How To Structure Your Earn Out (Without Getting Burned)

July 12, 2019 |  

About this episode


Kristin Delwo co-founded Stacks, a software used by librarians. Though the software was still early in its life, Delwo wanted to scale quickly and decided to look for a deep-pocketed acquirer.

To read a transcript of this episode, click here.

Delwo was too early in her lifecycle to attract an all cash offer so agreed to sell her business putting much of her consideration “at risk” in an earn out.

In this episode, you’ll learn:

  • The biggest mistake to avoid when structuring your earn out contract
  • How to value a company when you’re buying out an existing partner
  • The best way to get buy-in from employees when moving from a consulting to a product-based company
  • The one strategic reason Delwo chose to partner with EBSCO instead of building her own salesforce
  • The one fundamental decision Delwo made to set herself up for success in the sale

Kristin Delwo approached her business exit with a flexibility. She was willing to accept different options because she knew it would help her company scale. Having Structuring Flexibility is a key driver of ensuring a personally satisfying exit. Find out how personally ready you would be if you exited your business tomorrow. Take your free, 5-minute PREScore™ questionnaire now.

About Our Guest

Kristin Delwo is Founder, President & CEO of Stacks Inc., a SaaS startup in the information management space with global distribution in several markets including corporations, healthcare, academic institutions, and libraries. Delwo also owns and operates a successful professional services firm founded in 2006. Delwo is a trusted authority on business growth and entrepreneurship and is driven by the desire to find new and better ways to conduct business.


John Warrillow:                Next up you’re going to hear from a woman named Kristin Delwo who sold a company called Stacks, which was in the library game. It was software business, which she sold to one of the largest actually privately held companies in the world, EBSCO, which I had never heard of admittedly. But it’s apparently a massive company with lots of interesting ties and businesses. What I want you to listen for in this episode is how Kristin thought through a win/win solution for her and EBSCO. So in part it involved an earn out.

John Warrillow:                Now for a lot of entrepreneurs and earn out is the enemy, right? You want to do everything you can to avoid it. But for Kristin, admittedly they were early on in the product life, just a million dollars annual recurring revenue, and so they wanted to scale quickly and they figured that an earn out was the best way to do it. She made some really important de-risking decisions, which I’ll let her explain. She made one fundamental decision, which I think will set herself up for success when she comes to ultimately calculate the value of her earn out. Lots of really interesting tidbits and facts here for structuring your earn out. Here is Kristin Delwo.

John Warrillow:                Kristen Delwo. Welcome to Built to Sell Radio.

Kristin Delwo:                   Thank you.

John Warrillow:                You’re my first librarian.

Kristin Delwo:                   Awesome.

John Warrillow:                Are you really a librarian? That’s just marketing PR, right? You’re not really a librarian.

Kristin Delwo:                   No, I was systems librarian for a large consortia. We had about 150 public libraries and 100 school libraries that I was responsible for all their software network stuff.

John Warrillow:                Wow. Okay, so you really are a librarian. How did you get into this business? Because you took an interesting route to get into the Stacks company. How did you get there?

Kristin Delwo:                   Sure. So I was a customer of my co-founder actually. And I decided to join forces with him. When I kind of reached a ceiling of all the really cool things we could build with me as a customer and anything they could invent they could create. And that was incredibly powerful. So I joined the company and about eight months in decided to buy half of that founding firm and then we spun Stacks out of that.

John Warrillow:                Got it. So when you say you were a customer, you were… I was joking earlier that you’re a librarian, but you were working as a systems librarian.

Kristin Delwo:                   That’s right.

John Warrillow:                Is that right?

Kristin Delwo:                   We build web and mobile applications for all of those libraries and help to administer those and deliver those to that librarians for them to execute.

John Warrillow:                Okay.

Kristin Delwo:                   And that company was my vendor.

John Warrillow:                Right, and the vendor was a custom consulting company, right? They didn’t have an off the shelf product. They were doing sort of, they’d write a proposal. They’d send you that kind of stuff. And what was the name of that company?

Kristin Delwo:                   Hybrid Forge.

John Warrillow:                Hybrid Forge for our listeners who are not software guys or gals, they would think of Hybrid Forge as really a service company, right?

Kristin Delwo:                   Absolutely. So we bid on RFPs and proposals for custom, web, or mobile development work. Done lots of libraries, healthcare, quasi government type engagements, but all very custom projects, very one off.

John Warrillow:                And so you bought half of that. How did you come up with evaluation for that business to figure out what half of it was worth?

Kristin Delwo:                   Well I joined the company as VP of business development at first wanting to focus on sales. It was something… I’d always been on the management side and I never really focused on sales, and because we were generating so much library traffic based on the things that we were building and I was going to conferences and telling these stories and showing off these amazing solutions. And so it made sense to join as sales, but it only took about eight months to realize that–there were two co-founders on a that original firm founded in 2006. And it didn’t take us very long to realize that we needed to change direction if we wanted to grow bigger. We were really at this cusp where we were maximizing profit margin and we knew we needed to do something product focused if we wanted to grow.

Kristin Delwo:                   And so it really came down to what did we need for the other founder to move on and do other things. And he’s actually working at the machine learning institute at our local university now. So he’s moved on to some pretty neat things as well.

John Warrillow:                You confuse me because maybe you intentionally dodged that question or maybe you just… but how did you come up with a valuation for it? When you said, “Okay, I bought into it, how did you figure out how much it was worth?”

