What Everyone Should Know About How Talent is Bought and Sold

http://firstround.com/article/What-Everyone-Should-Know-About-How-Talent-is-Bought-and-Sold

by ca98am79 • 13 years ago

172 50 13 years ago

ghc• 13 years ago

I've been a part of one of these suddent acqui-hires. It's not terribly fun if you're the guy building the critical software, not knowing if you'll have to kill your whole year's work the next day so you can switch from your comfy, cramped space to some cube-farm.

And the lawyers...the whole process took two months, but it probably took 2 years off my life. And I didn't even get that much out of it besides a stable corporate salary.

Would not recommend. If you're going to go corporate, go in facing foward, with eyes wide open. Don't back into it for what is essentially a hiring bonus and a bribe to throw away much of the work you spent the past x-months caring deeply about.

wslh• 13 years ago

I have a friend who was acqui-hired for his successful open source project. In the general sense it was positive because he was able to focus on the project and not in the money.

I think the case of 100% open source projects without services attached is much different of companies who want an exit or growing. I can't imagine a dystopian future where a company like Google is being acquired by Yahoo.

bane• 13 years ago

It can also depend on the culture of the acquiring corp. I went through an acquisition and one of the bidding companies advertised themselves as a very process driven, standards focused corporate culture and had even instituted their own program management certification that all of the incoming managers would have to pass to stay on board.

Needless to say this was an absolute anathema to any small startup who's spent the last few years doing anything to survive and get positioned for an acquisition. It drove away everybody else involved in the acquisition and even the investment banking firm we were using was turned off by the pitch. "But look at all these entrenched and inflexible processes that take all of the thinking and joy out of your work that we're offering you!"

No thanks.

gohrt4• 13 years ago

If you are going to work in the software industry, you are best suited if you get comfortable early with the idea of throwing away 6 months of work at a moments' notice.

officialjunk• 13 years ago

yep. sigh...

yannk• 13 years ago

"And it’s not all about the money. “I worked on one acquisition where we had to fight over a startup bringing its pool table with them,” Brown recounts. “It was a big piece of their culture — all of their engineers would talk through their toughest problems over pool, apparently.” The corporate development team balked, and it ended up threatening the deal."

corporate development can be tight ass sometimes. Can someone chime in on which acquisition this was?

the_watcher• 13 years ago

I thought this was really interesting. I haven't ever seen an examination of the acquihire that is this detailed. Most pieces deal with starting a company or path to IPO, or focus on the largest acquisitions out there.

walshemj8• 13 years ago

Surprised that hold back is legal person A loses $ because B decides he wants to leave - this isn't Quatar you cant confiscate their pasports.

larrys2• 13 years ago

It makes sense. You want to make sure that the person A has a vested interest in making sure that people will stick around. Certainly not to encourage them to leave (or assist them or make it easy for them to leave after getting the money).

As a contract term it's legal just like if you are selling a ski resort you could say "if it doesn't snow 30 inches next season then we want ..."

Making something a term doesn't imply that you have control over the even directly necessarily.

For example let's hypothetically say that PG decides to sell HN. The terms might be that at least 70% of the top people who comment stick around for at least 6 months. So if PG had knowledge that those top people who comment would leave if he sold then he would have to factor that into the price he is being offered. And if he ran into them at a party he wouldn't be egging them on "oh now that I'm not affiliated I don't really care what you do".

walshemj8• 13 years ago

First HN commentators are not employees or workers in the legal sense.

But the employee now works for the acquiring company B how is it legal that the stake holders in company A can be penalized after the fact for the acquired employee deciding that he doesn't like the new employer.

And I thought TUPE was strange in the EU

tom_b• 13 years ago

Are acqui-hire employees particularly rewarded in these situations?

If you are identified as a critical or especially-sought-after employee at a company in this situation, what types of retention structures and contracts actually wind up happening? Just curious.

ivv• 13 years ago

Is there an opportunity for a business that builds and cultivates small and focused product teams optimized specifically for acqui-hires by large companies hungry for talent? The product would really be the team itself and the front-facing stuff would be largely irrelevant?

fleitz• 13 years ago

Yes, if you can put together effective teams and pitch them to companies then you have a nice consulting/recruiting biz.

gohrt4• 13 years ago

Maybe that's half of what VC is already.

icecreampain• 13 years ago

Just a heads up: was reading the article when all of a sudden some trojan took over the whole site. The background faded to black and something requesting information from me popped up.

I closed the tab and put "firstround.com" on the company blacklist.

slyall• 13 years ago

Question for the Valley types:

If I'm Facebook and I want to hire a talented team at a smaller company why would I go though the whole procedure of an acqui-hire?

If I just want the 10 programmers why don't I offer them each a $500k signup bonus ( total $5m ) rather than pay $20m to some VCs and investors for a company and product I'm going to throw away?

JonFish85• 13 years ago

My guess (and it's just that: a guess) is that it has something to do with a non-compete clause with their current employer. If these programmers are working on a substantially similar product to one at your Facebook example company, there might be a lot of legal reasons not to leave the smaller company to go work at FB.

001sky• 13 years ago

There are limited situations where a reasonable non-compete agreement may be valid in California.

    If an owner is selling the goodwill in their business.[14]
    When there is a dissolution or disassociation of a partnership.[15]
    Where there is a dissolution of a limited liability company.[16]*

Reply

walshemj8• 13 years ago

Which is not enforceable for grunt engineers in virtually all cases.

And if in the rare case it is enforceable (normally for very senior C level roles) you have to be paid for it!

