In Silicon Valley, Buying Companies for Their Engineers

I agree this happens - a lot. But if it's a matter of supply/demand and engineers being worth "$0.5m - $1m" then why are we not seeing salaries for developers a lot higher?

It would be a lot cheaper for Facebook to offer good developers $500k/year + options straight up rather than spending several million to buy a startup of a few devs, where a large %age of the purchase price is going to invetors and not the developers.

I wonder if Facebook, Google, etc paid that kind of money whether we'd see more young, talented developers joining Facebook rather than creating a startup?

Or maybe companies like Facebook already do pay that kind of money to the best engineers - we just don't hear about it?

Its an expensive way to acquire talent but it can keep some known producers in your company for a while. Generally its good to look at how much funding went into a company before trying to analyze the per-capita numbers. Most VC's don't want to leave with just their money back or worse less than their money back (I've heard such deals being called a 'hair cut')

So company A gets 10 million in funding and then gets acquired for 25 million, all 25 million might go to the investors with may be 2 or 3 million divided up amongst all the common stock. The goal it seems is to have the big 'retention' contract where you get some chunk of stock as part of the deal (or an 'earn out') 12, 18 even 36 months later. It keeps the stars on the payroll and out of the hands of competition or worse disrupting your own market.

A conversation I had with an entrepreneur friend who had been acquired by Cisco went like this ...

Me, "So how's the company doing?"

Them, "We were acquired by Cisco."

Me, "Oh, so how long are you in for?"

Them, "24 months but we can get out in 18 if we meet the numbers."

We both joked that if someone had over heard us and didn't know the valley they would think he was in prison or something :-)

One can always 'walk away' from these deals, generally it leaves stock and cash on the table if you do that. And there is a pretty steep drop off in benefit from the founders to the last person who was hired and had yet to reach their stock options first vesting cliff.

Yea, agree with bifrost that this article is stating the obvious. But I guess it might not be so obvious to those not in Silicon Valley.

Seems to me that this is just enabling companies to pay engineers what they're really worth without having to deal with the HR repercussions of having really large salary disparity.

So what's the line on this practice? It does seem to work in out some cases, but entrepreneurs seem to be gaming the system now, which would make this practice a much worse deal for the buying companies.

24 months does seem to be the avg. term, minus let's say, 3 months ramping up and 3 down. Consider weekends and holidays, and companies are not getting much for their dollar.

I understand the company's need to compete in an entrepreneurial market, but the investment doesn't seem to be worth it on it's face.

Am I missing something?

Seems rather expensive, but the money probably just keeps churning around many of the same circles eventually anyway.

I guess they'll try anything as long as it doesn't involve using remote workers or satellite offices in less expensive cities to attract other competent developers.

Its kindof stating the obvious, but detailing some of the juicy parts of these deals is pretty fascinating. Definately gives you a better idea of the value your company has, even if your company on a whole doesn't succeed.

“It is not what we are aiming for as investors, said Dave McClure, founder of 500 Startups, a venture fund. We are trying to build large, lasting businesses."

Aren't these the same VC's who want to sell/flip your startup (instead of letting it grow) in order to pay their investor?

I would have thought the kind of people that build startups aren't always the type that would enjoy working at a company large enough to acquire them.

What's the standard obligatory time a founder has to stay with the acquiring company? How many founders stay beyond that time?

I'm assuming it's not... But... doesn't this sound like slavery? Especially if you are an engineer who joins the startup and has no significant say in who you get acquired by... My guess is that you could just walk away but lose any promise of some kind of substantial pay. What's the deal?