Walking Away From An 8 Figure Deal

January 3, 2020 |  

About this episode


Wes Winham was a co-founder and shareholder in PolicyStat, a software company that helps hospitals keep track of their Standard Operating Procedures (SOPs), including everything from dress codes to how to handle life and death procedures.

To read a transcript of this episode, click here.

Wes Winham was a co-founder and shareholder in PolicyStat, a software company that helps hospitals keep track of their Standard Operating Procedures (SOPs), including everything from dress codes to how to handle life and death procedures.

The platform was sticky with more than 99.9% of contracts renewing each year, which is why PolicyStat was quick to garner multiple offers of 3.5 – 4.5 times their annual recurring revenue of $5 million.

Winham and his fellow shareholders selected an acquirer, countersigned a Letter Of Intent (LOI) with a 45 day diligence period of exclusivity (i.e. “No Shop” Clause) where the PolicyStat stat team agreed not to continue to negotiate with their other suitors.

Negotiations were progressing well right up until they began discussing the terms of an earn-out. The tone of the meetings went from friendly to adversarial, which is when Winham and his fellow shareholders decided to walk away from life-changing money. In this episode, you’ll discover:

  • How to compare and contrast LOIs
  • The danger of letting an exclusivity clause expire
  • Three secret hacks to evaluate the cultural fit with a potential acquirer

In the end, Winham and his partners re-started the sale process. They were successful in garnering another offer of almost four times annual recurring revenue because of how sticky their customers are. Have you got a recurring revenue model that keeps customers coming back each month? If not, we can help you think it through using The Automatic Customer Builder, which is step five in The Value Builder System – complete Module 1 for free by getting your Value Builder Score.

About Our Guest

Wes is a software entrepreneur from Chickasha (Chick-uh-shay), Oklahoma. He was employee #1 at a SaaS startup called PolicyStat. He lead product and engineering from $0 ARR to $5m ARR and a May 2017 acquisition. As the CEO of Woven, Wes is obsessed with better developer hiring by reducing bias. Wes lives in downtown Indianapolis with his wife and their 3 adorable pet rats.


John Warrillow:                In this episode you’re going to hear the story of PolicyStat, how they built it, how they ultimately garnered multiple offers for the business, how the first offer fell apart, and how Wes was able to resuscitate some other offers and bring it back around, selling the company for close to four times top line annual revenue. Fantastic exit, which Wes will tell you all about in this episode of Built To Sell Radio. Here’s Wes Winham.

John Warrillow:                Wes Winham, welcome to Built To Sell Radio!

Wes Winham:                   Thanks for having me!

John Warrillow:                So tell me about this company, PolicyStat. You guys were involved in working with hospitals to help them sort of formalize their processes, is that right?

Wes Winham:                   Yeah, think of it as a hospital is a complex organization. They do really important stuff, and when they make mistakes it matters for lives. So they have a playbook. Playbook’s really important, it’s how do you triage the emergency room. How do you dose heparin, and like what’s your dress code policy? So all that mixed together.

Wes Winham:                   Because they’re so important, they’re regulated. So it’s both a quality problem of like how do we do it right, and regulation, how do we prove that the right people are seeing these policies, they’re searchable, we’re proven them, we’re signing them. The old way was just a bunch of binders, bunch of paper on a shelf somewhere. We took it online, made it easy to search, find, keep up with all the signatures, that kind of thing.

John Warrillow:                Got it, so if I’m a hospital administrator and I want to be able to prove that all my nurses have signed the dot, read and signed the document about the way you administer an IV, or what the dress code is, or hand cleaning procedure in the surgical room, I mean, all that stuff is documented and they have to sign where appropriate so there’s a sort of paper trail, I guess?

Wes Winham:                   You got it. And if you’re a health network you’ve probably acquired three different hospital systems and these little clinics that all had different policies, and you need to figure out how your system policies interact with the local policies, which interact with the regional policies, which interact-

John Warrillow:                Oh wow.

Wes Winham:                   … Per state. So there’s a lot of complexity and it’s hidden, so that why we ended up being in 20% of the hospitals around the country. Because we were just a little bit better at that, especially that problem with multiple levels of hierarchy and how you work those things together.

John Warrillow:                Right, because it sounds easy enough to throw up a Google Doc and kind of be done with it, but you rightly have pointed out so many of the complexities and interconnectedness that need to be sort of addressed.

Wes Winham:                   I love these small problems from outsiders, that they’re fractal when you get closer to them. Like people inside of them, they’re deep. There’s a lots of complexity. I think it’s a great success of our country that people can build these little intricate businesses that end up being pretty big to help people with things that most of us just don’t have to worry about.

John Warrillow:                Yeah, for sure. What was the billing model? How did you bill customers for this software?

Wes Winham:                   Annual contracts, so these are mostly mid market E-enterprise, fairly slow moving organizations. I hear government is worse than healthcare to sell into, but it’s pretty slow. So annual contracts. The nice thing about those annual contracts is folks renew. If you totally don’t screw it up, they stick around. So we’re able to get 99.9% renewal rate, which is nice for your business.

John Warrillow:                Wow! That’s unheard of! That’s per month or per year?

Wes Winham:                   Per year.

John Warrillow:                Wow! That’s unbelievable. It’s like once they sign up they never leave.

Wes Winham:                   If they go out of business, they leave. Sometimes if they’re acquired they leave, but other than that I think it was like on one hand I could count the number of folks that signed up and then left.

John Warrillow:                What made it so sticky?

Wes Winham:                   I think there’s like two kind of levers for stickiness. One is just organizational. There’s some types of organizations that’s like don’t change fast, and I think we have that at our back. The other one is how much work it takes to get up and running.

