You’re not alone if you’ve ever wondered why a tech-savvy company would bother to buy a startup with no profit and a product in a completely different field.
As the war for tech talent is intensifying, it is becoming more and more difficult for companies to attract top-notch talent. Acqui-hiring is one such strategy that changes the game and has gained popularity in recent years.
But, what is acqui-hiring? What are the possible reasons to acquihire? What are its pros and cons?
Let’s find out.
What is Acqui-hiring?
Acqui-hiring refers to buying a company or organisation mainly for its employees’ skills and proficiency rather than for its products or services.
Also known as talent acquisition, acquihiring is a portmanteau of ‘acquisition’ and ‘hiring’. Acquisition is when one company buys another, and hiring refers to taking on employees. Acqui-hiring is simply a strategy that assists the growth of the company with the expertise of recruited employees.
This term is believed to have first appeared in a blog post by Rex Hammock on May 11, 2005. He spelled it Acq-hire and characterised it as:
When a large company “purchases” a small company with no employees other than its founders, typically to obtain some special talent or a cool concept.
Google, Twitter, and Facebook have been involved in acqui-hiring for a long time. Facebook acqui-hired Drop.io and Hot Potato. Google acqui-hired DoubleClick, which revolutionised the internet advertising industry.
Acquire vs Acqui-hire
Acqui-hire is not the same as acquire. In fact, acqui-hire is the subset of acquire.
What it is?
An acquisition occurs when the acquirer places a high value on both the company and the people who work for it.
Acquihire occurs when the acquirer places a higher priority on the team and their talent and abilities rather than on their products or services.
What is its purpose?
To gain ownership of the company by purchasing most or all of another company’s shares.
To hire a well-functioning team and use the skills of its employee team for innovation and growth.
Advantages of Acqui-hiring.
Acqui-hiring is a smart strategy for any organisation looking to expand its business. It is a perfect combination of talent and expertise and has several benefits that simplify solving any difficult problems.
From The Perspective Of The Acqui-Hiring Company
- Saves time and effort to find new talent: Acqui-hiring allows big firms to avoid the potentially lengthy process of identifying and screening new applicants. It provides businesses with evidence that a certain group of workers works well together and can perform a specific task using their niche skill sets. Twitter’s acquisitions of Summify and Posterous are two examples of multinational talent-driven transactions.
- Provides unique skill sets to the buying company: New workers bring new concepts, new energy, and new ways of working with them. They can revitalise the business. They are valuable because they think outside the box. In the tech industry, acqui-hiring is becoming more common as certain skill sets, such as basic computer programming skills, are in high demand and short in supply.
- Increases earning potential: Acqui-hiring can increase the company’s current market capitalisation and broaden its product range. This is true since most acqui-hires aren’t costly acquisitions for large corporations. In Silicon Valley, the going rate for acqui-hires is $1 million per quality engineer. More experienced teams benefit more.
From The Perspective Of The Target Company
- Provides safe exit strategy: Entrepreneurs see acqui-hiring as a secure escape. They believe they can now move on to bigger and better stuff and can create new products in a better business environment.
- Avoids Bankruptcy: If a company is on the verge of bankruptcy and needs to find a new place for its workers to work, then acqui-hiring is the best strategy to adopt. Within a larger organisation, the seller’s vision for his company can be realised more effectively.
- Assists in future growth: The target company employees gain access to resources and capital that can help them grow as entrepreneurs. Thus, acqui-hiring establishes them in a reputable position which aids them in obtaining financing for future projects.
- Makes failures appear to be successes.: A failed startup is not required to accept the blame. Instead, it may claim that the business did not fail; someone else bought it instead. Hence, providing an escape from the humiliation of a failed business.
Disadvantages Of Acqui-Hiring.
There are two sides to every coin! While acqui-hiring has proved to be a massive success, it is not without its risks.
From The Perspective Of The Acqui-Hiring Company
- No Guarantee: The main problem encountered by the acqui-hiring company is there’s no guarantee that the staff will want to stick around and work in a corporate environment unless the workers are on a contract. Moreover, even if they join, there’s no guarantee that the return on investment will be good.
