Justin Kan's Guide to Selling Your Company — The Legal Reality Behind Every Lesson

Back in 2014, Justin Kan wrote what I still consider one of the best founder-facing piece on selling a startup: The Founder's Guide To Selling Your Company. If you haven't read it, go do that first. I'll wait.

What makes Kan's post so good is that it's ruthlessly honest about the psychology of M&A — the distraction, the ego, the deals that evaporate. He lived it. And he's right.

But Kan wrote from the founder's seat. I've spent my career in the seat next to them — the lawyer's chair. And there's a whole layer of legal mechanics underneath each of his lessons that founders rarely see until they're in the middle of a deal. Some of it reinforces what Kan says. Some of it makes his warnings even sharper.

Here's what I've learned watching deals come together and fall apart.

Sell When You Don't Need To — And Your Board Will Thank You

Kan's first point is his best: the ideal time to sell is when you don't need or want to. You have options, you have traction, and you can walk away.

From a legal standpoint, this isn't just good strategy — it's tied to your fiduciary obligations. If your company is in distress and you're exploring a sale, you may trigger what's known as Revlon duties — a heightened obligation for the board to maximize shareholder value in the transaction. Once Revlon kicks in, your board isn't just allowed to seek the best price; they're required to. That means running an auction-like process, entertaining competing bids, and documenting why the chosen deal is the best available.

When you're selling from a position of strength? Your board has much more latitude. You can be selective about who you talk to. You can set timelines. You can walk away without someone later arguing the board breached its duties by not shopping the company harder.

Selling from strength isn't just psychology — it's legal breathing room.

The Distraction Tax Is Real — And It Can Kill Morale

Kan says acquisition talks are 10x more distracting than fundraising. He's not exaggerating. I'd go further: the distraction is primarily psychological, and the collateral damage when a deal falls apart is worse than most founders anticipate.

Once a potential sale is in the air — even if only a few people know — the founder's attention splits. Product decisions get deferred. Hiring slows down. Strategic planning stalls because "we might not need to worry about that." And if the deal dies? Anyone who knew about it has to process what feels like a failed exit, even if the company is perfectly healthy. I've watched teams lose months of momentum after a deal fell through — not because anything changed operationally, but because the emotional whiplash killed morale.

I tell founders: the moment you enter serious acquisition talks, run the business as if the deal will fail. That's not pessimism — it's smart (and often realistic).

Valuation: Strategic for Them, Legal Minefield for You

Kan nails it when he says startup valuations in M&A are strategic, not financial. Acquirers are buying teams, technology, market position — not DCF models. But the form that valuation takes matters enormously from a legal perspective.

A $50 million deal can look radically different depending on the consideration structure:

Cash is clean. You know what you're getting. Tax treatment is straightforward — your shareholders recognize gain on the sale, and depending on whether it's structured as a stock sale or asset sale, the tax implications shift significantly. In a stock sale, shareholders pay capital gains on their shares. In an asset sale (or a stock sale with a Section 338(h)(10) election), the acquirer gets a stepped-up tax basis in the assets, but the selling entity may face a double layer of tax. Your lawyer and tax advisor need to model this before you agree to anything.

Stock in the acquirer is where things get dangerous. Kan says don't take worthless acquirer stock, and he's right — but even valuable acquirer stock comes with strings. You'll likely face lockup periods (typically 6-12 months) during which you can't sell. If the acquirer is private, you may have no liquidity path at all. And the tax treatment gets complicated: stock-for-stock deals can qualify as tax-free reorganizations under Section 368 of the IRC, deferring the tax hit — but only if the structure is done correctly. Mess up the requirements and your shareholders owe tax on gains they can't yet realize. I've seen this happen.

Earnouts are the worst of both worlds. The acquirer says "we'll pay you $30M now and another $20M if you hit certain milestones." Sounds reasonable. In practice, earnouts are litigation machines. Who controls the business decisions that affect whether milestones are hit? What accounting methods are used to measure them? What happens if the acquirer deliberately tanks the earn-out metrics by restructuring the team? I draft earn-out provisions regularly, and I can tell you: no matter how detailed the language, there's always a fight. If you're taking an earnout, insist on objective, externally verifiable metrics, an independent accounting firm for disputes, and — ideally — a covenant requiring the acquirer to operate the business in a manner consistent with achieving the milestones.

NDAs: What They Actually Protect (and Don't)

Kan says to share data freely under NDA before the term sheet. He's right that you often need to share meaningful information to get a serious offer. But founders dramatically overestimate what an NDA actually does for them.

