the 18 months to 3 years as an employee in an earnout situation. What, what tips and tricks do, do you have for folks? In that situation? Yeah.

Rob Walling I mean, I think that there's a couple things. Number one, and it's gonna sound like I'm joking, get a therapist, be in therapy. Like, I, it, you are gonna have some tough times. I don't know of anyone, like we had the Cinderella story earnout. We had a great earnout. They, they treated us very well and it was still massively stressful and difficult for me to, to give my company, not give it, I guess sell it to that, to merge it in and to not be in control of stuff. Like I, I, I maintained product and engineering, but everything else, support and sales and marketing, all of that I gave away. And I knew that was coming. They told me that upfront, but it was still way hard. I had literally written every line of copy, like that was on the website and all that. And so it was all my voice and for them to take it over, which they told me they'd do, was still difficult. So for me to have someone to talk to that was not my co-founder and not my spouse was really, really helpful. I was actually in therapy twice a week at that point, which I was like, well, I guess I have the money to do this now. So that was, it's helpful to have something to vent and have someone to level set you of like, hey, you know what? Because there are certain things it's like you should fight, you should push that's not okay. And other things where it's just like, you're just stressful and it's hard to give up a company, right? So, a level set there. The other thing is something that a good friend of mine is named Ruben. He's the founder of Signwell electronic signature app. We've been friends for 15 years and he said, because I was saying, man, this is going to be so tough. It's going to be so hard. I hate working for big companies. It's going to be like prison time, whatever. I was making all these analogies and he said, you know what? What are you gonna learn while you're there? Because they're better at some stuff than you are. And I was like, what a way to flip the question. And so, I went into it then, once we got acquired, I was in there with these, you know what, they were so good at marketing. They were one of the best SaaS marketing teams that I knew that existed. So, I would just hang out with the marketing people and they welcome me in and I'd say, how you doing? Because they were way— I thought I was a marketer. No, no, no. I was solidly mediocre. I was a good 5 or 6 out of 10. They were legit. They knew what they were doing. They had a 40-person marketing team out of a total of about 180 people, a lot of marketing. I learned from them. I learned operations. I learned strategy. Like I then started saying, well, what am I going to learn to carry me to whatever I do next? And that became my goal is to actually not just look at it as serving time, but look at it as how can I, how can I better myself realistically and learn skills from people who are actually better at this stuff than I am?

John Warrillow Derek, what's your reflection as you hear Rob talk about Wow.

Garren Hilow It's just so positive. And I, it's, I'll, I'll share my—

John Warrillow That's where 6-week therapy basically gets you,

Garren Hilow Buddy. Yeah. Instead of, I'm going to try to just share my experience instead of my advice. And that was similar to what Rob was saying, that as soon as we sold, it wasn't my business anymore, but I didn't make that mental transition. It took me like months to be like, they'd be like, oh, we're going to, the marketing team is going to report to someone in Oregon and the sales team's going to report to someone in California and the finance team's in Colorado. And I was like, hey, that doesn't make any sense. And they're like, no, this is my call. Or I remember one meeting where we flew a whole team together and they were vastly underpricing their services. And there was like something that we sold to, and I was like, hey, we need to change this pricing. This is like way holding us back from us to be able to earn our earnings. And someone was like, oh, well, the board stated that that's how that should be. Do you? And I was like, oh, well, we should, but we should change it. And they were like, do you really, Garen? Do you really think you know better than the board? And I was like, well, honestly, I've looked up the bio of everyone on the board. I've got way more experience in this than any of them, but yeah. And I was like, next day I was hauled into my boss's office who didn't show up to that meeting. It was like, I heard you were disparaging the board in a meeting yesterday. I was like, what a mess. And I just assumed that I was dealing with nice people or people that like I just should have expected to be screwed. Here's another thing you were talking, John, about how I got fired for cause. It was more than just what I said. They they got me on job abandonment, which was kind of wild. My boss told me in my one-on-ones, just verbally. I went back and tried to find it. Stupid. I didn't have it in writing. He was like, "Garen, should you please stop coming to the office? Like we're going to get this new management here." I was like pretty angry. It'd be more productive if you just like, just work from home. So I worked from home, but it was a company policy now that I'm part of this massive company that everyone needed to be in the office. And so they, they got me on job abandonment when they finally fired me for cause. And I went back through my emails and I didn't have an email from him to prove that he told me to work from home. What a stupid thing for me to do. I also was having major mental health issues. Like I probably should have been with a therapist. If I had just told HR that I was having mental health issues, they couldn't have fired me for that stuff. Like if me assuming that they were nice people on my team was, was stupid. That's that I could have— it's not my company. I don't have to weigh in on all this stuff anymore. If they want to do silly stuff, it's not mine. It's not my call. And I should have expected them to not be good actors and I'd be in a much better place today.