- Struggle with the cost: While $1 million for each employee isn’t a lot to companies like Google, small companies may struggle with the cost. For example, Yahoo was already incurring substantial financial losses. Its decision to make a large number of acqui-hires worsened the financial situation. They were unable to integrate the new teams quickly enough to justify the acquisition’s cost.
- Resentment among current workers: Bringing in a new team through an acquihire can result in dissatisfaction among current employees as newly hired workers are undoubtedly in the spotlight.
- Prospects of a setback: An acquihire does not ensure that everybody will be hired. Some people might not do well in their interviews. When a sufficient number of new hires fail the interview, the company’s purchase becomes obsolete. It is less valuable without the whole team. Every unsuccessful interview jeopardises an acquihire.
From the target companies’ perspective
- Problems of relocation: Employees at startups are usually their own managers. They set their working hours and are free to come and go whenever they want. Working for a larger corporation entails more stringent laws. A company in a different city would need the employee to relocate. Thus, missing out on the perks of working in a startup’s laid-back atmosphere.
- Ignorance of Investors: The promising vision that acqui-hiring presents isn’t that tempting to the investors. Acqui-hires pose a problem for investors who invest in startups with longer-term investment objectives. Therefore, they aren’t interested in signing off the deal.
Despite these difficulties, the advantages of acqui-hiring outweigh the drawbacks.
How Does The Acqui-Hiring Process Work?
The acqui-hiring process differs for different companies. Usually, the employees receive the bulk of the buying money and a combination of stocks or properties is traded.
The cost of an acquihire is normally determined on a per-head basis by the buyer. That is, the company pays a fixed sum for each new employee it hires. Their prior job experience and credentials determine this figure. The going rate ranges from a hundred thousand dollars per person to $2 million. Employees who are acqui-hired are given stock that vests over a 4-5 year period as well as a small cash bonus and a wage. They receive these benefits after all the team members of the acqui-hired company signs the employment contract, which includes:
- A provision requiring a minimum duration of employment.
- A provision wherein the acquirer’s or its parent company’s shares are vested.
- A non-compete clause for the promoters.
If the target company has debts, then either the debt is repaid at the time of acquisition, or the employer is aware of the debts and has agreed to pay them, or the promoters will ensure that the debts are paid on their own. A contract is signed stating that the acqui-hiring company takes no responsibility for the target’s current debts.
Investors, on the other hand, usually don’t get anything out of such a deal. This is when the term deal consideration comes into play. Investors would get their money back if they own preferred stock with a liquidation preference. A liquidation preference implies that investors get some percentage of acqui-hired proceeds. This is intended to ensure that they get their money back or at least a fair return. For example, in a $2 million deal with 25% deal consideration, the investor receives only $500,000.
Investors not getting an equal share of the company’s net worth is one of the controversial issues in the startup ecosystem.
Despite the many benefits of acqui-hiring, if both parties’ business interests are not synchronised in an acquihire contract, it may cause serious problems. Thus, before striking off an acquihire contract, buyers should consider these factors:
- They must seek legal advice and approval from the board and stockholders.
- They must buy the business as a whole, not just the people and properties. Otherwise, the transaction might be postponed.
- They must take into account the effects the purchase has on the board of directors.
- They must limit or eliminate post-closing liabilities to the higher team and stockholders.
- They should consider if the estimated payment will be accounted as fair by an impartial observer.
- They should research tax implications such as parachute payments.
- They should make sure that creditors will be satisfied.
Acquiring talent is beneficial not only to an organisation’s talent pool but also in transforming an organisation’s community by bringing in innovation DNA and entrepreneurial vision. But it is not that simple as it seems to be. It’s all about using the previous firm’s ethos and absorbing the acqui-hired firm’s working style. The acqui-hired firm must accommodate, incorporate, and maintain the uncertainty as this strategy isn’t going anywhere anytime soon. Thus, both acqui-hiring companies and entrepreneurs must understand the laws and paperwork that go into an acquihire contract.
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An avid reader and economics enthusiast who is always eager to learn. Prachi is an aspiring leader who believes in what she does. Besides reading , she is fond of baking , dancing and travelling.