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    Need Human Capital? Acqui-hire it!

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  • The 'acqui-hire' phenomenon has made the competition in the technology sector for the best (software engineering) talent to reach new heights. When the war on talent started larger technology companies at first relied on more traditional incentives as signing bonuses, stock options and generous salaries to attract and retain engineering talent. Nonetheless, many engineers (still) prefer launching a start-up than working for large tech companies like Google, Twitter and Facebook and accept a lower salary and fewer perks in exchange for more control over the company and the chance to become successful. As starting and funding a start-up has become easier and cheaper, more and more engineering talent choose a start-up over established names. The solution to this problem introduced by tech giants who need top human capital? Acqui-hiring.

    Acqui-hiring describes the principle of acquiring a (start-up) company with the primary motivation to recruit some (or all) of the start-ups software engineers/employees, without having interest in its current projects, customer relationships and assets. Others however describe it as a transaction in which assets still are relevant and say it's just a shift in industrial-age economy, in which assets are not tangible anymore. In any event, one thing is certain: an acqui-hire is in sum a talent acquisition.

    The acquired start-up's are usually backed by venture-capital funds. Most of the acqui-hire's take place after the first round of funding and within the first few years after the founding of a - at this point struggling - start-up. Reason behind such acqui-hires is usually that these start-ups were not capable of developing and launching a product or service successfully into the market before getting their (second round of) funding's in order to ensure continuance. An acqui-hire therefore serves as a good alternative for liquidation. Often, the business acquired in the process is shut down after the transaction. By acqui-hiring a team of talented engineers who have proven to be a well-oiled machine, the buyer aims to boost its own company's development and innovation.

    In a normal acquisition the purchase price is based on the value of the assets and/or the profit expectations of the company. As the assets and/or the profit expectations  of the company are of no value to the buyer in an acqui-hire, the purchase price is expressed on a "per head" basis. The purchase price is generally divided into two pools, named the deal consideration pool (cash for the start-up's shareholders such as the engineers, angel investors, early employees and venture capitalists) and the compensation pool (stock and bonuses for the engineers). The deal consideration pool is earmarked as a 'buy out' of the shareholders. The compensation pool serves to retain the acqui-hired engineers. The engineers receive a retention package which typically vests over a couple of years of time to ensure that the engineers are incentivized to stay with the buyer for a certain period. In addition, the buyer binds the engineers to a non-compete clause. Just like in a normal (group)hire a buyer negotiates at an individual level with the engineers about their pay packages. An important part of the negotiation is therefore how to divide the purchase price between the shareholders and the engineers.

    In a normal (group)hire no money needs to be paid to the shareholders but only a compensation is paid to the engineers. So, if a large technology company wishes to acquire a team of engineers, why go into the trouble and expense of acquiring a company and not simply (group)hire away the individuals it has set its eyes on? The existential question on everyone's lips: why does acqui-hire occur?

    From a buyer's perspective, there are a number of issues playing a role in the decision to opt for an acqui-hire, besides reeling in a cohesive team of top talent without having to compose one from scratch themselves. An important reason is that an acqui-hire limits the risk of litigation. Generally, engineers are bound to a non-compete clause on the grounds of their employment contract which limits them to transfer to competitors of their employer, let alone to poach colleagues to join them. Furthermore, an acqui-hire prevents a toxic culture within the buyer's company. If the buyer would try to hire-away engineers from start-ups it would be required to offer generous salaries, signing bonuses, stock options and other inducements in order to attract and retain the engineers. As a result, the newly attracted engineers are likely to earn more than the existing employees, which will cause tension and discontent. By bringing in engineers through an acqui-hire - and in that context give them a generous bonus to join - buyers can hide behind the excuse that they had to buy their equity and in that way prevent the company culture to get poisoned. Another benefit is that an acqui-hire increases the buyer’s technical-staff and offers the opportunity to follow new avenues rapidly, in which the buyer has no experience yet, but the new engineers do. In an industry in which technological developments succeed one another in high speed this is a welcome advantage. 

    For engineers, an acqui-hire offers them a new job (accompanied by a financial upscale) and the opportunity to save face by saying that their start-up was bought by a large tech company, as a large number of the acqui-hired start-ups were not able to raise another round of funding needed to continue. In jurisdictions where a non-compete is enforceable, the limitation of the litigation risk is also a benefit for the engineers. However, the relationship with their investors is also important. As soon as the employees are ready to venture a new challenge they will need new investors. If engineers would leave their initial start-up via a group-hire, their initial investors would not get a return on their investment. This will of course impact their willingness to invest again. Further more, initial investors act as a reference for potential new investors. It is therefore of utmost importance for engineers to remain on good terms with their initial investors to prevent reputational damages. This also explains why engineers accept that part of the purchase price will be diverted to the shareholders. An informal sanction could be that engineers and investors form part of the same community. A conflict with previous investors could lead to social penalty's, like being excluded from high esteemed events. Another reason why engineers prefer an acqui-hire is that - as engineers usually are not “normal” employees, but the founders of the start-up - they feel loyal to the investors who had faith in them when no one else did and who acted as a sparring partner and ally. From a sense of loyalty engineers wish to treat their investors fair.

    From an investor point of view, an acqui-hire is the best option as they probably get - a part of - their investment back, whilst they would have received zero in a group-hire.

    At first sight all parties seem to win in an acqui-hire. The buyer gets his talent, engineers remain undamaged and get a new job with financial perks and investors get to recoup their money. However,  many buyers are struggling to make an acqui-hire successful in the long run. Buyers do not find the right role for the new engineers and misfire on cultural alignment by imposing their will and (bureaucratic) company structure on the new team. In addition, in most cases the unavoidable nature of the beast makes acqui-hired engineers hungry for new adventures. By remaining on good terms with their initial investors, the construction of an acqui-hire enables them to get back into the saddle as soon as the vesting period of the employee retention package has expired. It is therefore not unlikely that the engineers therefore consider the transaction merely as a stopover between two businesses. In many acquisitions, the desired effect of retaining top talent is ultimately not reached.

    There are some cases of acqui-hires which have the desired effect. For example, Google’s acquisition of the start-up Milk, Yahoo’s acquisition of 17-year old Nick D’Aloisio’s mobile app Summly, acqui-hiring eBuddy's team and  the case of Degreed Inc. acquiring Gibbon (one of the first acqui-hires in the Netherlands, which transaction our TMT sector team handled). Very recent (September last) an acqui-hire in Fintech was announced, Ohpen to acqui-hire Fynn Advice. So the number of acqui-hires is growing and that brings on the question: what is the secret to a successful acqui-hire? Good communication, caring for the engineers' ambitions, creativity and skills and allowing the engineers to continue to operate as an independent team in order to (also) develop their products instead of immediately discarding the assets of the startup and force them into the large tech company framework. An acqui-hire therefore serves as a great instrument to explore new markets and to acquire talent and businesses which complement the needs of the buyer's company. In order to do so, a critical part of the due-diligence research should be a thorough assessment of the engineers and whether their values, work habits and priorities match with the buyers. Only when a sustainable match is established, an acqui-hire will truly (also in the long run) be a win-win.