John Warrillow So interesting. And here's one thing I'd love to get your read on. I wrote a blog post about this maybe a year or two ago, but for a founder to reach the point that you all reached in your businesses, at least $1 million in ARR, in your case, Rob, a couple million dollars in ARR. I think the proportion of people that are able to achieve a couple million dollars of ARR bootstrapped in the SaaS world must be less than 1%. Would you agree? It's a very, very small universe. In your case, Guerin, what was your top line revenue when you sold?

Garren Hilow $12 million.

John Warrillow $12 million. So to get, so I think it's 4% reach a million. To get to $10 million, it must be less than 1% of all entrepreneurs ever get to. So if you think about your own worlds, you're probably Olympic level entrepreneurs. Very rare, very unusual skillset to get to where you are. For everyone, Garen, at $12 million, there's probably 1,000 or 5,000, you know, people with a Subway Sub franchise, not trying to disparage Subway Sub, but you know what I mean? Like that's, it's a very different level that you're playing at. You've reached the Olympic level, the elite level of your game. And then compare that with a director of marketing, a manager of facilities, a VP finance. And they're at the good level of the corporate hierarchy in the sort of business world, right? They're not a senior vice president. They're not a president. They're not a CEO. They're not on the board. They're like rank and file. Yet in some cases, you're all of a sudden reporting to someone who you're not actually— you don't think of them as a peer. You think of them head to head. You could beat them. You're an athlete, Rob. You probably had the experience of running for a boss or doing track for a coach who, you know, you could run faster for. Like you, like you head-to-head right now. Let's go. If you want to teach me how to run, let's go. I'll show you how fast I could run. That's the sort of vibe that I get for a lot of entrepreneurs, like head-to-head. I could do your job 5 times better than you do. And you're telling me what to do? Are you kidding me?

Rob Walling Yeah, that I worked with it. I wanna say I appreciated the team. I liked everybody I worked with at the, at the acquirer, but within weeks my co-founder and I was like, do you realize that we really know what we're doing here? And most, most of the people here don't. They are employees of a company. Most. Yeah, most of them. And you're right, there were some, the C-level folks that I worked with knew more about some things than I did, but for sure, if you haven't been a founder, That's a, that's a very incredibly unique skillset. And I've tried to figure out a way to communicate that without sounding disparaging, you know, not even just an, yeah. Well, I appreciate you saying it cuz you don't have anything to lose, right? I, I, but, but I have had this conversation with founders who've been acquired and, and asked them like, so is it interesting to see how good you actually are, assuming you can deal with the politics and navigate it and like you're not completely unemployable? Cuz there are some entrepreneurs that are That's unemployable, right? But put them aside. If you are a high-functioning person, an entrepreneur, a founder, and you come into an org like that, you could probably work at about 50% capacity and be better than most, almost everyone around you. It is very— That's some great advice. Yeah. Oh, that's the other thing. Actually, that's another piece of advice someone gave me. They said, back off a little bit. Like, you don't own the company anymore. Don't half-ass it, 'cause I don't do that. That's not a thing that I, I don't even have that gear, the half-ass gear. But he was like, Work 80%, 75%, 70%, just something. Just work a little less, care a little less. It was hard for me, but that was actually helpful. It helped me because I was burned out, similar to you, Garen. And it helped me start to get through that and be like, okay, I'm maybe not going to check email and Slack all weekend, all the time, like when I owned the company. Maybe I'm going to shut it off for like 12 hours or 24 hours on my vacation. That became helpful. And even if I got a little bit of flack for it later on from someone, it was like, Like, but it doesn't matter. Like, it doesn't matter.

