Executing Acquihires

What is an acquihire?

MK: An acquihire is an acquisition with the sole purpose of acquiring talent. That could take multiple forms. In most cases, buyers don't acquire the company or legal entity, which reduces risks. 

In many cases, acquiring the whole entity would be faster, but again the main thesis is getting people that are highly sought after.

It's about getting talent to your door, getting them acclimated into your company, and contributing for 2 to 3 years to your pre-existing strategy, whether it's a product, sales, or distribution strategy. 

TG: I agree. It's with the sole purpose of acquiring the people. Every deal is different, so you have to structure the deal to maximize your intention, which is getting these people into your company and allowing them to perform a specific task or objective that you ultimately prescribe. 

Look at Google, for example. They are an advertising company and they want to expand into Google fiber. Unfortunately, that expertise doesn't exist within their business, so they acquire a group of people with fiber experience.

In this example, they can acquire a successful fiber company. However, that will be expensive and must be done in a specific way. That company will also have legacy operations and a legacy customer base.  

With all those complexities, they can buy a failed fiber business with a team of engineers, technicians, and operators that could jump-start their focus and ability to enter the market.

Rules of acquihires

MK: You can do anything that makes sense for your company. There are no prescriptive rules regarding acquihires. The goal of an acquihire is to attract talent who have worked together.

The seller's objective is to maximize their returns. For the people who are moving companies, their objective is to land in a good place and to maximize their earning potential and their work enjoyment. As long as these objectives are met, you have yourself a deal. 

Hostile acquihires

MK: There's no such thing as a hostile acquihire because people can walk out the door. They are not bound to stay within the company  unless they voluntarily agreed to stay in the company for a specific time in exchange for a retention bonus. The individuals need to decide to join the company and stay there. 

It's not like buying cash flows or a set of customers because those things can't walk out the door. 

Offering massive bonuses to people without the seller's consent has many ethical and legal challenges. The legal protection varies by jurisdiction and depends on how non-compete or non-solicits are enforced. 

If you do this in mass, you will get interference claims from the seller. But in most cases, especially in the tech ecosystem, there are reputational risks.  

TG: The very nature of an acquihire is that hiring takes a lot of time. You can go on Linkedin and hire everybody at a startup, but that would take time. What makes acquihire so attractive is that you can hire people quickly.

Acquihire target roles

TG: Aside from engineers, it's also prominent in regulated entities. I've done acquihires to get better at selling to the federal government. There are instances where the federal government does specific RPFs. 

Having a track record with an entity is important. Having specific people responding and knowing how to respond to the government RFP is important. So acquiring a group of talent to do that is a huge win.

Alternatively, you can also see acquihire for tower climbers in cellular networks - fiber installers for fiber networks. Also people with specific project management skills. Sometimes, it's a cohesive group of people with a diverse skill set to tackle a particular problem.

Challenges of an acquihire

MK: In an acquihire, you must focus on retention. You have to ensure that the people who join your company stay in your company long enough for the thesis to make sense. The deal structure, the compensation plan, and cultural issues must focus on the people. 

The thesis always revolves around the contribution of the people you're attracting and they need time to fit in with the rest of the team. So that's the biggest issue to address.

If that talent is not happy when and where they landed, they will walk out. And they are highly skilled, rare, and in demand in the current labor market, that's why you do the acquihire, to begin with. 

TG: So when you're negotiating an acquihire, you need to ensure that the money goes to the right people. What are you paying for, and to whom are you paying? 

You're trying to put money to keep these people at your company to do this job. But is that money going to investors? Venture capital group? That's not an efficient use of funds, but you still need that VC group or board member to sign off on the deal. Otherwise, what's the incentive for shareholders?

So that's where the real issue lies. How do you structure something in a way that the compensation makes sense?

It's judiciously allocated to get the deal over the finish line. You're creative with how money is put to work, in salaries, equities, earnouts, which can get increasingly complicated, and other kinds of creative mechanics to retain these people for the long term.

Retaining non-key employees

TG: You need to approach every acquihire as a unique deal. Some targets will have an opinion on whether or not you can keep specific people. And as an acquirer, you can choose not to do the deal, but they may have specific clauses regarding keeping people for a certain period of time. 

This may include lawyers or finance people that you may not necessarily want. You may want those ten engineers but don't need the HR person. As an acquirer, you can also be in a position of power where your offer is so generous that shareholders and management can't refuse it. Then you can have your way with critical decisions and ensure you are keeping the people you only want.

MK: And the economic split is still there. As a buyer, you have a certain amount of money allocated for the transaction. So you need to think deeply about where each dollar goes. You want most of it to maximize retention. 

