“A Lowercase ‘C’ Cost Me £550K”: CEO Shares Lessons Learned from a Private Equity Earn-Out (Brains Byte Back podcast)

In this episode of Brains Byte Back, Erick Espinosa sits down with Sam Oliver, CEO of OpenFI, a market-leading conversational AI tool designed for businesses looking to elevate their customer interactions.

The London-based author and tech entrepreneur joins the podcast to share a cautionary tale about an earn-out agreement gone wrong during the sale of his previous company, Lead.Pro. Due to a minor but crucial lowercase “c” in the contract defining “connected parties,” Sam lost over half a million pounds in the midst of closing the private equity earn-out deal. 

Sam emphasizes the need to separate emotions from business decisions, particularly when selling a company, advising founders to recognize that while they feel invaluable, they aren’t indispensable in these types of deals. Adding that emotional attachment to one’s business can cloud their judgment during negotiations, which can come at a cost. He highlights the necessity of relying on experts, particularly legal experts, when navigating complex business transactions like mergers and acquisitions. As well as how leveraging escrow clauses can safeguard founders in earn-out deals, if done correctly.

The three-time tech founder describes the challenges of selling a tech company, emphasizing that profitability or high growth is crucial for attracting buyers. Sam notes that most acquisitions are “acqui-hires,” where the team is more valuable than the product, leading to modest financial returns. To increase a company’s appeal, he advises focusing on profitability and ensuring the business offers strategic value to the buyer. 

Sam Oliver reflects on his previous software company, which, despite its high quality, was limited by its niche market in the UK realtor industry. He realized that to achieve significant valuations, tech companies need scalable products. Learning from this, his new venture in conversational AI aims to target a global market by integrating exclusively with Salesforce to streamline growth. The focus is on enhancing sales by using AI to engage website visitors via WhatsApp, and improving conversion rates through automated, high-quality sales conversations.

You can listen to the full episode below, or on Spotify, Anchor, Apple Podcasts, Breaker,, Google Podcasts, Stitcher, Overcast, Listen Notes, PodBean, and Radio Public.

Find out more about Sam Oliver here.

Find out more about OpenFI here.

Connect with Brains Byte Back host Erick Espinosa here.

TRANSCRIPT:

Sam Oliver:  

I am Sam Oliver. I am the co-founder of a new tech startup called OpenFI, and we are building conversational AI for enterprises. We know that LLMs are incredibly powerful, but how do you actually get that to add value to your business? So, we’re making it really easy for enterprise customers to have superhuman conversations with their leads. So imagine the best sales development representative your business has, and then you have them, 24/7, answering everything perfectly all the time. That’s what we’re going for. 

Erick Espinosa:  

Amazing. Welcome, Sam. We appreciate you joining us on this episode of Brains Byte Back. I’m excited about this one because you’re joining us to share some valuable insight, specifically with entrepreneurs who are entering the world of making deals and who will most likely sell their business if the right deal does come along. I want to start off by sharing that you’re a successful startup, founder of three tech businesses, a property investor, an author, and a few years ago, an earn-out deal for one of your startups resulted in you losing half a million pounds to a lowercase c in an agreement. Can you tell us exactly what unfolded?

Sam Oliver:  

We’re very fortunate to get an offer to buy the company back in 2021. This was my previous software company, marketing technology company called Lead.Pro. I had a meeting with potential buyers. They said this sort of typical, what’s your number? I had thought about it. I gave them a number that I would be willing to sell the company for. I had previously told them but I really didn’t want to sell the company. They’d made a couple of low offers. I wasn’t interested in the low offers. And they came back and they said, Okay, we can make that number work, but not in 100% cash upfront deal. What we’ll do is we’ll value the company with with an upfront cash payment, but then with a second earn-out payment. So you think the company’s worth this much money, we don’t think it is, but if you hit these numbers that you’re projecting, then we’re willing to make the full payment for you. 

Erick Espinosa:  

Was this concept kind of new to you? Did you already hear about this type of…was it something you were just learning? 

Sam Oliver:  