Wes Winham:                   So if you’re loading all of your policies and all of your data, and all of your work flows, just thinking about doing … like we didn’t lock people in, we let people take their data, but just the idea of going through that work again? You’re going to have to be a pretty crummy product for someone to be excited about going and doing that other thing.

John Warrillow:                It’s like switching banks is like the worst nightmare of my life. Like, “No! Don’t do it!” Which leads me to believe that it must have been a really long sale cycle. Like how did you sell this stuff, because as hard as it is for people to leave, and sticky the product is means that whatever they’re doing right now would have been hard to dislodge them from.

Wes Winham:                   Totally. We’re long sale cycles. I don’t know what it is. I haven’t been with the company for three years, so this is all old news, but it’s six to 12 months. Some of the bigger networks they were two and three year sale cycles, where we would maybe get a tiny corner of the network and then kind of expand there. Like one of our deals was like a [inaudible 00:06:40] deal from the [inaudible 00:06:41] conversation. It’s a long process.

John Warrillow:                How did you incentivize sales people?

Wes Winham:                   We had percentage of first year revenue was kind of our quota. So they had quarterly quotas, and then commissions on top of first year booked revenue.

John Warrillow:                Got it.

Wes Winham:                   Like a kicker for longer contracts as well.

John Warrillow:                And were they working the phone or did they kind of physically call on hospitals?

Wes Winham:                   We had an inside sales model and it worked pretty well. I think it was a little unusual in 2008 or 2009, but it’s increasingly less unusual and more normal. We were able to close fairly big deals over the phone, over video calls, and then for some of the biggest deals with would fly out, but a lot less than you would think.

John Warrillow:                How big did you get this company before you guys decided to sell? How much revenue did you have like as a … ?

Wes Winham:                   Roughly 5,000,000 ARR, let’s say.

John Warrillow:                ARR stands for annual recurring revenue.And what was it that triggered you to want to sell? Why sell, it sounds like this cash cow that would go on forever!

Wes Winham:                   So we raised money from investors and about ten years in folks start asking for liquidity, or they at least want to see some movement. We went out to raise venture capital again. We had raised from mostly angel investors, and we got feedback from the market that we weren’t growing fast enough at that point. So we’re based in the Midwest and we were pretty proud, and I still am proud of our capital efficiency. Not raising a lot of money and getting to a high ARR.

Wes Winham:                   One thing I learned there is that growth rate is all that venture capitalists care about. Not all-

John Warrillow:                What was your growth rate at this time?

Wes Winham:                   It was south of 50% at that point.

John Warrillow:                Below 5 0?

Wes Winham:                   Yeah, we were still growing 40% ish. I believe, I can’t remember exactly, but, so good growth rate at any measure, but not … you really need to be north of 100%, ideally closer to 200%-

John Warrillow:                To attract a venture capitalist?

Wes Winham:                   Yeah.

John Warrillow:                So, just to be clear, you started in 2007, you sold in 2017. So this is kind of circa late 2016, early ’17? That we’re-

Wes Winham:                   That’s right.

John Warrillow:                That we’re talking about. So it’s a ten year run ultimately culminating at 5,000,000 in annual recurring revenue. You go to the venture capitalists and they say, “It’s not big enough. It’s not growing quickly enough for us.”

Wes Winham:                   Yep.

John Warrillow:                Got it. The investors that you went to, how much of the company did you have to give up to fund the growth of it? You said it was capitally efficient. How capital efficient was it?

Wes Winham:                   I actually don’t know that number, what the total … I must have seen the cap table at some point. It was a minority of the company, and it was definitely … but it was more expensive early than it was later, but I’m not actually sure-

John Warrillow:                Did you do multiple rounds?

Wes Winham:                   We did two rounds effectively. So kind of friends and family, mostly doctors and folks that were really familiar with the problem, they were like, “Aw man, this sucks!”

John Warrillow:                “Where do I sign?”

Wes Winham:                   Exactly. And then once we had some growth and some traction we raised from a group of angel investors who are mostly folks who had run companies, so they’re pretty sophisticated. So those two rounds, and also part of that round was there’s a group in Indiana called the IEDC, and they do venture investing for companies based in Indiana. It’s a really cool program.

Wes Winham:                   For a while they were the most active pre-seed and seed stage investor in the country. It really is a great boost for Indiana businesses.

John Warrillow:                That’s really cool. So, you get the message from the VCs that you’re just not growing fast enough to attract our attention. So what did you do next?

Wes Winham:                   So then it is, “Do we want to try to reach liquidity or do we want to make the decision to not to do that?”

John Warrillow:                And were you at this time … sorry to interrupt, Wes … were you dividing out the shareholders, the folks who had invested in the company, or were you pouring everything back into growing it? Just give me a sense, was just kind of continue to carve off the dividends an option?

Wes Winham:                   No dividends, the kind of tax treatment of that is generally unfavorable. It’s tough, so the obvious solution for us was we can’t raise venture to kind of grow it and get big enough quick enough, so selling and exploring options was the option we chose.

John Warrillow:                Got it. What’d you do next? How did you proceed from that decision?

Wes Winham:                   So step zero there was some people have [inaudible 00:11:43] over and over IRN investment bank. There were people that said, “No, you can do it yourself,” and really understand this at the time and probably [inaudible 00:11:53] CEO I would have said, “Ah, let’s just do it ourselves.”

Wes Winham:                   But I’m so glad we hired an investment banker. We took some recommendations. I think we talked to three or four firms, had them come in and talk to us about their process and there was kind of one clear winner that had sold companies like ours before.