Kristin Delwo:                   Well you know how co-founders are. You’ve got a shotgun clause on what that looks like. So it was really about negotiating the price with the founder who was leaving more so than the founder who stayed.

John Warrillow:                So the founder who was… you were essentially buying his shares. Is that right?

Kristin Delwo:                   Yeah.

John Warrillow:                Where you’d come up with the money to buy it?

Kristin Delwo:                   Oh, beg, borrowed, and steal. Friends and family money in there. We did some creative accounting in-house here. We made some payments over a period of time. Certainly wasn’t something that was in my bag of tricks at that point. But it was a pretty exciting opportunity, so when you’re that motivated you find a way.

John Warrillow:                So for folks who don’t know, a shotgun clause, you essentially, how is… you basically made an offer for his shares.

Kristin Delwo:                   Essentially the other co-founder buys him out and then I bought those shares.

John Warrillow:                I see.

Kristin Delwo:                   However the co-founder that stayed helped me make that purchase because that was a business decision that was strategically valuable for him. So helped make that work as well.

John Warrillow:                Yeah. Yeah. That makes sense. So just so we’re clear on the shotgun clause, for folks listening you may not have heard, as I understand it essentially one partner would say, “Look, I’m going to make an offer to buy your shares for X amount of money,” and that other partner has the choice of whether to accept that offer or basically make the same offer to… the person making the offer has to agree to accept the same offer they have made.

Kristin Delwo:                   That’s correct.

John Warrillow:                As I understand it. Got it. Okay. So you find yourself the half owner of this company called Hybrid Forge, which is doing custom work and doing a lot of work with librarians. How did the business of Stacks evolve out of that?

Kristin Delwo:                   Well coming into this, we were at that point doing about 60% library work, even though it was very custom. And there was an obvious pattern of creating various similar solutions for each of these customers. And we knew when I was coming in that there was a gap in the market. It didn’t have to be that hard. Coming from my experience being the consumer, it shouldn’t have to be that hard to get to where we need to be. But we did evaluate various SaaS opportunities from within the portfolio. So we looked at some healthcare solutions and some insurance solutions and tried to evaluate what’s our best opportunity. But for sure, we’re in Alberta, so we’re in an oil economy and it ebbs and it flows and it comes and it goes.

Kristin Delwo:                   When our government changes it would often impact our government contracts and that workflow coming in and out. So we knew we wanted to go global. We knew we wanted a SaaS product. We wanted that recurring revenue model. And so we evaluated several opportunities in the portfolio and ended up coming back to Stacks, as much I think because of the expertise as well as the relationships, but also there was just a clear market need, a demand.

John Warrillow:                I think a lot of people would want to get inside your head, you and your co-founder’s head at that time. Because one seemingly option you could have chosen at that fork in the road was to say, “Hey, we’ve got this profitable little consultancy. We make good margins. Sure it ebbs and flows, but it’s profitable.” I guess there’s a school of thought to say, don’t change that, just suck the profits out every year and live high in the hog and then the allure of the SaaS product that seems to have caught your fancy was I guess the other option. Now you chose door number two. Did you contemplate the other?

Kristin Delwo:                   Well you can’t have your cake and eat it, too. We still sustain some of that hybrid business and that hybrid work. We still do some of that today, even post acquisition. And we largely use that engine to boost strap Stacks. So rather than being in a position where you’re solely dependent on external investors to get where you’re going, that gave us a very stable opportunity to invest in ourselves and deeper time to build those relationships and be strategic. But we still do some of that work now.

John Warrillow:                So you used resources, cash and development time from…

Kristin Delwo:                   All of it, yeah.

John Warrillow:                … the consultancy. So this is fascinating because I’ve heard of companies trying this and falling flat on their face because the product, in your case Stacks, always was second fiddle to the screaming customer who needed it tomorrow. How did you guys manage to get Stacks out the door with customers always competing for resources?

Kristin Delwo:                   I think that’s really about building team loyalty and commitment. So it can’t just be the founders who have that passion and that energy and that belief and what that product is. So we incentivized our team early on. We gave away shares to key contributors, but we also opened up rounds every year for employees to buy in and to be personally invested. So what happened is we’ve got a dozen folks in here who are as passionate and excited about that product as we are as founders.

John Warrillow:                Sorry to interrupt, but did you enable them to… it’s part of my job. You enabled them to… you gave them stock and you also enabled them to buy. Were they buying into Hybrid Forge, the company that had this product that they were working called Stacks, or were they buying into Stacks as a separate-

Kristin Delwo:                   Just Stacks. Just Stacks.

John Warrillow:                Stacks, okay. So describe, if you would, we keep referring to Stacks, but I feel like we haven’t actually defined what does Stacks do? What is the product? What does the software do?

Kristin Delwo:                   Sure, so Stacks is a content management system designed specifically for libraries as we market it, but really research centric organizations. So we have customers in all information verticals. So medical institutions, corporations, law firms, academic libraries, public libraries, school libraries. So really started in libraries, but any research centric organization can benefit from the tailored approach to a content management system that really just knows their business and their core business tools and can plug into them quite easily.

John Warrillow:                So let’s assume I’m a 12 year old. I don’t know what a content management system is. I know what Google is, and I don’t even see why you’d need anything more than Google. So why do you need a content management system?

