Acqui-hire: Everything You Need to Know
An acqui-hire is when one company buys out the other one specifically to take the employees. It’s a popular strategy with tech startups.8 min read
2. What Are the Advantages of an Acqui-Hire?
3. The Company Benefits from Acqui-hires in a Couple of Ways:
4. How Do Businesses Structure Acqui-Hire Purchases?
5. How Does the Acqui-Hire Purchase Work for Employees?
6. What Is a Soft Landing?
7. What Are the Disadvantages of an Acqui-Hire?
8. Why Do Acqui-Hires Happen?
9. How Does a Company Decide the Proper Value for an Acqui-Hire?
10. What Is the Difference Between an Acquisition and an Acqui-Hire?
11. What Causes an Acqui-Hire?
What Is an Acqui-Hire?
An acqui-hire is when one company buys out the other one specifically to take the employees. It's a popular strategy with tech startups. A good acqui-hire can bring in a lot of new talent at the same time. Plus, the employees have experience working together as a group.
What Are the Advantages of an Acqui-Hire?
The number of people qualified to work in the industry is small. Companies with lots of cash flow try to lure top talent. When they can't do that, the acqui-hire is a great strategy.
The key is the current imbalance between supply and demand. Anyone who can write an app is capable of becoming rich and successful. The number of employees entering the technology industry isn't increasing for this reason. With so many large corporations lacking qualified workers, they feel the need to hire talented teams when possible. It's an easy way to fill the demand for tech employees.
A business adds a team of highly-skilled professionals who can build apps, create online services, and keep up existing software and hardware. Since the employees already have a strong working relationship, they can start a job with the new company as if they had worked there for years.
The first usage of the term "acqui-hire" was by Rex Hammock. He described Google's acquisition as a two-person hiring with a signing bonus. He spelled it Acq-hire and defined it as a large company buying a small company whose only employees are founders.
The Company Benefits from Acqui-hires in a Couple of Ways:
They can enter and stay in marketplaces thanks to the new influx of talent. They may also come up with new ideas, products, and processes, thanks to the suggestions of new workers. In extreme instances, an acqui-hire can even lead to an entirely new satellite office for a company.
The buying company also has its choice of how to handle the startup's employees. They can take the entire group. If that's not a good option, the buyer can also pick its favorites of the workers. An acqui-hire doesn't guarantee employment for the workers at the startup.
An acqui-hire can reinvigorate a company and increase its earning potential. That's particularly true since most acqui-hires aren't expensive purchases for large businesses. The going rate for acqui-hires in Silicon Valley is $1 million per quality engineer. More established teams will earn more, but it's still a small amount of money to the largest companies in Silicon Valley.
Major technology corporations like Twitter and Dropbox have performed acqui-hires to improve their worker base. Hubspot has done at least five acqui-hires. Alphabet, one of the most valuable companies in the world, has quietly performed dozens of acqui-hires, too. They understand the benefits of hiring full teams of employees to run specific projects.
How Do Businesses Structure Acqui-Hire Purchases?
No set rule exists for an acqui-hire. Usually, some combination of stocks or assets changes hands. Still, most of the purchase money goes to employees. Many of these agreements are light on terms since the true value is the employees, not the company.
Buyers usually decide the cost of an acqui-hire on a per-head basis. What that means is the company pays a set amount per staff member acquired. The going rate is at least a few hundred thousand, sometimes as much as $2 million per person.
The buyer should consider a few factors such as:
- How to structure the deal: You must make sure that you're buying the company in total rather than the people and assets. Otherwise, you'll delay the deal as the company goes through liquidation.
- How the purchase impacts your board of directors.
- How to limit or get rid of post-closing liabilities to the higher team as well as stockholders.
- Whether an independent analyst would view the expected payment as fair.
- Potential tax questions, including parachute payments.
- Will companies' creditors receive payments owed.
How Does the Acqui-Hire Purchase Work for Employees?
In most acqui-hires, the staff of the purchased company will interview for a new job. It's the same as any other hiring in this regard. Management treats the potential employees like they are normal candidates. Even the founders will have to interview, typically for product manager jobs. Like other job interviews, some people might not do well. Anyone who fails the job interview won't join the new company. An acqui-hire doesn't guarantee that everyone gets a job.
For this reason, acqui-hires sometimes fail. When enough potential hires fail the interview, the company's purchase no longer makes sense. Without the full team, it has less value. Every failed interview puts an acqui-hire at risk. When an acqui-hire does happen, the people who don't get to join the new company still receive payment. It's nowhere near as much as the people who do join, though.
What Is a Soft Landing?
Acqui-hires happen so often that some startups don't worry about seed funding as much. They use the term "soft landing" to describe an inevitable acqui-hire. That's when a team proves itself enough that each member understands that a larger tech company will buy them.
