We are all familiar with the “garage-to-greatness” entrepreneurial stories of Steve Jobs, Larry Page, Jeff Bezos and the like. Left untold are the stories of brilliant, diligent entrepreneurs, perhaps with equally compelling products, who succumbed to the challenges of securing investors, resources, or good fortune before reaching the echelons of greatness.
The Acqui-Hire Trend
Founders often dream of selling their company’s assets or stock to a large strategic buyer or going public. However, some ventures and their founders, less fortunate, may discover an alternative “exit event” through a trend known as “acqui-hiring.” This term describes the process wherein “Company A” acquires a modestly successful (and often underfunded) startup, “Company B-Minus,” primarily for the purpose of hiring its brain trust. Unlike traditional acquisitions that may seek intellectual property rights, hard assets, customers, services, or market presence, an acqui-hire primarily focuses on acquiring a team with a highly sought-after skill set.
A successful acqui-hire strategy allows Company A to swiftly assemble a team of tech-savvy innovators ready to create new products and explore fresh revenue streams. Moreover, it burnishes the CVs of the acquired talent, enabling them to present their venture not as a failure but as an “exit.” In this evolving landscape of corporate maneuvers, the emphasis shifts from conventional acquisition metrics to the cultivation and assimilation of intellectual prowess.
Potential Drawbacks
One potential downside is that the product Company B-Minus offered may be shelved in an acqui-hire situation and Company B-Minus may be shut down completely. Additionally, the purchase price in an acqui-hire acquisition will generally be much less than in a traditional acquisition. In fact, the price paid to acquire the firm is often calculated as a “price per head” without regard to any products or intellectual property which may come along in the deal. The buyer, however, must make the deal attractive enough to retain key talent and ensure continued employment post-closing. Additionally, a founder will likely need to give up their director and officer titles for a less prestigious position at Company A.
For companies engaged in potential acqui-hire deals, whether as buyers or sellers, there are several considerations.
Acquiring Companies Should Ask:
- Will I end up with what I paid for? Will the targeted talent remain after their lock-up periods end?
- Do the costs outweigh the benefits? How will this ROI be measured?
- Will the deal crush the morale of loyal employees expected to work with “outsiders” who walk in with outsized salaries? Will you need to award retention bonuses or other compensation to keep your own team intact?
The Target Company Should Ask:
- How much intellectual property (if any) should be included in the sale? What (if anything) can be carved out?
- Is it important to continue developing the business or projects that inspired you in the first place? Is this realistic?
- Is accepting this deal worth forgoing other potential opportunities?
- Does the company have any outstanding obligations (debt, litigation, etc.) that need to be considered in the acquisition?
- Will the transaction be too disruptive to staff in terms of a potential new location, new job description, cultural fit and new management?
- Will the board of directors and stockholders approve the acquisition? Will the purchase price satisfy current investors with at least a return of their original capital?
In essence, so long as acqui-hire strategies furnish a reliable exit strategy for enthusiastic entrepreneurs and investors, they can effectively mitigate risk and foster innovation resulting in an advantageous outcome for all parties involved.
If you would like to discuss the possibility of an acqui-hire transaction or any start-up needs, please contact your Varnum attorney.