exit, acquisitionSuppose a startup received some seed funding, but for one reason or another couldn’t make a sale or grow, and at the end of a year or two had a waning $X remaining in the bank. But the entrepreneurs are fairly talented and have some decent IP, so they receive an offer to sell their company to join Google or Facebook or Hoolie for some small multiple of (let’s say 2 or 3 times) $X plus a salary.
Obviously acquisition contracts can be very flexible, but who would typically get the banked cash and how does this affect the valuation?
Money in the bank is an asset just like any other tangible asset. Typically in an acquisition, the assets that are transferred to the purchasing company are outlined in the purchase contract. For money in the bank (just like debts), this is usually used to satisfy any open debt first, including payroll, accounts payable, and other real debt. After that what is left in the bank account is part of the purchase (usually).
Think of the money as the property of the company, not its partners. Usually a purchase contract includes all the debts and assets, so this gets transferred in the sale.
As far as how it affects valuation, again its an asset just like any other asset, although in your hypothetical case I would assume that the cash in the bank would be a smaller part of the valuation versus the value placed on the IP. Usually when making an acquisition, the purchasing company doesn’t pay N times $X bank account balance, there are a lot of other factors in play.
The case that you provided would be highly unlikely, a start-up that has money after 2 years of no sales and no growth. They would probably be purchased for the value of the debts plus employment contracts and I would guess that nothing would be left in the bank account at that point.
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