A comprehensive guide to buying or selling an entire company for its talent
If funding slows down in Southeast Asia and businesses start to struggle, acqui-hires could be on the agenda. Southeast Asia tech start-up and VC lawyer, Lee Bagshaw, discusses the issues to consider when you are acqui-hiring a team.
1. What is an acqui-hire?
In simple terms, it’s a transaction, the key driver for which, is the hiring of a team from another startup.
This might involve the acquisition of other assets as well. Depending on how the deal is structured, it may be an alternative to a winding down of a financially distressed company. Other times, well-funded startups target developer teams from competing companies. Hiring a team in this way might enable your business to scale rapidly at relatively low cost.
There is no obligation to take on all members of a team. Nor is there a standard way by which payments are made for the hires. What is common, however, is that without its key team members, the existing employer often closes or pivots shortly after the transaction.
2. Structure and documents
The structure can vary significantly. You could acquire the shares of the existing employer. This, of course, results in all assets and liabilities being transferred to your business, as in any share acquisition deal. More likely is that an acqui-hire consists of a team being hired, plus an acquisition of certain assets, for example certain intellectual property (IP) of the target.
You may, of course, not want any of the technology, IP, or other assets of the business. In which case, you are in effect making a payment to the current employer simply to ensure the immediate release of the hired team from their employment terms, and specifically any restrictive covenants. Whatever the structure, an acqui-hire agreement will generally look something like a short form acquisition agreement, potentially with some IP licensing provisions.
3. Who receives what?
With an acqui-hire, you are paying to acquire human talent and therefore the deal is often costed on a per-head basis. In the US, these payments can be significant if star teams are hired, but this is much less common in Asia.
Any money passing on the transaction tends to be split into two parts. The larger share is likely to make up the acquired employees’ remuneration packages (cash or share options) with a much smaller payment for investors and/or shareholders of the existing employer. Rarely will investors receive back anywhere close to their full investment.
Whilst this might look rather imbalanced, the reality is that the team generally remains the key asset of the business. Plus, the existing employer could well be due to be shut down in its current form. Therefore, an acqui-hire is in theory a win-win scenario by which investors can at least receive some return, as opposed to nothing. Ultimately investors and shareholders will need to approve the deal, so the amount of payments made to them is a matter for negotiation.
4. Issues to consider
As the acquiring company, you are likely to have the bargaining power given the existing employer could be financially distressed, or have trading difficulties. In our experience, the issues you should consider are:
Unless there are compelling reasons, it seems unattractive to acquire the target by way of a share sale simply to bring in a team. Aside from the more onerous due diligence that you would need to do to assess the liabilities of the target business, you would also then need to handle its winding up process.
If the deal consists only of acquiring a team and no other assets, remember that any payments that you make are simply for a release of the hired employees from their employment contracts and restrictions. With that in mind, the acquiring company should not take on unnecessary risk under the terms of the acquisition document.
Seek indemnification from the existing employer, and ideally its founders and the shareholders. This should cover liabilities that may arise in respect of the acqui-hire. You do not want to take on any unknown risks, for example for the actions of the team before completion of the acqui-hire, or in connection with the asset/employee transfers. If the existing employer is due to be shut down quickly, then remember than indemnification from it alone is worthless unless backed up by the founders and/or shareholders personally.
Like all transactions in which assets are acquired, you should seek some basic warranties to encourage disclosure from the existing employer and its founders. If you are acquiring any IP then you need to know, for example, whether there are any pending claims from third parties.
In situations where only employees are acquired, it is common to seek from the existing employer an exclusive license to use its IP as part of the bargain for the payments. Alternatively, to avoid any future claims you may seek a form of hold-harmless provision so that IP claims cannot be brought against your company by the existing employer or its stakeholders.
Consider whether some or all of the team being acquired should be required to stay with your company for a minimum period under the terms of the acquisition agreement. In some acqui-hire deals, payments made on the deal are either deferred or reduced if any one of the team leaves before the end of an agreed period.
Finally, control the communications that the founders of the existing employer can make regarding the deal. An acqui-hire can be a positive message for all participants, but as the acquirer, you should handle the content and timing of any press release.
Lee Bagshaw is corporate lawyer at technology and VC law firm, Simmonds Stewart. He advises investors, startup and high growth companies on venture capital financing and tech M&A deals across Asia Pacific.
The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.
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