Garren Hilow There's like this crazy change of gears too. If you're gonna be a successful entrepreneur, it probably means you're bootstrapping as we have. Like, that is way harder path. It means you're working way harder than probably everyone around you. And then you have to go up a gear because now you're selling the business. Now you're in diligence. Now you have to run and scale a company and sell it on the side. I've never worked harder. And my process was like almost a whole year. And then You sell the business to someone else and you have to step back like a couple of gears. And I'm not good at this. So keep my mouth shut when people are making decisions that I wouldn't make, because that's their decision. And so that's a major, major change. It takes— like I asked after we sold the company, I asked for a week off and my answer was, I'm sorry, you're a new employee. You'll be earning 1.5 days a month of vacation time. You actually have zero vacation time. And I flipped them off and said, I'm going on a 2-week vacation, which was another thing added to my fired for cause. I was like, what do you mean I don't have any vacation time? My company's been unlimited vacation the whole time. Like,

Rob Walling Man, that's brutal.

John Warrillow It's so true that you earn 1.5 days a month. And so you could take them, you could take them, you know, a week off and next. It's interesting because I gotta go back to this, this sort of Parallel, but for better or for worse. And I know we're all into like product and vision and people and product, but at the end of the day, I think most entrepreneurs, at least on some level, use money as a measuring stick. Like at some level, there is a way to measure the success of a business person. And it is money. We're not all philanthropic, charitable creatures. And And when you have an exit, you all of a sudden have a worth put on your head effectively. Like in your case, it was $150 million. Like, think about that for a second, $150 million. So let's put the Fortune 500 companies aside because the CEOs of Fortune 500 companies make an enormous amount of money and that's a different stratosphere. But for most sort of companies in America, if you're making $1 million a year as the CEO, You're like, that's a huge salary, right?

Garren Hilow Great.

John Warrillow And someone's just written a check for 150 times that. So it goes to reason, it stands to reason, at least in your case, Garrett, that you're like, I'm 150 times smarter than you. And you're talking to the CEO, not the COO or the VP marketing or the director of marketing or the manager of marketing. Like you're 150, in your own mind, there's a tendency to have that calculation. Because you're like, yeah, yeah. Like I just got a check for $150 million. You make a million a year and you're going to tell me what to do? Are you kidding me?

Garren Hilow That's well said. That's better said than I could say it. Yeah. That's, yeah. And you still have to shut up and listen to what they tell you to do. And

John Warrillow I'm not suggesting for a second that money is the only currency and we should all be focused exclusively on money. I'm just saying the reason I think entrepreneurs tend to be hard to employ, one of the reasons we are hard to employ is someone just wrote a giant check to us. And if we measure ourselves on some level by compensation, we can look at the people we work with and go, you're not even in the same league.

Rob Walling I will admit that going into the acquisition, being acquired, I remember thinking, they know a lot more about all this stuff than I do because they have venture funding and they're a legit company and they're 180 employees. And I was kind of self-deprecating. Both my founder and I are like, I just say relatively humble people. And I was like, I don't know, I'm just a guy who boots— I write about things and I podcast and I I start companies, but I don't really know what I'm doing. That's how, that's my mindset going into it and getting in there. I was like, oh no, we are actually exceptional at what we do. I didn't think about the money thing, but it makes, it does make sense the way you're framing it, John.