Wes Winham:                   They sold based on, “Here’s the revenue multiple we get.” So a lot of the conversations were around forward looking revenue multiples, and they kind of sold us on, “We can get you a higher revenue multiple with our process.” And I think that was a good thing to sell on. I think overall very happy with that choice.

John Warrillow:                How did you go about identifying the short list of M&A advisors to speak with?

Wes Winham:                   So we had a board and we asked them, and then we asked them to ask other people, probably 10, 15 folks that we knew that had sold before, asked them which banker they used.

John Warrillow:                Got it. And so you’re talking to the M&A guys and they were all talking multiples of revenue, which is what they were viewing your business to be worth, which is pretty common in the software as a service world. So what was the range you were hearing from the various bankers, like kind of low end, high end as a multiple of revenue. What were the sort of numbers they were throwing out?

Wes Winham:                   Three to 12, and 12 is, “this is a strategic buyer, they have a strategic use for you and your product portfolio,” and three would have been more to the lower end. You’re kind of like getting valued like you’re a spreadsheet. You’re just a discounted future cash flow. And the more you can position yourself as something strategic that’s going to be synergistic, the most overused word in business, if you can be synergistic with their existing product portfolio, or bring them into a market, then you get higher revenue multiple.

John Warrillow:                Oh so they’re saying three to 12. What was the straw that broke the camel’s back, like why did you choose the M&A firm that you did? Was there one or two reasons that you chose them?

Wes Winham:                   I think it’s so hard to choose. They all kind of look the same, they have the same pricing structure. They’re all very convincing, or they wouldn’t probably be in business. So for us it was recommendations. We asked and had, I think, two or three really positive recommendations. Everything else checked out, but i think, we could justify it as something we saw in them, but I think really it was the recommendations from other people they worked with.

John Warrillow:                So you hired this M&A firm, what’s next? What’s the next step in the process?

Wes Winham:                   I didn’t understand this at the time, but one of the values of M&A firms is they can go out … they built a list for us, they built, “Here are all the strategic acquirers, here are all the folks that are just you know they’re PE and they buy firms at your size,” and they know that list. I think there were 150 companies on that list, somewhere around there, and then they just ran a process. And they ran a process is step zero, again, was all right, we have the firm, then it is do your homework.

Wes Winham:                   So they had a list of here are the like … it was, you know, 100 items long on a spreadsheet. “Here are the things that y’all need to get your house in order. We know that investors are going to ask for these 100 things, so write up your security and disaster recovery policy. Talk about your IP. Put all of your R&D workers, intellectual property agreements here. Look at your sales efficiency. What’s your customer acquisition cost? What’s your CAC to lifetime value?

Wes Winham:                   And this part sucked. In retrospect I was pretty skeptical and I was like, “Ugh, why are we doing all this kind of BS inaudible 00:15:40] work and not running the business.” But that to me was the most valuable progress was getting all of our ducks in order. I think we actually learned some stuff about our business, which was surprising to me, specifically around sales efficiency and sales rep ramp time.

John Warrillow:                What’d you learn?

Wes Winham:                   We learned that our sales ramp time was lower than what most people expected in the industry, and that was kind of a thing I wish we would have learned earlier because I think we could have put some energy towards it and improved it if we would have known that actually our ramp time is 18 months, if we get up to 12 months that would make a big difference for our business.

John Warrillow:                And when you’re referring to ramp time you’re referring to how it takes a sales person to hit budget or hit quota, essentially?

Wes Winham:                   That’s right.

John Warrillow:                And it was 18 months, your experience?

Wes Winham:                   I think we were somewhere around there. And I think 12 months is closer to normal, and I don’t think we really put a ton of effort into it. At least i didn’t help much, and I think there’s work from the product and engineering side, which where I was, I could have done things to help and I … you know, wish I would have known that because I think I could have helped.

John Warrillow:                Interesting. So you developed what we call a pre-diligence package, which different folks call it different things. But basically a bunch of stuff that everybody’s going to ask about, you got to get done in advance. What was the next step? That you had this 150 long list. Did they go out with a teaser of some sort, like give me the next step in the process.

Wes Winham:                   Yep, that’s it. They ran out with a teaser. One pager, if you want more information reply, and then they would provide access to a data room that had the top ten percent high level things. It was a sales funnel. We sent out this many, we got this many responses. I want to say that was somewhere around ten percent, we’re like, “Send us the next step.”

John Warrillow:                The 150 you got 15 sort of in the hopper?

Wes Winham:                   I think somewhere around there. And at this point they didn’t know who we were, so one of the nice things about investment banker is you can reach out and explore the market without tipping off competitors and everyone else that you’re on the hunt. So they would say, “Let’s see a little bit more,” and then they would sign an NDA after that. And I think we got from, let’s say, 150 to 15 to, I would say seven or eight? They kind of went into that kind of more final stage.

John Warrillow:                And what are you thinking at this stage? So what’s your internal dialogue in your head, with your partner, with your investors, when you’re getting from 15 people interested in learning a little bit more, seven of them sign the NDA. What are you saying amongst yourselves? How do you think it’s going at this point?

Wes Winham:                   We’re asking a lot of questions. We’re saying, “How is this going? Is this normal?” I think that’s a question we asked over and over. Is this normal? Having an investment banker to say, “Yep, this is pretty normal, or actually that’s a little better than normal.”

Wes Winham:                   So the feedback we got is a little better than normal, but pretty much in the range of what we would expect. So we’re feeling vaguely good. All stressed about doing this process while running the business. That was another constant concern is like how do I balance doing this thing versus actually operating the business? How do I … I’m making these requests for like … I did a software license audit. And to the rest of my team it’s like, “What the heck is Wes doing auditing the software, like why?”

