Anika Begay
While the best startups are doing well, even in this tough venture capital market, others are struggling to raise new funding. If they can’t raise and haven’t become viable companies, their best bet is to get acquired, even if it’s for a fraction of their last valuation. The alternative is to run out of money and shut down.
Such acquisitions can seem like a huge disappointment to founders and senior employees. They dreamed of building a huge, valuable company that would make them rich. Instead, their equity may be worth little or nothing, they may have to take a role in the acquiring company, and they may even have to commit to working there for a period of time to get their full payout.
But under such circumstances, selling often doesn’t turn out to be as bad an outcome for founders and key personnel as it might first appear.
“Typically, when companies get acquired, it’s seen as a move down,” said Nivas Ravichandran, an early employee at Frilp, a startup acquired by Freshworks in 2015. “But acquisitions are a great opportunity financially. If you come in through an acquisition, the compensation and equity are better than if you come in as a lateral hire.”
Buyers often reward top team members for their hard work at the startup by offering them much better jobs and higher compensation packages than they could get elsewhere with the same experience.
“It typically takes a decade or more for senior engineers to get to a level six or seven,” said Sri Chandrasekar, a partner at P72 Ventures, referring to the standard “leveling out” at big tech companies like Google or Meta. Founders “I’ve seen founders who were hired through acquisitions get into a level seven or eight. A lot of them have four years of experience. It’s a big jump.” P72 Ventures has had more than 15 of its portfolio startups exit through M&A.
Because large acquirers are often primarily interested in accessing a startup’s talent pool in these transactions (which is why such acquisitions are often called acqui-hires), they design the deal to encourage the founder and key team members to stay on board for an extended period.
While traditional M&A deals often include retention bonuses for an executive team, paid 18 to 24 months after the acquisition, acqui-hires are increasingly focusing on incentives for the startup’s workforce. That means not just offering such deals to founders. But key employees could get higher salaries and overall compensation tied to extended stock vesting programs.
Founder- and team-centric agreements
Buyers “are often willing to give these people more seniority so they don’t have to invest so much money in the deal,” Chandrasekar said. “These are the things that shoppers are getting smarter about.”
A founder who recently sold his startup to a publicly traded company told TechCrunch that the buyer structured the acquisition so that he and his co-founders would receive a higher equity stake rather than paying more to his startup’s investors.
“If they hadn’t bought my company, I would never have worked for them,” he said. “I don’t find big public companies interesting after working in startups. Everything is very slow.”
But the big compensation package and the considerable responsibility he’s been given at his new company are making him want to stay. In other words, the incentives are working. And sometimes, people like that founder find over time that they like their companies.
When Frilp was acquired, for example, Frilp’s cofounders and other employees vowed not to stay long at the company. “They said, ‘We don’t like big companies,’” Ravichandran said, adding that by big they meant companies with more than 100 employees. “But a lot of them ended up staying more than five years. I stayed for seven years.”
Frilp had four founders, two of whom still work at Freshworks, according to Ravichandran. Freshworks is now a public company with thousands of employees.
Freshworks, which went public in 2021, acquired about a dozen startups while Ravichandran, now a marketing manager at Spendfo, worked there. “When you get acquired, you have accelerated career growth,” he said. “C-suite positions were often offered to founders who came from acquisitions.”
While acquisitions where investors don’t receive a significant return are often unpublicized, they do happen frequently. In Q2, 90% of M&A deals were undisclosed, according to the latest PitchBook-NVCA Venture Monitor. Of course, not all of these deals were acquisitions. Sometimes the acquirers want the technology, not the people. Sometimes they are competitors who want the customers, not the technology or the people.
But many are acquisitions, allowing companies to grab an entire team of specialized talent in one fell swoop. That was the case with Supaglue, a 4-person startup of data integration experts. Stripe bought the startup in March so that team could jump-start Stripe’s rapidly growing Revenue and Finance Automation business, the founders told TechCrunch in March.
AI startups are becoming acquisition targets, P72’s Chandrasekar said. Big tech companies are now on the hunt for pre-ChatGPT AI startups. Many of these companies won’t succeed because their product could easily be reproduced with the latest LLMs, but their talent in machine learning and AI is very valuable. Last month, Airtable acquired Dopt for its expertise in building AI.
In this market, getting hired via acquisition shouldn’t be viewed negatively, and those who have been through it want other founders to know that. The founders may be sufficiently rewarded financially. They may discover rewarding long-term career opportunities at their new big employer. And if they still have the entrepreneurial bug when their lock-up ends, they could always launch another new startup.
