7 things You Need to Know About Doing Acqui-Hires
Acqui-Hiring has taken the IT world by storm. Established companies have taken to looking for hot talent in startups that are not doing well, or intentionally acquiring them just to strip them of their most talented, accomplished, and productive staff. Still in its infancy, acqui-hiring is far from a perfect way to acquire desired tech talent and carries a lot of risk.
Before engaging in acqui-hiring, you should consider some several critical issues. The information gathered could provide the much needed information about the viability and likelihood of success of your acqui-hire strategy.
Let’s review the 7 things you need to know about doing acqui-hires.
7 Things to Know About Acqui-Hires
1. Differences in corporate culture can undermine a well-planned acqui-hire.
The company culture of the acquired company may be more relaxed, democratic, tolerant of rule breaking, and spontaneous than the corporate culture of the acquiring company. The acquisition of staff from the startup may lead to bruised egos, discomfort, stress, unhappiness, and loss of feeling connected to the organization. These feelings would be natural for the staff who have been transplanted from a nurturing, supportive, and unorthodox environment to an impersonal, cutthroat, structured, hierarchical one. Moreover, the inability of the company to mesh the two or help the acqui-hires transition from the startup to the new company will further illustrate to the acqui-hires that they are not part of the new company, but a remnant of an old one.
2. Retention of acqui-hires is lower than for direct hires.
Employees working for a startup may have intentionally avoided working for a traditional company. The acquired and acquiring companies may have very different goals, visions, reporting structures, and work environments. Thus, if there are significant differences between them. The differences may cause the acqui-hires to become stressed, demoralized, unhappy, and less productive. In short, they will be unable to fit into the new company and successfully work there. If this happens to a large percentage of the acqui-hires, the employee acquisition strategy will have failed to achieve its purpose. The acqui-hires won’t stay at the acquiring company or be valuable employees while working there.
3. The talent pool must be carefully studied before offers are made and compensation is discussed with the target employees.
The acquiring company must carefully examine the employees in the targeted company. It is important to understand if they are valuable as a team or are there only specific individuals that should be employed by the acquiring enterprise. If the team, as a whole, is valuable, then you’ll want to know what drives their internal dynamics, bonding, and cohesiveness. For example, is the team’s effectiveness the natural outcome of them working together, socializing and working together, having the same visions/goals, or their relationships with one another outside work? When the factors behind the team’s effectiveness and cohesion have been identified, then the acquiring company can determine if they can maintain the team (i.e., provide what it needs to remain productive and cohesive).
On the other hand, if only a few team members are valuable to the acquiring company, the company recruiters need to know if those individuals can maintain their effectiveness and productivity after they have been separated from their colleagues at the startup. For example, you may have four crème de la crème target employees that you want to transition to the acquiring company. However, there may be people at the startup who do not appear valuable on paper, but play key roles in defusing tension and conflict amongst the star performers. If the acquiring company fails to identify these people and hire them, the likely result will be that the star performers suddenly become argumentative, uncooperative, dysfunctional, and too difficult to work with at the new company.
Thus, it is of tremendous importance that the recruiters know the following:
- What each employee brings to the table?
- How do the employees mesh with one another?
- How much is each employee worth to the acquiring company?
- What is each employee’s motivation for working at the startup?
- Is each acqui-hire interested in working with the acquiring company?
- Which employees must be retained by the acquiring companies for the acqui-hire strategy to be successful?
4. Acqui-hiring is not an alternative recruiting strategy.
Acqui-Hiring is generally viewed as an alternative way to recruit employees. This erroneous thinking has led to high levels of acquisition attrition compared to the attrition of direct hires, 33% and 12%, respectively, according to Dr. Daniel Kim, Assistant Professor of Management at Wharton School of Business.
Also, acqui-hires did not agree to work for the acquiring firm when they joined the startup. This means that the acqui-hires signed up for a different kind of work environment and job than the one the acquiring company is offering them.
When acqui-hires must contend with different office dynamics, office culture, remuneration, and corporate goals and visions, they may no longer vibe with the business and opt to leave the acquiring company.