John Warrillow:                “Can we focus on what we’re doing here instead of some software audit?”

Wes Winham:                   Yeah, “Wes just wake up on one side of the bed and just like, augh! Software licenses, that sounds fun.” That was the tension I had, where otherwise I’m pretty transparent. I underestimated the stress for me personally being totally transparent to like I’m do this thing and I can’t really explain why and it feels goofy. That was pretty rough. I don’t know how to get around it but I was not expecting it.

John Warrillow:                I’ve heard it compared to sort of like a cheating spouse, the idea that you’ve got this huge secret and you don’t tell your spouse, and you’re walking around the house, and you feel all guilty all the time. I’ve heard it compared to that, that sense of duplicity, I guess would be one way to describe it.

Wes Winham:                   That feels right. It just does not feel like you’re holding up your end of kind of your contract with the rest of your team.

John Warrillow:                Yeah. How did you reconcile that in your head?

Wes Winham:                   So I had folks tell me lots of stories. I actually push back on this pretty hard. I’ve read examples of companies that will share it internally, but it’s risky, because if it comes up it can kill a deal. It can also get you sued. So I was convinced that that would be a really bad outcome and not worth the cost.

Wes Winham:                   The other cost that was brought up is if you share uncertainty with someone else and they’re just fixated on that uncertainty maybe they do a worse job. And actually if you give someone information that they can’t take any action on. Like what can you do? Just do your best, look for efficiency, serve the customer. The thing you do is the same whether you know that information or not.

Wes Winham:                   So then there’s an argument for that, but that cheating spouse probably can make the same argument, so I’m a little … it doesn’t feel good, but I think it was an okay decision.

John Warrillow:                After the sale, how did you … we’re going to get into the actual way you communicated it. How did those relationships sort of survive the sale? Did they survive the sale, and how did you patch them up or attempt to patch them up after the sale?

Wes Winham:                   I think we built up enough trust that they trusted that this was the way it had to be. So I didn’t get a lot of push back. I think there was a lot of surprise, and one of the things I think I would have done differently is we positioned this as like, “This is the right thing for our company and our customers,” and I think it was.

Wes Winham:                   A thing I would have done is position it as, “They bought us because they like our team and they like our product, and they think that we can figure out how to serve customers better and innovate.” What I actually positioned is is, “They have a plan for us,” and that felt very certain, but the reality is our acquirer was trying to figure out the plan, right? If they would have come in with, “This is what we’re doing,” it probably would have been a bad decision.

Wes Winham:                   I over promised on the certainty of the plan versus talking to my team and saying, “We need input, we need to figure this out. I want to you to learn about this other company, about where you think we can work better together, and then let’s build a plan together.” And I think that would have been a better way to frame this, and actually a more realistic, more reality congruent way of framing the situation.

John Warrillow:                Yeah, it’s such an important point. A lot of employees feel like their job is in jeopardy, they’re going to lose their job the moment … and in many cases they’re actually way more employable, have way more leverage right at the point of an acquisition because the acquirer wants to monetize what they’ve acquired, right?

Wes Winham:                   And especially for like folks in middle management ish, or maybe their team leads. So in our situation most of the executive team was out. So that creates a lot of opportunity internally. So I think we could have positioned more like, “This is going to create opportunity for you to advance more quickly in your career than you would have otherwise. You’re going to get more leadership opportunities. This is an opportunity to step up and kind of grow your career quickly.”

John Warrillow:                Yeah, for sure. So let’s get back to the deal itself. You’ve got seven folks who are sort of on the line. You’ve got the hook in the mouth, so to speak. What was the next step. Did they start to provide offers or letters of intent of some sort?

Wes Winham:                   We did kind of dog and pony show pitches. We mostly brought people in to see us. We went to see a couple people, flew in their management team, most typically like two to four folks-

John Warrillow:                How did you do that on the sly, on the quiet? Like how did you sort of invite them into the office without people kind of guessing who they were?

Wes Winham:                   Our law firm gave us space. So we went offsite, which is like pretty shady. We had to be careful about calendar settings. We had to be careful about what we named meetings. We had to actually change our default Google Doc settings as a result of this. So, if you’re an employee and you see a default Google Doc settings change, be skeptical.

John Warrillow:                Love it! Okay! So you meet with the lawyers, the lawyers offices, whatever. How many letters of intent did you ultimately get?

Wes Winham:                   We got more than one, I can say. So we had options, which was really … the goal of the investment banker is to give you options. Like the only leverage … like you could say, “Well this is the revenue, this is the market rate.” And if you have one option they can say, “Sure go get the market rate.”

Wes Winham:                   So the market rate is always what options do you personally have? What LOIs do you have? So we were fortunate to have multiple LOIs.

John Warrillow:                What was the range, if you could give me a sense of sort of multiples of revenue. You thought it was sort of three to 12, what did you end up getting?

Wes Winham:                   I think we got three and a half to four and a half, I think is where we were. Somewhere around there. The challenge is the offers, there were earn-outs. There are different ways of structuring the deal so that some of them seem like higher numbers but you had to hit other numbers, get there. It was actually pretty tough to compare deals. We at least had to look at what forecast can we think is reasonable? What extra money are they going to put in the business to make this new forecast reasonable?

Wes Winham:                   So it was very challenging to compare deals. I think going in with a strong expectation of what we could do over the next 18 months by default really helped us evaluate those deals.

John Warrillow:                What proportion of the deal were they putting at risk in some sort of earn-out?

