Life After Merger: When Edtech Acquisitions Go Sour

column | Mergers and Acquisitions

Life After Merger: When Edtech Acquisitions Go Sour

By Mary Jo Madda (Columnist)     Sep 21, 2016

Life After Merger: When Edtech Acquisitions Go Sour

Most startups will not go public. The next best option, typically, is to be acquired by another company, in exchange for cash or stock options. But what happens after the paperwork is signed and LAA (Life After Acquisition) begins?

For curriculum management startup UClass, which was acquired last year by Renaissance Learning, the relationship has been less than symbiotic, demonstrating there are growing pains even after a company has “exited.”

On Sept. 1, 2016, former UClass CEO Zak Ringelstein filed a lawsuit against Renaissance Learning, claiming that Renaissance had removed his management responsibilities, left him with essentially no role and is now denying him the stocks and severance payments he was promised. “Filing a lawsuit was not something I ever wanted to do, but I’m faced with a pretty extreme injustice that I believe needs to be righted,” Ringelstein tells EdSurge in an interview.

The lawsuit is still pending. The case isn’t black-and-white, but here are details and perspectives from both sides.

Ringelstein and Renaissance

Last February, Wisconsin-based learning analytics and assessment platform Renaissance Learning acquired UClass, a San Francisco-based startup that billed itself back then as a “Dropbox for Education.” Terms of the deal were not disclosed. At the time UClass had raised $1 million in venture funding.

Renaissance, founded in 1985, has exchanged hands a couple times between private equity firms. It is currently owned by Hellman & Friedman, which in 2014 paid $1.1 billion to buy the company from Permira Funds.

According to Renaissance CEO Jack Lynch, who spoke to EdSurge about the acquisition in 2015, the choice to acquire UClass would give Renaissance an edge in the instructional resource space: “What UClass helps us do is build a better bridge between assessments and instruction, without teachers having to sacrifice freedom of choice in what resources to use.”

According to the suit, terms of the acquisition included giving Ringelstein, then CEO of UClass, employment as Renaissance’s “General Manager, Teach[ing].” The agreement also stated that Ringelstein would receive 1,488,519 restricted shares of Raphael common stock (Raphael is a holding company created by Permira), as long as he remained a Renaissance employee for three years. “The way these things are structured is that the company will pay 80% of the acquisition price upfront, and then in order to get the last 20%, you have to work for the company for a few years—to help transition relationships, customers, etc.,” says Ringelstein’s lawyer, Richard Grimm.

When Ringelstein joined Renaissance, he was tasked with leading the development of Renaissance’s “Planner” product, having bi-weekly meetings with Renaissance CEO Jack Lynch, and being a “public face” of the company—a role that included building relationships and speaking at conferences.

But this is where things get tricky. While Ringelstein started out with a number of direct reports that he managed, he says that Renaissance eventually removed those individuals from his management authority. He also claims to EdSurge that he “went months without any goals, and was prevented for talking with C-level staff at times.”

“They kept taking away my ability to do anything at the company,” Ringelstein alleges.

You Say Tomato, I Say Something Completely Different

Lynch, perhaps unsurprisingly, has a different take.

About nine months after the acquisition, he says Renaissance embarked on a new strategy that required developing better partnerships with teachers and third-parties. “Our platform strategy is really predicated on interoperability with those third-party providers,” Lynch tells EdSurge. “In order for us to build that ecosystem of partners, we wanted someone who was articulate and could help us build that ecosystem.”

Lynch believed that Ringelstein fit that criteria, and moved him into a VP of Strategic Partnerships role in January 2016. “We asked Zak to perform that role of VP of Partnerships, and to report to Paula O'Gorman on my executive teams. Direct reports were not transferrable to Strategic Partnerships,” so anyone that reported to Ringelstein received new managers.

By February 2016, Lynch noticed that Ringelstein “began to express dissatisfaction with the role, and that culminated in what you see in the lawsuit.” By spring, Ringelstein was no longer a Renaissance employee. In his interview with EdSurge, Lynch says that Ringelstein resigned in an April 25 email, but Ringelstein claims he “never said [he] was quitting.” Rather, he “was merely expressing [his] dissatisfaction with a severely diminished role at the company,” and through a misunderstanding, eventually felt he had no choice but to resign—which he did on April 28, three days later.

The specific sequence of events that led to Ringelstein’s departure will help determine whether he will get more than $1 million worth of stocks and severance pay that was promised in the contract. If the suit is not settled out of court, a jury will decide whether Ringelstein “resigned for good reason or was terminated without cause,” as is stated in the contract.

What Other Organizations Can Learn

Other startups looking to get acquired—or bigger companies looking to acquire—can learn from both Ringelstein and Lynch’s advice about questions to consider before the acquisition papers are signed.

1. What do you know about your buyer—or what you’re buying?

While many edtech companies claim to put the customer first, it’s up to each party to decide whether or not missions are aligned.

According to Lynch, getting to know the entrepreneurs is crucial before drawing up an acquisition contract. He believed that UClass brought a sense of user knowledge to the Renaissance team that he hadn’t found elsewhere “A credit to [Ringelstein] and his team—they were focused on creating something that allowed educators to share and capture content,” Lynch says. “Whenever we see those entrepreneurs work really hard and thoughtfully, we take notice.”

Ringelstein, on the other hand, recommends that startups be cognizant of whether or not edtech organizations are owned by private equity firms which often “focus more on profit” than on impact:

“I believe Renaissance and I had stark value differences. Theirs was to make short-term revenue goals (raising prices and selling new products that were not proven to meet teacher needs, taking advantage of their brand recognition and long history in the education market), often at the expense of what was best for teachers and students.”

If Ringelstein could go back in time, he says that he “would have done more due diligence on private equity-owned companies and Hellman & Friedman,” including conducting thorough reference checks of their other portfolio organizations.

2. Are you comfortable with change or possible restructuring?

Lynch is a firm believer that growing pains accompany any acquisition, and that startups should know that change is inevitable. “Anytime you have a change resulting in some sort of reorganization, there will be issues with folks who won’t be as successful in the new organization,” he says.

For startups, Ringelstein recommends that founders research the acquiring company’s leaders and their backgrounds to see what sorts of movements or major changes they’ve made in the past. “I probably could’ve asked more questions about work they’d done in previous companies, specifically related to mission-driven work,” he says.

3. Have you thoroughly gone through the contract?

As with most major business agreements, Ringelstein says that “there’s extreme stress for everyone during that time, and it’s hard to get every last thing right.” So, he encourages startups to find a good lawyer.

“We did our very best job to do our due diligence with the help of a broker and our lawyers. I think we did just about as good of a job as we could.”

Update: September 27, 7:15 am PST

In light of this article, Renaissance CEO Jack Lynch released the following statement on September 27, 2016 regarding the company's mission:

Renaissance is a mission-based organization dedicated to ensuring that every student has the chance to reach his or her full potential. That’s why we put teachers first. We hire educators to keep our products and services in-tune with classroom needs. We invest deeply in meaningful research and development. And we’re guided by the belief that teachers counsel, engage and encourage students in a way that in a way that is responsive to all the different ways children experience the world around them—what they see, what they hear, and what they feel.
Renaissance is one of the most successful edtech companies in the industry not because of a focus on financial success. Financial success is the natural consequence of our mission-driven culture and single-minded focus on creating value for educators and the students they serve.

Editor's Note: Paula O'Gorman's name has been corrected.

Mary Jo Madda (@MJMadda) is Senior Editor at EdSurge, as well as a former STEM middle school teacher and administrator. In 2016, Mary Jo was named to the Forbes "30 Under 30" list in education.

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