Kristin Delwo:                   Well content management system allows you to build a website. That’s important. What we do is we take EBSCOs products and other vendor products and integrate them so that you get that curated Google-like experience in a website that you’ve curated. So not only do you search, but you can also browse and interact with different resources.

John Warrillow:                And you’re browsing your own content, or external content?

Kristin Delwo:                   It’s mostly often a combination of subscribed content, so content they pay subscription to have access to whether that’s academic journals, patents, product launch, databases, things like that. Subscribed resources, their own resources that they created in house, as well as open resources. So we allow the information managers of the librarians to curate that experience and then brand it all their own.

John Warrillow:                Got it. So you’re pouring money from the high margin, but ultimately not terribly scalable consultancy into the creation of this product called Stacks. As you look back now with hindsight being 20/20, do you think there were one or two seminal points in the development of Stacks that enabled you to win that, kind of key forks in the road or major decisions that you made that ended up being the right ones in hindsight?

Kristin Delwo:                   I think there are more meaningful engagements rather than meaningful development and I say that because often those pivotal pieces of the product came from engagement first and we developed them on the heels of a great conversation. So I mean fake it til you make it, right?

John Warrillow:                What do you mean by fake it?

Kristin Delwo:                   I think there was definitely some interactions with key stakeholders or other vendors in the space or customers. Cal Tech was certainly pivotal for us. That was the first customer that we engaged and as a product company. So we had done a custom version of Stacks, an early version that was a custom development with Microsoft’s library and we’d done a few that were measurable and made us known. But Cal Tech was the first product subscriber and that was definitely a pivotal relationship.

John Warrillow:                And it sounds like as opposed to a hard line in the sand, there’s somewhat of an arbitrary line. Tell me if I’m wrong, between Hybrid Forge, which is custom consulting and Stacks which sounds like a product. Because it doesn’t sound like Stacks is off the shelf. You’ve got to integrate it with an existing… Is that fair to say or no?

Kristin Delwo:                   Stacks is designed to be off the shelf in that you can configure it yourself and there are lots of self guided tutorials and really it’s not any harder to work with than Squarespace or something like that. It just knows their business. So it knows you want to put book covers in a carousel. A normal Squarespace wouldn’t know that. So it’s very plug and play and designed to be very self usable. We do have a Stacks line of professional services that is a little more measured and calculated in that we will do integrations that leverage a Stacks defined predefined architecture. So it’s not totally custom, but you could come and say I’ve got this data repository that I want to integrate and we’d say, “Okay, well it fits in this architecture, this one, or this one.” And these are the fixed prices for that, whereas Hybrids work tends to look a little more like milestone billing and benchmarks and those kinds of things.

John Warrillow:                What was it about creating your own product that was attractive?

Kristin Delwo:                   I think buying into the company originally for me, I’d always hit a two, three year ceiling on a job, on a particular role, and then feel the need to do more, the need to expand that. So coming into the company for me, it was really about being able to make it my own and make it challenge year over year and pivot as we see fit. I think the market opportunity for Stacks has been pretty motivating to see the same needs across the world, and because we have relationships with vendors like EBSCO who already have that market share and those relationships, we did have exposure to that global need very early on which I think a lot of founders don’t necessarily get to see.

John Warrillow:                Is there a personal financial motivation where you borrow. You said you borrowed and begged to pull together the money to buy into the company. Is there also that personal motivation to say, “I want to make a return on that money. I’ve taken a big risk here financially. It’s just not sweat equity. I’ve actually put in money of my own.”

Kristin Delwo:                   There certainly is. I think Hybrid was a successful enough company that we’ve always done quite well. So not starving artists exactly in the startup space. I mean we’ve always had that foothold and had some consistency. So a little less scary. I always think you need something other than money to motivate you alongside it. For me it was really the impact factor. When you start to impact research on a big scale and some of our corporate customers are testaments to that, but when you start to influence food production and drug production and the research that goes into these things, you just make a the world a better place. So I like to lean on the cleaner water, healthier food, safer airplane impact factor, and I find the less I chase the dollars the more of them I get.

John Warrillow:                That’s a good point. How did you educate, or did you, your staff on that point? Because it sounds like all of your employees on Stack were financially motivated. They were shareholders, option holders.

Kristin Delwo:                   Just got to work the hardest, man. You just, as a leader…

John Warrillow:                Yeah, but did you talk to them about not necessarily chasing the financial gain, but the larger purpose, or?

Kristin Delwo:                   We talk about the larger purpose because that’s what’s get me real excited. So when we get a new customer, a new opportunity, and it nets something positive like that, I mean I tend to bring that back as a librarian. I mean I believe in sharing the knowledge. And so I can get pretty excited, but I think everybody’s motivated by something different and certainly the motivators across the team are not the same for everybody. But I think working harder and being a believer, it’s pretty hard to watch me sweat it out and not believe that I believe at the very least.

John Warrillow:                Yeah. Yeah. But it’s funny with visions and stuff like that, because ever since Jim Collins wrote whatever it was, Built to Last… I can’t remember which one it was where he kind revealed for the first time the importance of having a vision and blah blah blah. Admittedly I’ve personally been a little bit skeptical on that stuff. I think it has a purpose, but if executed clumsily, it can sound kind of trite and fake, right? So if everybody’s mission, like if you distill everybody’s mission down, it’s basically to make the world a better place.

Kristin Delwo:                   Right, right.

