There are other ways than selling your whole business as a founder. We take a deep dive into partial buy-outs in this journey.
This article was provided by the co-founders of BitsForDigits: a private equity marketplace for internet SMBs Laurits Just (Twitter @Lauritsjb) and Jan-Philipp Peters (Twitter @jpdavidpeters)
Most if not all makers, builders and indie hackers in the online business community have been alerted to the trend in SMB founder exits. This is made possible partially by new and incumbent full acquisition marketplaces like Flippa and MicroAcquire, but perhaps more so by the liquidity infusion in capital markets. In any case, high net-worth individuals and equity funds are looking to the private markets for opportunities to create returns and solutions to the problem of rising inflation. This is great news for business owners looking to offload assets! But for founders interested in taking some chips off the table while still running, growing and staying invested in their business, not enough options are presented for partial exits.
Having worked in tech and finance for years, both of us (JP & Laurits) understand the ever-shortening lifecycles of online businesses and the benefits of risk diversification. At Google and Facebook, JP worked with app companies and internet startups that died before they could launch a campaign due to fierce competition and rapid changes in the technology landscape. At BlackRock and Rocket Internet, Laurits was exposed to industry best practices of institutional investors’ balancing of risk and returns across alternative investment portfolios in venture capital and technology sectors. The culmination of said experiences is BitsForDigits: a private equity marketplace for online SMBs offering a third option to the all-or-nothing dichotomy most bootstrapped internet startups suffer under.
Why sell a minority stake?
Taking cash off the table in a secondary offering has an unnecessary stigma surrounding it which discourages founders from realising a return on their asset until the very end. Why should bootstrappers live a frugal life when their internet business is worth six or seven digits on paper? Business owners should be allowed to partake in transactions involving the sale of existing shares to hedge their bet by onboarding no-control investors while continuing to operate the business for the long run. Because who knows what online business might be worth in the future? If more, that’s great! The founder is still invested in the business and will benefit from the upside. If less, then great that they sold a stake while the company was still valuable. Regardless of what the future holds for their business, founders who have sold a minority stake can sleep calmly knowing they have cashed in enough chips to have something to show for their hard work. And there are many professional investors out there looking to buy into profitable internet ventures for the purposes of shared earnings or pure capital gains. These types of investors include institutional firms and high net worth individuals.
A famous example of a partial buyout was struck when the founders of Basecamp, Jason Fried and David Heinemeier Hansson, sold a minority, no-control stake in their business to none other than Jeff Bezos back in 2006. At that time Basecamp was already profitable but the two founders were seeking a way to hedge their bet about the future of the company – because as wise people know the competition online is fierce and the software technology landscape everchanging. The amount of equity sold and the cash amount received remains undisclosed but they are happy they made the deal as it provided them with the confidence to take Basecamp all the way, doing what they love without the stress of an all or nothing scenario looming over their heads.
Why sell a majority stake?
Similar to how founders can sell less than 50% equity as a no-control stake in their business, they can also choose to sell more than 50% to pass on the reins to a new operator while staying onboard themselves. Founders who really believe in the future of their business but who for whatever reason can’t or don’t want to lead the business anymore, can sell a majority stake to an operational investor like a PE or search fund interested in growing and optimising the business further with the founder involved in a supporting capacity. Especially in the indie hacker community, founders who built their own product find themselves doing more business administration tasks once their company has grown to a certain size and subsequently fall out of love with their work. To rekindle the fun in working on their project, they can sell a majority stake and take on the role of a CTO for instance to do what they love while leaving the “boring jobs” to new management.
Selling a majority stake leaves the founders with a minority interest, which they can sell at a later point once they feel the full potential of their business has been reached under new management. This concept is known as a “double dip” because the business owner can sell one portion of shares and wait until the value of the company has increased before selling the remaining shares. The investor might buy them out or sell the entire business on to a new owner thus exiting alongside the founder. Of course, double dips can also be a tactic for founders who are looking to run their business with the support from experienced investors who buy minority interest to provide advisory or operational help to the founder in charge.
In summary, regardless of the amount of equity a founder chooses to part with, be it a minority or majority stake, what matters is that the founder gets to stay invested to claim future upside of the business derived from scale, growth and profit optimisation down the road. Putting all eggs in the same basket is risky and a premature exit from a full acquisition can leave founders with a bittersweet feeling if their business grows 10x under new ownership. So, founders should consider partial buyouts as a way to hedge their bet by anonymously listing their business on BitsForDigits and getting the conversation started with investors interested in making cash offers for bits for ownership.
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