NGINX recently celebrated the one‑year anniversary of its acquisition by F5.
I’ve been part of or witnessed quite a few acquisitions in my career, and I can honestly say this has been the best. Sure, there are always some bumps and lumps as you integrate two distinct groups of employees, several physical locations, and hundreds of systems and processes. But we never lost focus on the customer, the market opportunity, and the advantages each company brought to the table. I commend F5’s CEO, François Locoh-Donou, for his vision and stewardship throughout the process.
And as with any anniversary, it’s a great time to reflect. On this anniversary I found myself asking two questions. If we could do it all over again, would we? And what would be my advice for entrepreneurs who are in the position we were in 18 months ago?
The answer to the first is clear: Yes. I would do it all over again and choose F5.
As for the second question – advice to fellow CEOs – that’s the subject of this post.
Choose Your Path, and Stick to It
When you lead a start‑up company, you find yourself on a path with three possible exits. You can go public and get onto the stock market, you can sell your company to a corporate buyer as we did with F5, or you can go out of business.
You try not to go through Door #3, for obvious reasons! If you aim at being acquired, you run the risk of switching your focus from making your company truly valuable to making it attractive to a potential buyer. That’s a losing strategy. Suitors value authenticity and companies with a clear purpose.
So I think the only path that makes sense is the one aimed at the first exit, and it’s the one we chose at NGINX – striving to become a successful, independent company by staying true to ourselves and focusing on customer needs. We figured that if a suitable party wanted to acquire us, we’d consider that option seriously, but not at the cost of distracting us from our core mission. We’d stay focused on creating an innovative, customer‑ and community‑driven solution for modern app and API delivery.
We didn’t actively seek or expect to be acquired at the time it happened. But since that’s what happened, I want to share my three key takeaways for any other CEO facing a similar decision.
1 – Make It a Win for Employees, Not Just Investors
We got several acquisition offers during our time as a startup, most with proposed terms that would have wiped out all of our employee’s unvested stock options. If we had accepted any of those, it would’ve meant that the upside for the employees was only for the time they had spent with the company, not for the future. For example, employees who had been working at NGINX for a year had vested in a quarter of their options and had three years’ worth of options yet to vest. The acquiring company might grant them RSUs as new employees, but those RSUs were probably never going to be worth anywhere near as much as the unvested stock eventually would.
Instead, we held firm on the requirement that unvested stock options not be wiped out. We wanted employees, who had taken the risk of joining NGINX, to benefit not only during the time they had spent on the journey with us so far, but to continue reaping the rewards of their risk‑taking as part of the new company. They deserved that upside as long as they stayed with the new company.
F5 not only agreed to this, but offered additional new options to employees who came over as part of the deal. I’m gratified to report that almost all NGINX employees joined F5, and a year later 90% of them are still with us. Having gone through other acquisitions, I can tell you that such a high level of retention is quite rare a year after an acquisition. Making sure that employees – and not just investors – benefited financially from the acquisition was a huge part of our considerations when we accepted F5’s offer.
2 – Be Critical to the Future of the Company that’s Acquiring You
Let’s say, for example, that NGINX got an offer from a company that earns 80–90% of its revenue selling anti‑virus software. With only a small part of our business focused on anti‑virus protection, what do you think would’ve happened to NGINX as a business unit that wasn’t core to the mission of the new company? We would’ve become some side‑project to them, with no additional investment. I wouldn’t be reporting to the CEO, but maybe the Head of Product, and no matter our level of effort our staff would be struggling to get any attention from sales or marketing teams.
The fact that NGINX is core to F5’s mission means that it’s seen as a key contributor to the future of F5. We’re getting more attention and focus within the company than we deserve based on the revenue we bring in, quite honestly. The opposite would be true if we weren’t core to the mission of F5; we’d be starved of the resources and funding needed to accelerate growth. The bottom line is that being core to F5’s mission makes the acquisition better for all employees – including the 5,000 already at F5 when we joined – because NGINX can improve the future of F5 overall.
3 – Culture is Key to Success
The third piece of advice is probably the most critical: culture is key. Honestly, we had to make a gut call on F5. The meetings I had with François leading up to the deal were crucial to the decision. They indicated that as our new parent company F5 was going to be open, transparent, and supportive – all things that matched the culture at NGINX. Ends up it was, and it still is. No matter how much money is on the table, if your people dread coming to work every morning, they’re not going to stay.
So, when I think about the NGINX acquisition, I feel that there was a lot of luck involved. Sure, that luck was informed by instinct, but accepting F5’s offer was still a leap of faith. And for us, the decision paid off. We have seen already that F5 took swift action towards a “human‑first” approach in supporting customers during the COVID‑19 pandemic. We focused on customer’s needs, how we could help, and how employees could donate time and expertise to the community while companies were struggling to adjust to a new normal. That is only one example of the culture at F5, but it’s exactly what I believe NGINX would have done on its own. It helped further harmonize our teams.
To Fellow CEOs: Be Prepared; We’re Entering Turbulent Times
In summary, if you’re a CEO, then your priorities when considering an acquisition should be fairly simple:
- Look after the employees. Don’t take anything away from them, because they are the reason your company is worth being acquired in the first place.
- Ensure your technology has a great home and is core to the parent company’s mission, not a side‑project. Feeling valued will keep your people engaged.
- Keep culture at the heart of where you go. This will keep your people happy longer term and maximize retention.
I believe the current pandemic and global crises are leading to turbulent times. If history repeats itself, this will be a time of consolidation. I expect to see significantly more M&A activity as incumbent technology providers seek new growth engines that are central to their strategies as well as opportunistic “tuck‑ins” that round out a small part of their portfolios. Keep these three tips in mind over the next twelve months. Chances are you’ll find yourself in the same position that we were in last year.
I’m confident you can guide your teams down the right path. I look forward to hearing about your successful exits.