How 'acquisition math' works

When I founded Divvy, I focused on the problem space, building a high quality solution, and surviving each week. I rarely considered an eventual exit or its economics: a gap that inspired this post.

First, some context. Divvy was capital intensive; scaling required large fundraising rounds. Capital intensive startups are not unusual, and include everything from foundational model companies to defense hardware to nuclear startups. If you are building a capital intensive business, you should plan for large capital raises and a massive exit, and this essay may be less relevant. My reflections in this post are best applied to businesses that have the option to grow more leanly, with lower amounts of funding.

Finally, I want to note that I’m forever grateful that I had investors who were willing to back me with Divvy, despite it being capital intensive.

Now to the actual lesson…

When an acquirer buys a company, they pay an enterprise value. From that headline price you add your balance sheet cash, subtract outstanding debt, and subtract transaction fees (working cap adjustments, legal, bankers). The remainder represents equity value, which is what flows to shareholders. Preferred shareholders make an economic decision around whether they will get more back by taking their preference amount (usually the amount invested but can be a multiple) or converting to common. If they choose not to convert to common, they get back their preference stack (called a “liq preference”, or the amount invested x any multiple they specify). If they choose to convert to common, they share in pro-rata with the common shareholders to divide up the remaining proceeds. In practice, there is no real “decision” to convert to common; your lawyers will run the math and go with whatever returns the most for that shareholder.

We sold Divvy Homes, a startup focused on increasing homeownership through a new financial model, for ~$1 billion in February 2025. However, after adding our cash balance, paying back our debt balance, and paying transaction fees (~5% of headline price), the remainder was not enough to clear our preference stack. We didn’t have any burdensome payout requirements (see FN 1); however, we had raised a lot of equity and the nature of our company required a significant amount of debt. Over the course of 7 years and 5 fundraises we had a total preference stack of $366 million. Meaning that unless the resulting equity netted greater than $366 million, the common shareholders weren’t going to walk away with anything.

Many founders – including us in our early days – don’t understand that the more capital you raise, the bigger the outcome you need and there are fewer ways to get there. It is hard to understand how exiting for $1 billion could “not be enough”, but in capital intensive businesses, exit sizes need to be multiples bigger.

In today’s hype-cycle economy, most founders announce fundraises as if they’ve just won the NBA championship. It is a badge of honor. A testament to hard work. While I did the same, I’d argue that every dollar raised is instead a liability. I’ll go through a quick, high-level example to illustrate my point. Google sheets backup is here.

You are the founder of an enterprise SaaS business. You raise a Seed Round of $5 million (that is the dollar amount raised, not the valuation, see FN 2), super impressive! You crush your metrics and then raise a Series A of $25 million and then a Series B of $75 million. However, like all companies, you have a hard couple of years and then need to raise a Series C of $50 million but the terms include a 2x liquidation preference (meaning those investors get back $100 million prior to the common being paid out). You are able to work through challenging times and eventually raise a series D of $100 million. You are a darling startup and are getting pressure to think about a potential exit. At this point, your preference stack is $305 million, despite only taking in $255 million of capital:

Note: Some of these assumptions are simplified. For example, it excludes refresh grants or pool increases. It also doesn't assume investors do pro-rata in the next round (which blends shareholder results across series). Tried to keep the math as simple as possible.


And lets say you raise every ~2 years and you perform in the top quartile of all SaaS companies, implying you now have an ARR of almost $60 million after 8 years.

With the pressure building from investors to get an exit, you start to look at public comps to understand what someone might pay for your company. Your recent growth rate is strong, but you struggled a few years back. Let’s say you are able to get a 4-8x revenue multiple (SEG, aventis-advisors.com, scalexp.com), this would value you on an enterprise basis at $240-$480 million. At the low end of $240 million, you would not clear your pref stack of $305 million, and walk away with nothing despite a fairly impressive outcome. Let's say you get the high end of this range because your product has great retention and is showing momentum, so $480 million. 

While the exact math of what you’d walk away with is hard to calculate without knowing valuations, it is safe to assume that your series B onward would take their preference stack and not convert to common in the acquisition. So $480 million enterprise value, assuming cash and debt are a wash, 5% transaction fees, and the Series B onward take their pref of $275 million (math here) - this leaves the converting shareholders with $181 million. Let’s say you, as the founder, owned ~30% of the equity to start (3 founders, 10% pool), this would mean you own 20% of the as-converted cap table (after 5 rounds of dilution), you walk away with $37 million pre-tax. That is life changing money and an amazing outcome.

However, let's first recognize that getting to $60 million ARR puts you in the top 10% of all companies, and, furthermore, the average M&A multiple for SaaS companies is closer to 4x. If you put this all together, I’d guess you have a 33% chance of walking away with nothing, 33% chance of walking away with <$10 million, and 33% chance of actually getting >$10 million. Probability weighted, this puts you at a ~$15 million outcome (again, math here). At that level, you may as well have built a $5 million ARR company but owned 100% of it - less headache, significantly more acquirers, and potentially the same financial outcome ($5 million ARR at a 3x multiple would get you $15 million if you owned 100%). Again, I’m not saying $15 million isn’t life changing – it 100% is. Or that you don’t have other reasons to build a company other than financial returns. My commentary provides the math around the relative returns a founder can get compared to the level of risk and energy they put in.

Also, this is assuming you are a SaaS business that gets valued on revenue. As a proptech company, we certainly weren’t. We were valued on our unit level cash flow, which made the numbers even tougher.

