Selling a startup in an ‘acqui-hire’ is more lucrative than it seems, founders and VCs say

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 self-sustaining businesses, their best bet is to get acquired, even if it’s for a fraction of their last valuation. The alternative would be to run out of money and shut down. 

Such acquisitions may feel like huge disappointment for founders and senior employees. They were dreaming of building a massive, highly valuable company that would make them rich. Instead, their equity could be worth little to nothing, they may have to take a role at the acquiring company, and they may even have to commit to work there for a period of time to get their full payout. 

But selling under such circumstances is often not as poor of an outcome for founders and key staff as it initially seems. 

“Generally, when companies are acquired, it’s considered a down move,” said Nivas Ravichandran, one of the first employees at Frilp, a startup acqui-hired by Freshworks in 2015. “But acquisitions are a great opportunity from a financial standpoint. If you come in via an acquisition, the pay and equity are better than if you join as a lateral hire.”

Buyers often reward the top team members for their hard work at the startup by giving them much better jobs and higher pay packages than they could land elsewhere with the same experience.

“The senior principal engineers usually take a decade or more to get to a level six or seven,” said Sri Chandrasekar, a partner at P72 Ventures, referring to standard “leveling” at large tech companies like Google or Meta. Founders “I have seen founders who are acqui-hired go in at level seven or eight. Many of them have four years of professional experience. That is a big jump.” P72 Ventures has had over 15 of its portfolio startups exit through M&A.

Since large acquirers are often primarily interested in gaining access to 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 remain on board for an extended period.

While traditional M&A deals often include retention bonuses for a management team, paid out 18 to 24 months post-acquisition, acqui-hires increasingly focus on incentives for the startup’s workforce. This means not just offering founders such deals. But key employees could get higher salaries and overall compensation tied to extended equity vesting schedules.

Founder and team-centric deals

Acquirers “are often willing to give more seniority for these people not to have to put as much cash into the deal,” Chandrasekar said. “Those are the kinds of things that acquirers are getting increasingly clever 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 received a higher stock grant rather than paying more to his startup’s investors.

“If they didn’t buy my company. I would never work for them,” he said. “I don’t find large public companies interesting after working in startups. Everything is just very slow.”

But the large compensation package and significant responsibility he received at his new company are compelling him to stay there. In other words, the incentives are working. And sometimes, people like that founder discover over time that they do like their companies.

When Frilp was acquired, for instance, Frilp’s co-founders and other employees vowed not to stay at the company for long. “They were saying, ‘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 longer than five years. I stayed for seven years.”

Frilp had four founders, two of whom are still working at Freshworks, according to Ravichandran. Freshworks today is a public company with thousands of employees.

Freshworks, which went public in 2021, acquired about a dozen startups while Ravichandran, who is now head of marketing at Spendfo, worked there. “When you get acquired, you have accelerated career growth,” he said. “Directorial positions were often offered to founders who came from acquisitions.”

Although acquisitions in which investors don’t receive a meaningful return are often unpublicized, they happen frequently. In Q2, 90% of the M&A transactions were undisclosed, according to the latest PitchBook-NVCA Venture Monitor. Of course, not all of these transactions were acquihires. Sometimes buyers want the technology and not the people. Sometimes they are competitors who want the customers and not the tech or the people.

But many are acquihires, allowing companies to gain a whole team of specialized talent in one swoop. Such was the case for Supaglue, a 4-person startup of data integration experts. Stripe bought the startup in March so that this team could supercharge Stripe’s fast-growing Revenue and Finance Automation business, the founders told TechCrunch in March.

AI startups are now becoming an acquihire target P72’s Chandrasekar said. Large tech companies are now hunting for pre-ChatGPT-era AI startups. Many of those companies will not succeed because their product could be easily reproduced with the latest LLMs, but their machine learning and AI talent is very valuable. Last month, Airtable acquired Dopt for its AI-building chops.

In this market, being acqui-hired should not be viewed negatively, those who have been through it want other founders to know. Founders could be well-enough 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.