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People Of Interest: When Start-Ups Sell Out

Silicon Valley entrepreneurs have built companies with astonishing value. But when they sell out, they often pay a high psychic price.

J. D. Heilprin has repeatedly faced the moment of reckoning well known to every successful company founder: To sell or not to sell.

Heilprin has helped launch entities as diverse as iTunes forerunner RioPort and electronic TV Guide wannabe Modern Feed & Supply, but still obsesses about the finality of the buyout decision as he turns over unanswerable questions. "You can't help it," he says. "You think: Is this the best time to sell? What will my legacy be? Am I going to go on to have a chapter two or will I become useless? Am I helping or betraying my employees if I sell?"

It's a surprisingly complicated dilemma, no matter how much wealth a deal promises to deliver to a founder.

Millions Accepted, Billions Declined

Every tech start-up that begins to gain traction ultimately encounters the same crossroads as Heilprin has. Some accept millions (or billions) in a buyout: Tech developers Jan Koum and Brian Acton, for example, recently sold control of WhatsApp, their global mobile-messaging platform, to Facebook for a price that could eventually amount to $19 billion. Others reject head-turning offers and stick to their personal business plans, with varying levels of success: Facebook founder Mark Zuckerberg, who turned down a reported $1 billion from Yahoo! in 2006, when his site was still getting off the ground, later earned billions more in an IPO. On the other hand, Andrew Mason, the founder of Groupon, rejected a reported $6 billion offer from Google in 2010, only to watch his site decline in usage and his board eventually engineer his dismissal.

The staggering flow of capital being invested in Silicon Valley has made the tech business something of a spectator sport, and researchers seeking insights into decision making have been ramping up their studies of the industry. "Relatively few new businesses survive and grow," says Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University in Cleveland and the author of The Illusions of Entrepreneurship . "Most people dealing with start-ups are unsuccessful. And we don't have a lot of information about the relatively few who are successful and sell their businesses to somebody else."

Shane believes that a founder's level of anxiety about whether to sell depends in part on his or her expectations and stage of life. For young coders who develop a business or app with the goal of selling from the start, the decision poses little conflict. "It's more problematic," Shane says, "when people have run a business for a long time. These people always had a fair amount of control. But, of course, once they sell, they don't have control anymore."

Even the hardest-charging entrepreneurs have pangs of doubt, Shane says. An owner can turn down a lot of money because it doesn't seem like enough, but how does one know for sure? "Investors are always pushing you to get the maximum price," he says. But while most of us can't fathom turning down hundreds of millions, "another person might say, 'I already have plenty of money, and I'm really worried that I'm going to be unhappy if I'm not working any longer.'"

We likely imagine tech entrepreneurs as gifted, calculating thinkers who crunch the numbers and always make logical decisions. But while they may have complete confidence in their vision for new products or even a whole new means of communication, Shane says, "It's difficult when people shift from the decisions they make all the time to decisions they make rarely."

Huggy Rao, a professor of organizational behavior at Stanford University, where many ideas for tech start-ups have been hatched, teaches "From Launch to Liquidity," a course for would-be entrepreneurs that includes a lecture he calls "The Day After"—as in, the day after the sale. In it, he notes that no matter the price, taking a buyout offer still brings "psychological shock and surprise to all entrepreneurs."

While a sale may enrich them beyond their wildest dreams, it is also common for founders to experience sudden anguish on an unexpectedly deep and personal level. The sense of loss can be overwhelming. "They tell me, 'Oh my God! This is like a divorce or a separation—it's just like a breakup. I never knew I had all these feelings of attachment,'" Rao says.

David Ropeik, a consultant in risk perception, communication, and management, and the author of How Risky Is It, Really? believes that loss aversion, our tendency to value avoiding loss over acquiring gains, helps explain the sellers' anguish. "The emotional pain of selling something that you own carries a value beyond the dollar value of a transaction," he says. Even when the amount is mind-blowing, it's not all about the money. By cutting ties to his or her past, the seller can still face a grave loss of identity.

"When we give up something that has become ours," Ropeik says, "in the family of emotions, it can be as profound as losing a friend or even a loved one."

When we read about an entrepreneur selling a company for a fortune, our first instinct may be to envy someone who is clearly set for life. This seemingly lucky individual, however, could actually feel like a failure, Ropeik says, if the pain of giving up his or her company carries more emotional weight than the financial gain.

"You might experience a feeling of being trapped," Ropeik says. "You might suddenly feel old. You might ask, 'Now what do I do with the rest of my life?'"

A sale may appear to be the finish line for entrepreneurs, but that's not always the reality, Rao says. "When you sell, your employees often feel betrayed, and everyone else's perception of you changes. Now that you have a lot of money, they always want something from you. It's like climbing Mount Everest. You can climb it, but you can also die on the way down."

Learning From the Losers

Gabe Lozano, 31, is the founder of LockerDome, a thriving six-year-old St. Louis-based website that is a kind of Facebook for sports fans and averages nearly 20 million unique visitors per month.

While pleased with his company's progress and apparent bright future, Lozano has the occasional sleepless night when he frets about whether he is doing the right thing by remaining independent and not giving in to overtures from larger outfits. Still, he has decided that, for now, it is more advantageous to keep control of LockerDome than to take the money and run.

"A lot of this stems from having an entrepreneur's point of view," he says. "You have to feel that you can process information correctly and not care that much about what someone else is telling you. When you're on your own as a private company, you can follow your vision."

Lozano knows that he might be throwing away a life-changing opportunity every time he turns down an offer, but by remaining independent, he's exhibiting a willingness to bet on himself—a classic entrepreneurial instinct. "Pure greed leads to some reckless decisions," he says. "I have to detach myself and my personal wealth from the task of running this company. That way, I can make more practical decisions."

It's a strategy that has served many tech founders well—except, of course, the ones who didn't sell, whose moment passed, and who went out of business. Those entrepreneurs are almost certainly in the majority, but as Paul Carroll, a former Wall Street Journal correspondent and the co-author of The New Killer Apps , points out, we too rarely learn their lessons.

The reason, he says, is survivor bias, the tendency to focus attention on successful individuals or companies while ignoring failures or simply excluding them from study. It's a mistake that could doom many in the new generation of tech entrepreneurs, Carroll warns. They may follow a legendary CEO's blueprint to the letter, Carroll says, "but what they miss are the lessons from those who followed all that same guidance and failed. Dead men tell no tales, and dead companies don't, either."

"Some ancient Romans prayed to a god to save them during a storm at sea, and they were saved," Carroll says. "Then they convinced everyone of the power of that sea god, because the multitudes who prayed to the god but still drowned weren't around to contradict them."

For every Mark Zuckerberg and Steve Jobs, there are countless other tech founders whose stories will never reach the big screen. Their lessons, though, could benefit many more entrepreneurs who will one day face the ultimate decision. At those moments, alone with their doubts and dreams, the pros and cons can be overwhelming.

"It's always tough," Heilprin says. "You're used to being the boss, the one responsible for everything. You're used to leading the charge. But what happens if you give it up? What are the new owners going to do with your vision, and your baby? You feel like you're going to get spanked if you do it, and spanked if you don't."