John Warrillow:                Google’s is to organize the world’s information. Why is that important? Well ultimately it’s to make the world a better place, right? Here at Value Builder, our goal is to level the playing field for business owners as they approach their exit. Why is that important? Well, ultimately it’s to make the world a better place. So had do you find… I guess my question, an authentic vision that is both motivating for your employees but at the same time kind of believable and I don’t want to say realistic, because I’m not suggesting it’s not realistic, but believable and that they can actually kind of buy into it.

Kristin Delwo:                   Sure. I think it evolved overtime. If I think back to gaining the buy in and folks getting excited and certainly every employee that’s walked through these doors has not been a believer. But I think it’s about engagement and about spending time with those folks and allowing them to spend time with customers. So we’ve actually over the years as we go to conference and we engage prospects in the market and partners and try to expose them to the industry, because I’m the only one comes from the library space. I mean we’re a bunch of technologists here. But so socializing them and taking developers to a sales conference and allowing them to participate in vendor booths and see the customer engagement and the response, I think it’s certainly much more valuable coming from the outside in than it is from me going out. But we’re also a very open concept office space, so we’re very transparent in what that feedback looks like, good, bad, or ugly, and engaging the team and letting them have that exposure.

John Warrillow:                Great. Great. Okay, so let’s jump forward. So at some point along the road, you meet this company with this weird name called EBSCO

Kristin Delwo:                   Yes.

John Warrillow:                Nobody will have ever heard of even though they’re apparently giant. I shouldn’t say nobody. I’ve never heard of them. What on earth does EBSCO do? What does EBSCO actually stand for?

Kristin Delwo:                   So EBSCO stands for the Elton B. Stephens Company.

John Warrillow:                That’s a guy who needs some branding help. But anyways, EBSCO, yes.

Kristin Delwo:                   Right, so privately held company in the US, one of the largest I understand, and that’s grandpa. That’s granddaddy there. And that’s the legacy. They essentially provide scholarly subscription content mostly to information organizations around the world. So I was a customer of theirs in the library space. If you went to post secondary and you have to cite a research paper, there’s a really good chance that that paper’s coming from EBSCO.

John Warrillow:                Okay.

Kristin Delwo:                   They have exclusive right to a lot of content. They publish a fair amount of content in house, and now they’re starting to index open content alongside that subscription content. And it’s really their index technology that sets them apart. So while they have a stronghold on the content side, it’s really about how they aggregate that and index that in a meaningful way that goes beyond what Google does in context, looking at research and aggregating that data.

John Warrillow:                And so how did you first come to work with EBSCO on the Stacks product?

Kristin Delwo:                   Oh, sure. So I was a customer of theirs for years. As Chad and I built custom solutions and then I brought opportunities and relationships to my co-founder, Chad, as I brought business his way and he started to interact with the library space, that’s when he met EBSCO as a vendor. So at that point now I’m a customer of both these guys. But when we were ready to take Stacks to market, in theory, so not necessarily a turnkey product yet, but really to test the water and see how the market’s going to respond to that, EBSCO was one of the first to pick up on that. So there were some early discussions around more marketing content than product content.

John Warrillow:                Okay, because they had all of the customers that you wanted as customers already.

Kristin Delwo:                   Right, right.

John Warrillow:                Okay. All these libraries, and okay. Got it. So you thought okay, we’ll partner with EBSCO and we’ll allow them to take the Stacks product to their customers and see how it works.

Kristin Delwo:                   Yeah, and that was a tough decision. It probably slowed us down about a year to go to market, because we essentially had to do due diligence as if we were being acquired to be a partner for them to be a reseller of our product. The advantage there though was that we got to build the business model and the price model based on a relationship. So we weren’t trying to shoehorn that in after. So it slowed down our time to market, but I realized very early on that there was no way I was going to build a sales force that had the global reach that EBSCO had.

John Warrillow:                Why not?

Kristin Delwo:                   And those trusted relationships exist. And so I thought it wise despite all the temptations to just start taking it to market and pedal it, to invest the time in that relationship. And so that first customer, Cal Tech, was signed by EBSCO.

John Warrillow:                Interesting. Go back. So why did you think it would be impossible or not favorable to build your own sales force? You mentioned I realize early it wouldn’t be possible, but why not?

Kristin Delwo:                   Well, I think you need to know what you’re good at and I think the biggest mistake I see as I’m coaching and mentoring and talking to these companies is that you want to be everybody all the time. And nobody’s really good at anything and if you’re really good at product incubation as a small firm, there’s a pretty good chance you’re not that good at sales. Even the sales you have, you don’t have relationships. I mean EBSCO has product in 170 countries. Employees in 100 countries. I don’t have boots on the ground in the Middle East. There’s no way. That’s just not attainable in the short run. And they were a trusted vendor. The entire market. I bet you’ve got 90% of the market buys something from them.

John Warrillow:                So there’s a lot of entrepreneurs out there listening to this and saying, “Yeah, that’s what I believed about the big distributor in my industry. I did a partnership based on the fact that they have offices in 90 countries and 50 million sales force. And then I gave them my product to sell and they sold nothing.

Kristin Delwo:                   Well, you can’t just give it to them.

John Warrillow:                Yeah, so what are we doing wrong? So how did you… because I mean the downside of doing a distribution deal with a company like EBSCO is you lose control of the selling process, right?

Kristin Delwo:                   Yes.

