Of Acquihires, Talent Wars and Startups

Indulge me for a moment in the exhilarating world of the binge-worthy South Korean Netflix series Start-Up. Start-Up delves into the lives of ambitious young entrepreneurs as they navigate the cutthroat startup culture, sharing their journeys of success and setbacks. Inspired by the series, I embarked on a creative journey during my sabbatical to write this article, to explore the fusion of fiction and reality.

Meet Seo Dal-mi, a visionary determined to make her mark alongside industry luminaries like Steve Jobs despite lacking some of the traits needed to achieve this dream. On the other side, there's Nam Do San, a mathematical genius, who co-owns Samsan Tech with his friends. Yet, despite his talents, his parents (angel investors) see him as a failure and withdraw their financial support from Samsan Tech after a bug is discovered in one of his apps.

Ji Pyeong is a tech savvy investor involved with the "Sandbox," an incubator/ accelerator program for promising startups. Through a series of orchestrated events, Seo Dal-mi and Nam Do San find themselves intertwined, with Samsan Tech competing in a high-stakes hackathon for investment opportunities run under the Sandbox. Seo Dal-mi's unexpected appointment as Samsan Tech’s CEO raises eyebrows, but her exceptional communication skills and leadership soon win over skeptics.

As Samsan Tech's image recognition app, Noon Gil, gains traction, they attract the attention of Alex Kwon, the owner of 2STO, with a tempting acquisition offer. Ji Pyeong realizes too late that the deal is an “acquihire”, as Samsan Tech seals the deal with 2STO. The fallout from the acquihire leaves Seo Dal-mi and Sa-ha, a lawyer, out of the picture, Samsan Tech is wound up, while Nam Do San and his friends head to Silicon Valley to work for 2STO. Seo Dal-mi finds herself jobless but she is thrust into a new role as chief operating officer at another startup.

Acquihires

From the Start-Up, you gain a bit of understanding of what I mean by an “acquihire” (also acqui-hire). The acquirer’s primary concern and motivation is to hire the most talented and skilled employees of the target company, with the acquirer redeploying the newly hired talent into a new venture or depending on the circumstances retain them in their existing venture. From a legal perspective, the transaction is still an acquisition and may still be structured as a stock or share purchase, an asset purchase, or a merger.

The deal particularly focuses on acquiring the employees rather than other valuable aspects of the business such as the start-ups projects, assets, intellectual property, revenue streams, or customers. Where the patent or intellectual property (IP) is crucial, the acquirer ensures that the patents and IP move together with the talented employees.

What are the key drivers of a successful acquihire ?

(a) Talent Retention 

The acquirer is interested on a higher return on investment, and as such, the retained talent must stay with the acquirer for a long time to attain the objectives for which they were hired. The key question for the acquirer is: how will it ensure that the talent is well integrated into the new team? Especially if there is a difference in background, culture and their environment. Planning for integration in advance of the talent joining the team, especially in terms of accommodation, work permits for expatriate employees may be key to ensuring a smooth transition to their new role. For consideration, there are two pools of consideration – (i) deal consideration and (ii) the pool consideration, which is payable to the talent incorporating clauses that consideration may be performance-vested for a period of three (3) to four (4) years.  

(b)   Inclusion of Non-Compete and Restrictive Clauses

Despite some jurisdictions rendering non-compete provisions illegal, a carefully drafted clause may pass scrutiny and be enforceable. The other provisions may include non-solicitation, confidentiality provisions, non-hire, and assignment of innovation agreement.

(c)    Individualise the Deal for each Employee!

The deal must be personalised to the requirements of the hired talent to ensure that the value in the acquihire is attained. The underlying documents such as (i) employee share/ stock ownerships, (ii) offer letters, (ii) equity rewards, (iii) intellectual property agreement, (iv) technology transfer agreement and (v)the employment agreement must be personalised to meet the talents needs, unlock their creativity, and achieve success.

(d)   Working Location

An acquirer needs to pay particular attention to what is the best working environment for the talent. How best will their creativity be triggered/ unlocked? For instance, if the talent is in another country, would it be best for the talent to continue working in their country and/or move to the country in which the acquirer is located.   

(e)    Integrating the Talent

The acquihires have traditionally created a means of mitigating litigation risks, avoiding regulatory scrutiny, and circumventing any informal sanctions from an anti-trust perspective. For example, the Federal Trade Commission in the US is investigating whether investments by the big tech companies could harm or distort competition. It is interesting to note that there are various alternatives to acquihires, i.e. direct hiring and or poaching. It is interesting to note that there are various alternatives to acquihires, i.e. direct hiring and or poaching. Addressing the pros and cons for an acquihire and alternative hiring proceses may be a story for another day.

Is there a Talent War? Really!

Tech deal makers are getting creative and more aggressive in acquiring top talent in the market.  If you have no idea how intense the talent war in the tech sector is, let me summaries it for you- it is insatiable, “you snooze- you lose”. Given that acquihires focus on entities with light assets with heavy talent, you can clearly see that tech companies are focusing solely to get excellent people. Amazon, Google, Microsoft, Apple and Meta are known to be on acquiring sprees having acquired hundreds of companies over the years to solidify their positions as the most powerful tech giants in the world. 

