Acqui-hires are all the rage, as I’m sure you’ve heard. Let’s discuss what these deals are, how they are structured, and some things to consider if this is your path.
What is an Acqui-hire?
An acqui-hire basically is a fancy way to say your company is being bought predominantly for the fabulous team you’ve assembled and not for the product/service you were (trying) to bring to market. This can be tidier than a wind-down process for a failing company, but often signals a distressed sale. Relatively recent data suggests that most acqui-hires are of companies that have raised less than $5M of outside funding and anecdotal data suggests most of these companies were not able to get additional funding needed to continue. Often, the business acquired in the process is shut down after the transaction. Payment may be in the form of cash, buyer stock or a mix of both.
How are these structured and valued?
This can vary, but it’s typically an acquisition of stock or assets, with the bulk of the purchase price being earmarked for employee packages (retention and otherwise). In cases where the buyer truly only wants the team, they may simply sign a release agreement where the company agrees, in exchange for the deal payment, to release the buyer for hiring the employees and possibly a defensive license agreement of the company’s IP. The term sheets are often “light” on terms.
In terms of pricing, Buyers frequently express the price on a “per head” or “per engineer” basis, and the going rate seems to be anywhere from a few hundred thousand to two million per head. In many of these deals, the investors recoup less than their investment.
What other things should you think about here?
There are a number of issues surrounding these transactions, but they are not wildly divergent from the considerations you’d have for a more traditional M&A transaction:
- You may want to try to structure the deal, as best as you are able, to ensure the company, and not just the people or assets, are acquired, so that the company does not separately have to go through a wind-down process.
- Your board and stockholders will need to approve the transaction and, assuming your stock is held by a small cohort, most if not all of the directors will be “interested” in the transaction – with that, you’ll want to be sure you consider with your lawyer how to best insulate the board from claims.
- Think about post-closing liabilities to team and stockholders and how to best limit this, or even eliminate it.
- You’ll want to really explore alternatives to ensure you’re getting the best deal you think you can for all stake holders.
- You will need to consider how payments are categorized for the team being compensated for going over (compensation/payment for stock), looping in tax advisors early.
- You should find out early whether there are more complicated tax questions, such as parachute payment (or “280G”) tax considerations.
- You may have additional exposure for terminating non-continuing employees and other employment issues.
- Make sure your obligations to creditors will be satisfied.
Unfortunately, a “smaller” deal is not always a “less complicated” or “less expensive” deal from a legal perspective – so, we’d suggest you talk to your attorneys early in the process to ensure the details get covered.