John Warrillow:                You’re basically handing your baby to someone else to sell. How did you ensure that they were successful in selling it, but they did sell it and not the other 50 things in their briefcase?

Kristin Delwo:                   Well honestly in the first couple years I was on every single sales call as a sales expert, wherever that is in the world with whatever team that is. And it takes a lot of investment in people, time, for that to be effective. I know myself, I spend a lot of time getting to know the low level account executives that are out there chasing leads, all the way to the top of the executive chain. And every layer of those relationships is important, and I think we think dealing with the biz dev team and building that relationship is kind of all we need. Or maybe we need to make friends with product management people. Now everybody in the organization needs to believe and they need to buy in. And so a lot of face time, a lot of travel, a lot of getting on the plane and going to meet these folks, but I’ll save those low level employees just as important to build relationships with as the top.

Kristin Delwo:                   And fast forward to acquisition time, I have folks point out all the time, “You know more people at EBSCO than we do.” Well, maybe. Because when you take the time, it really makes an impact. And in the early days, a lot of calls where they just learn how to engage the customer, how to position the product, but you’ve really got to take the time to show them.

John Warrillow:                What about, what sort of legal protections did you put in place? So first of all did EBSCO have exclusivity on the Stacks product or were they one of many distributors?

Kristin Delwo:                   We started exclusive in one market only. So we essentially sell to eight different markets as EBSCO would define them. We started off small with one market segment exclusivity. Then we moved up. Of course the exclusivity doesn’t cut out ourselves so we always had the opportunity to go to market ourselves and do some sales in parallel to EBSCO never found the need to action that.

Kristin Delwo:                   When we were doing custom solutions for libraries, we did have a reseller agreement with another vendor that didn’t go as well. So not to say that the first one was the golden ticket. We certainly learned some things that first time about how to package it, how to control the offering in a way that you can scale it and be productive, which is really that menu of stuff I was talking about. It really has to be product defined and not open ended I think.

John Warrillow:                So you can have option one, option two, option three, but you can’t have a custom for every…

Kristin Delwo:                   Right. Right.

John Warrillow:                Yeah. Got it. Like Henry Ford, “You can have any color as long as it’s black.”

Kristin Delwo:                   Right.

John Warrillow:                So EBSCO you had exclusivity in one geographic market. Is that right?

Kristin Delwo:                   Mm-hmm (affirmative), one geographic market and one segment. So we have public libraries in North America only to start. And it was pretty much every six months we were adding something to that agreement because we were doing well.

John Warrillow:                And what was the quid pro quo? So you were giving them exclusivity, which presumably had value. What were you getting in return?

Kristin Delwo:                   Also exclusivity. So they agreed not to resell or recommend any other content management system but ours. So certainly reciprocal on that.

John Warrillow:                Got it. Got it. So becoming deeper and deeper entwined. So how did things go from this great symbiotic distribution agreement to acquisition?

Kristin Delwo:                   Well I think as soon as we started to tap into all markets around the world it started to look attractive. It took a little bit, to them, to EBSCO I think. It took a bit for us to warm up to the idea, I think. But there’s certainly a lot of perks in how quickly you can scale post acquisition. So it wasn’t an overnight decision for sure, and we didn’t sell the first time we looked at it either. So it was really about flushing out the terms of what would that engagement look like moving forward and does everybody win in that equation?

John Warrillow:                So how did it come about? Who raised the idea in the beginning?

Kristin Delwo:                   EBSCO and we looked at it and we didn’t make a deal the first go round. We came back and did another round. Essentially I think since we’ve been partnered with EBSCO, we’ve done around a due diligence every year one form or another to move on to the next level of our relationship.

John Warrillow:                Right. Right. And so what was the change that made it more attractive the second time around?

Kristin Delwo:                   I think really the attractive part was the growth path of EBSCO, the company. So where they were at, a pivot point in shifting and really becoming a software company, and it opened some opportunities to do more with the product line than we had before. And it just was really getting a lot of traction around the world. And so excited to scale Stack specific roles globally. So not just having sales representatives selling the platform globally, but having the opportunity to put employees in those places and to really grow that. Also selfishly a little bit of Alberta economic development here in the diversification. We’re working real hard in Alberta to get a footprint. So to have one of EBSCO’s national offices and have an EBSCO Canada, I think as born and bred Albertans, all of us, Chad and myself, that’s a feel good thing, too. So it was really about timing and opportunity within the organization to take a leadership role on a global scale.

John Warrillow:                Got it. Okay. So how much revenue did you have at that point? What was either… I’m just trying to get a sense of what size of company Stacks was at the time.

Kristin Delwo:                   Sure. So take Hybrid off the table, just the Stacks product line we were just reaching a million in annual recurring revenue.

John Warrillow:                In annual recurring revenue. They call it ARR in the subscription world. How many employees?

Kristin Delwo:                   15.

John Warrillow:                15, and all dedicated to Stacks or also a hybrid of-

Kristin Delwo:                   Some Hybrid in there as well. Some of these guys still wear a couple of hats in how they contribute, but majority Stacks.

John Warrillow:                Okay. So where does it go from there? So who made the first move? Did they say what do you want if we bought your business? How much… do they ask you to do the number?

Kristin Delwo:                   Of course.

John Warrillow:                Did they?

Kristin Delwo:                   Of course.

John Warrillow:                What do they say?

Kristin Delwo:                   Just like that. What’s this look like for you?