Soft landings happen most often when a startup fails to raise more capital after its first attempt. Without new money coming in, the business will die. The workers can earn a job with a bigger and better company, though. It's a mutually beneficial tactic for startups without business savvy and larger businesses with a constant need for talented technology employees.
Many startup employees quickly discover that the technology part of the job is easy. Running a business is hard. They sometimes feel relieved when a large corporation buys them out. Also, they can add a note on their résumé that they worked on a startup that became part of an acqui-hire. Hirers generally view this outcome as proof that the startup was a success.
What Are the Disadvantages of an Acqui-Hire?
The negatives from an employee perspective are obvious. A business in a different city will usually need the worker to move. They also won't enjoy the benefits of working in the relaxed environment of a startup. Many of the employees at startups are their own bosses. They set their own hours and come and go as they please. Working for a larger company comes with different rules that are more restrictive.
For the business performing the acqui-hire, the biggest disadvantage is risk. Their hire assumes that the workers will come to the new company. Unless the employees are under contract, that's not something anyone can guarantee. Also, many contracts have out clauses for situations in which a competitor performs a buyout.
To do an acqui-hire right, the buyer must get the team to agree to join the new company. An annual contract is standard. Sometimes, the hirer can convince the employee to join with a signing bonus. Even then, many founders leave the moment the contract is up. They use their newfound experience with startups to begin another company. It's a smart strategy for the worker. They can make millions of dollars quickly through the combination of failed startups and acqui-hires.
Another concern is cost. While $1 million for every employee isn't a lot to companies like Facebook and Google, less-savvy corporations can struggle with the cost. Yahoo! is a great example of a business that was already suffering significant financial losses. Its decision to make a lot of acqui-hires made the financial situation even worse. They couldn't integrate the new teams fast enough to justify the cost of the acqui-hire.
Finally, a hidden danger of an acqui-hire is morale. The team from the failed company enters the new office in an elevated position. Each person has a lot of money and a guaranteed contract thanks, to a business that went broke. Meanwhile, many veteran employees of the surviving business have neither. Bringing in a new team from an acqui-hire can, and usually does, cause resentment among current workers.
Many experts call acqui-hire a battle for talent. The problem is that the message this battle sends to loyal employees is that they should quit and found a startup.
Why Do Acqui-Hires Happen?
- Makes failures seem like successes: The founder of a failed startup doesn't have to take responsibility. Instead, the person can say that the company didn't fail. Someone purchased it instead.
- Allows for Expensive Hirings: A technology company is in an awkward position when it wants to hire a talented employee. If it brings in someone at a higher salary than an existing worker, the situation looks bad. An acqui-hire allows the company to bring in employees without negotiating salary the same way as a regular hiring.
- Has tax benefits: The employees don't have to treat their bonuses as salary. Instead, they can list the money as capital gains, which have a lower tax rate. The buying company can write the purchase agreement in the most helpful way for tax purposes. Everyone can best the IRS in an acqui-hire.
- Keeps venture capitalists happy: The primary benefactors of startups are venture capitalists (VCs). They also do a lot of business with large corporations, too. The big companies like Google and Facebook need good working relationships with VCs. Hiring away the talent behind a startup could ruin a VC's investment in the new business. An acqui-hire protects the VC, keeping it happy.
How Does a Company Decide the Proper Value for an Acqui-Hire?
The company is buying a startup that they believe has no real value. To some, the purchase shouldn't cost much at all. The team involved in the acqui-hire needs incentive to go to the new company, though.
What Is the Difference Between an Acquisition and an Acqui-Hire?
In a traditional acquisition, a business buys out someone for the customer base or the product. The purchased company has assets that executives at the larger business believe have value. The goal is to acquire those assets to strengthen the position of the purchasing company.
With an acqui-hire, the goal is much simpler. The workers at the company hold enough value that buying the entire company is a worthy idea to gain their services.
What Causes an Acqui-Hire?
Everyone knows that most small businesses fail within the first two years. Working for a startup is a gamble. The employees take that risk to work in a great atmosphere with friends and peers. Many startups lack people with experience in raising capital, though. Since everyone expects a paycheck, startups burn through money quickly.
Venture capitalists are willing to fund a lot of startups once. They want to see how the teams manage money and the perception of success that comes from a triumphant fundraising campaign. Most startups ask for little money during the first funding round. The problem is that the money doesn't last long. Venture capitalists are much more critical about additional rounds of funding. They expect to see results.
A startup that fails to get a second round of funding will face a budget shortfall. Without enough money to stay in business and no means of bringing in more, it will face bankruptcy. Savvy corporations will pay attention to such situations, taking note of which startups have the most talented employees. When one is in danger of failure, the larger business will offer an acqui-hire as a means of keeping the startup team together.
If you need help in launching an acqui-hire or your company is about to become the target of one, post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site.