If your judgment says that attracting non-key people will maximize the retention of key people, then it's okay to allocate funds for it. Otherwise, the non-key people compensation is coming out from other budgets. 

Retention of key employees

TG: In my experience, employees rarely have long-term contract. In addition, it takes little time to figure out who the key people are. 

MK: Remember that you're also doing an extensive and expensive interview process. Like any hiring process, any mistake will cost you at least 12 to 18 months of pushback.

Like a typical hiring process, buyers must find a way to motivate and ensure that the employees want to be a part of the organization's mission.

When problems arise, you need to fix unmet expectations from the people. Whether it's career progression or corporate politics, you must treat them in a way that you treat employees that you hired through a normal recruiting process. 

You'll never know if newly hired employees will stick around for two years, but that's part of the interview. It's the art of attracting people to work for you.

TG: Just like in HR, if you identified a person for an acquihire and you looked him up on LinkedIn, and he switches jobs every six months, that's already a red flag.

Acquihire vs. M&A

MK: The timeline and the activities are similar. The most significant difference is that in most cases, you're not buying the entity. So then you don't need due diligence, and it becomes the seller's problem what to do with the entity after a transaction. 

Other than that, you need to figure out your thesis. This includes an understanding of these questions. 

• What are you trying to accomplish from the acquihire?
• How will this acquired team help you achieve objectives faster, better, and cheaper than your team can? 
• What is the price you're willing to pay for the acquihire?
• How will you negotiate with the sellers?
• How will you review all the resumes and conduct interviews with the key people?
• How do you plan to ideate the structure?
• How will you execute the deal?

But the execution and due diligence are faster. Acquihires usually involve small companies. There are very few revenues, if you are not talking about a thousand people, it's a dozen at most. 

The lower complexity of the transaction discounts everything. So, to that extent, an acquihire is faster. But, from the buyer's perspective, you must go through the same ideation process and investment committee approval. 

TG: There are a couple of examples where it's a quintessential acquisition, and there are red flags from the business because its revenue is declining. You're already seeing employees leave, the company's shrinking, or doing layoffs.

Those are not great places to look for an acquihire because the talent has already left. What's left is a gray area where the company may not have reached a mental maturity and accepted that they're an acquihire and still believe there's funding left even though they're at the end of the road.

Though they don't have the product market fit, they think they're about to turn the corner with a new feature release from a sale with a big enterprise. Even though they've been thinking that for several months already, they think it will happen soon.

This is where it gets tricky because as a target, you're thinking of an acquihire. But, they still think it's a traditional acquisition, and it usually needs to be revised. So, now, you can try to coach and explain why valuation is a lot different than they're perceiving, and that's an instance where you have to walk away and come back a few months or a year later.

This is just one of those things that you have to do in managing a deal pipeline. The CorpDev team has to be on top of these things. And, this is why acquihires vary in flavor and you have to be willing to adapt to different circumstances.

Negotiations   

MK: The main difference is you're negotiating with the employees directly. When you're buying a business you don't negotiate with as many people.

TG:  Also, in a traditional deal, you're doing deep product demos, you understand the market, learning the sales process or the deal pipeline, and all these kinds of things. 

In an acquihire, it's like an HR exercise. You're doing a lot of deep interviews with the people themselves. You're looking at resumes or LinkedIn. You try to understand the value of the asset you're acquiring, which is people.

Valuing acquihire deals

MK: Ultimately, It's what the buyer thinks the cost will be to recruit all these people and how much it will delay certain activities in terms of dollars, time and capacity. I've seen multiple rules of thumb, ranging from a million for an engineer or for small acquihires, multiple of what has been invested.

There could be more approaches to valuing this, depending on whether you have more or less stable business comparable transactions. Every case is specific. The numbers are typically stratospheric so it varies.

TG: There's no specific answer to this question. But, it's important to know your customer. You also have to figure out who's making the end decisions before trying to structure something that makes sense for them.

Buyers must focus on retention. For this, you need to take some internal corporate development guidance because you need to do your own internal valuation. You have to stick to your number. 

Once you have the internal stakeholders in agreement and stick to these principles, you're more likely to be successful in acquihires. But there's no guarantee.

MK: The other consideration is whether the buyer has aspirations of becoming a serial acquirer. Because if that's what you are, you want to ensure that VCs or early investors are happy with the deal. 

You need to have a good reputation to have a place that provides soft landings. If that's what it is, you'll see a much greater pipeline or earlier pipeline before other acquirers see it. A serial buyer can offer all sorts of benefits to a serial seller if you will. 

Structuring an acquihire

MK: You don't want to negotiate with multiple parties. Only one term sheet outlines which would get what, and as the deal progresses, you start getting buy-ins from other parties.