A standard M&A NDA will protect your confidential information from being disclosed to third parties. Good ones also include a non-use provision preventing the acquirer from using your information for competitive purposes. But here's the thing: proving someone used your confidential data versus independently developed similar insights is nearly impossible. If Google's corp dev team sees your product roadmap under NDA and six months later Google launches something similar, good luck proving causation.

What a good NDA does give you:

• Standstill provisions — preventing the acquirer from making unsolicited public offers or buying your stock on the open market
• Non-solicitation of employees — critical, because acquirers routinely try to poach your team if the deal falls apart
• Process restrictions — limiting who at the acquirer can see your data (insist on a "clean team" or "need to know" list)

What founders should push for but often don't: a residuals clause that clearly states the acquirer can't use any of your proprietary data that sticks in someone's memory. Yes, these are hard to enforce. But they establish a baseline expectation and make litigation easier if things go sideways.

One more thing: tier your disclosures. Don't dump your full data room on someone after the first meeting. Share high-level metrics and product information early, and save the sensitive stuff — detailed financials, customer contracts, source code access — for later stages when the deal is more real. This protects you if the process dies early, and it gives you natural checkpoints to gauge whether the acquirer is serious before handing over the keys.

Kan is right that you should share data. Just make sure your NDA has actual teeth, tier what you share over time, and know that an NDA is a speed bump, not a wall.

Most Offers Are Bull$#@! — Here's How to Legally Pressure-Test Them

Kan says if there's no expiration date or term sheet timeline, the offer isn't serious. From the legal side, I'd add a few more tells:

• No mention of consideration structure. If someone says "we'd love to acquire you" but can't tell you whether it's cash, stock, or a mix — they're fishing.
• No discussion of exclusivity. A serious buyer will eventually want a no-shop period. If they're not asking for one, they're not planning to spend real resources on diligence.
• No internal approvals referenced. Has their board approved exploring this? Is their CFO involved? If it's just a corp dev person freelancing, you're wasting time.

When an offer is serious, it'll come with a Letter of Intent or term sheet that includes an exclusivity (no-shop) provision — typically 45-90 days during which you agree not to solicit or entertain other offers. This is where Kan's advice about competitive dynamics is critical: you want competing interest before you sign exclusivity. Once you're locked up, your leverage drops off a cliff.

I always negotiate the no-shop period down as aggressively as possible — 30 days is ideal, 45 is acceptable, anything beyond 60 should make you nervous. And insist on a fiduciary out: a provision allowing your board to consider unsolicited superior proposals even during the no-shop period. Most acquirers will resist this, but it's standard in public M&A and increasingly present in larger private deals.

Pre-Term Sheet: Share Data, Protect Your Team

Kan says to share data but refuse team interviews before the term sheet. This is one of his most important points, and I want to underscore the legal dimension.

Team interviews before you have a signed term sheet create several risks. First, you may be forced to disclose the potential acquisition to employees before you're ready, which can destabilize the company. Second, the acquirer gets a free look at your talent — and if the deal dies, they know exactly who to recruit. Third, once employees know a deal is in play, retention becomes a crisis.

From a legal structuring perspective, employee retention is one of the most complex pieces of any startup acquisition. Key employees will typically receive retention packages — bonuses, equity grants, or employment agreements with the acquirer. Existing equity holders need to understand how acceleration triggers work: does their option agreement include single-trigger acceleration (vesting accelerates on the acquisition itself) or double-trigger acceleration (requires both the acquisition and a termination event)? Most institutional investors insist on double-trigger, which means your employees' unvested equity doesn't accelerate just because the company is sold — they have to be let go or have their role materially changed.

These retention packages are often negotiated directly between the acquirer and your key employees, which creates an inherent conflict: the acquirer is essentially paying your people with money that could otherwise flow to your shareholders. As a lawyer, I watch these carve-outs carefully. Retention is necessary — you need to keep the team — but the total retention pool and its allocation need board scrutiny.

Before You Sign the Term Sheet: This Is Your Moment

Kan says to negotiate everything before signing the term sheet, because that's when you have all the leverage. From the legal trenches, I'd put it even more starkly: the term sheet is the deal. Everything after it is just papering what you've agreed to — and fighting over what you didn't.

You're not going to negotiate detailed reps and warranties in an LOI — that level of specificity comes later in the definitive agreement. But there are critical economic and structural terms you absolutely should nail down before you sign:

Escrow and holdbacks. Acquirers will want 10-20% of the purchase price held in escrow for 12-18 months to cover indemnification claims — basically, if any of the representations and warranties you make in the purchase agreement turn out to be wrong, the acquirer claws money back from escrow. Negotiate the escrow percentage down (aim for 5-10%) and the duration down (12 months max).

