Are acqui-hires really making failed team members rich?

Everytime I read about an aqui-hire on Techcrunch or Pando, there’s an implication that Yahoo! or Google bought the failed startup at a valuation of 1M+ per engineer. That sounds crazy. The company has already failed, why bother paying a premium? I’ll admit it makes me bitter that the tech eco-system is rewarding failure just because they’re funded by well known accelerators and VCs.

  • Actually in most cases these acqui-hires don’t result in the startup founders or team members getting money. Basically the VCs get their money back and pretty much whatever else is left over. Think for instance about an aqui-hire at $10 million for a company that’s been through at least a series A round of funding, so they’ve raised a seed round as well. Seed round probably around $1 million at a $4 million pre-money valuation means that the company is worth $5 million; the VC owns about 20%, so on paper the founders own about $4 million.

    However, the VCs make sure to include liquidation preferences of at least 1x. This means that if the company sells for $1 million the VC gets his money back but makes no profit and the founders get nothing. So, onto the series A round. The company raises $5 million at a $15 million pre-money valuation.

    The VC gets another 20%, so now his stake is 38%, as well as the fact that the liquidation preferences are still there. The company struggles to grow much past it’s series A round and might even have decreasing revenues or users. They cling onto life for a few months or years before Yahoo or another company who are looking for engineers agrees to buy the company for $10 million if the founders and engineers agree to come work for yahoo.

    Having failed, and also having lived on below market wages for years, the founders and engineers are glad to take high paying jobs at Yahoo or some other acquiring company, which also helps to reduce the stigma of failure; they get to put out a press release about how their company was acquired for $10 million and their friends and relatives call to congratulate them, thinking that they’ve made millions of dollars.

    However, remember that the VC has liquidation preferences. This means that since they invested $6 million, they get their $6 million back before the founders see a dime, then they take 38% of the remaining $4 million.

    So, the founders and their first few employees will end up splitting roughly $2.5 million, which is not much money for a group of people who spent 3-5 years working on a company.

    Most of the time the purchase price is even lower than $10 million; more like in the $1-$5 million range, so the VCs might not even see their money back, and the founders definitely don’t get anything in such a case.

    • I appreciate the long analysis but if I’m not mistaken you’re making a hypothesis. I’m actually more interested in some real “anonymous” answers.

      We can all speculate who gets the money and how the pie is cut. I’ve heard more equity is given just for the team members like in the case of the Gowalla acquisition by Facebook which actually soured the investors.

      • I’m the guy from the initial response:

        What do you mean by this line?:

        “I’m actually more interested in some real “anonymous” answers.”

        Are you implying that I work for Startups Anonymous? Because I don’t. I’m just a regular visitor like you are.

        I don’t know the specifics of the Gowalla acquisition, but unless the investors were stupid, they would have had liquidation preferences, and there’s no way that Facebook could get around that.

        You don’t trick investors, since that only damages your reputation in the future if you wish to start a company and need capital. Reputation means everything in the tech world; you burn bridges and you’re screwed.

        • What I meant is to get some actual answers for people who actually worked at companies who were acqui-hired. I apologize that I didn’t make that clearer.

          Your answer seems to imply that you were making guesses which is fine but I’d like some actual experiences.

    • Me again – the poster. Just wanted to add that the aquiring has no obligation to “repay” the investors sunk costs or the founder’s lost wages and sweat equity. The company has already FAILED. If not for an acquisition – everybody gets nothing.

      Why would a Yahoo! or Google even pay such an outrageous premium to get a dead company.

      • I’m the guy from the initial response:

        They’re not paying for the company, they’re paying for the talent. Yes, it might seem ridiculous to pay millions of dollars just to get a team of coders, but in Silicon Valley where there’s tremendous competition for good programmers, it’s a cost that many large companies are willing to pay.

        The acquirer has no obligation to repay the investors, but if the founders wish to maintain their reputation and raise money in the future, they won’t just abandon the company and go work for Yahoo. T

        hat’s why they stick it out until a large company comes to acquire them for peanuts. The investors get their cash back, and maybe the founders get a few hundred thousand each, if they’re lucky but most of the time they walk away with nothing.

        • Thats the “word on the street” and thats why I feel bitter about the ecosystem rewarding failure because that’s exactly what is happening.

          I was mainly posting the question to elicit some answers from people who actually went through the experience to confirm or deny if that thats case.

    • Would you be able to give an estimate or at least speculate how much the early employees should get in the 2.5MM that is left over? say one of the early employees owned 2-4% of the company.

  • This isn’t always the case. Going through it right now and there is no premium being paid whatsoever. Our investors will get shares in acquiring co. and we’ll get a job. That’s it.

    We would have just folded if we didn’t have investors. In our case, investors get a second chance at success, we get a job and save a little face.

    • Thank you for proving my point. People just see the headline and assume that the founders get that money, when really it almost always ends up being just the investors that benefit, and sometimes even they don’t make their investment back and have to walk away with a loss.

      This is how the game is played though; something like 10% of VC backed companies have good exists, 70% go out of business, and 20% have the acqui-hire type of exists where it’s not a win for the founders either. You played and you lost this round, but good look in your next venture if you decide to start one.

      • I meant to say good luck*. By the way I’m the guy from the first response for anyone who couldn’t tell. Wish this website wasn’t so anonymous; makes it hard to tell who is replying sometimes. We could use aliases instead of real names; that way there’s still anonymity without any confusion about who is replying to who.

  • I cant wait until the next recession hits, ad budgets get cut, ad-reliant revenues plummet, and FB Twitter Google etc are firing 1000s of “workers”. Then this aqui-hire BS will stop in seconds, and hopefully every Angel and their mother get FFed.

    • Yes but the adopted acqui-hired children of Ms. Meyer will already have made their moolah and will be happy partying in Fiji.

      Another thing that pisses me off more than failed acqui-hirers making bank is the insider rounds where founders take money off a hyped but doomed company like Groupon, Zynga and Snapchat.

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