Wes Winham:                   It varied. Let’s say I think on the low end I think it was like low single digit percentages, a few percent, on the high end it was 10 ish, 10 to 15% of the deal, if I recall.

John Warrillow:                So at the end of the day it’s still 85% to 90% of the deal would have been cash at closing?

Wes Winham:                   Yep.

John Warrillow:                Got it. What other considerations did you look at in evaluating the LOI? So you obviously had the sale price, so what are they willing to spend? The proportion that would be at risk in an earn out. What else did you use to compare and contrast the offers?

Wes Winham:                   Which is going to be better for our team and our customers, so culture was really important, and this is that word that everyone knows is important but tough to define. So we spent a lot of time trying to meet as many people as we could at both teams and get to know how they worked.

John Warrillow:                How did you evaluate culture?

Wes Winham:                   We asked for some heuristics-

John Warrillow:                What’s a heuristic?

Wes Winham:                   So like a rule of thumb. So our rule of thumbs were around what is our company policy around PTO, time off, and work from home, and kind of a silly one, but what did they dress like? What did these people come to the meetings, did they-

John Warrillow:                Not silly at all. Yeah.

Wes Winham:                   So that was a reasonable one. We were able to … how did they interact with us via email? Is this kind of very formal emails, or did I get LinkedIn messages telling me something was cool about our product? So it’s such a fuzzy process, but we were trying to mostly evaluate policy and then kind of what the face to face and digital interaction was about. And this was what we debated, we went back and forth. It was tough.

John Warrillow:                You debated internally?

Wes Winham:                   Mm-hmm (affirmative).

John Warrillow:                You and who? Your partner and other investors, or just you and your partner in the business?

Wes Winham:                   So we had four folks on the management team and kind of all had different opinions, and then ultimately also had to take that to the board and it’s like this is the offer we think we should take. The board was ultimately really supportive. They asked questions. It was really felt like a management team decision.

John Warrillow:                So it was culture fit. There’s obviously sales price. There’s proportionate risk in an earn-out. What else, was there a fourth dimension that you looked at?

Wes Winham:                   We looked a little bit about what we thought this would be for our customers, so product synergies. So we had a mix of kind of strategic. There’s some product synergy and just kind of money, investors, and for the investors there was just kind of money. It was, “How much more money did they want to put into the product,” and for strategics it was, “How do we feel like these two products could fit together and make our customers better?”

John Warrillow:                So which deal did you go for?

Wes Winham:                   First we went to a different deal. So we were excited, we went through it, we were like, “These are the folks!” We saw some products opportunity were we would be better, our customers would be better served by having both of these products. I went to visit their office, we’re really excited.

Wes Winham:                   I toured their office, talked to about, I had like one on one time with the product engineering team, got really technical. And then when it came time to negotiate the earn-outs things got … the tone changed.

Wes Winham:                   So they brought someone in to help within negotiations and it got very adversarial very quickly. The people that we talked to that we had good feels about kind of stepped back, and then it felt like we were real zero sum, and we were … and luckily we signed a limit on how much, exclusivity period. We had a limited number of days. We hit that and we weren’t feeling good, and they asked us to resign and we said, “We’re not sure.”

Wes Winham:                   And then we had another offer come in.

John Warrillow:                It … got so many questions. Let me just pause and make sure everybody’s following. So when you sign a letter of intent it usually has a no shop clause or an exclusivity clause. It sounds like yours did in this case. Yours was likely 60 days, was is? Do you recall? Ish?

Wes Winham:                   I think it was 45 or 30 days?

John Warrillow:                45? Okay. So that’s a period with which you can’t negotiate with the other people. You’re exclusively kind of engaged to this one firm. They’re talking to you about the product fit and things are going along well. Was the earn-out not stipulated then in the letter of intent? Why was that sort of the point of negotiation in diligence?

Wes Winham:                   It was not. It was the amount of earn-out was stipulated by the-

John Warrillow:                You mean the percentage?

Wes Winham:                   The percentage, yeah. The percentage of the total was stipulated. The terms that would actually be achieved were not stipulated, and management employment agreements were also … I think I remember the language was like, “reasonable employment agreements.” So those were the two things that … definitions of reasonable vary, let’s say.

John Warrillow:                It’s a subjective word, reasonable! Your reasonable may not be the same as mine. Okay, so you’re into the thick of the negotiation. What was the first tip, the tip off, the indicator that the earn-out discussion was becoming more adversarial than the other discussions?

Wes Winham:                   It was … it became, instead of this, “Let’s talk together about what’s the right plan and where we’re going to go,” it was, “Here’s what we think you need to be able to do.”

Wes Winham:                   So it went from, “Let’s talk about it, and collaborate, and find the right solution,” to, “Here’s the thing. What do you think?” Like it went very top down, which was a surprise to us.

John Warrillow:                And what was your reaction to it?

Wes Winham:                   At first we thought it was kind of weird. We reached out back to the … so this was a new person brought in to negotiate this. And I can see why they did that. It’s negotiation tactic, it’s have good cop, bad cop.

John Warrillow:                They were the bad cop?

Wes Winham:                   It’s okay to have a bad cop. But when we reached out to our good cop they were kind of like, “Talk to them.” And that didn’t feel right. It felt like, “You got to hit these numbers.”

Wes Winham:                   And we had some questions, like what kind of investment we’re going to make. “These numbers are bigger than the numbers we were showing you whenever you made the offer. How are you going to help us get there?”

Wes Winham:                   And it’s like, “Nope, you got to hit these kind of higher numbers.”

John Warrillow:                The good cop in this situation were the product people and the bad cop are the finance people, am I getting that basically right?