Indemnification caps and survival periods. This is the one founders miss in the LOI and regret later. Push to agree on a cap on total indemnification exposure — typically a percentage of the purchase price — and how long the acquirer has to bring claims after closing (the "survival period"). Without a cap agreed to upfront, the acquirer's lawyers will draft the purchase agreement with uncapped exposure, and you'll be negotiating from a much weaker position. Similarly, survival periods can stretch to 2-3 years if you don't set expectations early. Get the framework into the LOI.

Closing timeline. Kan says push for a 30-day close. He's absolutely right. Every day between signing and closing is a day the deal can die. I've seen deals collapse because of a stock market dip, a change in acquirer leadership, or a regulator raising an eyebrow. The purchase agreement will include closing conditions — typically regulatory approvals, third-party consents, and a "material adverse change" (MAC) clause giving the acquirer an out if something terrible happens to your business before closing. The MAC clause is the single most negotiated provision in any purchase agreement. Fight for a narrow definition. Your acquirer's lawyers will try to make it broad enough to drive a truck through.

Due Diligence Red Flags That Kill Deals

Here's the part Kan doesn't cover much, because it's pure legal mechanics. Due diligence is where deals go to die. The acquirer's lawyers will comb through everything, and here's what kills deals:

Cap table problems. Missing 409A valuations, improperly issued stock, options granted below fair market value without board approval, former founders who never signed IP assignment agreements but still hold equity. I've seen a deal delayed six weeks because a company couldn't locate a signed stock purchase agreement for a co-founder who left three years earlier.

IP assignment gaps. If your engineers didn't sign invention assignment agreements — especially contractors — the acquirer can't be sure they're actually buying your IP. This is the most common diligence issue I see, and it's the easiest to prevent. Every person who touches your codebase needs a signed CIIA (Confidential Information and Invention Assignment Agreement). No exceptions.

Pending or threatened litigation. Nothing spooks an acquirer like an active lawsuit, especially one involving IP infringement or a former employee. Even threatened claims can trigger expanded escrow requirements or price reductions.

Regulatory compliance gaps. Data privacy issues, missing licenses, export control violations. These used to be minor footnotes. Post-GDPR and with state privacy laws proliferating, data practices are now a top-five diligence category.

The lesson: diligence readiness isn't something you do when you're selling. It's something you maintain continuously. I tell every client to run a "diligence fire drill" annually — pretend you're selling and see what breaks.

The Close: Where Deals Go to Die

Kan calls the period between term sheet and closing the most dangerous stretch, and warns founders to stay on top of their lawyers. Having been one of those lawyers, I'll add: stay on top of their lawyers too.

The definitive purchase agreement will run 60-100 pages plus disclosure schedules. Every line matters. Acquirer's counsel will try to expand reps, broaden indemnification, widen MAC clauses, and slip in post-closing covenants (non-competes, consulting obligations) that founders didn't expect.

A few things to watch for in the final stretch:

• Working capital adjustments. Many deals include a post-closing true-up based on the company's working capital at closing versus a target. This is a common source of post-closing disputes. Make sure the methodology is spelled out in detail, with example calculations attached as exhibits.
• Disclosure schedules. These are the exceptions to your reps and warranties — every known issue, every pending matter, every deviation from the "clean" picture the reps paint. Founders tend to treat disclosure schedules as busywork. They're not. An item you fail to disclose is a potential indemnification claim. An item you do disclose is protected. Spend real time on these with your lawyer.
• Third-party consents. Many commercial contracts, leases, and IP licenses have change-of-control provisions requiring the other party's consent before an acquisition closes. Identify these early. I've seen deals stall for weeks because a key customer contract required consent and the customer used it as leverage to renegotiate terms.

And honestly? Be prepared for the deal to fall apart. Kan says this, and he's right. I've had deals die on the day of closing. The best protection is maintaining your leverage — keeping the business strong, maintaining other options, and never acting like you need this deal.

The Takeaway

Justin Kan wrote a wonderful playbook on how to think about selling your startup. The legal reality underneath it is just as important — and in some ways, more consequential. A bad term in an escrow provision or a poorly negotiated MAC clause can cost you millions. A missing IP assignment can kill a deal entirely.

Here's my practical advice: if you're even thinking about a potential exit in the next 12-24 months, start preparing now. Clean up your cap table. Make sure every contractor and employee has signed IP assignments. Run your diligence fire drill. Get an M&A lawyer on board — not when the term sheet arrives, but before.

The best deals I've worked on weren't the ones with the highest price tags. They were the ones where the founder was prepared, had leverage, and was genuinely willing to walk away.