- In April, 2019, Seattle home improvement startup Porch acquired LA home-moving concierge startup Kandela in an all-stock deal.
- A year later, Kandela is suing Porch.
- Kandela agreed to sell for $11.5 million, the lawsuit says, with a little under half the amount paid up front and the remainder when Kandela hit certain sales goals after the deal closed.
- This is a common way for some companies to structure deals when they want to be sure they are not overpaying.
- Kandela's lawsuit claims that certain marketing directives from Porch coupled with a lack of support made it impossible for Kandela to hit its targets and get the rest of the stock.
- The lawsuit offers a revealing inside look at what can wrong, and how founders could lose millions, when one startup buys another.
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In April, 2019, a 100-employee Los Angeles startup called Kandela founded in 2012 by two cofounders, seemed like it was having its happy exit when Seattle home improvement startup, Porch, acquired it.
Flash forward to May 11, 2020, and Kandela has filed a lawsuit against its owner, Porch, over the all-stock deal valued valued at a maximum of $11.5 million, according to the complaint seen by Business Insider.
At issue is about half that stock, worth more than $6 million, which was dependent on Kandela hitting certain revenue and profitability metrics. Kandela offers a concierge service to help people move and order utilities like cable, internet, find movers, get home security or smart homes setup in their new residences.
Kandela didn't hit its metrics so its cofounders didn't get their $6 million payout, hence the lawsuit.
The founders are blaming Porch, alleging that their company's acquirer didn't provide adequate resources and that Porch's CEO forced Kandela into selling various Porch services that turned out to be "vaporware." They say that Porch made it impossible for them to hit their revenue targets and are suing for the whole $11.5 million plus damages.
There are other allegations in the lawsuit as well, such as some claims that Porch fired a Kandela sales person after that person refused to ask his wife, who worked for a prospective customer, to help them win that deal; and there are some allegations about how various NDAs may have been violated.
The executives at Porch refute the allegations and have their own versions of events.
"Porch acquired Kandela and the acquisition included an earnout. Unfortunately, when selling its business, Kandela oversold their ability to hit its own objectives. We strongly dispute all claims related to this lawsuit and we will defend ourselves vigorously," said CEO Matt Ehrlichman. "Porch as a company has grown rapidly and we will continue to work in partnership with utilities and other partners across the country to help make the homeownership experience better and we are excited about what is ahead."
A peek inside an all-stock deal gone wrong
The lawsuit provides a window into how things can go wrong when one privately-held startup sells itself to another in an all-stock deal. Porch has raised nearly $120 million in venture capital since it was founded in 2013, including an estimated $22 million funding round in January, according to Pitchbook. Pitchbook puts the startup's estimated valuation at $346 million. Kandela doesn't appear to have raised much, if any, money from VCs, according to Pitchbook, which shows no records of such investments.
While Kandela believes it has a case to make in court about this deal, it's hardly the only startup to find itself in a failed acquisition. Researchers vary on the number, but some say half, and others say more than half of all acquisitions fail. Experts say the reasons are abundant: poorly matched cultures, poorly matched incentives, poor communication, a failure of the acquired company to integrate into the power structure of its new owners.
All of these things can derail an acquired company so that, instead of flourishing in its new home, payouts are missed or products are shuttered. And if the buyer is a startup, the acquired company may be dealing with an owner grappling with its own growing pains.
To protect themselves from overpaying and having to justify a difficult return-on-investment, some companies prefer deals where half the offer is up-front and half is paid out when milestones are hit, such as the type Kandela and Porch negotiated.
"But watch out: such earn-outs can backfire on the acquiring company in unexpected ways," Jim Price, who teaches entrepreneurship and innovation at Michigan's Ross School of Business, wrote in an article about why acquisitions fail for Business Insider way back in 2012.
Anytime only a few people will get the money from a buyout, incentives across the company aren't aligned for it to happen. For instance, the new company may have more salespeople but those salespeople have no reason to focus on the newly-acquired product versus others in their portfolio. Likewise, the CEO may wind up with a reverse incentive because if the company doesn't hit its sales targets and doesn't get the payout, then the CEO acquired the company for half the price. That's what Kandela is alleging in its suit.
"The better bet — easier said than done — is negotiating a fair price up-front," Price wrote back in 2012, the same year Kandela was founded. And it apparently holds just as true today.
Are you a Porch insider with insight to share? Contact Julie Bort via email at jbort@businessinsider.com or on encrypted chat app Signal at (970) 430-6112 (no PR inquiries, please). Open DMs on Twitter @Julie188.
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