Thursday, September 13, 2012

Acqui-Hires: Buying Teams of Engineers from Start-ups

The Wall Street Journal reports on the growth of an interesting phenomenon that has existed for some time in Silicon Valley. 

Established technology companies increasingly are buying—and then shutting down—early stage start-ups, mostly to acquire their software-engineering talent.  Investors, attorneys and others involved have dubbed these transactions acqui-hires.  The deals, which typically range in price from about $3 million to $6 million, started to become commonplace in Silicon Valley last year as demand for software engineers soared.

The paper reports that the deals come with some strings attached (naturally).   The employees may have to sign agreements to stay on board at the acquiring company for a few years.   They also may have to sign noncompete agreements that kick in if/when they leave for another firm. 

Even with these types of "strings" attached to a deal, I think these types of acquisitions come with some risk.  On the plus side, you are acquiring a team of engineers that is comfortable and experienced working together.  You are getting more than talent... you are getting a potentially terrific team.  On the downside, you are not much buying much other than the people.  Yes, you can stop them from walking away, or from going to a direct rival (although non-competes can be tough to enforce).  However, just keeping them there contractually does not insure that they will be productive.  You have to keep them happy.  If they have walked away from an entrepreneurial dream, then the task of keeping them engaged and fulfilled may not be easy.  

What do you have to provide for these folks?  It's more than good compensation.  You have to provide them interesting projects on which to work - fulfilling, meaningful work.  You have to make them feel like they are contributing to something bigger than themselves.  You want them to feel ownership of the product or service on which they are working.  It's a tough task, but it's critical if firms wish to make these types of acquisitions successful. 

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