Hint Marissa didn't have any problem walking from Google to yahoo did she

Reply

rizzom5000• 13 years ago

One guess is that the management at FB (to use your example) are more interested in acquiring the leadership component of the team than the 10 programmers. They want to hire the visionaries, the folks who did the grunt work get to come along for the ride.

Reply

beagle3• 13 years ago

Actually, many companies are interested in a proven knows-how-to-work-and-make-a-product team, and would gladly pay some premium for that.

Reply

gohrt4• 13 years ago

That's certainly not true; entrenched players at big companies have no interest in aquiring more bigwigs to compete with. They want to a hire a bunch of staff who have produced a work sample that shows that they are a much safer bet than an equivalent number of unknown new hires.

Reply

kitcar• 13 years ago

Few different alternative reasons: Capital gains are generally taxed at a lower rate than bonuses/salary - therefore in after-tax cash terms a $500,000 signing bonus is not the same as selling shares for $500,000. Potentially different tax treatment from the acquirer side as well.

Also - Investors are commonly the ones that orchestrate the talent acquisitions - therefore they want to get their share of the pie.

Also - shareholders of public companies perceive acquisitions differently than large salaries, both in technical terms (i.e. where the transaction appears on financial statements) as well as psychologically speaking.

Also - its potentially more complex to negotiate individual hires, especially if its a large team. (i.e. Some employees may choose to walk away from an individual hire - maybe the employees you really want. They don't really have that luxury if the deal is dependent on all-or-nothing)

Reply

jeffasinger• 13 years ago

Also, if the products are too similar, you can't just poach the entire team, because that would probably run afoul of NDAs.

Reply

justin66• 13 years ago

Lest any youngsters take seriously the value of shares a startup is offering you, take a look at how seriously the author takes it:

With retention structures and contracts, a buyer can make sure the money goes where they want it to go — to a promising junior engineer they want to keep on, for example, instead of the office manager who technically owned 20% of the company’s equity.

"Technically owned." Yeah. Think about that.

It's adorable that the author has that money going to a junior engineer rather than management in his example. Don't be sucked in.

Reply

stephengillie• 13 years ago

Like technically correct, "technically owned" is the best kind of ownership.

Reply

walshemj8• 13 years ago

Yes explain to me this concept of "technical" ownership which you dont actually own something.

Reply

Retric• 13 years ago

You own shares but the total number of shares is not fixed.

Say you own 20,000 shares out of 100,000 shares and you own 20% of the company, they issue another 9,900,000 shares 10 min befores selling the company and you now own 0.2%.

Reply

ChuckMcM• 13 years ago

Like "technically owning" DVDs for example.

Reply

kogir• 13 years ago

Usually it's common shares that are affected. If your company sells for $15 million, but $20 million was invested with 1x preference, there's not enough money to pay out investors, let alone common. It doesn't require dirty tricks like issuing more shares, and happens reasonably often.

In cases like the above, investors will often agree to take even less and allow some of the money to go directly to employees as retention bonuses. It's still sometimes better for them to get some rather than no money back.

Reply

nugget• 13 years ago

This only works up to a certain valuation and on a certain % ratio. Yahoo paid $1.1 billion for Tumblr and $70m personally to retain Karp. They probably couldn't have paid $1 billion for the company and $170m for Karp, for example, without permission from his shareholders. And even then, any shareholder could hold out, claim fraud and file a lawsuit.

In smaller startups, up to the low teens or maybe 20 million, it's true that there is less protection for common shareholders. Many deals are <50% payment to the shareholders and >50% payment to acquired and retained employees. But in most of these cases the primary value IS the team itself. In a case where you, as a shareholder (either employee or investor), felt there was real value in the assets, independent of the team, that was stolen away in an improper acqui-hire type deal, you could sue and cause all sorts of problems for everyone.

Of course the best rule is still and always has been to try to work for people whom you trust and stay far away from those you don't.

Reply

netcan2• 13 years ago

There are certain protections and more importantly, risk awareness & risk mitigation for investor-shareholders that employee-shareholders rarely have. They don't have the information. The savy or bargaining power to negotiate the specifics of their contracts. Etc. That doesn't mean the equity is worthless. It's a few steps up from a verbal commitment but it has the same caveat, you need to trust the person its coming from.

Reply

buckbova• 13 years ago

Options (if you are publicly traded) are a great way to pay talent to stick around, especially if your stock is trending upwards.

Reply

InclinedPlane• 13 years ago

They used to be. But the market and IPOs are much different today.

Reply

michaelochurch2• 13 years ago

"Talent" acquisition is a misconception. I find the term insulting, given that (in bubble times like this) people a lot less talented (and skilled, etc.) than me regularly get acqui-hired at $10+ million per head. Call it an HR acquisition. Calling it a talent acquisition is, in many of these cases, an insult to people who have the talent.

Just why do these companies buy "talent" at a panic price? I have some theories that are partial explanations, but mostly it's tax. Also, it ends up in a different place on the balance sheet than a typical HR expenditure. It has little to do with the people being bought, and it offers a gigantic arbitrage for investors with the connections to make these deals happen.

Reply

eru• 13 years ago

Those people might be less skilled than you in, say, programming. That doesn't mean they are less skilled at making money.

Reply

michaelochurch2• 13 years ago

When you're born with the kind of connections that they (the founders, at least) have, making money is the default, not an artifact of skill.

Reply

justzisguyuknow• 13 years ago

God I hate that friggin popup asking me to subscribe!

Reply

What Everyone Should Know About How Talent is Bought and Sold

Related Stories