John Warrillow As I frame it, do you, like when you hear that, you go, oh, Warlow's off the reservation here. He doesn't have a clue what he's talking about. Or do you think like in your own mind, do you agree on some level on that?

Rob Walling I certainly agree that To be a founder, and this is one of the reasons that an earnout is so— this is one of the reasons why an acquirer wants the founders or the execs to stay on is because we are like unicorns or snowflakes. We are so rare and so unique and you can't— like at some point I was going to leave. I could have moved for after a year. I could have moved to a consulting role and still gotten No one reported to me. That was just written in the contract. And as we approached the year, they were talking about who to replace me with. And I was in some of those conversations and they were just like pulling their hair out cuz they're like, well, no one can do all the things that I do because as a founder you do everything. So I was running the engineering team, I was running the product team. I would help with like a little bit with dabbling in marketing and then customer success would come and ask me advice cuz guess what? I did customer success and marketing and product and, you know, all this stuff. I mean, with my co-founder and all that, but like, nobody does that in the corporate world. And so it, you're, and if you're good enough, you don't even, I always say, you know, Jack or Jill of all trades, master of none, but guess what? As a founder, even if you do 5 things, you, you probably do them better than most people that are even solely focused on.

Garren Hilow So I agree. And I think that we should expect them to replace you. And I didn't really realize this going into the process. I think it's a first-time founder thing where I was like, I'm so good at this. They should acknowledge that I'm so good at this and they should want me here. And that kind of led to me being less humble than maybe I should have been. And, you know, after selling, I was invited to this dinner. This is in Boston, best restaurant in Boston. You had to have sold a business for more than $100 million to be invited to this dinner. And the guy sitting across from me was a At a major private equity company. You would know the name and we're not going to talk about it, but like my $190 million exit's like small. That's like a fundraising round for them. And I was like, I have to ask you, it's like after a couple bottles of wine went around, it's like, when you buy a business, how often are you expecting to replace the founders? And he did not miss a beat. He answered immediately, said 100% of the time. It's just a matter of when. I want someone in that company that works for me, that I trust, ideally with some gray hair. And the other VCs and PEs around the table went, oh yeah, oh yeah, every single time. Like, it's just a question of whether it's immediately or whether it's like soon after. And I was blown away because as a founder, I'd never expected them to have this plan going on to replace me. And so that's, that's just difference in perspective. Now that I've got that experience, I know that we should expect them to be on a path to replace replace me, even though they say we want you here. And it sounds like, Rob, you had a great experience. In the back of their mind, they're looking to replace you. And so that's a helpful mindset as you navigate things post-exit or during while you're negotiating your deal.

John Warrillow That's really fascinating. I knew it was relatively high, but I'd never thought, and I actually have never really thought about the reason that they would want to replace you other than just performance, but just the loyalty, right? It's like, I want My own people that I've recruited that, that have loyalty 100% to me. That's interesting. What advice would you all have for acquirers? I know this show is not about acquiring a business, but we do have some acquirers listening and it might in a fun way sort of give entrepreneurs some semblance of what they should negotiate for. But if you had an acquirer in front of you and, you know, and, and they were asking for your advice, like, how do I structure this to To keep this entrepreneur around, to bottle what you talked about, Rob, the kind of unicorn fairy dust, whatever the description is, without, you know, having it blow up in my face. What advice would you give a founder, an acquirer?

Garren Hilow I think that I'll go first.

John Warrillow Sure.

Garren Hilow I think that people get lost in deals and that everything's very financial and that Like to realize that the founder who just ran their business is probably pretty beat down. And a founder who just ran their business and made it through an intensive diligence process is probably at the end of their rope. Like, Rob, you're right. We, they should, every founder who goes through that diligence process should be in therapy. And what I needed, what I'll just speak from my experience, what I needed when that was done was 2 weeks off. And I needed them to say like, good job and thank you and recharge and come And they were like, "F you, Garen. I just paid a hundred and fifty million dollars for your company, and you're going to take off for two weeks? Absolutely not. You're going to be at your desk every day because I'm going to get my value out of you." Like I'm so good at what I'm doing and recruiting people and keeping people engaged that if I had a chance to reset after that deal, I could still be there today.