John Warrillow:                What would it take?

Kristin Delwo:                   Yeah.

John Warrillow:                To sell us the whole company?

Kristin Delwo:                   Absolutely.

John Warrillow:                How did you respond to that?

Kristin Delwo:                   Oh those guys are brazen. They’ll just ask. That’s okay.

John Warrillow:                And how did you respond?

Kristin Delwo:                   There’s more than a number on the table. I think for Chad and I, especially Chad’s been in business for himself for a really long time. Me, not quite as long, but the idea of having a boss can be a daunting thing, right? That’s a change in life. So it really became about them making sure there was a culture fit and an opportunity to continue to grow and innovate and incubate product and continue to do the things we want to do and live the life we want to live. And they ended up doing a pretty good job of that.

John Warrillow:                So, but how did you specifically answer the question? When they looked over the table, they put down their glass of wine and said, “Kristin, what do you want for this company?” How did you respond?

Kristin Delwo:                   I don’t even know if I remember the bold response right there. I mean they do ask those questions. Of course that number is not a simple number, right? We all, we’ve had this conversation lots amongst our shareholders of what’s our current minimum, what’s our benchmark. But the reality is, a good deal with a private company, there’s a lot of math involved to get to that number, right? It’s not all you just win the lottery today and that’s it.

John Warrillow:                What’s the-

Kristin Delwo:                   I mean there’s lots of numbers and those are percentages and they come in different values that equate to that number. So certainly not black and white, and certainly took a few tries to find a model that worked for everybody and where everybody felt still incentivized and comfortable.

John Warrillow:                So I’m reading between the lines and saying that you did not respond to EBSCO and say, “We need X million dollars or there’s no deal.” Did you ever answer in that emphatic way?

Kristin Delwo:                   No, it was more like, “But I want to be as big as you and I want to contribute to the bigger machine that is EBSCO.” And as a family owned private company, that’s a real conversation that you could have. So it was even more than just Stacks itself. It was we want to be a part of this thing that was so grand. And I think timing mattered about where they were going as a company, but it was really about more than Stacks.

John Warrillow:                So it sounds like you were setting yourselves up, maybe intentionally or not for kind of an earn out type deal where there’s a… if things go well there’s a big goal at the end of the rainbow, so to speak. But we’ve got to make sure that… so again, you may not be able to answer this and I appreciate it, but I’ve got to ask. What proportion of the deal was cash at closing versus earn out potential? Are you able to share that?

Kristin Delwo:                   I can’t give you an exact portion, but I can tell you a little bit about the structure and that that purchase price is pretty modest. The earn out is definitely the larger component, but I think it’s critical. A good deal is one where everybody wins. It was important for them to know. I think we would have been too early to exit if we would have done it another way. I don’t think the product’s at the level of maturity. I don’t think we’ve established a market presence in all our market segments well enough. I think they really need us to show up, sort of de-risk the deal for them. It was critical that we are still incentivized and that we show up tomorrow. That’s pretty important.

John Warrillow:                Yeah, and by the same token from your perspective, to kind of make sure you protect your downside, I’m assuming you needed some cash upfront so that if the deal, if everything just kind of fell apart for whatever reason, you were covered, so to speak.

Kristin Delwo:                   Certainly. So I mean when we looked at how do we de-risk, we started to look at things like maybe it’ll be based on revenue and not profit, to be sure that big companies aren’t going to erode our margin.

John Warrillow:                It being the earn out goal.

Kristin Delwo:                   Right.

John Warrillow:                Were tied to revenue as opposed to profit. That’s one we’ve heard a lot on Built to Sell Radio over the years. So many people tie their earn out or the acquirer wants to tie to EBIDTA of the division and that can be manipulated. And so you guys were super smart in saying, “We’re going to tie it to revenue.”

Kristin Delwo:                   Right. I think confidence was high in our relationship. EBSCO has a very similar culture, and over the years in working together to get this product off the ground, we certainly got to know each other quite well. So I think there was low risk in not being successful. But certainly there were things that both sides needed in order to make it comfortable. I think a contributing factor to the decision to sell early as well comes down to the ability to scale, and whether or not it’s worth it to spend money fundraising to scale or to just scale via a known path that you can scale right now. And our market demand was getting really high. We were growing very fast and having a presence all around the world. And so there’s a little less red tape, believe it or not to get to where we’re trying to go here in a short turnaround.

John Warrillow:                So were you also courted by investors, venture capitalists, or private equity?

Kristin Delwo:                   Of course.

John Warrillow:                Yeah. Yeah. And so that was another route that you were considering. What ultimately, what was not attractive about raising money and continuing independently?

Kristin Delwo:                   Well, I think what’s unattractive about it is the process of raising money. It’s not the funnest thing to do. Going out and doing the pitch. I mean when go do the pitch and you close the sale with a top university and whatever, that’s a good feeling. When you go and do the pitch, and it’s just a different kind of investment deal where someone else is reaching in your pocket, those are tougher things, they don’t feel as good. It’s also not how we wanted to spend our days. The product is hot. The market opportunity is hot. Do we really want to spend time raising money? I mean you’re a fellow Canadian. You know that’s not the easiest thing to take American dollars over here. And so it really was about where are we now, what’s our fastest path to where we want to be, and are all those needs met? But certainly not the funnest part of what we do.

