$31 billion Atlassian just revamped its M&A term sheet to take on more risk in the acquisition process and make it less stressful for founders to sell their companies (TEAM)
Over the years, developer software company Atlassian has spent $1 billion to buy more than 20 companies, five of which it snapped up in the past year alone. And yet the $31 billion company is taking a stand against the power that large acquirers like itself have over the startups they buy.
On Monday, Atlassian made an unprecedented move to publish its new M&A term sheet, giving potential acquisitions â and everybody else â a deep look into exactly what they're getting themselves into when they enter in to the deal-making process.
For Chris Hecht, the head of corporate development at Atlassian, there's too much "antagonism built into the process" of acquisitions, which makes it difficult for companies and their leadership teams to actually integrate with the bigger company once a deal closes.
While many founders are excited to sell their startups, the selling process can leave them feeling like they shoulder too much financial risk if something goes wrong in the process, Hecht said. Tense negotiations take an emotional toll the people involved, and that toll can continue to burden the founders after the companies have merged, he said.
"They're coming into this process super excited that they're going to sell the company, but it becomes very arduous for them mentally and emotionally," Hecht said.
Read more: Investors used to balk at startups for software developers â but after Microsoft bought GitHub for $7.5 billion, they're all inHecht, who spent time as an investment banker before leading mergers and acquisitions at Salesforce, worked closely with Atlassian Chief Legal Officer Tom Kennedy to revamp the default term sheet the company uses in M&A. The two execs agreed on one big idea: Even if an acquirer, like Atlassian, takes on more risk on its term sheet, it will benefit in the long run from a less stresful and more peaceful M&A process.
"M&A as a practice traditionally has not been aligned with Atlassian's values," Hecht told Business Insider. "We think that increasing transparency will drive a much healthier experience. We think we can drive a lot more value more quickly."
More financial risk, but less stress
The new term sheet hasn't been used yet. But the next company that gets an offer from Atlassian will notice a few founder-friendly elements that aren't offered by an other tech companies, as far as Hecht is aware.
For one, Hecht and Kennedy wanted to close the risk gap, which their analysis found protects acquirers beyond what is necessary.
"Buyers are getting a lot more insurance than they need. We spent many months going through hundreds of deals to figure out how much risk sharing was expected," said Hecht.
The term sheet eliminates some key provisions common at other companies, such as indemnity clauses â special provisions designed to protect the acquirer. Those provisions might include the ability to hold a startup's founders legally liable for certain problems that arise as part of the deal, or even change the terms of escrow.
Escrow terms mean that part of the proceeds of the sale are held by a third party until both parties agree that the sale is satisfactory, almost like a security deposit.
Most companies ask for 10% to 20% of the purchase price to be held back in escrow, Hecht said. That can be annoying for founders, who then have to wait for the deal to close to everybody's satisfaction to see their full payout.
Atlassian's new terms ask for just 5% in escrow, going as low as 1% in escrow if the company opts to purchase insurance to protect the deal.
This fixes a sticking point for a lot of founders looking to sell, Hecht said, because they often have to negotiate between the buyers who insist on keeping a large amount of the sale total in limbo, and from their investors and other shareholders who want to put as little of the purchase price at risk as possible.
