The most famous of these historic 'aqui-hires' were IBM's acquisition of Lotus to get software guru Ray Ozzie in 1995 (Lotus had previously acquired Iris Associates for the same reason) and Apple's purchase of Next to re-acquire the services of one Steve Jobs.
Those antecedents underscore the way in which intangibles like intellectual capital and the human capital that creates it have shaken up traditional notions of value. There was a time when hard assets were perceived to be where value resided. Sell side analysts and money managers scoffed at 'soft assets,' which they derided as variable costs to be managed and disposed of as serious executives saw fit.
But that was before supposedly hard assets like real estate suddenly deflated like week-old birthday balloons. Globalization and the fraudulent puffery associated with companies like Enron contributed to the demise of that world-view. Factories, land and the machines that operated on or within them were so many chess pieces on an international board. But the talent that made them work better than those of competitors began to achieve grudging recognition.
As mobile computing and the apps that separate it from alternatives become a dominant force, the people who have the skills to make that happen are in sharper demand. Often, they work for small, even obscure start-ups. There is a band-of-brothers mentality about starting a business with a few friends. And having founders' equity cements those bonds. To get at these rare talents, established companies are finding it is cost-effective to simply buy the entire entity. Haggling with one or two people is time-consuming and can create resentment among existing employees of the acquiring firm who question why the newbies are being showered with recognition. Given the multiples at which bigger tech firms trade and the pharaonic amounts of cash they have on hand, these purchases are barely a rounding error in quarterly accounts.
Such acquisitions are cost-effective and can be less challenging operationally than trying to insert new personalities into an already ego-driven staff. There may be some hard feelings among non-engineering staff, if they are not acquired as well and the decision may be agonizing for founders who really, really wanted to create their own thing. Money can be a soothing balm in such situations. Contracts binding the payout to longer term performance metrics can be challenging. Until the next call comes to discuss an opportunity. JL
Sarah Needleman reports in the Wall Street Journal:
Established technology companies increasingly are buying—and then shutting down—early stage start-ups, mostly to acquire their software-engineering talent Andrea Vaccari recently faced a grueling decision: whether to accept an offer from Facebook Inc. FB -2.23%for his 18-month-old start-up, or go for broke. He and his co-founders had poured their money and energy into Glancee, which made a mobile application designed to help people find others with similar interests, and the app was finally taking off. In May, Glancee's owners decided to accept an "acqui-hire" offer from Facebook, even though they knew the offer's primary purpose was to recruit them as software engineers. Now they work for the social-networking giant. Investors, attorneys and others involved have dubbed these transactions acqui-hires. The deals, which typically range in price from about $3 million to $6 million, started to become commonplace in Silicon Valley last year as demand for software engineers soared. Now, with tech start-ups proliferating because of the relatively low cost of getting off the ground, desperation for software talent has moved even small and midsize tech companies to make acqui-hires. For the founders being wooed, it can be tough to choose between giving up on a start-up and taking a job at an established company—or sticking it out in hopes of one day making it big. Accepting an acqui-hire offer not only sidelines an entrepreneur's dreams, but it typically results in negligible, or even zero, returns for the start-up's investors. Moreover, the products and services it took long days and nights to create either cease to exist or are folded into the acquirer's portfolio. Any employees who aren't software engineers may be left without jobs. When Facebook swooped in, Glancee had spread to 25,000 users, up from 1,000, in the less than five months. "You will never know if it will be better to continue," says Mr. Vaccari. "We are always looking for great entrepreneurs," says Facebook spokeswoman Ashley Zandy. "These deals are one way to bring great teams to Facebook." Micah Baldwin, founder of Graphicly Inc., a provider of online-publishing software in Palo Alto, Calif., says he has turned down acqui-hire offers from three publicly traded tech companies in recent months. He says the deals would have given his start-up's nine engineers significantly higher-paying jobs but left him and four other employees out of work. The ordeal "was agonizing," says Mr. Baldwin, 40. While Graphicly's user base was growing rapidly at the time of the offers, it would soon need to raise more funding to stay afloat. After lengthy discussions with his team and investors, everyone agreed "to double down and go for it," he says. Founders who accept acqui-hire exits often have to agree to concessions, says Ivan Gaviria, a partner with law firm Gunderson Dettmer LLP in Redwood City, Calif., which has worked on dozens of the transactions in the past year. For example, they might have to stick around as employees of the acquirer as long as four years or lose some of the restricted stock often doled out to them as part of the deals. Other forms of compensation might be clawed back as well, and founders might be required to sign noncompete agreements prohibiting them from engaging in the same business for a specified period after leaving the acquirer. "You have to look for hooks, how much is contingent versus what you really get," Mr. Gaviria says. Acquiring entire businesses mainly to recruit software talent may seem like an over-the-top expense, but the strategy can make sense for tech employers because they get teams of engineers that are used to working together. For many founders who are acqui-hired, "it's a consolation prize," says John Coyle, a professor at the University of North Carolina's School of Law who co-wrote a paper on the practice last month with colleague Gregg Polsky. "This is often the alternative to liquidating and sending your résumé out," Mr. Coyle says. "It looks like something good happened" for those who are acqui-hired, but it may be a "false win," adds David Cohen, co-founder of TechStars, a start-up accelerator based in Boulder, Colo., with five locations in the U.S. In June, Thinkfuse Inc. of Seattle was acquired by Salesforce.com Inc. CRM -0.80%in a deal that, according to its co-founders, was mainly a maneuver to recruit the two-year-old software company's four engineers. Its only non-engineer team member, co-founder and Chief Executive Aydin Ghajar, says he was lucky: Salesforce hired him as a director of product management. "The toughest part was shutting down the service," says the 33-year-old Mr. Ghajar. "It was actually growing pretty rapidly." Salesforce declined to comment. At the time of the offer, Mr. Ghajar and his colleagues were making below-market salaries and working in an incubator with about 30 other start-ups. Now they work in a high-rise building with a gym. "It was a good outcome for us," he says. Nate Schmidt, co-founder of InstaGift LLC, an e-commerce software provider in Birmingham, Ala., turned down what he considered to be an acqui-hire offer last year from a closely held firm in a related field. "We weren't ready to give up on the dream of becoming really big," he says. "I want us to be the next great e-commerce company." Mr. Schmidt, 38, acknowledges that achieving his goal won't be easy. "We have a runway of maybe a little bit less than a year before we need to raise more money," he says. "The pressure is on for us to perform."
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