John Warrillow:                Okay. Okay. So let’s go back to the earn out, because again reality for virtually everybody listening to this show is there will be some transition required, right? Some period of time where you as the former owner, or the current owner helps the new owner monetize or capitalize on what they purchased, right? One form of that transition is an earn out. So one of the things you did was tie your earn out to the achievement of a top line revenue goal. What else did you do to de-risk your earn out?

Kristin Delwo:                   Oh. Wow. I mean other than tying it to revenue, we do have it tied to all our lines of revenue, so not just the Stacks product. It is tied to continuing all of our business the way that it is. It certainly comes with some nice employment as well, but there is a run there where we need to finish building the business. We’re certainly not done that yet, and I think it’s pretty secure. And looking at scaling this business, I mean just the transition of support and implementation and all those day to day things, the machine as the volume grows, there’s certainly work to be had there. They need us to show up.

John Warrillow:                And what happens if at some point God forbid they fire you? What then?

Kristin Delwo:                   Well that would be terrible.

John Warrillow:                That would be terrible, I know. It’ll never happen, but what if?

Kristin Delwo:                   I’ve never been fired in my life. I would be mortified if I got fired.

John Warrillow:                I’m not saying it will happen. I’m just saying what if it does happen? Is there some sort of clause in there that protects you if that were to happen?

Kristin Delwo:                   Our noncompete isn’t too serious and I think the lessons we’ve learned in this industry, likely if we were to do something again, it would likely be a similar solution in a different market use case. So on the consulting side of the business, we’ve had the pleasure of working in healthcare quasi government insurance, operations, lots of different organizations and build solutions. So I think there’s certainly with myself and my founder, no shortage of ideas and market opportunities. But I think we just go again.

John Warrillow:                Got you. What advice would you have fellow Edmonton entrepreneur comes. He says, “Kristin I’m thinking of selling my company to a partner that we worked with for awhile. I know you’ve done something similar. What do I need to be aware of. What do I need to think about? What are the things that I need to… the gotchas that could crop up?

Kristin Delwo:                   Well, I think you need to know your numbers. I very rarely talk to a company or mentor anybody who knows what their customer acquisition costs are, knows what their annual costs on a customer are. I mean we tend to talk about margin on SaaS products. The only spend there is hosting and development time and that’s really, really foolish. And so I think know your numbers as you go into those exercises because there’s a lot of numbers back and forth. The due diligence process is certainly not for the faint of heart. And know what kind of life you want to live. Know what things matter to you and that’s often not a dollar, but more lifestyle generated.

Kristin Delwo:                   So make sure that you think about those things, because I certainly did in this equation to say, “This is how I want my day to day to look like. This is how I want to live my life. And we got to make sure that that’s going to continue for me to be happy in my own life.

John Warrillow:                What’s been the biggest impact on the way your day to day life unfolds now that you’re a division of EBSCO versus independent?

Kristin Delwo:                   Well on the day to day in the office, I mean I may delegate invoicing, but I still have to tell somebody to send the invoice. So a lot of the functions are delegated into other teams, but I certainly have a pulse on that and you need to engage those folks in order to do that.

John Warrillow:                Sure.

Kristin Delwo:                   It’s certainly netted a different level of travel. So I said before, you got to get on the plane and you need the face time. That’s certainly increased since acquisition.

John Warrillow:                Where’s EBSCO located? Where are their main offices?

Kristin Delwo:                   The information services is headquartered just north of Boston, the north shore in Ipswich, Massachusetts. And then EBSCO Industries, the big head office is down in Alabama.

John Warrillow:                And so are you traveling from Edmonton to those offices?

Kristin Delwo:                   Yeah, and still doing events, conferences, and things like that. But as a startup, you have a good reason not to go, because you can say I’m being fiscally responsible. Well now as part of the big machine, they’re a little happy to make those investments and make sure we’re in those places. So I don’t have any excuses anymore other than I want to see and spend every other week with my kids.

John Warrillow:                Yeah. Yeah, yeah. That’s interesting, right? Because you do take away that cost…

Kristin Delwo:                   You do.

John Warrillow:                … not cost. That’s not the right word. But there’s deeper pockets there, right?

Kristin Delwo:                   Right.

John Warrillow:                We’re asking to grow the business. Go grow it, right? And I mean–

Kristin Delwo:                   That’s right.

John Warrillow:                Interesting. Yeah, and that might not work for everybody.

Kristin Delwo:                   No, it might not. I mean I think I could probably get away with less, but I’m pretty motivated to see it succeed and to make it as big as we can be by designing the structure of the deal. So somebody did something right in making sure I was motivated.

John Warrillow:                So again, tell us about the structure. So as much as you can share. There’s an earn out component that is tied to you getting top line revenue. How many years is that over, is there-

Kristin Delwo:                   Four.

John Warrillow:                Four years. So is it an all or nothing deal, like if you hit this target in four years, you win the lottery?

Kristin Delwo:                   It’s just revenue based. I don’t have targets like that.

John Warrillow:                Okay. And so it’s revenue based, but is it shades of gray versus it’s either win or lose or is there a consolation prize so to speak?

Kristin Delwo:                   No, not really. It’s pretty straight up. It’s a pretty black and white deal. We still have this much. This is how much we got. So it’s pretty straight up. As big as we can make it we can continue to win. So we tend to look at things with a little bit of a lean business case, which works out okay, because percentages sound real pallettable in the lean business case and now I think all parties are just excited to knock it out of the park and see what we can make those numbers look like.