I’d heard of earnouts before, and I had been cautioned on them, particularly by some of my investors who’d had bad experiences in earnouts before. I think the key part for me was the business had been growing very well, and it had become profitable a few years before. Was exceptionally happy with how things were going. And then covid came, and all of our customers, like paused their billing when the market was closed. We sold to estate agents or realtors in a US context. And it had been really difficult time because we’d kept paying staff, even though we didn’t have any money coming in. I could see this profitable business going bankrupt. And then we were exceptionally lucky that our industry was really busy after covid, with everyone buying houses and moving houses. Our customers had record-breaking sales years. They started spending with us again massively. So the company really grew. But part of me really thought when we were in that difficult period in covid, I had to remortgage one of my properties to put money into the business to keep it running. And I’d seen just how risky it could be. So I thought while I am enjoying running and growing the business, if I get a good offer, it’s a nice time to completely de risk, take a win and then run another company, in particular with the earn out structure, I thought as long as the initial cash consideration is good enough. It almost doesn’t matter if we get the earn-out, like I would have taken the deal anyway. The earn-out for me was like a bonus. My earn-out was revenue-based. So every single pound of revenue we added increased over the over 12 month period, increased how much cash we would get at the end of the year. So the big objective for me was to go out and grow sales. And we smashed it. We did it over four times growth in revenue in 12 months, and really crushed it. There’s obviously a risk for the buyer here where they don’t want you to go to your brother and say, Hey, can you sign a massive contract with me and pay me $100,000 a month, and then I’m going to get paid. Our multiple was 36 times, you know, 3.6 million on the back of that. So the buyer wants to protect from any like dodgy dealings. So in our share purchase agreement, there was a connected parties clause, and basically it means that you can’t go to a brother, a family member, a friend, a shareholder in the business and get them to, like, give you fake revenue to bump up the valuation. So it was completely fine with that clause. We did have an investor who worked at the largest company in our industry with like 7000 employees, and they were one of our biggest customers, and the revenue that we grew in that year for from that customer was worth over half a million pounds. And what happened at the end of the earn out was the buyer turned around and they said, well, actually, one of your shareholders works at one of your customers, therefore the revenue from that customer is a connected party revenue, and we’re not going to allow it in the calculation. What was really difficult for me here was that shareholder was not involved with the contract at all. They worked in a completely different department. I actually got the CEO of the company, of our customer, to write a written testimony stating that that individual was not connected to the deal at all. It had gone through a full procurement process, a competitive one, and we had one on the merits of the business, and it was like really good revenue. Where the lowercase c comes in is in UK tax law, connected party is actually a defined term, and what it means is someone who has a controlling interest in the company and in our contract, it was not a defined term. So it didn’t have a capital C, it just had a lower case c, and that meant that it was up for debate as to what a connected party was. So we didn’t have that protection of saying, well, the person wasn’t involved in the transaction. They could, they could legally say, well, actually, the person is connected to the revenue, therefore we don’t have to pay it. So that simple single letter difference, capitalization of a single letter, well, two letters connected, CNP cost us over half a million pounds. 

Erick Espinosa:  

Wow. Is there any way that could have been caught previously? I imagine you had lawyers involved. 

Sam Oliver:  

We had, when we started the company, one of my friends who was a successful entrepreneur, recommended a lawyer and the lawyer was good that they were not an expert in M and A, and realistically what we and one of the things the lawyer was very good at doing was always saying, you know, I’ll give you a deal on this fee so that when you come to the company, let’s sell the company. You’ll do it with me. You’ll do it with me. So I felt very obligated to give them the work of selling the company, because it’s the biggest fee that they usually make is when they’re involved in M&A. Realistically, I should have said, You know what, thank you for all your help over the years. You’re not really an expert at this. Even though they kind of said that they were expert at it, they were not an expert at it. And we should have gone to a separate legal company. I think the other thing was, when we were negotiating the earn out contract one of my investors, so the earning contract is part of the sale agreement, and one of my more experienced investors had said, you should put all of the intellectual property into escrow, and that way, if there’s any dispute at the end of the year, you’ve got some leverage. You know, they can’t access the IP until the payment is made. And I think that, I think I was so keen to get the deal done that I didn’t even ask the other side to have that. I was like, I don’t want to jeopardize the deal. I want to get this deal over the line. I was, like, impatient to get it done, and it actually wouldn’t have cost me anything to at least try to get that escrow clause in the contract. Maybe they would have rejected it. Maybe they wouldn’t, but it would have made the situation probably different. Having more leverage at the end. 

Erick Espinosa:  

It’s kind of your baby. You’re emotional at that time. You mentioned that with your mortgage of the house,  you’re really putting your emotions in there.  You’re putting faith in this company. With that in mind, what type of advice would you give other people in your position, with their startup companies, what type of advice would you give them to kind of separate their emotions when these deals are supposed to be signed?

Sam Oliver:  

 Probably a lot of other entrepreneurs, their identity becomes their work. So if you’re working 10 hours a day, seven days a week, which isn’t healthy, but there’s times that you do need to do it in a business. You work very closely with your team. Your identity is as a founder of a business, as not and an entrepreneur, and when you sell the business, that identity has to completely change. You’re now the operator of a business that you no longer own, and you have to make very different decisions. Part of what blinded me was really my ego. So I had thought I know this business inside out. I know all our big customers. I’ve done an amazing job. I’ve grown revenue by over four times in a year. It’s 400% growth. It’s insane. I’ve made these buyers so much money. I’m irreplaceable. And actually what happened was, when I started to fight them on getting paid because they tried to pay us a lot less than we eventually got, they fired me. And I had kind of thought that I was valuable enough to them, that there was leverage there in my value, like they wouldn’t want to try and piss me off and screw me over, they’d want to retain me. So I think the big thing is, when it comes to selling a business and you’re negotiating that sale, you are 100% replaceable, even if you don’t feel like it because it’s your baby, because you’re so emotionally attached to it, you are selling the baby, and the baby will survive without you once you’ve sold it. And I had been very naive in thinking that there would be much more good faith than there was. 

Erick Espinosa:

I also think it speaks to you, talking about experts, because you’re an expert in your field. You’re confident about it, but at the same time, you need other experts to help you in other aspects of the business, right? 