In the last few weeks, Microsoft has been on the market, as per the Financial Times. Following the corporate debacle last year regarding OpenAI and the board, Microsoft has acquired Inflection with the talent expected to lead the consumer AI business. According to the Financial Times, the approach taken by Microsoft is being referred to as the Nadella variation. It is a form of corporate gambit, a diabolical game of chess match where once the talent is acquired, the target company is left behind. Microsoft went on a spending spree splashing USD 620,000,000 to get cozy with Inflection and another USD 30,000,000 to address any legal squabbles and disputes. 

The obsession for talent is evident as the deals are not limited to just one company. For instance, Apple disclosed in 2021 that it had bought over 100 companies in a span of six years. The specific sectors for the acquihires included virtual reality, maps, semi-conductors, health and AI. The valuation of the company is dependent on the number of engineers working in the companies, with Apple strategically ensuring that the talent is hired specifically to address certain problems. For instance, AuthenTec’s acquisition led to the creation of iPhone’s fingerprint scanner and accelerated Touch ID now used in all their products.

Amazon is famous for having acquired companies like Goodreads, now integrated with Kindle, Twitch, IMBD and Zappos. Google is known to have acquired Motorola Mobility and has acquired more than thirty (30) start-ups since 2009.

In writing this article, I find it prudent to diverge momentarily into Robert Greene’s 48 Laws of Power, particularly his first law, “Never Outshine the Master”. While this may hold sway in certain careers, I believe that in the innovation fields, adhering to this conservative view may impede one’s career, since in innovation, talent and meritocracy reign supreme. I hope African tech startups are taking note and developing products that may attract such investments in the future.

Insights from Real Stories and Lessons

In my case study, I delve into Apple's approach to acquihiring talent. According to various reports, Apple has keen interest in technical talent, often referred to as 'individual contributors' in Silicon Valley jargon. Interestingly, there seems to be merit in being a 'lone wolf,' as leveraging individual strengths and showcasing talent are valued attributes. Moreover, Apple evaluates whether a particular technology could offer a competitive edge over rivals when considering an acquihire.

Tim Cook has articulated Apple's strategy, emphasizing the pursuit of small, innovative companies whose technologies align with and enhance Apple products, with valuation and strategic fit as primary considerations. Apple is known to acquire a new company every two to three weeks.  Unlike its rivals, Apple is not known for “big bang” acquisitions.

Apple imposes stringent conditions on transactions, mandating that a certain number of technical employees join the company for the deal to proceed. These select employees are offered 'golden handcuffs'—substantial stock packages that vest over three (3) or four (4) years—provided by the acquirer. Despite the secretive nature of these deals, it's estimated that Apple pays around USD 3,000,000 per engineer, rather than basing compensation on the startup's revenue or fundraising track record.

Maintaining utmost discretion is paramount for Apple. Acquihires are not publicly announced, and employees are cautioned against updating their LinkedIn profiles to reflect their new status. In the rare event that media attention arises, Apple's standard response is 'generally do not discuss.' For smaller acquihires, Apple opts to handle all transaction details and due diligence internally, avoiding the involvement of third-party bankers due to concerns over confidentiality and trust.

It seems clear that as long as ambitious and talented individuals keep setting up their business and creating innovative products acquihires will continue to be a trend. Acquihires also seem more appealing to engineers and technical staff as it gives individuals a soft landing.

Conclusion

As I wrap-up, I feel there is still some lingering suspense, akin to a well-crafted cliffhanger. While there are many things I could have tackled or delved into, I thought it best to stay on course. The intriguing world of acquihires must wait until the wave of creative inspiration strikes- a eureka moment or that elusive “Aha” moment.  The next sequel may shift my focus to the nuanced implications of acquihires from a labor law perspective or look closer home on how an acquihire may play out in the Kenyan context. Until then, I hope to keep my curiosity and creativity alive.

Here’s to the next adventure!

Further Reading + References

Andres, S. (2015). Buying Teams. Seattle University Law Review, 38(2), 651-684.

Beril, B., Mahmut N.O. & Samina, K. (2023). Acqui-hires: redeployment and retention of human capital post-acquisition. Strategic Management Journal, 45(2), 205-237.

John, F.C., & Gregg D. Polsky. (2013). Acqui-hiring. Duke Law Journal, 63(2), 281-346.

Kif, L. (2021). How Apple does M & A: Small and quiet, with no bankers. CNBC.

Madhumita, M. & Camilla, H. (2024). How Big Tech is winning the AI Talent War. Financial Times.

 Disclaimer : This article is provided for informational purposes only and should not be construed as legal advice. While I strive to offer valuable insights, no attorney-client relationship is established through its reading. The opinions expressed are personal and may not reflect those of any organization or institution. References to legal principles are for informational purposes and may not apply universally. Readers are urged to consult qualified legal professionals for tailored advice. Reliance on any information herein is at the reader's discretion. Please note that the content may not be regularly updated to reflect legal changes, so consulting legal counsel is recommended to ensure relevance.