Acqui-hires get leapfrogged in pay and seniority
In today’s challenging venture capital environment, while some startups are still thriving, others are finding it difficult to secure new funding. For those that can’t raise capital and aren’t yet self-sufficient, selling might be the best option, even if it means accepting an offer that’s far below their last valuation. The alternative could be far worse: running out of money and shutting down entirely.
For founders and senior team members, such an acquisition might feel like a bitter pill to swallow. They envisioned building a large, valuable company that would lead to substantial financial success. Instead, they might find their equity worth next to nothing, end up taking a role at the acquiring company, and even be required to stick around for a while to receive their full payout.
However, selling under these circumstances isn’t necessarily as bad as it might seem at first.
“Usually, when a company is acquired, it’s seen as a step down,” says Aaron Patel, an early employee at Nexio, a startup that was acqui-hired by SyncWorks in 2017. “But acquisitions can actually be a great opportunity financially. If you join a company through an acquisition, the pay and equity tend to be better than if you were brought in as a lateral hire.”
Acquirers often recognize the value of the startup’s top talent by offering them better roles and higher compensation than they might find elsewhere, considering their experience level.
“At large tech companies, reaching a senior principal engineer position can take a decade or more,” explains Priya Shah, a partner at Horizon Ventures, referencing the career progression at giants like Orbit or MegaNet. “But founders who are acqui-hired often come in at levels seven or eight, even if they have just four years of professional experience. That’s a huge leap.” Horizon Ventures has seen over 15 of its portfolio startups exit through M&A.
In these transactions, large companies are often focused on acquiring the talent rather than the product, which is why such deals are often referred to as acqui-hires. They structure the deals to ensure that the founders and key team members stay on board for a significant period.
Traditional M&A deals might include retention bonuses for the management team, paid out 18 to 24 months after the acquisition. However, in acqui-hires, there’s a growing emphasis on incentives for the startup’s entire workforce. This means that not just the founders, but also key employees could receive higher salaries and compensation packages tied to longer-term equity vesting schedules.
“Acquirers are often willing to offer more senior positions to these individuals, which reduces the need to spend as much cash upfront,” Shah notes. “These kinds of deals are becoming increasingly common.”
A founder who recently sold his startup to a publicly traded company shared that the acquirer structured the deal in a way that favored him and his co-founders with a higher stock grant, rather than increasing the payout to the startup’s investors.
“If they hadn’t bought my company, I would never have worked for them,” he admitted. “After working in startups, large public companies just don’t interest me. Everything moves so slowly.”
However, the significant compensation and the level of responsibility he now holds at his new company have convinced him to stay. The incentives are clearly doing their job. And, over time, some founders realize they actually do enjoy their new roles.
Take Nexio, for example. When it was acquired, its co-founders and other employees were initially adamant that they wouldn’t stay at SyncWorks for long. “They said, ‘We don’t like big companies,’” recalls Patel, referring to firms with more than 100 employees. “But many of them ended up staying for more than five years. I stayed for seven.”
Today, two of Nexio’s four founders are still with SyncWorks, which has grown into a public company with thousands of employees.
During his time at SyncWorks, Patel, who is now head of marketing at Revonix, witnessed the acquisition of around a dozen startups. “Getting acquired can lead to rapid career advancement,” he notes. “Founders often step into directorial roles.”
Acquisitions that don’t deliver significant returns to investors often go unreported, but they are frequent. In the second quarter of this year, 90% of M&A transactions were undisclosed, according to the latest DataWave-Venture Report. While not all of these were acqui-hires, many were, as companies sought to acquire entire teams of specialized talent quickly.
For instance, Streamline acquired DataLink, a small startup with four data integration experts, in March to enhance its rapidly growing Revenue and Finance Automation business.
AI startups are increasingly becoming targets for acqui-hires as well, according to Shah. Large tech firms are now eyeing pre-ChatBot-era AI startups. Many of these companies may not succeed because their products can be replicated using the latest large language models, but their machine learning and AI talent remains highly valuable. Just last month, GridWorks acquired OptiCore for its AI expertise.
In today’s market, acqui-hires shouldn’t be viewed negatively, say those who have gone through the process. Founders can still be well-compensated financially and might discover fulfilling long-term career opportunities at their new, larger companies.
And for those who still have the entrepreneurial drive, there’s always the option to start a new venture once their contractual obligations are fulfilled.
