C&B Notes

The Mystery Behind the “Acqhire”

An old axiom says that the true value of a financial services firm goes up and down the elevators every day.  A recent study explores the manifestation of this idea in Silicon Valley.  We find that some of the value that other analysts often tend to ascribe to a company is value that actually resides with the employees.

“Acqhires” — where larger tech companies make deals to absorb young companies for their talent rather than their products — are a bizarre and unique part of the Silicon Valley economy.

When it really comes down to it, they are about ego and saving face, according to what may be the first academic study of the matter by two University of North Carolina corporate law professors.

* * * * *

Authors John Coyle and Gregg Polsky posit that acqhires make little sense.  Why doesn’t Google, Facebook or Zynga just hire away a team of engineers, if that’s what they’re after?  Generally speaking, California employment laws allow this, and it would cost less and put money directly in the hands of the newly hired employees.

But there’s a third party involved: The start-up investors.  While VCs don’t get much money back when a portfolio company is acqhired, they aren’t totally screwed.  And even though VCs are extremely unlikely to sue — the authors could find not a single example — both large tech companies and engineers are scared of making VC enemies.

So basically, it’s a self-regulating environment, because people care about long-term relationships and reputations more than a single transaction.

And what’s more, structuring a hire as something closer to an acquisition makes it sound like a success.

It’s cheap and sexy to build a start-up and relatively easy to find seed money, so many great hires are locked up outside of larger, more successful companies.  This is where ego comes in.  Being able to say your start-up “sold” is more prestigious than just quitting your job to join the same company.  Plus, it’s possible that you’ll be taxed much less, if the compensation counts as long-term gains.