John Warrillow:                For sure. But I guess for people negotiating a similar deal, I’m trying to get a sense of… and again, we can maybe take this out of… if it’s too personal, we can take it out of your specific situation and talk about your friend who is going through something similar. Because there’s one way to structure an earn out, which is all or nothing. Let’s just make a number. If you hit three million in revenue by this date, you get this amount of money, right? That’s kind of one way to do it. Another way to do it is say okay, our goals are to get somewhere between 2 and 5 million in revenue and obviously there’s more for you if you hit five than there would be if you hit two. I guess what I’m asking is was it more like the second scenario where there are different performance thresholds and course buying payments, or is it all or nothing?

Kristin Delwo:                   It’s just straight up. The more revenue we do, the more money I make. Just like that.

John Warrillow:                Okay.

Kristin Delwo:                   There’s no ceiling.

John Warrillow:                Okay. Got it. So that’s helpful.

Kristin Delwo:                   It’s a privately held business, right?

John Warrillow:                Yeah. Yeah, but that’s helpful. So there is no ceiling, per se because-

Kristin Delwo:                   That’s right. There is no minimum either.

John Warrillow:                Got it. Got it. That’s helpful for sure. So it really just unleashes you to go… so that’s your wheelhouse, right? I mean you are… you shared earlier that was the business development piece, was what you brought to Hybrid Forge. So what about your partner, Chad? What’s his perspective.

Kristin Delwo:                   He’s an engineer.

John Warrillow:                So how did he get comfortable with this idea of putting all of his eggs in top line revenue as… I mean I’m sure he trusts you, but at the end of the day, it’s a big chunk of his wealth and is tied up on you.

Kristin Delwo:                   Right. I’m sure he still has moments of oh my God, how did I get here? How did this happen? But I think over the years you build a trust relationship. And I always say proof is in the pudding. So as long as every year, it’s evolving and you see the results of these things, I mean I think we’ve come a long way over the years. And certainly we’ve had ups and downs and all the above along the way, but he’s pretty excited, too.

John Warrillow:                What was the biggest deal point for you and Chad to work through with EBSCO, like with the deal? What was the biggest point of frustration or sandpaper?

Kristin Delwo:                   Financials I think. It’s a small business. We didn’t have to be too rigid on how we booked recurring revenue, or how we organized our finances. As two entrepreneurs in a small company, you can really just kind of treat it like a marital account and everybody knows their boundaries and their swim lanes and you know you have respect for the other person. And so I think working through the details of the financials and getting everything where it needed to be for the buyer, I think that was probably the biggest sweat moments where you’re down to the wire and you got deadlines and you got to produce things in a certain shape and certain format. And there was some sweat in there. I think strategically or philosophically what was he hardest part to figure out was what our roles would be within EBSCO and how it would continue to ensure that we had growth opportunity, and the opportunity to invent solutions.

Kristin Delwo:                   I mean that’s really what gets the both of us up in the morning. So we found ways to make sure that we make a good living doing just that. So ensuring that we didn’t lose those creative freedoms, I think that was probably philosophically the biggest challenge was to define roles for ourselves that made good sense.

John Warrillow:                How did it work out for your employees who also had options or shares in Stacks?

Kristin Delwo:                   Sure, so we gave everybody their investment back plus some interest and everybody’s part of that earn out.

John Warrillow:                Ah, okay. So you’d be able to tie them to the earn out. But they got the original amount of money that they invested in.

Kristin Delwo:                   That’s right.

John Warrillow:                How did you figure out the interest rate? IF you’re not watching the video, Kristin’s finger went up in the air to find out which way it went.

Kristin Delwo:                   Stick your finger in the wind.

John Warrillow:                Yeah, yeah, yeah, got it. So it was a bit of a guess. Okay. Did you buy yourself anything, any trophy to mark the win of selling your company to a…

Kristin Delwo:                   I actually did. I bought a house.

John Warrillow:                Did you really?

Kristin Delwo:                   And I watched, as I was on a security conference call this morning I watched a moose take a swim on the lake out on my backyard.

John Warrillow:                Really?

Kristin Delwo:                   Really.

John Warrillow:                Wow. That’s fantastic. There’s a lake in your backyard.

Kristin Delwo:                   That’s right.

John Warrillow:                Oh, good for you. Good for you. So you must be just outside Edmonton then, or?

Kristin Delwo:                   Yeah, just east of Sherwood Park.

John Warrillow:                Ah, there you go. Well that’s fantastic. Congratulations on your new home and hope the moose got a good drink of water.

Kristin Delwo:                   Right.

John Warrillow:                Where do people… I mean I know people are going to want to reach out and say hi. Are you kind of a LinkedIn person? Do you connect with people that way, or is it Twitter? What’s the best way to people to reach out and get to say hi?

Kristin Delwo:                   LinkedIn is definitely my go to. I tend to… Twitter stops at the conference, I think I got too much going on. I struggle to keep up with the Twitter, but LinkedIn’s a safe bet.

John Warrillow:                So it’s Kristin Delwo, D-E-L-W-O.

Kristin Delwo:                   That’s right.

John Warrillow:                On LinkedIn. And where do people find out about Stacks and EBSCO if they want to learn more about Stacks?

Kristin Delwo:          and

John Warrillow:       or Kristin, thanks for joining us.

Kristin Delwo:                   Thanks so much. Cheers. Bye bye.


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