Wes Winham:                   It was kind of the good cop was the management team of the company. The bad cop is folks that finance people, yep.

John Warrillow:                So the finance guys are saying, “Here’s the earn-out, take it or leave it.” You’re like, “Well, need more information.” When you pushed for, “What’s the budget you’re applying against this to help us achieve this number, what resources do we have access to,” what was their reaction?

Wes Winham:                   It was, “It’s the budget we determine. We haven’t determined it, but it’ll be the budget that makes the sense for the company.” So kind of like no commitment sort of thing, which I can see why they might say that. They don’t want to get locked down, committed to something. We also didn’t want to be committed to something in a world where they might pull budget. That felt very … I think the reality is with an earn-out, you’re never get an ironclad contract that defines what everyone wants to do.

Wes Winham:                   So I think assuming that direction that kind of showed a lack of trust, and once that trust was gone it became a thing where we were only going to do it I think if we stopped having other options.

John Warrillow:                But at the end of the day it’s still a fairly small percentage of the deal, right?

Wes Winham:                   It is, yeah.

John Warrillow:                Why not just fake it and say, “Screw it, yeah we’ll do your earn-out,” and then leave the day after you get the money?

Wes Winham:                   I think that was a thing we talked about. It was like, “what would it look like if we just did this deal and just assume that we’re not actually going to get the earn-out.” So we did that evaluation. It probably wouldn’t have been, “Screw it,” but let’s assume this earn-out doesn’t actually happen, re analyze it, and then we start to think, “Actually maybe this is not the right deal for us.”

John Warrillow:                But why not? What was the calculus that allowed you to come to that conclusion? Because bird in the hand is worth two in the bush. Like, you’re kind of into the throes of this negotiation. Who knows if the other guys are going to bite again. Because the risk of course is if you go back out to the market after the 45 days expires everybody’s going to go, “Hmm, I wonder what they found in diligence that … the other guys found … ” and there sort of antennae for diligence goes up like 100 fold.

Wes Winham:                   Absolutely.

John Warrillow:                So bird in the hand is worth two in the bush. Why not just take the money, it’s 90% of what … well like, because a high percentage of the deal’s up front. Take me through your head space there. Why not take the money and just do the deal?

Wes Winham:                   This was the point where my CEO was sleeping four hours a night. He lost, I think almost 15 pounds. And he’s like a fit guy, so this is like not, this is like stress weight. So this is probably the darkest hour, is we have a thing that we’re not feeling good about and we don’t really feel like we have a lot of options, because exactly like you said, we go back to the market, maybe those deals are gone.

Wes Winham:                   And it came down to … it probably wasn’t a fully rational spreadsheet decision. It was, “We built this thing. It’s our baby. Is this the kind of relationship we want to start in?” And I can’t tell you it was obviously the right decision. I know it worked out for us, but it could have been the wrong decision.

Wes Winham:                   There’s another parallel universe where things fall through, we’ve done all this work, we’ve gotten our hopes up, and I’ve heard those stories.

John Warrillow:                This is a big deal, obviously. You’re talking three, four and a half times revenue. How life changing is it for all of the shareholders, for yourself, for your other shareholder? I mean is this going to be enough money for them to live for the rest of their lives? Why was it so stressful that he lost 15 pounds over this earn-out discussion?

Wes Winham:                   So our CEO is one of the most commonsense people I know. Really cared about these people that gave money to go do this thing, and he thought a lot about the downside and wanting to get their money back. I think it’s just [inaudible 00:38:10] about that thing. I think that’s, it’s a real emotional, caring. I don’t think … it’s not, nobody put in all their life savings, nobody is going to get FU money, as people call it, out of this deal.

Wes Winham:                   But he cares a lot about his reputation and his impact. So I think it’s a reflection of his character, not of any kind of absolute scope.

John Warrillow:                What about for you personally? I mean, you are a shareholder in this company. Where were you at on the, “Let’s just take the money and do the deal,” versus, “Let’s go back out to the market,”? Where were you at personally?

Wes Winham:                   I cared a lot about the product and our customers. Like that was the thing that motivated me a lot personally, is who’s going to be the right place for this product that I’ve spent the last ten years building-

John Warrillow:                But you thought these guys were great? Right, like in the beginning you thought these guys were great for the product, there was a fit. You were in bed with the engineers and so forth. So did that change or were you still feeling it, if we can get past these finance guys the product is best suited with this firm?

Wes Winham:                   It did change. So when we try to reach out to the good cop folks and they tell us, “You got to talk to the bad cop,” it just felt like that … the trust wasn’t there. I don’t think it was unreasonable, I don’t think they did bad things. It wasn’t unethical, but it reflected on what the relationship was going to be like going forward and that didn’t feel good.

Wes Winham:                   I think it’s surprising how much feels kind of get caught up in this thing, a thing I spent ten years building, and I’ve talked to hundreds of people and I think I want a good home for it-

Wes Winham:                   And for me I wanted the money and the flexibility so that I could go start my own thing, but honestly that was weighing less than I want a good product and home for our customers and our team.

John Warrillow:                You built this thing, you want to see it. What are the M&A guys doing, because we talked earlier about benefits of having M&A, you were a bit skeptical about M&A guys, but then you came around to how much value they add. I got to believe at this late stage on the earn-out conversation they’re pressuring you to take the deal.

Wes Winham:                   Yeah, I think to their credit all their incentives are to take the deal. They really don’t benefit by us dragging our feet to find the right home, but I didn’t feel a lot of pressure. I think they made it clear that the risks of pushing off here were that we’d go back and, exactly as you said, things would go south. The diligence alarms would increase for everyone else.

