Founders and VCs: Selling a Startup in an 'Acqui-Hire' Can Be Lucrative

Founders and venture capitalists reveal that selling a startup through an 'acqui-hire' can be surprisingly profitable. This strategy, where a company is acquired primarily for its talent rather than its products, can offer significant financial benefits. Insights from industry experts highlight how 'acqui-hiring' can provide a lucrative exit option, making it a valuable consideration for startups looking to sell.

While top startups continue to thrive even amid a challenging venture capital climate, others struggle to secure new funding. For these struggling startups, getting acquired, even at a lower valuation, might be their best option to avoid shutting down due to lack of funds.

Such acquisitions can be disappointing for founders and senior staff who envisioned building a highly valuable company. Instead, they may find their equity worth less than expected, and they might need to take on roles at the acquiring company, sometimes committing to work there for a certain period to receive their full payout.

Despite initial disappointment, these acquisitions can turn out to be more beneficial than they seem.

“Acquisitions are often viewed negatively,” said Nivas Ravichandran, an early employee at Frilp, a startup acquired by Freshworks in 2015. “However, from a financial perspective, they offer great opportunities. Employees acquired through such deals often receive better pay and equity compared to lateral hires.”

Buyers typically offer top team members enhanced roles and higher compensation than they might find elsewhere with similar experience.

“The senior principal engineers usually need a decade to reach a level six or seven at large tech firms like Google or Meta,” noted Sri Chandrasekar, a partner at P72 Ventures. “In contrast, founders often enter at level seven or eight with much less experience. This represents a significant advancement.”

Since acquirers are generally interested in a startup’s talent, known as acqui-hires, the deals are structured to keep the founder and key team members onboard for an extended period.

Unlike traditional mergers and acquisitions (M&A) deals, which offer retention bonuses to management teams, acqui-hires often include incentives for the startup’s entire workforce. This can mean better salaries and compensation packages for founders and key employees, along with extended equity vesting schedules.

Acquirers “are increasingly creative about providing more seniority and better terms without investing as much cash into the deal,” said Chandrasekar.

A founder who recently sold his startup to a publicly traded company shared that the acquisition was structured to grant him and his co-founders higher stock options rather than increasing payments to investors.

“If they hadn’t bought my company, I wouldn’t have worked for them,” he explained. “I find large public companies slow and uninteresting compared to startups.” However, the attractive compensation and responsibilities at his new company are keeping him engaged, showing that the incentives are working. Some founders even find they enjoy their new roles over time.

When Frilp was acquired, its co-founders initially planned to leave due to their dislike of large companies. “They said, ‘We don’t like big companies,’ meaning those with over 100 employees,” Ravichandran recalled. “Yet, many ended up staying for over five years. I stayed for seven.”

At Freshworks, which went public in 2021 and acquired numerous startups, Frilp’s co-founders continued their careers there. Ravichandran, now head of marketing at Spendfo, saw accelerated career growth for acquired founders, who were often offered directorial positions.

Although acquisitions where investors don’t see a substantial return are common and often undisclosed, they occur frequently. In Q2, 90% of M&A transactions were undisclosed, according to PitchBook-NVCA Venture Monitor. These deals sometimes involve acquiring technology or customers, rather than talent.

However, many are acqui-hires, allowing companies to onboard an entire team with specialized skills. For instance, Stripe acquired Supaglue, a team of data integration experts, to enhance its Revenue and Finance Automation business.

AI startups are increasingly targets for acqui-hires, Chandrasekar noted. Large tech firms are seeking pre-ChatGPT-era AI startups for their machine learning and AI expertise, even if the products themselves may be easily replicated. Airtable recently acquired Dopt for its AI capabilities.

For those going through it, being acqui-hired should not be seen negatively. Founders can receive substantial financial rewards and discover fulfilling long-term opportunities at their new employer. If the entrepreneurial spirit persists after their lock-up period ends, they can always start another venture.

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Source: techcrunch‍