Should I turn down a funding round because an acquisition looks likely?

A term sheet is a document. "An acquisition looks likely" is a feeling. Founders get into trouble when they trade the first for the second.

The short answer

Keep raising until a signed letter of intent (LOI) with a price and a structure is in your hands. Before that, you have a signal, and signals do not pay payroll.

Four questions that decide it

1. Who is the buyer? A strategic that is already a customer, partner or investor is a more credible signal than a cold note from a corp dev team. The closer the relationship, the more you can read into their interest. A first call is noise until the buyer does something that costs them effort.

2. How far along is the conversation? "Likely" covers a lot of ground. A good intro call, an NDA, a management presentation, a formal process with advisors and an LOI are five very different places to stand. Push the buyer to the next concrete step. If they will not move, the signal is weak.

3. What does closing the round do to the deal? A raise is not an automatic deal-killer, but it changes the math. New investors bring their own return expectations. A higher post-money valuation can open a gap with the price the buyer has in mind. New liquidation preferences change who gets what at a given price. Run the waterfall at your realistic exit price before you sign, not after.

There is also a flip side. A buyer who knows you are in a live process has a reason to move faster. Competition for your company can start with the people funding it.

4. How much runway do you have without the round? Runway is leverage on both tracks. With a year or more in the bank, you can let the acquisition conversation mature. With under six months, you cannot wait, and a distressed raise weakens your position with the buyer as much as with investors.

Run both tracks until the LOI arrives

Do not kill the round to clear the path for an acquisition that has not shown up. The two tracks are not exclusive until a signed LOI forces a choice. A live raise also keeps you honest about price, because it is a second market for your company.

When it is right to pause the raise

• You hold a signed LOI with a credible price and structure.
• The buyer made pausing the raise a condition, in writing.
• Your counsel and advisors have read the LOI and see a real path to close.
• You can absorb the exclusivity period without putting the company at risk. Read the no-shop terms closely, because that is the part that stops you from raising elsewhere.

Without those four, pausing is a one-sided concession.

What to do this week

1. Write down who the buyer is and what they have actually done so far. 2. Ask for a concrete next step with a date on it. 3. Model your cap table at two or three realistic exit prices, with and without the new round. 4. Know your runway number to the month. 5. Do not commit to a pause until the LOI is signed.

This is general information, not legal advice. Have counsel review any exclusivity or no-shop language before you sign.

Related reading: What is a letter of intent (LOI) in M&A; How long should exclusivity last in an LOI; I got an unsolicited offer to buy my company. What do I do?; What is a down round and how does it affect founders.