John Warrillow Like don't forget to give advice, Garen. I think that's fascinating. I've heard that before. Savvy found savvy acquirers will build in. in a month for the founder just to sort of reset. Now, it's not always practical or even realistic given whatever's going on in the business, but this idea of like at least a cooling off period where the earnout doesn't start immediately that the share purchase agreement is signed, like there's a month for, you know, a transition for you to get your feet. That's a really interesting— what would you add to that, Rob, in terms of advice for an acquirer?

Rob Walling I think the big thing is if you're acquiring to start to evaluate, I like what Garen said about treating people as people rather than as deals. And it's, does this founder make sense to stay in the seat? Do they, you know, is this, and knowing that, and you may not know that on the first day. I mean, if you think about it, it's kind of like a job interview when you hire someone new. You're going to know in 30 to 60 days usually if they're going to work out. That's how I think about it is if I was going to acquire a company, pay a big chunk of money and bring the founder in, I would have a gut feel as to whether this founder is going to stick around or am I just acquiring it for the business and the team without the founder. And once I know that, I can take steps. If we're going to oust the founder, I guess be kind about this, like ethical and kind. And if we're not and we're going to try to keep them around, then think more about retention. You know, think more about treating them well and helping them feel welcome, which is something that my acquirer did a really good job of asking me how I am. I remember a couple months in after the acquisition, I was like, I was burned out. It was noticeably burned out. Like everyone could tell. And the CEO pulled me aside and he said, hey, we got you this gift card. And it was for, I know this could go in directions. It was for a cabin for like 2 or 3 nights up at the North Shore of Lake Superior here in Minnesota. And he was like, go up there, take your family, go alone. I don't care. You should, you need to recharge. And I, and I did. Yeah. I mean, that's the kind of thing, right? Because he knew, they knew they wanted us around. And so they were trying to actually be humans to us. And, and if they knew we, they didn't want us around, you know, whatever, they're, they're gonna try to get rid of us, blah, blah, blah. That's a whole other story. But that's, I, I like that thought of like, treat us like people.

Garren Hilow As an acquirer, how do you figure that out? And I'll say that when And when people would ask me during diligence, like, Kieran, what do you want? You want to stick around? Like the people in my year, my bankers, my lawyers would say, Kieran, here's your answer. You say, yes, I want to stick around. I want to add so much value. I want to grow your business. And in my heart, I'm saying, I want out of here. And so I just kind of had to, you know, I didn't exactly say what my lawyers told me to say. I didn't exactly tell them how I felt. So how do you figure out what someone really wants pre-deal, or does that happen after the

Rob Walling I think it happens both. I mean, I will tell you the CEO, you know, again, I worked with the CEO, but let's say instead he was a corp dev person. Like the CEO flew out to California and met and was at SaaStr, which is an event in San Francisco and drove 3 hours to meet me at my house. And we had coffee all after, like we hung out for like 3 or 4 hours and just had kind of straight one day. It was just he and I, nobody else. That if I was trying to evaluate, do I want to keep this founder around? That's the kind of stuff that I value. I would, I would do.

Garren Hilow That makes a ton of sense. It blew me away that I never met the CEO before she wrote a check for so high. And then when we did meet, it was just so brief and just crazy to me.

Rob Walling Just one more deal.

Garren Hilow I thought I was more important than, you know, maybe I wasn't.

Rob Walling You were just, it sounds like you were just another like line item, another agenda item, another deal. You know, that's, it's crazy.

Garren Hilow I was also the first deal they ever did. So I think they learned a lot. I was the first acquisition So, you know, that's—

John Warrillow There's like the Garrett Halo memorial plaque on the wall. Like, never do this again.

