A startup is going through a round of funding and an investor wants to invest, but they don't have a mobile strategy. Their business is just web based. He will invest if they have a mobile presence. The CEO contacted me because my app is in the similar market, but I'm only on mobile. We just talked once on the phone, but he said he's not looking to buy my app outright. Instead looking for a merger, partnership, or acquisition. This is all new to me. I want to be sure I'm prepared if talks continue, which they probably will. I am open to the idea, but only if it's the right fit. Any advice or help would be appreciated.
Let's start with the premise that an investor is willing to invest "subject to mobile." Unless there is a term sheet that states this, what is far more likely is that an investor was pitched and declined to invest citing that they don't have a mobile offering. The entrepreneur likely said something along the lines of "well can we come back to you when we have a mobile offering?" and said "sure." In this scenario, there is no actual commitment or even high probability of closing an investment. So you want to start by clarifying what the actual commitment is - if any - since entrepreneurs can often misinterpret investor sentiment.
Although startup to startup mergers do occur, they have a high point of failure (failure to actually close the deal) because it's very difficult to value the two companies and without real resolve from both teams, it's difficult to establish which is worth what percentage of the merged entity.
All of this being said, it's really about what you want. Do you want to go it alone and build a big business behind your app, or would you prefer to be part of a team? Can you recruit a better team on your own than the one they already have?
If you are unsure of your desire to go it alone, and unsure of your ability to recruit a better team for your own startup, then you may wish to consider their offer, but I would caution you not to actually close the merger until after the money had been raised. Otherwise, you are at risk of assigning your work to this combined company and if it can't raise you're then stuck.
The good news is that it doesn't sound as though you have investors in your company so that actually reduces the complexity of the sale. You should really focus first on whether you love these people. Do you want to work with them everyday for the next 5-7 years? Get there first, and then consider everything else I've said.
I'm happy to discuss this in more detail with you in a call.
Best of luck!