The real other concern is who will acquire you for these increasing amounts? Outside of the Mag 7, acquiring a startup for ~$500 million is a big pill to swallow. In order for a company to do an acquisition of this size, they need to have valuations themselves of $20 billion+ and be actively acquiring. Think about your industry. How many potential acquirers have done an acquisition of $500 million+ in the past 3 years? Can you IPO / SPAC instead, sure! But how many IPOs have there been in the past 3 years? You get the point.

I speak to a lot of founders who want to exit but get stuck. Too big to quit, too small to IPO, and just chugging along without an exit in sight.

This is why I now find it almost comical when startups treat big raises as a win. I get it - did the same. It’s a signaling mechanism: to other investors, to customers, to future hires. But every dollar you raise raises your hurdle. You need more revenue. More cash flow. A bigger exit. And fewer paths to get there. I would bet that most of these founders, while celebrating in the press, are actually filled with dread because they know they are on an unstoppable train of larger preference stack, fewer potential acquirers, and a higher performance hurdle to raise the next round.

Here is a novel idea: let's popularize the non-funding announcement - “we have so much revenue and cash flow we don't need to raise capital”. I often joke with my cofounder Nick that our north star should be 2 employees, $100 million in revenue, and no capital raised. 

At Divvy, I remember being at the seed stage and doing the math around this. I had an “oh shit” moment when I realized that given how much capital we had to raise, our exit needed to be massive, and there weren’t many massive companies in the single family housing space. So, in the words of Dua Lipa, here are my new rules:

Understand your pref stack.

You’d be surprised how many founders don't know their actual pref stack. If you don’t, ask your company counsel for it. In fact, ask them for a liquidation waterfall, which is a spreadsheet where you can plug in what you sell for and see how much each shareholder (including individual employees) will get. Sear these numbers into your brain. Understand what revenue you need to achieve to hit this preference stack and what companies can acquire you for this valuation. Do this when you are Series A, not when you are Series D. 

I know that as founders it is enticing to raise increasing amounts of capital. You want to hire. You want to grow. And maybe for your business this makes sense. Heck, if you can IPO for $100 billion, raise away! At that outcome size, the numbers just work. However, remember the statistics and understand if you are willing to swing for the fences, or if you want to be able to make a return after a decade of hard work.

Rule of 3.

The quick rule I use is: whatever my pref stack is, multiply it by 3 and that is the size of the exit I need to get. I think about that for every dollar of capital raised. You might ask why 3? While very imperfect math, I assume that the preference stack is a minimum of 1x, then you want at least a delta above that to offset years of hard work (your personal rule might be 2x or 10x, but 3x to me set a minimum bar). This number is inversely coordinated with the amount raised; the higher the amount raised the lower the rule and vise versa. 

Breaking this down, there are two real recommendations: (1) keep your pref stack low, and (2) keep your ownership high. The first will protect your downside. The second maximizes your upside. 

Limit debt.

I’ve covered this above, but every $1 of debt is a $1 higher valuation you need to get.

Consider your options.

If you are doing this math, and getting a little woozy at the numbers, there are ways as founders to protect your financial outcome. First, I’d recommend talking to your investors early on about a carve-out. A carve-out is where you get a set percentage of an acquisition price even if you sell for at or below your preference stack. If you wait until you have an acquisition offer, most investors will not give you this (why would they, you already have the offer!). If you negotiate it upfront as an incentive to always have exit opportunities, the conversation will likely go better. It all comes down to framing, so focus on: “I want to build a massive company, but if investors decide they want to sell and I want to continue, then I’d like to partake in the economics of the sale.”

There are two main types of carve-outs: management carve-outs and common carve-outs.

Management carve-outs typically only are for the founders / CEO and maybe some of the top execs. It is an agreement where you get some percentage of the sale proceeds even if you don’t clear your preference stack. There are incentive and retention plans that you can ask for to pay out your employees when you get an acquisition offer. Most of these are structured as one-time bonuses (discussed below). 

Common-carve outs is when the preferred investors agree to allocate a percentage of the proceeds to the common shareholders. Once you have an acquisition offer, if it doesn’t clear your preference stack, you can make the argument that the common shareholders would have been better off not selling, and therefore requiring a carve out for the common shareholders to be compensated. This is a tricky legal subject, so talk to your counsel.

Finally, for your team, focus on getting them retention packages. This is a bonus that is tied to them staying on through an acquisition. I was able to get this for some of the team members, and truthfully it felt amazing to compensate them for sticking by me.

Raising capital isn’t free. It comes with strings. If your goal is to return something to your team and yourself, after a decade of grind, make sure the math works.

These were lessons I learned the hard way, and I hope sharing this helps other founders on their journeys.

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FN 1:  Companies can often raise capital with onerous terms, which include but are not limited to liquidation preferences. A liquidation preference states that you need to return a multiple of the equity paid in prior to the common, or other shareholders, getting paid. For example, a 2x ‘liq pref’ means that if an investor paid $1, they must be repaid $2 prior to other shareholders getting paid. Divvy only had 1x liquidation preferences meaning we only had to pay back the equity we took in.

FN 2: Quick side note: when companies announce a $X million raise, they are usually announcing the dollars raised which is not the same as their valuation (which is not shared publicly as much). For example, a $5 million raise means the company took in $5 million and gave up some percentage of the company for this. So a $5 million raise on a $20 million pre-money valuation, means the post-money valuation is $25 million and the ownership of investors is $5 million / $25 million or 20%.