Steven J. Enwright

Six questions you must ask before engaging in an “Acqui-hire”

Before any Acqui-hire, there are several things to consider

We all know the “garage-to-greatness” entrepreneurial stories of Steve Jobs, Larry Page, Jeff Bezos and the like. But we have to wonder – for each of these superstar founders, how many brilliant, conscientious entrepreneurs with equally exciting products failed before they reached similar greatness, simply because they couldn’t muster the investors, resources or good luck.

These less fortunate ventures and their founders may yet find their own “exit event” through a trend known as “acqui-hiring.” This portmanteau describes the process in which “Company A” acquires a modestly successful (and often underfunded) start-up “Company B-Minus” generally for the sole purpose of hiring its brain-trust.

This tactic is good for Company A because it’s a quick way to assemble a team of tech-savvy big-brains ready to invent new products and develop new revenue streams. And it looks good on the CVs of the acquired talent, because instead of admitting their venture failed, they can say it was “acquired.”

One downside is that the product Company B-Minus offered will likely be shelved in an acqui-hire situation. 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 that generally come along with the deal.

What is of interest to us is that this phenomenon appears to be on the rise across the globe, where economic recovery has spawned a flurry of start-ups. If you’re a company that’s on the buying or selling end of a pending acqui-hire deal, there are a number of things to consider.

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 existing employees expected to work with “outsiders” who walk in with big-time salaries? Will you need to award retention bonuses or other compensation to keep your own team intact?

The target company should consider:

  • How much intellectual property (if any) needs be included in the sale?
  • 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 walking away from other potential opportunities?

The bottom line? As long as acqui-hire strategies provide a solid exit strategy for eager entrepreneurs and investors, they help mitigate risk and encourage innovation. That’s generally good for everybody.

If you would like to discuss how acqui-hire strategies and transactions could work for you, please contact attorney Steven J. Enwright at senwright@lippittokeefe.com.

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