Part 4: The Exit
A. M&A Readiness — What Due Diligence Actually Looks For
Most of the legal work that determines how smoothly an acquisition closes happened years before the deal was ever discussed. Due diligence doesn't create problems — it finds the ones that were already there, and the companies that move fastest through it are the ones that kept clean records all along.
What Buyers' Counsel Actually Reviews
A typical diligence request covers corporate records (formation documents, board and stockholder consents, cap table history), IP assignments (making sure every founder, employee, and contractor who touched the product signed an assignment), material contracts, employment and contractor classifications, outstanding litigation or disputes, and regulatory filings including securities filings like Form D and blue sky notices.
The Gaps That Slow Deals Down Most Often
In practice, a handful of gaps show up disproportionately often: missing or unsigned IP assignment agreements from early contributors, cap table inconsistencies between what's recorded and what founders believe is true, contractor relationships that look like misclassified employment under closer scrutiny, and missing corporate formalities — board consents that were never properly documented for decisions made years earlier.
None of these individually kill a deal, but each one generates back-and-forth, indemnification negotiations, or purchase price holdbacks that could have been avoided with better records kept in real time.
An Exit-Readiness Checklist Worth Running Annually
Rather than treating diligence-readiness as a fire drill that starts once a buyer appears, a light annual review catches most issues early: confirm every past and current employee, founder, and contractor has a signed IP assignment on file; reconcile your cap table against actual signed documents rather than a spreadsheet someone updates from memory; confirm all board and stockholder approvals for major decisions (financings, option grants, amendments) are properly documented in minutes or written consents; and review contractor relationships against the classification factors that matter most.
Why This Matters Even If You're Not Selling Soon
The same records that speed up an eventual acquisition also make every financing round faster, since investors' counsel runs a similar diligence process before every priced round. Clean records aren't just exit preparation — they're a compounding asset that pays off at every financing milestone along the way.
The One-Sentence Version
Due diligence doesn't create the gaps it finds — it just surfaces them at the worst possible time to fix them, which is exactly why the companies that move fastest through an acquisition are the ones that treated recordkeeping as ongoing discipline, not a pre-deal scramble.
B. Control Rights and Who Really Decides on a Sale
When an acquisition offer arrives, founders often assume they'll be the ones deciding whether to accept it. Depending on how your financing documents are structured, that may not be entirely true — and the moment to understand who actually holds that decision is well before an offer is on the table, not during it.
Approval Thresholds
Most financing documents specify what approval a sale requires: typically board approval, stockholder approval by a majority (or supermajority) of outstanding shares, and often separate approval by the preferred stockholders voting as a class. Depending on your ownership percentage and how protective provisions are written, common stockholders — including founders — may not control the outcome even if they collectively hold significant ownership, because preferred stockholders vote as a separate, often decisive class.
Drag-Along Rights
A drag-along provision requires stockholders who didn't vote in favor of a sale to still go along with it — selling their shares on the same terms — once a defined majority (often preferred stockholders plus some threshold of common) has approved the deal. This exists to prevent a small minority from blocking a sale the rest of the cap table wants, but it also means founders opposed to a particular deal can be compelled to sell anyway if the numbers align against them.
Why This Matters Most in a Modest Outcome
These mechanics matter most in exactly the scenario founders hope never happens: a sale at a valuation below what later investors paid, where liquidation preferences (discussed in Chapter 5) mean preferred stockholders are made whole first and common stockholders — founders and employees — receive little or nothing. In that scenario, the same preferred stockholders whose money is being returned may also hold the deciding vote on whether to approve the sale at all, and a founder who disagrees with the decision may have limited ability to block it.
What Founders Can Actually Do About This
You can't renegotiate control mechanics after the fact, but you can understand them clearly at each financing, and negotiate specific protections where they matter most — for instance, requiring common stockholder representation or a minimum threshold of common approval for any sale below a certain valuation. These protections are harder to win in a competitive financing, but they're worth raising explicitly rather than discovering their absence only when an offer arrives.
The One-Sentence Version
Ownership percentage tells you your economic stake; approval thresholds and drag-along rights tell you your actual say in a sale — and the two numbers are worth understanding as separate questions well before an acquisition offer forces the issue.