To avoid this situation, the acquiring company has to sell the acqui-hires on it. The bigger the buy-in by the acqui-hires, the more likely they are to stay with the acquiring company. In order to achieve this kind of buy-in, the acquiring firm must be transparent, direct, and upfront about what each acqui-hire brings to the company, what kinds of work they will do, their responsibilities in the office/corporate culture, and what value they add to the acquiring company. If this is done, the recruiters can identify points of friction and resolve them, or at least set up ways for the staff to address and work through them.
5. Acqui-Hiring is a controversial strategy.
Acqui-Hiring has taken Silicon Valley by storm. Some view it as a great talent recruiting strategy, and others see it as a win-win strategy. However, its detractors think it is sucking the life out of the tech industry, and encouraging the founding of unsustainable businesses that are created for the sole purpose of being flipped for profit.
Acquiring a successful team that has proven itself can put a company in a position to meet its goals and operate more efficiently. Moreover, acquiring a working team can save a company lots of money and time that would have been spent on recruiting, training, developing, and firing direct hire employees.
Alternatively, some observers of the acqui-hire trend view it as a system with no winners. The company doing the acqui-hiring is getting a team created by an innovative founder, and a startup is being eaten up by an established company. The industry doesn’t advance by established companies gobbling up innovative startups. This kind of conduct cripples competition within the industry, makes larger companies less adaptive to the evolving market, and decreases collaboration amongst industry participants.
This trend also encourages founders to create unsustainable startups with the hope of selling them to a bigger, more established company for a big wad of cash. Ultimately, this leads to less innovation and commitment by tech teams and weak startups, because there was never any intention for the company to be more than a fledgling enterprise.
6. The intellectual property that the acqui-hires worked on and their rights to it must be carefully reviewed and understood before the acqui-hires are onboarded.
The acquiring company needs to know the legal agreements governing the development, licensing, and sale of intellectual property (IP) developed by the startup’s team. In addition, it should know if it is getting control of the firm’s IP in whole or part. Moreover, the company needs to know if the founder has any rights to the firm’s IP and/or is walking away with any of it. Finally, the company needs to know if anyone else has rights to the startup’s IP and how those rights may affect the acquiring company.
7. Assess the legal enforceability of non-compete agreements and other restrictive covenants that are going to be used when onboarding the acqui-hires.
When acquiring new talent from an existing enterprise, especially when the founder is walking away from the tech team being acquired, the acquiring company may want the founder and startups staff to sign non-compete agreements or other restrictive covenants. This is necessary because the startups tech team and/or the founder could become competitors of the acquiring company or join its existing competitors. The acquiring company doesn’t want to have to compete with people who have an inside knowledge of the startup, its technology, and the problems with its operations and tech team.
Many jurisdictions have held that non-compete agreements are illegal. However, if the non-compete agreements or other restrictive covenants are part of acquiring a business or an acqui-hire they are allowed. The acquiring company must be careful when drafting these restrictive covenants and make sure that they are legally enforceable. Other restrictive covenants that a company may use in its hiring or termination proceedings may include non-solicit, no-hire, confidentiality, and invention assignment agreements. Moreover, the acquiring company’s work contracts should not run afoul of work contracts signed by the startup’s tech team when they joined the startup.
Acqui-Hiring may be trendy and popular, but it is far from easy to successfully do. Besides being aware of employees’ work contracts, team dynamics, motivation, and willingness to try and work with one another, the acquiring company must also do due diligence.
The assessment of a startups financial situation, liabilities and assets, can affect the acquiring company’s success in doing the acqui-hire. Startups may have complex financial structures, different types of investors, and a variety of profit sharing agreements. To fully gauge the financial condition of a company, hire a professional accounting firm that has experience working with startups.
Free Cash Flow (FCF) Agency can provide you with a thorough assessment of the startup that you are considering raiding for talent. It can provide you with a detailed financial assessment of the company before making a decision to engage in an acqui-hire. When deals can be made or lost based on the financial performance of a company and its financial projections, don’t let the financials of a startup doom your acqui-hire. Contact FCF and find out what they can do for you.