
Attack of the Acqui-hires - quant
http://finance.fortune.cnn.com/2012/08/10/attack-of-the-acqui-hires/
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pg
The article doesn't mention one of the most important reasons companies do HR
acquisitions: competition forces them to. If company A offers to acquire a
startup and company B merely offers to hire the founders, all other things
being equal the founders will take company A's offer.

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lacker
That explains why companies pay more during an acquihire than they'd pay for a
normal hire. But it doesn't explain why acquihires happen instead of just
paying a higher salary.

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pg
The article and the paper it discusses talk about that.

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michael_miller
The article raises an interesting question on tax practices regarding aqui-
hires. If the IRS does decide that such gains should be treated as ordinary
income, will investors still be able to "save face" when, legally speaking,
they can't even call it an acquisition?

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elechi
I'm a bit ignorant into corporate law and taxes, but if one legal entity
bought another legal entity for reasonable value, how is the sale of the
company not capital gains to the previous owners? Unless the buying company
vastly overpaid for the acquired company, I'm not sure what the IRS could do
about this.

#edited to fix grammatical errors.

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_delirium
I assume that last "unless" would be the key: if the acquirer is overpaying
for the company, as a way of transmuting what's really a hiring bonus into a
capital gain, that could be problematic. But it seems like it'd require
actually showing that there was overpayment, which courts tend to not want to
get into except in really egregious cases (like politicians overpaying for
houses as a way of funneling money somewhere), because of how difficult it is
to objectively determine.

~~~
wmf
But if you "overpay" all the investors then it doesn't look like a signing
bonus.

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dm8
What is done to IP (code, patents) in most of the acq-hire cases?

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tptacek
They become the property of the acquirer.

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krakensden
> Not only because suing an entrepreneur can cause major reputational damage,
> but also because the entrepreneur still has the right (in California) to
> just up and leave

Because clearly the world would be a better place if financial agreements were
more like indentured servitude.

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ShabbyDoo
While I am reluctant to suggest that the courts require specific performance
(continuing to work) for employment contracts, awarding damages to the other
party does not seem terrible. Does California law allow for damages to be
awarded in such cases?

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anamax
> While I am reluctant to suggest that the courts require specific performance
> (continuing to work) for employment contracts, awarding damages to the other
> party does not seem terrible.

Why are you assuming that "employees" will sign such contracts?

Suppose someone shows up to work. How does the court determine whether they're
working per contract? (If someone says "I don't have any patentable inventions
this month", do you think that they should be penalized?)

CA allows non-competes in certain circumstances.

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ShabbyDoo
I see your argument. Unless an employment contract stipulates specific work
deliverables (even showing up, etc.) , it really is just a non-compete which
might require the employee to pay the employer in the case of early
termination by the employee.

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edabobojr
How does this work from an employee point of view? Are they compensated in the
buyout? Do they get to do any negotiation with their new employer? The cynic
in me thinks this could easily be a raw deal for non-owners.

~~~
anamax
> How does this work from an employee point of view? Are they compensated in
> the buyout?

It depends on the employee. The employees that the acquirer wants are treated
differently than others.

Both are paid for their stock and vested options. "The wanted" may get
retention bonuses, additional grants, etc.

> a raw deal for non-owners.

What do you mean by "non-owners"? Are you referring to employees without any
options or stock or to folks that don't have much in the way of options/stock?

Stock/options owners are compensated per their ownership.

Of course, the interesting question is how well the stock/options owners are
treated, and there are different classes, hence the whole section about VC
liquidation preferences.

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edabobojr
"Non-owner" was a poor choice of terms. I was thinking more in terms of the
little guys who have at most a 1-2% ownership stake in the company.

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anamax
> was thinking more in terms of the little guys who have at most a 1-2%
> ownership stake in the company.

They get 1/10th the money that folks who own 10-20% get.

What do you think should happen?

There's only 100%. Some investors have liquidation preferences over others.

The buyer, of course, is free to give money to people post-deal as it sees
fit.

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patio11
_They get 1/10th the money that folks who own 10-20% get._

That's engineer math, but not financier math.

People at 10-20% are in the room when terms are decided upon, people with 1-2%
are typically not. There are a variety of mechanisms by which 1-2% of an
acquisition can, in a few failure modes, evaluate to nothing.

Here's one: You own 1% (by current dilution) of a company. This company has
not done well. There exists a company which wants to buy it.

The co-founders collectively own 60%, with approximately 30% being owned by
investors, and approximately 10% held in aggregate by employees. You watch the
M&A team, VC partners, and founders walk into a room. Two hours later, they
walk out, and everyone looks fairly happy. You overhear the VC say "$20
million."

You think you're getting $200k, right?

Would it surprise you the next day when you're given a contract to sign and
told that you've been allocated a $10k signing bonus with the new company? And
that this is, by the way, it?

How the heck did that happen? The VCs were a little displeased with their
return, since this company did poorly, so they played hardball with your
founders. The VCs got $10 million. (Check those percentages again. Yeah. I
know.) This represented 100% of the purchase price, and as it didn't clear the
VC's liquidation preference, the common stock is valueless. You and the
founders hold common stock. For their participation in the deal, the founders
were guaranteed 3x $3 million signing bonuses with the acquirer. This leaves
$1 million to pay the lawyers, cover the accountancy costs, etc etc etc. But
hey, because you're such a nice guy, despite your options being worthless they
fought hard for you and convinced the acquirer to cut a check for _three whole
months_ of your old salary.

You would be, of course, free to decline this bonus. The door is on your left.

And, to be fair, you did better than another 1% owner of the company --
employee #1, who went on to greener pastures a year ago. His shares have
vested. But he was "disloyal" and "didn't stick it through", so hey, no check
for him at all.

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anamax
> That's engineer math, but not financier math.

Engineers read the whole message, including the bit about liquidation
preferences and doing things outside the deal.

Why do you find it unreasonable for different people to get different signing
bonuses?

Note that they're not getting them because of ownership, but because of
perceived value to the acquirer.

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vexxt
The reason they do acqui-hires is to bail the VC out. The same VC sits on the
board of the aquiring company.

And we all know what happens when you try to hire away employees due to no-
poach collusion, the hirer get's fired after Steve Jobs's email.

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joshu
This is much rarer than you think. Cite some examples.

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vexxt
Most of the recent aqui-hires. AOL buying Netscape.

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joshu
So you don't have any examples or know what you are talking about. Got it.

