What is an acqui-hire?

The word joins acquire and hire. A buyer, usually a larger technology company, purchases a small startup because it wants the engineers, designers or founders who work there. What the startup built may be shut down, folded into the buyer's product, or kept running for a short time while customers move.

The value in the deal is the team. A startup that has built something clever but cannot find enough customers or money may still hold a group of skilled people who are hard to hire one by one. For the buyer, buying the whole team can be faster than recruiting, and it keeps a group that already works well together.

In a normal acquisition, the buyer pays for the business: its revenue, customers, technology and brand. In an acqui-hire, most of the money is tied to people staying. The payment is often small compared with the money the startup raised, and a large part may be offered as employment packages, bonuses and shares in the buyer that vest over time, instead of cash paid to shareholders.

This changes who benefits. Founders and key staff may do well through their new job offers. Investors, who paid for shares in the startup, may get little back, sometimes less than they put in. Employees who are not offered jobs may lose their roles and their unvested options.

Several pressures push towards them. Funding may dry up, as it did for many startups after 2022 when investors became more careful. A startup may run out of cash before reaching profit. A founder may decide that joining a big company is a better path than running out the clock. On the buyer's side, competition for technical talent in cities such as Bengaluru, Hyderabad and Gurugram is strong, and buying a team can be a way to get past a long hiring process.

Acqui-hires are also common in fast-moving fields, such as artificial intelligence, where a small group with the right experience is valuable. In such cases a deal may be structured as a licence of the technology plus the hiring of the team, rather than a purchase of the company.

Founders usually receive job offers, retention bonuses and shares or options of the buyer. They commit to staying for a period, often two to four years, and the money is linked to that. Some may also receive cash for their shares.

Not every acqui-hire is a failure story, and not every one is clearly an acqui-hire. Press reports often use the word for any small deal where a team joins a bigger company, even when the buyer also keeps the product. The terms are usually private, so outsiders rarely know how much was paid or how it was shared. When you read about one, treat the details with care and look for what the parties themselves have said, such as the buyer's announcement or a filing.

Investors are paid according to the deal terms and their liquidation preference, the right to be repaid first in a sale. If the price is lower than the money invested, a preference may return part of their money, but there is often little left for common shareholders. Investors may also have to agree to the deal, so the terms are negotiated with them.

Employees come in several groups: those offered new jobs, those not offered, and those who hold options. Vested options may be bought out or cancelled depending on the terms. If you hold ESOPs in a startup that is being acquired, ask in writing what happens to vested and unvested options.

For founders, the main risk is that the retention package depends on staying, so leaving early can mean forfeiting the money. There is also the risk that the buyer's priorities change and the team's work is dropped. Customers of the startup may lose the product they depend on with only short notice.

For investors, an acqui-hire often means a loss on the investment. For buyers, the main risk is that talented people leave after the retention period, so the money is spent and the team is gone. Whether the deal pays off often depends on whether the culture of the two sides fits.

Read how the money is split between cash for shares and employment payments. Talk to your investors early, because their consent may be needed and they have an interest in the price. Ask what happens to your staff and your customers, and whether the buyer will take everyone or only a few. Get the key terms, such as vesting, non-compete and what counts as leaving for cause, checked by a lawyer.

Compare the offer with the alternatives: a smaller raise, a merger with a rival, or a planned wind-down. Our guide on shutting down a startup covers the last route. This guide is general information and not legal or tax advice, so get a professional to review any deal.