What is Acqui-Hire?

Acqui-hire is a different type of acquisition strategy which has come into existence with the emergence of technology-based start-ups. For many start-up companies, employees are now their biggest assets. Hence, it should not be surprising that other companies may want to acquire this employee base to meet their own business needs.

Hence, if a tech start-up company is facing cash flow issues, it can leverage its human resources to strike an acquisition deal. Such deals are unique in the sense that the acquiring company is not interested in the assets of the firm. Instead, they are more interested in the human capital that the firm has to offer. The acquiring firm is using acquisition as a way to hire a fully functional team. Hence, the term acqui-hire is used to describe this phenomenon.

What is Acqui-Hire?

As mentioned above, acqui-hire is when a company acquires another company with the sole intention of gaining access to their human capital and talent profile. Tech employees tend to be versatile. The same team can be used to solve different types of business challenges. Hence, if one start-up company is failing because of cash flow issues, other start-ups see value in acquiring the human capital of the firm. For the owner of the failing start-up, this represents an opportunity to generate some cash -flow and minimize the losses.

The acquiring company can merge the acqui-hired employees with their existing team or they can let them continue as a separate team. In many cases, the acquiring company will also take over the existing office premises of the selling company as part of the acqui-hire deal. In such cases, this acquired office is considered to be a satellite office of the main company.

The acquiring company sees value in using the acqui-hire model since instead of hiring several different employees one by one, the company can hire all of them in one shot. This leads to reduced hiring expenses and also these employees already have experience of working together as a team. Many large companies such as Dropbox, Twitter, and Hubspot have integrated the acqui-hire model into their overall human resource strategy.

How Do Acqui-Hires Work?

In most cases, acqui-hires work like a normal recruitment process. This means that the entire staff of the company being acquired is considered to be a potential candidate for the acquiring company.

Each and every employee including the founders may have to go through an interview. This interview will be a normal process wherein the human resource professionals of the company will validate each and every employee of the company being acquired.

There is a possibility that each candidate can either be selected or rejected. However, rejection has a negative impact on the overall process. With every rejection, the chance of a successful acqui-hire reduces considerably. This is because of the fact that the acquiring company is interested in acquiring the team as a whole.

Once, the acqui-hire interview process is complete, the acquiring company decides the rate that they will be paying for this acquisition. It is common for the rates to be decided on a per head basis.

It is common for silicon valley companies to pay around $1 million per employee in case of an acqui-hire. Most of this money goes to the employee itself. However, the founder is entitled to receive a percentage of the proceeds. Employees who did not get selected also receive some amount of money if the acqui-hire goes through. However, the money received is much less as compared to the employees who have got selected.

Benefits of an Acqui-Hire

The acqui-hire model has significant benefits for both sides. Some of these benefits have been listed below:

  • The acquiring company is able to obtain a ready-made fully functional team that can start operations from day one. Start-ups are usually pressed for time and face strict go-to-market deadlines. A delay could mean a loss of market share. Hence, acquiring companies are willing to pay a premium if they can obtain a fully functional department in one shot.

  • Many times, founders of the company being acquired, realize that figuring out the technology is the easy part. It is running the business which can be very difficult. In such cases, these companies are happy being acqui-hired by larger companies who have the acumen and the knowledge to manage the business aspects of the venture. The founders can continue to work on technology which was their passion in the first place.

Issues with an Acqui-Hire

The acqui-hire model is a great strategy that works wonders for some businesses. However, this strategy can have a negative impact as well. Some of the common issues have been listed below:

  • The acqui-hire model assumes that the hired workers will work with the company for a long time. It is common practice to put a certain time frame of minimum employment in the contract. However, if the company is not able to retain the employee after this minimum time frame, then the amount paid for their acquisition is wasted.

  • There is a huge cultural difference between start-ups and multinationals. Hence, it is completely possible that a team might be highly productive in a start-up environment while being less effective in the corporate world. Most of the start-up employees like the independence and lack of procedure that working in a start-up entails. They tend to grow frustrated with the very formal work environment which bigger companies have to offer.

The bottom line is that an acqui-hire is a relatively new business strategy that can be used effectively in order to help the founder save some money by selling a failing company.


❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Startup Finance