Wes Winham:                   So they told us, they didn’t sugar coat it. They just made us aware, and when it came time, the exclusivity period, the no shop agreement ended, they asked us what we wanted to do. And they actually said, “It seems like you’re not feeling good. It would be reasonable to not renew this.”

Wes Winham:                   So I think giving us that permission was a fairly high integrity move for them.

John Warrillow:                Yeah, it sounds like! What did the other side do when you said, “No, we’re not renewing the no shop clause,”?

Wes Winham:                   I think they seemed a little surprised. I think they were a little miffed. They put in a lot of time. They were pretty reasonable. They were, you know, “Let’s do it for 15 more days,” and then it was kind of a like, “Well, take it or leave it, you left it,” and then kind of radio silence for awhile.

John Warrillow:                You lost me there. So the original period was 45 days, you did extend for 15 additional days, is that correct?

Wes Winham:                   They said, “Hey can we extend this for 30 days,” and we were like, “Nope.”

Wes Winham:                   “What about 15 days?”

Wes Winham:                   “Nope.”

Wes Winham:                   And then it was, “Okay. This is our best offer.”

John Warrillow:                So they did not attempt to re-trade or renegotiate? They didn’t attempt to woo you back in, they just kind of said, “Okay,”?

Wes Winham:                   As far as I know, that’s true.

John Warrillow:                Got it, so, what next? I mean, you had, I guess, seven folks kind of on the line. A handful of letters of intent. What was the next step of the process?

Wes Winham:                   So at this point we hadn’t talked to any of those LOI folks in over 45 days, because that’s the agreement. Like we’re not going to to communicate at all, and so then it’s like, “All right, we got to reach back out and see what’s still out there.”

Wes Winham:                   I don’t actually remember what happened with all the other folks, but I know that we got a new offer. So one of the original, let’s say, 150 to reach out to was like, “Hey, is this still around?”

Wes Winham:                   We were considering re-upping and going back in negotiation with the original offer. And this new one came in and we’re like, “Can you make a decision quickly? What about … ” I think it was nine days, eight days?

John Warrillow:                When you say, “Can you … ” this is the second, the new offer? You pushed them saying, “Can you make a decision quickly?”

Wes Winham:                   Yep, new offer. “Can you make a decision quickly?”

Wes Winham:                   And they were like,” Yep, we can do it.”

Wes Winham:                   And we were like, “You can make a decision in nine days?” And they did it. They ran due diligence. They went through all of our materials, talked to our exec team and made this decision that we’d working on in 45 days and they had it done in seven … I think they maybe missed the day by one? I think it was like ten days instead of nine-

John Warrillow:                That’s stunning!

Wes Winham:                   They got it done.

John Warrillow:                So, that’s just mind blowing! So you went from letter of intent with this new offer to close deal in literally ten days?

Wes Winham:                   I think, yeah. It was less than two weeks.

John Warrillow:                Wow!

Wes Winham:                   It was super fast.

John Warrillow:                What was your reaction to the letter of intent?

Wes Winham:                   I remember just being … I think at first I was skeptical, like “There’s no way we can get this done so quickly! This seems like I’m worried that I’m going to waste more time. Is this going to go away?”

John Warrillow:                Where were they on some of the key metrics like value, you were sort of in the three and a half to four and a half range before? Similar kind of space?

Wes Winham:                   Yeah, similar range. Less earn-out, more guaranteed. It ended up being similar. I think they got a little bit better deal than the other person would have gotten, so their credit for moving so fast. But it ended up being multiple, that we were all pretty happy with.

John Warrillow:                Got it. So the overall value was slightly less than the first offer? More of it up front?

Wes Winham:                   I think it depends on how … what’s your opinion on whether that earn-out would actually happen I think that was kind of the [inaudible 00:45:16]

John Warrillow:                Right, the cash at closing was comparable then?

Wes Winham:                   Yeah, very close.

John Warrillow:                Yeah, yeah. It’s weird when … I reflect back on your original kind of conversation with M&A guys and they said, “You know it’s somewhere between three and 12,” and then all the offers you received were kind of in that three and a half to four and a half range. Do you find that peculiar? Do you think there was some thing … like was there some back channel communication going on that sort of suggested this was the range you guys were willing to accept?

Wes Winham:                   I think looking back that 12x is, that’s like the best. That’s probably the best multiple-

John Warrillow:                It’s crazy. Yeah.

Wes Winham:                   Yep. That’s the one, and that now goes on every one of their PowerPoint presentations. That one time they got a 12x multiple.

John Warrillow:                Yeah, and so your sense was that the lower end of the range was really the realistic range of what the business was worth?

Wes Winham:                   I think that’s right. I think if we were growing faster I think we could have got a higher multiple. There’s other factors that could have moved us north, but they’ll dangle that, whatever the best case they’ve ever seen in front of you on that slide, but I think it’s not real.

Wes Winham:                   I think the Pacific Crest Survey, I think is real. I think the name of that changed. It used to be called Pacific Crest. It was like SAAS multiple private valuations, and it kind of goes through what are the factors that are going to turn valuations?

Wes Winham:                   And at the time we went through that process with our numbers and yeah, we’re three and a half to four.

John Warrillow:                Interesting.

Wes Winham:                   Rational evaluation.

John Warrillow:                Yep. Why was the second firm so fast in doing their due diligence?

Wes Winham:                   They had a very centralized decision process. It was really one person with a little bit of input. So I think he was able to use that as an advantage. I think that’s famously Warren Buffet can make a deal in a day because it’s his decision, he can do in the back of a napkin, I think he was kind of channeling some of that energy of, “I can make this decision. I don’t have to go out and get a lot of approval.”