You must cut a check to some early investors because they need to bless the transaction. But, then, you're also cutting checks to key people. For example, if the CEO is the founder who controls a large chunk of the company, that person can get some payout.

However, you don't want to make a big payout. If you wish to this trust/technical founder on board, you want them to join and stay motivated for two or three years; you want to pace things out. 

TG: For retention, the most critical things are big legal documents. In the case of an acquihire, it can be issuing offer letters.

MK: The other consideration is pay equity in the acquiring company. The rationale behind it is that those people will become your employees. Sooner or later, they will know who gets paid what. So you need some level of discretion. 

If you're hiring somebody who'll become a senior director of engineering and already have hundreds of senior directors of engineering, you need to be in a band. Especially if the HR process matures, you'll have bands for all those levels. You can also play with equity or retention bonuses.

HR is your key stakeholder in an acquihire. They are partners with the corporate development in structuring and thinking about how this transaction will be integrated or how the process will play out from day one.

Because on day one, you have a particular number of new employees at the firm. And some of them have their reporting structure intact. Some of them will have a different reporting structure. They'll report to their functional heads. Some report to product, other to engineering. It all needs to be carefully planned. 

Many of those things are not within the purview of corporate development or the CorpDev team doesn't have that expertise.

Do's and don'ts in an acquihire

MK: It's not different from negotiating a normal acquisition of a company. But acquihires tend to be smaller. So each individual becomes much more important. 

If you're buying a business and some people walk away, you'll still have customers and cashflows. But, for an acquihire, your sole focus lies on how these people will be integrated into your company. 

TG:  Another pitfall you can see in a traditional M&A is that it's got a big dollar sign associated with it. There's a good chance that the best people from the acquirer's side will work on the integration. They'll be thoughtful of the corporate strategy and they're going to do everything in their power to make it work.

If an acquihire is low on dollars and you work at a big company like a Fortune 500 entity, there's a good chance that this gets lost in the shuffle. This is why it's important to have a defined strategy. First, you have to know what's the purpose behind the acquihire. 

Having an executive who can oversee the acquihire is crucial, especially in the first year of the new employees operating at the company. 

Buyers must look out for cultural fit if the acquired employees can work with existing teams. If you're a Fortune 500 company and you just acquired a Silicon Valley startup, are they allowed to bring dogs to the office? Do they need to wear a collared shirt? Do they need to undergo a drug test? 

There are numerous things that you have to be thoughtful of in an acquihire. 

It's carefully thinking about the return on investment and ensuring that you've done all your homework so there are no surprises. 

MK: Finally, you need to be committed to the strategy that necessitated the acquihire in the first place. Strategies change all the time. 

Planning for integration

MK: You need to start early. You have to engage with the stakeholders, starting with the HR and the people whose teams will be impacted. Pay extra attention to the importance of closing a particular gap to the corporate strategy, so you don't run into a sudden change. 

TG: For example, you acquired a group of engineers to add a feature to your flagship product. In this case, there's tight integration with the existing team and that's going to require a different playbook than if you're acquiring a group of engineers to work on something that's completely adjacent or orthogonal to your existing product.

In that case, buyers must ensure that the group can operate independently to achieve their objectives without getting caught up in the bureaucracy of the acquirer.

MK: Planning for those is not easy. These are 100 percent, by definition, people-related. It's very personal, promises get made. Careers and lives are changed to some extent. So this makes it more personal than traditional acquisition.

Pitfalls 

TG: Earnouts are an asset. It's a tool in the tool belt, but earnouts never go as cleanly as you would anticipate. Things change, strategies can change, a company direction may shift and the acquihire has these earnout goals in mind. 

When the strategy changes, the company's no longer in a position to actually go after those goals. Getting too goal-oriented on earnouts can be a challenge.

MK: Also, the target has now, all of a sudden, a whole number of dependencies in accomplishing their goals. They're not used to having dependencies, but by nature, if they're brought in and they're working with the acquirer, they are expected to work together and achieve something together.

All of a sudden, if the goals are not met, there's a possibility of dispute. Whether the target has yet to accomplish the mission because of their fault, something they haven't done or done improperly or incorrectly, or whether they were not set up for success by the existing team. This is where you could get into a lot of friction.

Governance

MK: It depends on the size of the company. If you're a 20,000-person acquirer, and you're thinking about bringing in two to five people, you can go to someone other than the CEO of the board. It's the same way if you are acquiring something that would add 10% to your revenues. 

The approval should stop earlier in some of these cases than when discussing large business acquisitions. While the risks are lower, the company's disruption risk is still pretty significant. If the acquihire is done to integrate, build or improve something, then that's your KPI.