Attack of the Acqui-hires | Hacker News Reader

Attack of the Acqui-hires

finance.fortune.cnn.com

53 pointsquant40 comments

The article doesn't mention one of the most important reasons companies do HR acquisitions: competition forces them to. If company A offers to acquire a startup and company B merely offers to hire the founders, all other things being equal the founders will take company A's offer.

That explains why companies pay more during an acquihire than they'd pay for a normal hire. But it doesn't explain why acquihires happen instead of just paying a higher salary.

The article and the paper it discusses talk about that.

It would seem buying up talent is like buying up land. There is only so much of either to go around, and the price is just going to get higher and higher.

Actually there are several efforts to increase the number of programmers, e.g. http://hackerschool.com, http://insightdatascience.com, etc.

And http://devbootcamp.com/, we've graduated and got jobs for 15~ programmers so far. Another 40 graduating next week.

My impression of hacker school is that it mostly makes talent more visible, not really increases the pool. But maybe this is a distinction without difference.

We're definitely focused on increasing the pool. We've had a number of students come to Hacker School with minimal (e.g., ~2 months) of programming experience and leave as professional devs.

In general, the goal of Hacker School is to help people become dramatically better programmers, regardless of where they start. Some people come in without much programming experience, and some people come in with substantial programming experience. Across the board our students report that Hacker School is one of the most educational and productive periods of their lives (here's what a very experienced student wrote about her time in the current batch: http://news.ycombinator.com/item?id=4335460)

Great to hear!

Can I hijack this thread to ask -- seems like everyone who participated and posted about it wants to come back. How do you manage the exponential/fibonacci growth?

How do you manage the exponential/fibonacci growth?

We actually had exponential growth for our first four batches, but that's not super impressive when you consider our first batch only had six students :)

In truth, every batch is an experiment, and each time we're terrified we won't get enough qualified applicants.

It's quite similar to the patent arms race, disparate companies buying up anything that could become a threat as a preemptive measure.

The article raises an interesting question on tax practices regarding aqui-hires. If the IRS does decide that such gains should be treated as ordinary income, will investors still be able to "save face" when, legally speaking, they can't even call it an acquisition?

I'm a bit ignorant into corporate law and taxes, but if one legal entity bought another legal entity for reasonable value, how is the sale of the company not capital gains to the previous owners? Unless the buying company vastly overpaid for the acquired company, I'm not sure what the IRS could do about this.

#edited to fix grammatical errors.

I assume that last "unless" would be the key: if the acquirer is overpaying for the company, as a way of transmuting what's really a hiring bonus into a capital gain, that could be problematic. But it seems like it'd require actually showing that there was overpayment, which courts tend to not want to get into except in really egregious cases (like politicians overpaying for houses as a way of funneling money somewhere), because of how difficult it is to objectively determine.

But if you "overpay" all the investors then it doesn't look like a signing bonus.

This is especially true for software companies where it is difficult to prove what the market value for a company ought to be within an order of magnitude (if not more!). Did Facebook overpay for Instagram?

In the UK there is a IR35 law which basically says if you are a contractor working for BigCo every day, 5 days a week, for 6 months we will treat you as an employee and tax you accordingly.

It is frequently got around with pretty slim "contracts" and generally the HRMC keep it in their back pocket for rainy days

I suspect the IRS will let an awful lot of acqui-hires go through so that they can pick off the obviously dodgy ones without finding them selves bogged down in masses of law suits with defensible "we really were bought out" and the horror of some bad precendants.

What is done to IP (code, patents) in most of the acq-hire cases?

They become the property of the acquirer.

> Not only because suing an entrepreneur can cause major reputational damage, but also because the entrepreneur still has the right (in California) to just up and leave

Because clearly the world would be a better place if financial agreements were more like indentured servitude.

While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible. Does California law allow for damages to be awarded in such cases?

> While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible.

Why are you assuming that "employees" will sign such contracts?

Suppose someone shows up to work. How does the court determine whether they're working per contract? (If someone says "I don't have any patentable inventions this month", do you think that they should be penalized?)

CA allows non-competes in certain circumstances.

I see your argument. Unless an employment contract stipulates specific work deliverables (even showing up, etc.) , it really is just a non-compete which might require the employee to pay the employer in the case of early termination by the employee.

in particular CA courts will enforce non-competes against the owners of one company who sell it to another. This means that the acqui-hired can be subject to an enforceable non-compete by the acquiring company.

How does this work from an employee point of view? Are they compensated in the buyout? Do they get to do any negotiation with their new employer? The cynic in me thinks this could easily be a raw deal for non-owners.