Garren Hilow I carry some scars. I guarantee they do too. Like, no one, no one, like, well, we'll all do this better next time. But if I could choose, if I was looking at 2 deals and they were similar deals and one was with an acquirer who's done a bunch of deals and one is a first-timer, like that would seriously play into my decision, like to go with someone who's got some experience in doing Same.

Rob Walling Mine was also the first deal they ever did. Isn't that crazy? Yeah.

John Warrillow One of the things I've heard, and I'd love to get a quick reaction from both of you before we wrap it, is this idea of like, as an acquirer, you should understand why you're buying this business. And there's sort of two, I'm sure there are many, but two broad streams come out a lot in conversation. One is I want to integrate this company into my company. They've got a product and Rob, it sounds like this was very much in your case, like they've got a product. A service, a sales team, something that I want to really infuse into my company. And if that's the case, an earnout is a disaster because you are basically, you know, especially if it's tied to profit or earnings, you're going to fight with that entrepreneur on every attempt to integrate. The second scenario is where you're really wanting that unit, that business, that division to operate independently. And continue to grow and achieve a goal and not integrate effectively. Let them do their own thing, in which case there's a better case perhaps for an earnout. Where it blows up is where you put a profit goal in front of an owner that you want to integrate their business. It sounds like we're sort of summarizing a couple of the themes here, but would you have just a broad strokes reaction to that idea? Integration versus sort of separate business unit.

Rob Walling Is the integration involve kind of, because I felt like we were integrated into the company and we had an earnout. And so, but our product was kept separate, right? Drip was kind of email marketing automation and Leadpages was landing pages. And so, but we were absorbed, we were absorbed throughout the company. So I, I guess my—

John Warrillow Sorry, go ahead, bro.

Rob Walling But I was gonna ask like, is the integration, would that be if they kind of got rid of our product and just migrated our customers over. Is that like the, 'cause if they had done that, it wouldn't have made any sense to have milestones of anything. But ours, we were integrated into the company, but our products stayed separate.

Garren Hilow Interesting. I think you touched on a really important thing for a buyer. Yeah. If you're going to, if your goal is to integrate, then you can't do an earnout. Like as soon as they bought our business, we were a Boston-based business. They were mostly California. But like, as soon as they bought us, like I was in control of our sales and marketing team. And now marketing was reporting to Northern California. Sales was reporting to Southern California. Finance was in California in another spot. Yeah. Operations was in Oregon. And so like my ability to just walk over to my marketing person and change something on our website or change our pricing was now like, I needed to go to the marketing person's boss who was in California. Who it was, it was a nightmare for me. And so they would try to do all this integration and I'd be like, we need to hit this earnout. And so the earnout was a major thorn in our side. Like everyone would have made more value out of it if we just didn't have the earnout. So I tried to convince them to just pay it, pay us a percentage of it and then do it. And then they found their own way out of the earnout.

John Warrillow I could riff with you guys for hours. I think this is a real fun experience. I'm sorry, Garen, that you you know, that had the experience that you did, but it sounds like things worked out really well for you despite that. And Rob, yeah, yeah. I'm thrilled that your earnout was a success as well. And I'm grateful for you both for sharing your wisdom with our listeners. Just briefly, I know our listeners are going to want to reach out. So is there a place that you would invite them to reach out? Maybe LinkedIn, Rob, or maybe a website? Where would you, where would If they want to reach out to you, find you?

Rob Walling Yeah, they can find me at my home on the internet, Rob Walling.

John Warrillow And how about you, Garen?

Garren Hilow Yeah, ping me through LinkedIn. You can find my LinkedIn page, Garren Hilow. I post often and I usually check my messages, so find me there.

John Warrillow Garen, Rob, thanks for doing this.

Garren Hilow Thank you, John. You are so good at this. It's so, it's so fun to be on your podcast and so good for your listeners. Thank you so much for doing this. You had so much value to the community.

John Warrillow You're too generous. Thanks, man.