How We Sold Our Company Without Destroying It
Matt Westgate and I started Lullabot on January 1st, 2006. Like most founders, we didn’t start the company with the intent of “building a business” so much as “working for ourselves.” Much to our surprise, some great people came forward who wanted to work for us. So we hired them and grew the company. As more people came on board, we became more and more excited about the possibilities of working with all of these wonderful people. If we could do cool things with just two people, what sorts of cool things could we do with eight? Or sixteen? Or thirty-two?
We read a lot of books about business and culture. Could we grow the company without losing what made it special? We listened closely to others’ stories of business success and failure. What made people happy? What made businesses thrive? What were the common mistakes? We had our own failures and mistakes. We had some successes too. We tried to take notes, learn from the mistakes, and build off the successes.
We tried to hire people who were better than us – people who could do what they were doing better than we could do what they were doing. We hired people who inspired us and people we could collaborate with and trust.
Over the years, we had a number of inquiries about buying the company. The first one was a surprise. We hadn’t thought about the company itself having monetary value, much less that anyone might be interested in buying it. We scrambled to put together documents that made sense of our finances, our growth, our brand, our value, and our market differentiation. But with this inquiry and others in the future, our own personal holistic value would always outweigh any offer from another company. We also had gratitude for the people who helped build the company and we didn’t want to let them down.
We had friends who had started companies in order to become their own boss. We’d then seen them sell their companies only to find themselves with a new, ultra-demanding boss of their own. The entire focus of their company would shift as the company ran its engine at full throttle to ensure a profitable purchase for the new parent entity. Inevitably, the culture would evaporate, and usually most of the employees would move along, leaving only a husk of a brand.
But what really stuck with us was the exercise of documenting our worth. If we could make ourselves valuable to another company, wouldn’t we also be valuable to ourselves? We started to get more organized about our finances and projections. To ensure that our employees would be taken care of if the planets aligned and we did sell the company, Matt set about putting stock options in place. It was a huge project and at first it didn’t feel like it had immediate benefits. But it did force us to put together a consistent valuation model for the company. After all, if we’re giving out options on our stock, it should be clear how much that stock is worth at any given time.
Having built the company around open source software, we found that open code tended to be cleaner, clearer, more secure, and generally more well-written than proprietary code that no one else was going to see. So we moved towards an open books model, sharing the company finances with the employees in a monthly report. We were now operating a lot more like a public company, not only acknowledging the business of the business, but tracking performance, value, and opportunity in an ongoing and transparent manner.
It was around this time that Matt read A Stake In The Outcome and we started thinking about an Employee Stock Ownership Program (ESOP) as a possibility for the company. We also expanded our leadership team, introducing director-level roles. Eventually our leadership team included Seth Brown (Director of Operations), Brian Skowron (Director of Sales), Karen Stevenson (Director of Technology), Jared Ponchot (Creative Director), and Addison Berry (Director of Education).
Lullabot’s Drupal training arm morphed into Drupalize.Me, a subscription training platform with streaming video. Several employees started working on this product full time and eventually, split off into their own company, Osio Labs, with Addison as CEO.
In 2015, Lullabot had grown to over 60 full time employees. But the company had a very difficult year. We spent month after month saying, “We’re going to need to do layoffs if things don’t get better.” The next week, things hadn’t gotten much better, but they hadn’t gotten too much worse. So we remained in this uncertain position, just a few weeks from possible layoffs. Week. after. week. after. week. It went on for months. It was VERY stressful. As the year came to a close, business began to stabilize. But I was burned out. It had snuck up on me.
It had been 10 years. We had a great leadership team in place. We had systems and processes in place to sustain the company. We had proactively and intentionally built a great culture. We had hired a team of the best developers, designers, and digital strategists in the world. We had stock options in place and we were starting to share stock with the leadership team. It was time for me to take a break.
I would eventually take an indefinite sabbatical and hand over CEO duties to Matt. Matt would eventually come to me with an offer to buy me out at the full valuation of my shares – a better offer than we’d seen through any type of M/A offer in the past. This would set in place a precedent for Matt and the rest of the leadership team to eventually sell their shares back to the company and create an ESOP where the company was wholly owned by the employees. No golden handcuffs. No faceless company taking over. No change in culture. It was an idyllic situation. We signed the papers at the beginning of 2017.
Lullabot continued to thrive. Another Lullabot product – a QA preview and test platform called Tugboat – started to mature enough to warrant a dedicated team. With such a strong leadership team in place, Matt was able to step away and dedicate himself full time as the CEO of Tugboat, handing the Lullabot CEO role to Seth Brown.
Seth and Matt, along with the rest of the leadership team, continued to pursue the ESOP path. A convergence of economic, political, and legal factors led them to a sooner-than-later approach. And early in February, 2021, the company converted into a 100% employee-owned business, buying out the owners who had accrued stock over the years. The company also exercised all of the employee stock options, sending a surprise check to many employees who hadn’t paid much attention to the fact that they owned options in the company.
Now that Lullabot is an employee-owned company, current and future Lullabot employees will vest stock as they work. When employees leave, the company will buy back their shares. So at any given time, 100% of the company stock is owned by 100% of the employees.
I’m really proud of the company we built. I’m also proud of the way that we sold it. From the very beginning, “Inspire & Empower” has been at the very top of Lullabot’s Core Values. I’m glad that we found an exit that empowers the employees that helped us build the company. I’m proud of Seth Brown and the rest of the leadership team that has “gotten it” in a way that allowed us to relinquish control without worrying about the welfare of the company.
And lastly, I’m really proud of Matt Westgate, who I will always refer to as The Best Business Partner In The World™. Over the years, we’ve spent thousands of hours together on the phone and in person. We always made an effort to understand each other and rarely disagreed. I can’t remember ever having an argument with him. Matt is highly intelligent, fundamentally honest, mindful, and empathetic. He kept me grounded and as a true partner, he helped alleviate the loneliness that can come from running a company. We were in it together. I trusted Matt from the first moment that I met him and that trust has never wavered over the 17 years I’ve known him.
By becoming employee owned, Lullabot has 100% aligned the motivations of its shareholders with those of its employees. The conventional motivation of a public company is to “maximize value for shareholders.” This can create difficulty when that “value” is purely measured in money to people outside the institution. But when the shareholders are the same people who are doing the work, that “value” can also encompass non-monetary factors such as happiness, safety, and being proud of your work – while at the same time, everyone in the company has a stake in the financial success of the company.
I am a proud parent, delighted to see the Lullabot enter a new stage of growth and maturity. I no longer have control in the company’s future, but I couldn’t be happier about what it has become. And I’m excited to see what will become of it in the future.
Matt Westgate and Jeff Robbins - December 2011
Jeff Robbins is a business coach, mentor, and virtual business partner who works one-on-one with company owners and leaders to help them build vision and direction for their companies while building productivity, stability, and happiness for their employees and themselves. You can work with him too. Reach out to set up a free session