Wes Winham:                   That ended up being an advantage for him.

John Warrillow:                Mm-hmm (affirmative). What was that closing day like for you? Can you describe that experience of ten days after accepting LOI actually closing on the deal?

Wes Winham:                   What I really remember is the day that we announced it to the team. So we get everyone in the conference room. Steve, our CEO, stands up and no one really knows what’s going on. Everyone’s just kind of like chit chatting, and like I hear some more nervous energy than I would expect in that meeting, because I think people have some idea something else is going on, especially folks that have been through it before.

John Warrillow:                How many employees at this time?

Wes Winham:                   About 50. Think we probably had 35 people in the room. Just energy, and he stands up and shares the news, and breaks down in tears, is really thankful. And I think just everyone connected over what we’ve done over the last ten years. There’s that cycle of emotion. First it’s surprise, and I think you could see with him standing up there how much he cared about the team and the company, and I think clear tha when he made that decision he was just looking for the highest multiple, he was looking for the right place. The best he could find.

Wes Winham:                   That’s something that really stuck with me, is that’s the kind of leader I want to be. I want to be someone that I trust to make that holistic decision. I think he did a really good job balancing all the stakeholders.

John Warrillow:                How involved were the investors, both the friends and family as well as the kind of more formalized … I don’t know if you call this series A, but kind of the more formalized institutional investors. How involved were they in your decision making around walking away from the first offer and consummating with the second deal?

Wes Winham:                   So our board was informed. So they knew and they were given advice, and to their credit, it was very much like CEO supportive. It was like, “We got you, this happens. We know it happens. Huge percentage of these first offers don’t actually work out. We expected it, it’s fine. You’re going to get to a good outcome.”

Wes Winham:                   So they were supportive. They also asked questions. “What other options do we have? What do we expect now?” And then the rest of the group, there were a couple of investors that have closer relationships, so it was interesting how some of those were like texting Steve at 2 A.M. to know what’s happened in the deal. So he was getting lots of attention from a minority of folks who were just really close.

John Warrillow:                Because they wanted their money or … ?

Wes Winham:                   You know I’m sure their motivations are a mix, but they were very interested in that money. I think that’s fair to say.

John Warrillow:                Yeah, interesting. Did you buy yourself a trophy? How’d you celebrate this win?

Wes Winham:                   I founded a company. I didn’t spend a dime extra. I put it in a savings account, and one of the weird things as I was realizing about a year ago, I have one physical artifact from my time at PolicyStat. Well, a couple of t-shirts, and then I have … our investment banker bought us this kind of nice little plaque thing that I have in my office. And that’s it. I spent ten years of my life-

John Warrillow:                Can you show it to me? Do you have it like in front of you? Yeah, for those of you who are listening on iTunes, we’re on YouTube and Wes is going to hold up on YouTube his trophy from his investment bankers. Oh cool! It’s basically like a tombstone of the deal, showing PolicyStat sold to iContracts. That’s fantastic, congratulations!

John Warrillow:                That’s cool!

Wes Winham:                   It’s kind of crazy how un-physical it is, but the money from that gave me enough personal runway that I didn’t need to take a salary for the first 18 months of founding my new startup, Woven. And also allowed me to put a little bit of money to run the company. So that was-

John Warrillow:                What’s the new startup do?

Wes Winham:                   So we help companies hire better fit developers faster. We do that by finding hidden gems. Resumes suck. You miss folks, especially developers. A third of our customers’ hires are people that they would have screened out at the resume phase. We give those folks a shot to actually do the job a little bit. We evaluate it, we handle all that, and we say, “Actually, these two people, you should talk to them. They’re way better than their resume.”

Wes Winham:                   And then our customers, as a result, hire faster. They use fewer head hunters. They save engineering time. All that.

John Warrillow:                That’s awesome! And where can people find out about Woven?

Wes Winham:                   Woventeams.com

John Warrillow:                Woven is spelled W-O-V-E-N?

Wes Winham:                   You got it.

John Warrillow:                Like woven wo? What’s the backstory on the name?

Wes Winham:                   So I think if you’ve ever worked on a great team it feels like … it’s an organism that’s together. Strengths and other person’s weaknesses line up, and you kind of mesh, and you kind of know what other people are going to do. And I think great software teams are built that way. So other people’s weaknesses line up.

Wes Winham:                   There are lots of tools and ideas out there that’s like, “Did you go to these school,” or, “Can you do this algorithm?” But great teams are about communication and collaboration and problem solving. So our focus is on those aspects of being a software developer. Coding, too, but coding … there’s lots of people who can code. But there’s not a lot of great development teams out there.

John Warrillow:                And we’ll put that in the show notes at builttosell.com but it’s woventeam, or woventeams?

Wes Winham:                   Woventeams.

John Warrillow:                Woventeams.com. And Wes are you a social media guy? Are you okay if people connect with you on LinkedIn, or what’s best sort of social channel?

Wes Winham:                   Yeah, if you send me a LinkedIn request put a message mentioning the podcast. I get a lot of attention. And tweet me, I’m pretty active on Twitter. That’s pretty the best place to-

John Warrillow:                What’s your handle on Twitter?

Wes Winham:                   It’s weswinham, And that is W-E-S-W-I-N-H-A-M. So Wes win ham.

John Warrillow:                And same I assume on LinkedIn as well?

Wes Winham:                   That’s it!

John Warrillow:                Wes, it’s been great. Thank you so much for sharing your story in great detail! I appreciate it.

Wes Winham:                   This was fun! Thanks for having me!


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