Large public companies often acquire small private start-up companies to add new capabilities to their portfolios. This strategy is particularly common in the technology sector, where established players can take their pick of a multitude of start-ups. Given the nascent nature of start-ups, start-ups typically have limited assets, often consisting of a small number of software or hardware platforms. Oftentimes, of potentially greater value to an acquirer is the start-up's talent pool, and hence, the phenomenon of the "acqui-hire".
The essential concept of the "acqui-hire" is an acquisition that is driven by a desire to harness the target's key employees, such as software developers and engineers. The opportunity to import a cohesive team of talented employees can represent tremendous value to an acquirer, particularly when such a team has a record of generating and commercializing innovative ideas. In a sense, the acquirer is buying what it hopes will be the team that will create the next sensational product, rather than any of the products currently in the start-up's portfolio. Thus, the "acqui-hire" is an example of the role that acquisitions play in fostering innovation.
The phenomenon of "acqui-hiring" provides insight into the factors influencing acquisitions beyond the target's assets, including the acquirer's company morale and its relationships with other market players. In theory, the "acqui-hire" provides benefits to both the target start-up and the acquirer. The start-up's key employees get a healthy paycheque, typically in the range of US$1-2 million vesting over several years, and the venture capitalists that initially funded the start-up get some return on their investment. This latter aspect of an "acqui-hire" transaction allows the acquirer to maintain positive relationships with venture capitalists, as opposed to simply poaching the start-up's top talent and leaving it to fail. The "acqui-hire" also makes the hiring of new talent more palatable to the acquirer's existing employees. New employees can be paid more than existing employees without disrupting the company's pay scales because the newly "acqui-hired" talent has to be compensated for the purchase of their equity in the start-up.
Interestingly, some consider "acqui-hires" to be something of a golden parachute for the key employees of start-ups that would be unlikely to secure future financing. Being "acqui-hired" allows the founders of once-promising technology start-ups to tout the fact that their fledgling companies were acquired by one industry giant or another, rather than face the risk of liquidation down the road.
In California's Silicon Valley, where the "acqui-hire" has been most popular, "acqui-hiring" reached its peak in 2013 and 2014. The levels of seed financing by venture capitalists and the demand for talent by the industry's major players are the main factors driving the trend. With the recent decline in venture capital funding, it remains to be seen whether the "acqui-hire" will retain its popularity.
The author would like to thank Mark Vanderveken, Articling Student, for his assistance in preparing this legal update.
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