Sam Oliver:

Definitely. I mean, my feedback to the lawyers was, my work here was to grow the revenue like that’s what I’m an expert in. Your work was to protect us and make sure we get paid and messed it up. 

Erick Espinosa:

Sam, now with rising interest rates and the cloud of the last few years lingering, you know, with the venture capital world, where other tech startups were promising but they took a nosedive. There’s some entrepreneurs right now that are considering, you know, like an exit strategy. Talk to us about, you know, the mental strain founders experience when deciding whether to continue with their own projects or deciding that it’s time to tap out.

Sam Oliver:

Yeah, sure. So I think that one of the real difficulties with technology companies is it’s very easy to look at the 0.01% of companies that sell for billions of dollars having never made a penny of revenue. I think this is like the complete exception in M and A and exiting. If your business is not profitable or very high growth, like growing very quickly, unprofitably, it’s going to likely be very hard to sell. A lot of companies that sell are really an acqui-hire, where they’re just taking the team of a startup that’s essentially failed, and they’re just getting jobs and maybe a small cash payment, but not really anything meaningful. So I think the main thing would be focus on getting your business to profitability. Maybe you’re going to need to cut costs. Maybe you’re going to really need to push and hustle on sales. There’s probably two things that make a trade sale occur. So this is what makes someone actually buy your company. So one, there has to be a reason for the buyer to want to do the deal. Either they see you as strategically valuable, they want your team, they want your technology, they want some exclusivity contracts you have, they want your IP. That’s the motivator for them to get out of bed and do the deal. The second part is going to be the valuation. And the valuation is going to be tied to a couple of things. Usually it’s going to be based on your profitability or your revenue growth, and you’re going to get a multiple of that. The best situation that you can manufacture as a founder is one where your numbers are somewhat irrelevant, and the opportunity that you offer to the acquiring business is where the value is. So they have a really large customer base. Your product would fit in very well. You can help them create massive revenue by buying this technology and putting it in that’s going to make you more valuable, or wherever possible, the bidding war of having multiple different buyers chasing you is the prime example of where you’re going to be able to pump up your price. If you don’t have those strong fundamentals, those situations are very hard to create. 

Erick Espinosa:  

Talk to us a little bit about what you’re working on right now. After all the—I mean, you sold your third tech startup. Right now, what’s in the pipeline for your future, Sam? 

Sam Oliver:  

The last software company we built was really fantastic. Not just blowing my own horn here. We built some amazingly good quality software. The issue was it was very niche. It was only for the realtor industry and only inside the UK, which is actually a super small market. The reason that technology companies get such high valuations is the potential of their scale. And I’d realized that we had built a product for a very small market. The other thing that we did was you can build a product and you can go very vertically deep, or you can stay quite horizontal. And while I do think it’s important to build for a niche so that you get quick feedback, corporate market fit, and you can sell, you still need to build for a large market. So the new company I’m working on with conversational AI. We want to be able to take this technology and sell it to anyone in the world, anywhere. However, another thing I learned in the last business is we spent a lot of time and money, and it slowed us down integrating with multiple different CRMs, so we maybe did like 16 different CRM integrations. What we’ve also decided to do in this new company is only integrate with Salesforce and only work with companies using Salesforce. So we’ve got a platform strategy which will make growth much, much faster. We’re also keeping it exceptionally focused on what we do. So we put a WhatsApp chat button on a company’s website. Traffic increases because people find it easier to click and chat on WhatsApp compared to an email form or live chat. So the first thing we do is we increase the number of conversions of web traffic for our customers. The big fear for customers is, well, how do I resource all of these inbound conversations? You know, how do I respond to them? Some people have tried to put chatbots in, but they’re not very good, and customers don’t like them. We’re using conversational AI, so it feels like you’re talking to an exceptionally good salesperson. And rather than focusing on customer support, which is important, but isn’t, where there’s revenue generated from customers, we’re really focusing on sales. So it’s all about sales talk. How can you increase the amount of traffic that’s converting to an engagement from a customer’s website, and then how can you increase the conversion of it by having really good conversational AI that is going to both educate and qualify the customer. So that’s what we’re working on now, and I’m super excited about it. Yeah. 

Erick Espinosa:  

So it’s automated AI, basically, right? 

Sam Oliver:  

Fully automated. The first thing that we do when working with the customer is we understand the fields in their Salesforce instance, we understand their sales script, and we use that to understand who’s a good customer, who’s a bad customer, and then we fully automate the entire sales conversation up into a zoom call being booked in the salesperson’s diary. So our objective is to just pre-qualify all those calls and fill the sales team’s diaries with calls and all of the work before fully automated  

Erick Espinosa:  

Sam, thank you again for joining us on this episode of Brains Byte Back and for being so transparent about your story. I’m sure your insight, it’s valuable. It’ll help a lot of people out there to take a step back and consider the steps they need to take when they are considering an exit strategy, a real pleasure. 

Sam Oliver:

Thank you so much, Erick. Thanks!

Disclosure: This article mentions a client of an Espacio portfolio company.