I'm sure it depends greatly on the exact situation. I worked for a company (Company A) where some deal was worked out with another company (Company B) where Company B was free to hire all of Company A's employees and took over Company's A existing office lease and such but didn't outright buy Company A (they didn't want to own or continue working on the same projects, they just wanted all of Company A's employees to work on something new).

Company B basically just hired all of Company A's employees for their existing salaries with no individual negotiation for raises or bonuses. Almost all of Company A stayed around to begin with because Company A had a lot of smart people who enjoyed working together, but within 6 months a lot of people (including myself) bounced from Company B for a whole host of reasons.

All in all, for me the situation was neutral. Company A was basically dead in the water without Company B anyway, but all that really happened for me is it delayed my having to find a new job for a few months. After deciding to leave Company B I quickly found a new job with a good raise over what I was making so that's cool.

Of course, YMMV, I'm sure every deal like this is very different.

> How does this work from an employee point of view? Are they compensated in the buyout?

It depends on the employee. The employees that the acquirer wants are treated differently than others.

Both are paid for their stock and vested options. "The wanted" may get retention bonuses, additional grants, etc.

> a raw deal for non-owners.

What do you mean by "non-owners"? Are you referring to employees without any options or stock or to folks that don't have much in the way of options/stock?

Stock/options owners are compensated per their ownership.

Of course, the interesting question is how well the stock/options owners are treated, and there are different classes, hence the whole section about VC liquidation preferences.

"Non-owner" was a poor choice of terms. I was thinking more in terms of the little guys who have at most a 1-2% ownership stake in the company.

> was thinking more in terms of the little guys who have at most a 1-2% ownership stake in the company.

They get 1/10th the money that folks who own 10-20% get.

What do you think should happen?

There's only 100%. Some investors have liquidation preferences over others.

The buyer, of course, is free to give money to people post-deal as it sees fit.

They get 1/10th the money that folks who own 10-20% get.

That's engineer math, but not financier math.

People at 10-20% are in the room when terms are decided upon, people with 1-2% are typically not. There are a variety of mechanisms by which 1-2% of an acquisition can, in a few failure modes, evaluate to nothing.

Here's one: You own 1% (by current dilution) of a company. This company has not done well. There exists a company which wants to buy it.

The co-founders collectively own 60%, with approximately 30% being owned by investors, and approximately 10% held in aggregate by employees. You watch the M&A team, VC partners, and founders walk into a room. Two hours later, they walk out, and everyone looks fairly happy. You overhear the VC say "$20 million."

You think you're getting $200k, right?

Would it surprise you the next day when you're given a contract to sign and told that you've been allocated a $10k signing bonus with the new company? And that this is, by the way, it?

How the heck did that happen? The VCs were a little displeased with their return, since this company did poorly, so they played hardball with your founders. The VCs got $10 million. (Check those percentages again. Yeah. I know.) This represented 100% of the purchase price, and as it didn't clear the VC's liquidation preference, the common stock is valueless. You and the founders hold common stock. For their participation in the deal, the founders were guaranteed 3x $3 million signing bonuses with the acquirer. This leaves $1 million to pay the lawyers, cover the accountancy costs, etc etc etc. But hey, because you're such a nice guy, despite your options being worthless they fought hard for you and convinced the acquirer to cut a check for three whole months of your old salary.

You would be, of course, free to decline this bonus. The door is on your left.

And, to be fair, you did better than another 1% owner of the company -- employee #1, who went on to greener pastures a year ago. His shares have vested. But he was "disloyal" and "didn't stick it through", so hey, no check for him at all.

> That's engineer math, but not financier math.

Engineers read the whole message, including the bit about liquidation preferences and doing things outside the deal.

Why do you find it unreasonable for different people to get different signing bonuses?

Note that they're not getting them because of ownership, but because of perceived value to the acquirer.

There are stories of them having to interview for their own jobs.

That is standard practice with any acquisition. If Company A acquires company B which has 1000 employees, it almost certainly won't want to retain them all. There will be lots of redundancy, employees who wouldn't be needed at Company A for whatever reason, etc.

The cynic in you is right. The employees have power in an acqui-hire, but they don't negotiate as a group.

The reason they do acqui-hires is to bail the VC out. The same VC sits on the board of the aquiring company.

And we all know what happens when you try to hire away employees due to no-poach collusion, the hirer get's fired after Steve Jobs's email.

While I don't think this is systematic, it definitely happens from time to time and nobody says anything about it.